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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-15190
OSI PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 13-3159796
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
106 CHARLES LINDBERGH BLVD., UNIONDALE, N.Y. 11553
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (516) 222-0023
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
NONE NONE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE, AND
SERIES SRPA JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS
(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, 2000, the aggregate market value of the Registrant's
voting stock held by non-affiliates was $1,517,485,637. 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, 2000 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, 2000, there were 33,552,000 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 2001 annual
meeting of stockholders are incorporated by reference into Part III of this Form
10-K.
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PART I
ITEM 1. BUSINESS
We are a leading biopharmaceutical company focused on the discovery and
development of gene-targeted, small molecule drugs, in the area of cancer,
respiratory diseases, diabetes and cosmeceuticals. Independently and with our
corporate partners, we have built a pipeline of discovery programs and drug
candidates for 46 individual gene targets addressing major, unmet clinical needs
and significant commercial opportunities. We have two candidates in clinical
trials and nine projects with candidates in late stage pre-clinical development.
OSI-774 (formerly CP-358,774) is an inhibitor of the epidermal growth
factor receptor, or EGFR. The protein product of the EGFR gene is a receptor
tyrosine kinase, or RTK, that is over-expressed in approximately 30% of all
major cancers. We believe EGFR inhibitors represent an exciting new class of
relatively safe and well tolerated anti-cancer agents that may have utility in
treating a wide range of tumor types. OSI-774 is an oral, once-a-day small
molecule drug designed to specifically block the activity of the EGFR protein.
OSI-774 was originally being developed as part of our long-term partnership in
cancer drug discovery with Pfizer Inc. The importance of this new class of drugs
led to an antitrust finding by the U.S. Federal Trade Commission in June 2000
during its investigation of Pfizer's merger with Warner-Lambert Company and the
return of all rights to OSI-774 to us.
OUR STRATEGY
Our objective is to be the leading biopharmaceutical company focused on
developing and commercializing gene-targeted, small molecule products to address
major markets with unmet clinical needs. We intend to develop our own drug
candidates through the early stages of clinical development prior to entering
into co-development and commercialization agreements with leading pharmaceutical
companies in return for a greater share of the revenues derived from product
sales. The key elements of our strategy are:
Develop and commercialize OSI-774. Our lead candidate, OSI-774, which is
currently in open-label Phase II clinical trials, has demonstrated anti-cancer
activity, as a monotherapy, in a number of tumor types including non-small cell
lung, ovarian and head and neck cancers. We intend to advance the development of
OSI-774 through a comprehensive clinical trial program. Our goal is to seek
rapid regulatory approval of OSI-774, broaden its application to additional
cancers, assess its utility in combination with existing chemotherapy agents and
demonstrate a survival benefit for earlier stage cancer patients enabling its
front-line use in major cancers.
Further the development of existing small molecule candidates to maximize
their economic value. We believe that our future growth will be driven by our
proprietary drug discovery and development efforts. We intend to emphasize the
independent development of selected proprietary candidates through clinical
development. By advancing these candidates through the early stages of clinical
development, we expect to maximize the commercial value of the resulting
products to us. In certain instances, we may out-license to third parties early
drug candidates that we choose not to develop independently with the intent of
providing near-term revenue growth while maximizing value from these assets.
Leverage our advanced drug discovery technologies and capabilities to
generate novel, clinical candidates. We have built, and continue to advance, our
fully-integrated drug discovery platform. This platform includes every major
aspect of small molecule drug discovery and development, from the identification
of a validated drug discovery target to the emergence of a clinically proven
drug candidate.
Support our existing portfolio of partnered drug candidates. Our discovery
alliances with pharmaceutical partners have historically provided our primary
source of revenue through research funding and continue to represent a source of
royalty-bearing product opportunities. We intend to continue to support these
alliances.
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OUR DEVELOPMENT PIPELINE
The following table summarizes the status of our more advanced product
candidates and identifies any related collaborator.
<TABLE>
<CAPTION>
DISEASE
AREA/PRODUCT GENE TARGET STATUS(1) COLLABORATOR
------------ ----------- --------- ------------
<S> <C> <C> <C>
CANCER
OSI-774 Epidermal growth factor receptor Phase II OSI-Owned
CP-609,754 Farnesyl transferase Phase I Pfizer
CP-663,427 Farnesyl transferase IND Track Pfizer
CP-547,032 Vascular endothelial growth factor receptor IND Track Pfizer
CP-673,451 Platelet-derived growth factor receptor IND Track Pfizer
RESPIRATORY/ASTHMA
OSIC-113760 Adenosine A(1) receptor IND Track OSI-Owned
M810309 Interleukin-4 gene expression IND Track Aventis
CHOLESTEROL
LOWERING
HMR 1171/ AVE Low density lipoprotein receptor gene IND Track Aventis
9103 expression
COSMECEUTICALS
AD-01-728 Skin pigmentation IND Track Anaderm
CONGESTIVE HEART
FAILURE
OSIC-0961370 Adenosine A(1) receptor IND Track Solvay
</TABLE>
---------------
(1) Denotes safety and efficacy tests as follows:
"IND Track" -- Final stages of pre-clinical development which focus on
meeting formal Food and Drug Administration requirements for an
investigational new drug application. This phase typically takes nine months
to one year to complete.
"Phase I" -- Evaluation of safety in humans.
"Phase II" -- Evaluation of safety, dosing and efficacy in humans.
Our research and development activities are focused in the following areas,
all of which represent major unmet healthcare or quality of life needs: cancer,
respiratory diseases, diabetes and cosmeceuticals.
CANCER
Background
Traditionally, development of anti-cancer drugs has resulted in products
which generally kill all rapidly dividing cells. These products, called
cytotoxic drugs, usually interfere directly and non-selectively with normal
processes in the cell associated with DNA replication and cell division. Since
these cell division processes occur routinely in healthy tissues, the cytotoxic
drugs are severely limited in their utility by their serious side-effects
including disruption of the blood, immune and gastrointestinal systems. These
side-effects limit the anti-tumor value of these cytotoxic drugs because they
can only be used in sub-optimal dosing regimens. Overall, cancer remains a major
unmet healthcare concern with over 1.2 million Americans diagnosed with solid
tumors every year.
Since the early 1980's, substantial growth in the medical community's
understanding of the biology and genetics of cancer at the molecular level has
led to the discovery and early development of next generation anti-cancer drugs
that specifically target the molecular abnormalities associated with human
cancer. These
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anti-cancer drugs include approaches that specifically target cancer-causing
genes, or oncogenes, and processes required for tumor growth such as
angiogenesis. Oncogenes are typically growth regulating genes that are either
over-expressed or mutated in cancer cells in such a manner that they confer a
significant growth advantage on cancer cells in the body and contribute to the
uncontrolled growth that we associate with cancer. One of the most important of
these oncogenes is EGFR. Epidermal growth factor is one of several natural
proteins that promote normal cell proliferation in a tightly regulated manner by
binding to its receptor, EGFR, and sending growth signals, via the receptor's
tyrosine kinase enzyme activity, to the nucleus of the cell controlling growth.
In many human cancers, EGFR is either over-expressed or mutated, leading to
abnormal signaling and the development of a cancerous mass.
EGFR kinase is over-expressed in a wide range of human tumors, including
non-small cell lung (40-80%), ovarian (30-80%) and head and neck (90%). More
than 700,000 patients diagnosed with cancer each year in the United States have
tumors that over-express EGFR. Thus, there is both an urgent medical need and a
substantial potential market for an effective anti-EGFR agent. Progress in the
field has established EGFR as a validated target for cancer intervention and
small molecule tyrosine kinase inhibitors as promising drug candidates in this
area. Antibody products are also under development which target the EGF binding
region of the receptor and have demonstrated improved anti-cancer activity when
used in conjunction with existing treatment and chemotherapy regimens. These
agents, however, are unlikely to inhibit mutated forms of EGFR, require delivery
via intravenous infusion and are expensive to produce. In contrast to these
agents, small molecule inhibitors of the tyrosine kinase activity, such as
OSI-774, should be effective against either mutant or over-expressed forms of
EGFR, are active as once-a-day oral therapies and are relatively easy and
inexpensive to manufacture. In addition, OSI-774 has demonstrated anti-tumor
activity when used clinically as a single agent.
U.S. INCIDENCE OF EGFR OVER-EXPRESSION
<TABLE>
<CAPTION>
PERCENT
NEW CASES OVER-EXPRESSION
TUMOR TYPE 1999 EGFR
---------- --------- ---------------
<S> <C> <C>
Lung (including non-small cell) 171,600 45%
Colorectal 129,400 17%
Breast 176,300 48%
Bladder 54,800 30-90%
Esophagus/Stomach 34,400 30-70%
Head and Neck 29,800 90%
Ovarian 25,200 30-80%
Prostate 179,300 10%
</TABLE>
OSI-774
Since 1986, we have focused, through our collaboration with Pfizer, on the
discovery and development of novel classes of orally active, gene-targeted,
small molecule anti-cancer drugs based on oncogenes and tumor suppressor genes
and the fundamental mechanisms underlying tumor growth. The most prominent and
advanced of these programs targets EGFR. OSI-774, our small molecule anti-cancer
agent, is a potent, selective and orally active inhibitor of EGFR. OSI-774 has
demonstrated anti-cancer activity in ongoing, open-label Phase II trials and is
representative of an emerging new class of anti-cancer drugs directed against
EGFR. OSI-774 was jointly discovered as part of our cancer discovery alliance
with Pfizer. We gained full development and marketing rights to OSI-774 in order
to allow Pfizer to meet certain requirements of the FTC arising from the FTC's
review of Pfizer's merger with Warner-Lambert.
Clinical Data. Phase I and ongoing Phase II trials on OSI-774 have
demonstrated the drug to be active as a single agent, safe and well-tolerated
with manageable side-effects. The trials revealed a reversible rash and
occasional diarrhea as the principal side-effects. The dose limiting side-effect
in the Phase I trials was
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diarrhea at 200 mg per day. On a 150 mg oral daily dosing regimen, however, this
side-effect is generally mild and is treated effectively with Loperamide (over
the counter Imodium(R)). Clinical investigators have generally considered the
rash to be the most common adverse event in the context of anti-cancer therapy.
Some success in treating rash has been observed with minocycline as well as with
a variety of agents. In many patients, the skin rash subsides while continuing
therapy with OSI-774. A subset of patients in both Phase I and Phase II trials
have received daily doses of OSI-774 for extended periods (from six months to
over one year) and over 300 patients have now received the drug with
well-managed side-effect profiles.
Phase II enrollment has been completed for single agent, open-label salvage
trials in 34 ovarian cancer patients, 56 refractory non-small cell lung cancer
patients, and 113 head and neck cancer patients. Patients in these trials have
advanced or metastatic cancer and have generally failed standard treatment
regimens. We believe these trials are encouraging because they demonstrate
objective clinical responses to OSI-774 as a single agent. The primary endpoint
in these trials is response rate, with stable disease rate, time to progression
and quality-of-life being monitored as secondary endpoints.
In our ongoing Phase II trial of OSI-774 for non-small cell lung cancer,
patients have tumors that are confirmed to be EGFR positive and have failed
standard platinum-based chemotherapy. Patients receive a daily dose of 150 mg of
OSI-774. Preliminary data emerging from this Phase II trial shows that 48% of
the 56 patients had either a partial response or stable disease at 12 weeks and
continued on the drug. Seven patients showed objective partial responses, while
20 patients demonstrated stable disease. Forty-two of the 56 patients (75%) had
either no occurrence of rash or mild rash and only one patient exhibited a
severe rash.
A second 150 mg per day trial of OSI-774 in advanced head and neck cancer
also reveals indications of the anti-cancer activity of OSI-774. Results for the
first 78 evaluable patients show that 42% had either a partial response or
demonstrated evidence of stable disease at 12 weeks. Ten patients in the study
had objective partial responses, while 23 patients showed stable disease. The
rash side-effect was more severe in the head and neck study with 24 patients
undergoing a dose reduction and two patients discontinuing therapy.
Objective responses were observed in earlier Phase I trials in patients
with colorectal and renal cell cancer and in ovarian cancer patients in the
ongoing Phase II trials.
OSI-774 CLINICAL TRIALS
<TABLE>
<CAPTION>
TRIAL TRIAL DESIGN NUMBER OF PATIENTS STATUS PURPOSE
----- ------------ ------------------ ------ -------
<S> <C> <C> <C> <C>
Phase I Single agent, open-label, 40 healthy volunteers Completed Safety
rising single dose
Phase I Single agent, open-label, 42 cancer patients Completed Safety
daily dose
Phase I Single agent, open-label, 27 cancer patients Completed Safety
weekly dose
Phase II Single agent, open-label, 34 patients enrolled In progress Safety and
daily dose with advanced ovarian efficacy
cancer
Phase II Single agent, open-label, 56 patients enrolled In progress Safety and
daily dose with advanced non-small efficacy
cell lung cancer
Phase II Single agent, open-label, 113 patients enrolled In progress Safety and
daily dose with advanced head and efficacy
neck cancer
</TABLE>
Other Cancer Programs
In addition to OSI-774, our collaboration with Pfizer has identified two
compounds, CP-609,754 and CP-663,427, as orally active inhibitors of an enzyme
called farnesyl transferase. CP-609,754 advanced to Phase I clinical trials in
the United States in December 1999, and CP-663,427 is in advanced pre-clinical
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development. These compounds target a number of important signaling proteins
including the ras oncogene, an important target in many tumor types such as
colon and bladder cancers. In addition, other compounds are in advanced
pre-clinical development and are being developed as orally available, potent and
selective inhibitors of key protein tyrosine kinase receptors involved in
angiogenesis. Angiogenesis is the process of blood vessel growth and is induced
by solid tumors which require nutrients that enable growth. We believe that the
ability to safely and effectively inhibit this process represents one of the
most exciting opportunities in cancer drug development. CP-609,754 and
CP-663,427 target the vascular endothelial growth factor receptor, VEGFR, and
the platelet-derived growth factor receptor, PDGFR, respectively. An additional
12 targets are in active research and development in the OSI/Pfizer
collaboration.
Our proprietary cancer program includes drug discovery projects directed
against another RTK, the insulin growth factor receptor-type 1, or IGF-1R. This
is an important anti-apoptosis factor. Apoptosis, or programmed cell death, is a
normal process controlling cell survival. There is a strong correlation between
high IGF-1R level and an increased risk of developing cancer. Another important
apoptosis target in our program is the PKB/AKT proto-oncogene which is a key
gene in the regulation of cell survival.
RESPIRATORY DISEASES
In July 1999, we purchased certain assets from Cadus Pharmaceutical
Corporation including a program focused on the adenosine receptor family. 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 research and development efforts have led to high quality
proprietary lead compounds for each. The adenosine A(1) receptor is targeted for
the treatment of the bronchioconstriction associated with the acute phase of an
asthma attack, while the adenosine A(2B) receptor is believed to mediate the
inflammatory components produced by mast cells and associated with the longer
term damage caused by the disease. There are more than 17 million asthma
sufferers in the United States alone, approximately 25% of whom are children.
We are currently developing several sub-type specific inhibitors of the
adenosine receptor family. OSIC-113760, an adenosine A(1) receptor inhibitor
will undergo evaluation, with the goal of identifying a drug candidate to treat
the acute phase of an asthma attack. Adenosine A(2B) receptor targeted compounds
will undergo evaluation with the goal of identifying drug candidates to treat
the longer term damage associated with chronic asthma. In addition to these
adenosine receptor antagonists, we have discovered an inhibitor of the
Interleukin-4, or IL-4, gene expression as part of our long term alliance with
Aventis Pharmaceuticals Inc. in gene transcription drug discovery. The IL-4 gene
mediates and sustains allergic asthmatic inflammatory responses.
We have identified additional sub-type specific adenosine receptor
inhibitors as a result of our asthma program. These include an adenosine A(2A)
inhibitor for the treatment of Parkinson's disease, an adenosine A(3) inhibitor
for the treatment of glaucoma and an adenosine A(1) receptor, CDS-096370, for
the treatment of congestive heart failure. CDS-096370 has been licensed to
Solvay Pharmaceuticals, B.V. for advanced pre-clinical and clinical development.
DIABETES
Diabetes is a chronic, progressively debilitating disease affecting more
than 143 million people worldwide. According to the American Diabetes
Association, diabetes is the sixth leading cause of death by disease in the
United States and is estimated to afflict 16 million Americans with
approximately 800,000 new cases diagnosed annually. 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 number.
Effective October 1, 1999, we entered into a fully-funded collaboration,
including milestone and success payments and royalties, with Tanabe Seiyaku Co.,
Ltd. to discover and develop small molecule drugs for the treatment of Type II
diabetes. We received an upfront fee upon initiation of this program. This
collaboration is
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built upon our comprehensive drug discovery alliance with Vanderbilt University
Diabetes Center, with which we have collaborated since April 1998. The
OSI/Tanabe collaboration will focus on drugs designed to normalize elevated
plasma glucose levels seen in Type II diabetes. The program is also focused on
selected targets in diabetes, while allowing us to pursue other targets in
diabetes not otherwise covered by the collaboration. As a result, we have begun
discovery efforts of our own on certain targets in this area.
COSMECEUTICALS
Every year consumers worldwide 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. We believe that most of these
products are not optimally effective and may have undesirable side-effects.
In 1996, we entered into a joint venture with Pfizer 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. We are the sole drug discovery arm of Anaderm providing discovery,
biology, medicinal chemistry and pharmaceutical development resources. We have
discovered a candidate, AD-01-728, which is currently under development as a
mediator of skin pigmentation and is in advanced pre-clinical trials.
CHOLESTEROL LOWERING
Another project in our Aventis alliance targeted cholesterol lowering. The
cholesterol lowering market is dominated by a class of drugs commonly referred
to as the statins, including Lipitor and Zocor, which target a key enzyme
involved in the body's metabolism of fats and cholesterol and have total
worldwide sales of over $12 billion per year. 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. Our program with Aventis was
designed to target a new class of compounds that would avoid these
complications. Two compounds discovered in the program, HMR 1171 and AVE 9103,
are in advanced pre-clinical development. These compounds enhance the expression
of the low density lipoprotein receptor, or LDLr, the principal mechanism by
which liver cells bind LDL-cholesterol, commonly referred to as bad cholesterol,
for clearance by the body. In pre-clinical primate models, these candidates are
effective in lowering LDL-cholesterol and in early pre-clinical safety studies
are apparently well-tolerated.
OUR DRUG DISCOVERY AND DEVELOPMENT PLATFORM
Background
Our approach 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. Our drug discovery platform constitutes an
integrated set of technologies and capabilities covering every major aspect of
pre-clinical and early clinical development. The process begins with a lead
seeking phase. In this phase, which generally takes one 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 of these molecules
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 progress into lead
optimization.
During lead optimization, 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
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advanced toward clinical trials, the IND-track phase, in which toxicological,
scale-up synthesis and clinical trial design issues are addressed. This phase
usually takes nine to 12 months.
Upon entering clinical trials (usually with an investigational new drug
approval from the Food and Drug Administration) 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, or Phase II, trials to demonstrate activity in humans
prior to extensive Phase III trials designed to collect the data necessary to
support a new drug application 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. We have, therefore, adopted a research strategy that manages a
portfolio of product opportunities and have integrated a platform of
technologies designed to rapidly and cost-effectively enhance the overall
process.
Our Technology Platform
We have built a fully-integrated drug discovery platform in order to
accelerate the process of identifying and optimizing high-quality, small
molecule drug candidates. Our core discovery technologies and capabilities
include: (i) yeast-based functional genomics systems for characterizing orphan
G-protein coupled receptor, or GPCR, drug discovery targets, (ii) gene
transcription, signal transduction, protein kinases and other assay systems,
(iii) automated high throughput screening, (iv) a library of over 350,000 small
molecule compounds and over 125,000 natural product extracts, (v) medicinal and
automated combinatorial chemistry, (vi) in vivo pharmacology, pharmacokinetics
and pharmaceutical development capabilities and (vii) a core clinical project
management and regulatory affairs unit.
Functional Genomics
GPCRs constitute one of the largest families of targets for drug discovery
in the pharmaceutical industry, with approximately 40% of currently marketed
pharmaceutical products functioning as modulators of GPCR activity. The
physiological roles played by many of these receptors remain unknown (the
so-called "orphan" receptors). This is primarily due to a lack of identified
activators and inhibitors. We have established a powerful methodology by which
this class of orphan receptors may be converted into targets for therapeutic
intervention. This scientific platform generally relies upon strains of the
yeast, saccharomyces cerevisiae, which have been genetically manipulated to
allow the detection of the functional coupling of mammalian GPCRs with modified
G-protein subunits. This provides a means by which both activators and
inhibitors can be detected via high throughput screening.
Our bioinformatics group has assembled comprehensive libraries of GPCR,
G-protein subunit and biological activator or inhibitor gene sequences. These
libraries are regularly updated and are analyzed by a number of different types
of searches of both protein and nucleotide databases. Proprietary software
integrates and filters the output from these various searches. The combination
of automated searches, comprehensive libraries and logical filters creates a
discovery system that eliminates false negatives, minimizes false positives and
identifies novel sequences. Finally, the software automatically creates reports
that allow scientists to view the filtered results graphically, perform final
analyses and proceed to screens for activation of the identified orphan GPCRs.
Activation of the orphan GPCRs can be detected by using receptor-expressing
cells exposed to small molecule libraries, natural product libraries or
biological extracts. If one of the compounds in these libraries or extracts acts
as an activator of the orphan GPCR resulting in a receptor gene signal, active
compounds or peptides are then verified with respect to receptor selectivity and
potency in yeast and mammalian cells. Once the activator is identified,
profiling of the G-protein coupling capabilities of the orphan GPCR is
undertaken along with animal studies to determine the physiological role of the
orphan GPCR.
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Assay Biology
We specialize in the development of a variety of drug screens that
capitalize on recent advances in our understanding of the human genome and its
correlation to disease. Various assay biology techniques are used to target
selected and validated gene products for drug discovery. We 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 encoded by the target genes. This broadly enabling technology allows us
to discover compounds that exert their effects on signal transduction proteins,
transcription factors and other sites. Over the last several years we have
broadened our assay expertise extensively. Currently, we are able to conduct
screens on a wide variety of assay platforms, including enzyme, immuno and
receptor assays. We believe that this breadth of expertise enables us to select
the most appropriate assay with which to pursue drug discovery against a novel
biological target.
High Throughput Robotic Screening
We have been at the forefront of high throughput screening since the
1980's. We developed software and automation that enables us to manage large
compound libraries and prepare test substances for screening. We have 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. We continue to develop the
technology to accommodate a high degree of flexibility allowing us to conduct a
wide variety of assay formats in screening. In our proprietary robotic screening
facility, we can analyze up to 300,000 different test samples each week,
depending on the complexity of the assays. Our 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 our drug discovery efforts. Leads discovered from these libraries
become the proprietary starting materials from which drugs are optimized. We
manage over 1.5 million compounds in our compound libraries facility from our
own and several of our partners' compound libraries for high throughput
screening. Our proprietary libraries include focused libraries of small molecule
compounds derived from our high-speed combinatorial analoging, libraries of
diverse, high quality small molecule compounds that we have acquired and our
natural products library derived from our unique collection of over 70,000
fungal organisms. We have a library of 140,000 diverse, high quality small
molecule compounds directed toward GPCR discovery as well as an exclusive
worldwide license to a library of 140,000 compounds from The Dow Chemical
Company for the purposes of discovery and development of small molecular weight
pharmaceuticals and cosmeceuticals. We also continue to expand our libraries
through our high speed combinatorial analoging activities.
Chemistry and Lead Optimization
The pharmaceutical properties of a lead compound must be optimized before
clinical development of that compound begins. In 1996, we acquired OSI
Pharmaceuticals (UK) Limited, or OSI-UK (formerly known as 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 expansion of our OSI-UK facility and the acquisition
of Cadus' chemistry team in Tarrytown, New York, we have assembled a high
quality medicinal chemistry team of combinatorial, computational and natural
product chemists. This team has integrated various computational techniques for
molecular modeling and diversity analysis into our lead optimization and
development activities to further enhance the speed and quality of our drug
discovery.
Pre-Clinical and Clinical Development
We have expertise in pharmacokinetics and pharmaceutical chemistry and the
management and generation of good laboratory practices, accredited data required
for regulatory dossier submissions to agencies
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such as the FDA. Thus, we are able to support the development of a drug
candidate for clinical testing. We have invested significant resources in
expanding this capability and in technological enhancements in this area. In
addition, we are implementing approaches that allow us to generate information
on the metabolic liability of lead compounds together with their physical and
chemical properties. We are 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.
A core team of physicians and clinical project managers through Nadler
Pharma Associates LLC, product and pharmaceutics managers and regulatory affairs
and clinical affairs specialists work to integrate externally contracted
clinical development support activities with contract research, manufacturing
and inventory control organizations.
OUR MAJOR COLLABORATIVE PROGRAMS
We maintain collaborations with pharmaceutical companies to combine our
drug discovery and development capabilities with the collaborators' development
and marketing resources. Our agreements with Anaderm and Tanabe provide that our
partners fund our collaborative research and development programs, which are
jointly managed, and pay for clinical development, manufacturing, marketing and
launch costs for any product developed. We will receive royalties on sales of
any resulting products from these and other historical collaborations. Certain
collaborative programs involve milestone payments by the partners. The
collaborative partners usually retain manufacturing and marketing rights
worldwide. Generally, our collaborative research agreements prohibit us from
pursuing with any third party drug discovery research relating to the drug
targets covered by research under the collaboration, but does not block research
activity in the fields.
Anaderm Research Corporation
On April 23, 1996, we formed Anaderm with Pfizer for the discovery and
development of novel compounds to treat conditions such as baldness, wrinkles
and pigmentation disorders. In April 1999, we amended a prior research agreement
with Pfizer and Anaderm to expand our collaborative program. The amended
research agreement is for a term of three years. Pfizer may terminate the
agreement early in its sole discretion after consultation with Anaderm and us to
determine whether satisfactory progress has been made in the research program
during the previous year. The agreement provides for funding by Pfizer of up to
$35.0 million in total payments to Anaderm to fund our research and development
activities during the three-year term and up to $15.0 million in phase-down
funding following expiration of the three-year term or earlier termination by
Pfizer. Under the expanded program, we 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. Anaderm or Pfizer will
pay royalties to us on the sales of products resulting from the collaboration.
Tanabe Seiyaku Co., Ltd.
Effective as of October 1, 1999, we entered into a collaborative research
and license agreement with Tanabe focused on discovering and developing novel
pharmaceutical products to treat diabetes. Under the agreement, we are
responsible for identification of targets (subject to Tanabe's approval), assay
development, screening of compounds from our library and Tanabe's library
against identified targets, identification of seed compounds meeting certain
criteria specified in the agreement, optimization of these 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 us.
If Tanabe determines to initiate further development of lead compounds
identified by us, we will grant to Tanabe exclusive, worldwide licenses to,
among other things, use, manufacture and sell all products containing these lead
compounds directed to the identified targets in exchange for 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
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development of a lead compound or if Tanabe discontinues development of
candidate compounds, we will have the sole and exclusive right to develop, use,
manufacture and sell all products resulting from the collaboration, and we will
pay royalties to Tanabe.
Generally, both Tanabe and we are prohibited during the term of the
contract from pursuing independently or sponsoring, directly or indirectly,
research and development of compounds and products in the diabetes area relating
to the targets identified in the agreement. 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 September 28, 1999, we received approximately $4.3 million
from Tanabe, which represented advanced funding of the technology access fee of
$3.5 million and research funding of $812,500 for the first quarter of fiscal
year 2000. Tanabe has committed to provide research funding to us in an
aggregate amount of up to approximately $16.0 million.
Vanderbilt University
Effective as of April 28, 1998, we 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
agreement was for a term of one year, and was extended until we executed a
third-party research collaboration agreement, which we entered into with Tanabe.
Concurrently with the execution of the Tanabe agreement, we entered into an
amended and restated collaborative research, license and alliance agreement with
Vanderbilt and Tanabe with an effective date of August 31, 1999. The term of the
research program conducted by Vanderbilt and us commenced on April 28, 1998 and
will end upon termination of the contract period under the Tanabe agreement
unless mutually extended by Vanderbilt and us. The OSI/Vanderbilt research
program is comprised of both research directed toward the targets identified, as
well as those not identified, in the Tanabe agreement. We 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 us in
fulfilling our obligations under the OSI/Tanabe research program by providing
access to Vanderbilt's drug discovery resources, including laboratories and
assays.
We will provide funding to Vanderbilt to conduct the OSI/Vanderbilt
research program. A portion of this funding will come from Tanabe's funding of
the OSI/Tanabe research program. We will also pay to Vanderbilt a percentage of
the revenues we receive from Tanabe and any other third party which
commercializes products resulting from the OSI/Tanabe research program, based on
the extent to which Vanderbilt technology and patents contributed to the product
generating the revenue.
Pfizer Inc.
In April 1986, we entered into a collaborative research agreement and
several other related agreements with Pfizer. During the first five years of the
collaboration, we focused principally on understanding the molecular biology of
oncogenes. In 1991, we 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. In April 1996, we renewed our collaboration for a new five-year
term by entering into new collaborative research and license agreements. Pfizer
was originally responsible for the clinical development, regulatory approval,
manufacturing and marketing of any products derived from the collaborative
research program. This changed with the divestiture of OSI-774 to us in June
2000. The funded phase of the collaborative research agreement will expire on
April 1, 2001, and we expect that the agreement will not be renewed.
Effective as of April 1, 1999, we 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, we will conduct a program which includes pre-clinical and
clinical research and development, through and including Phase II clinical
trials, for compounds to assess their
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safety and efficacy to be developed as therapeutic agents for the treatment of
psoriasis and other related dermal pathologies. Pfizer has granted to us 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 us if it intends to continue development
and commercialization of a compound within three months following receipt of the
data package from the clinical studies. If Pfizer notifies us of this 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 us, we 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. We are, however, under no obligation to
accept this license. The duration of the licenses is coextensive with the lives
of patents related to the licensed compounds.
Aventis Pharmaceuticals Inc.
Pursuant to an amended collaborative research and license agreement
effective April 1, 1997, we had been conducting research and development
activities with Aventis, which had focused specifically on our expertise in
live-cell assay technology. Aventis was responsible for all lead development
activities. We had identified several compounds, which Aventis is optimizing for
further development. The most advanced of these compounds are in advanced
pre-clinical development for atherosclerosis and asthma.
We have granted to Aventis 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 our lead seeking efforts against
these individual drug targets. In exchange for the license, Aventis will pay
royalties to us on sales of products arising out of the collaboration. The
funded phase of the agreement terminated on September 30, 2000. The agreement
states that the license expires on the later of March 31, 2002 or the last to
expire of any obligations of Aventis to pay royalties.
Sankyo Co., Ltd.
Effective as of February 12, 1997, we entered into a collaborative research
and license agreement with Sankyo to be conducted in partnership with MRC
Collaborative Center, London, UK. The collaboration is focused on discovering
and developing novel pharmaceutical products to treat influenza. We are
responsible for conducting research 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 us.
The agreement was 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 each
of us. We renewed the collaboration for an additional two years in November
1999. The agreement is subject to early termination in the event of certain
defaults by each of us.
Solvay Pharmaceuticals, B.V.
With the acquisition of the assets of Cadus in July 1999, we 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. Our fields of use include cancer, asthma
and inflammatory diseases. Solvay's fields of use include cardiovascular,
central nervous system disorders and gastrointestinal diseases. 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. The term of the research program expires December 31,
2000, and we have elected not to continue collaboration with Solvay, but rather
to focus our research in cancer in our proprietary programs.
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CLINICAL TESTING
We intend to rely on third-party clinical research organizations, or CROs,
under the management and supervision of our OSI-774 development team, to conduct
clinical studies and assist us in obtaining regulatory approvals for our product
candidates. We have entered into an agreement with Theradex(R), a CRO with
expertise in oncology, to monitor our ongoing Phase II clinical trials for
OSI-774 in non-small cell lung, head and neck and ovarian cancers.
MANUFACTURING AND SUPPLY
We intend to rely on contract manufacturers to supply our products for use
in our pre-clinical and anticipated clinical trials. We also expect to rely on
third parties to provide any necessary raw materials or intermediates for
product manufacture.
We have sufficient quantities of OSI-774 to conduct our current and
anticipated clinical trials. OSI-774, a small molecule, is manufactured in a
relatively simple, inexpensive three-step process with high yield. We are
currently in discussion with potential manufacturers of OSI-774; however, no
agreement has been reached. We expect to enter into manufacturing and supply
agreements with at least two suppliers of bulk product and manufacturing
intermediates in the near term. We have engaged McKesson BioServices to
undertake inventory control, packaging and distribution of OSI-774. If we are
unable to establish or maintain relationships with third parties for
manufacturing sufficient quantities of our product candidates, including
OSI-774, that meet our planned time and cost parameters, the development of our
product candidates and the timing of our clinical trials may be delayed.
OUR INTELLECTUAL PROPERTY
Patents and other proprietary rights are vital to our business. Our policy
is to protect our intellectual property rights in technology developed by our
scientific staff through a variety of means, including applying for patents in
the United States and other major industrialized countries. We also rely upon
trade secrets and improvements, unpatented proprietary know-how and continuing
technological innovations to develop and maintain our competitive position. In
this regard, we seek restrictions in our agreements with third parties,
including research institutions, with respect to the use and disclosure of our
proprietary technology. We also enter into confidentiality agreements with our
employees, consultants and scientific advisors.
We currently own 13 U.S. patents and 38 foreign patents. In addition, we
currently own 23 pending applications for U.S. patents, three of which have been
allowed, and 16 applications for foreign patents, one of which has been allowed.
Moreover, we jointly own with Pfizer rights to 16 issued U.S. and 52 issued
foreign patents and 36 pending U.S. and 457 pending foreign patent applications.
Further, other institutions have granted us exclusive rights under their United
States and foreign patents and patent applications.
Included in the above patents and patent applications are one issued U.S.
patent and 21 issued foreign patents for OSI-774 and related compounds, which
contain composition of matter, process of preparation and method of use claims,
and six U.S. and 159 pending foreign patent applications relating to OSI-774 and
related compounds. We also have six applications for U.S. patents and six
applications for foreign patents pending, which contain composition of matter
and method of use claims for our receptor-subtype specific adenosine receptor
antagonist compounds. We intend to aggressively seek patent protection for all
lead compounds discovered or developed in our own programs.
We have assembled a strong gene transcription patent position. We currently
have six issued U.S. patents and two issued foreign 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, and U.S.
Patent Nos. 5,580,722 and 5,846,720 cover modulation of genes associated with
cardiovascular disease. We have additional patent applications pending, three of
which have been allowed in the United States, which should further enhance our
patent position in the area of gene transcription. We believe that this
technology is in widespread use throughout the pharmaceutical and
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biotechnology sectors. We are conducting a non-exclusive out-licensing program
for this patent estate. Currently, we have licensed this technology to Aurora
Biosciences Corporation, Pharmacia & UpJohn SpA, the R.W. Johnson Pharmaceutical
Research Institute, American Home Products Corporation and its wholly-owned
subsidiary, American Cyanamid Company, and Merck & Co., Inc. Under these
agreements, we receive reciprocal license rights to other technology or annual
fees together with milestone and royalty payments with respect to small-molecule
gene transcription modulators developed and marketed as pharmaceutical products.
We expect to execute similar additional license agreements with third parties
that use this technology.
OUR COMPETITION
The pharmaceutical and biotechnology industries are intensely competitive.
We face, and will continue to face, intense competition from organizations such
as large pharmaceutical companies, biotechnology companies and academic and
research institutions. We face significant competition from industry
participants which are pursuing the same or similar technologies as those that
comprise our technology platform and from organizations that are pursuing
pharmaceutical products or therapies that are competitive with our potential
products. Most of the major pharmaceutical organizations competing with us have
greater capital resources, larger research and development staffs and facilities
and greater experience in drug development, obtaining regulatory approval and
pharmaceutical product manufacturing and marketing. Our major competitors
include fully-integrated pharmaceutical companies that conduct extensive drug
discovery efforts and are developing novel small molecule pharmaceuticals, as
well as numerous smaller companies.
With respect to our small molecule drug discovery programs, other companies
have potential drugs in clinical trials to treat disease areas for which we are
seeking to discover and develop drug candidates. These competing drug candidates
may be further advanced in clinical development than our potential products in
our small molecule programs and may result in effective, commercially successful
products. In the cancer field, our lead drug candidate, OSI-774, is currently in
Phase II trials. At least four competitors, Pfizer/Warner-Lambert, AstraZeneca
PLC, ImClone Systems Incorporated and Abgenix, Inc., also have compounds in
clinical testing for this target.
In addition, CP-609,754 is being developed by Pfizer 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 Schering-Plough Corporation and Johnson & Johnson. Moreover,
our efforts in the area of asthma have led to advanced pre-clinical development
OSIC-113760, a promising adenosine A(1) receptor inhibitor. Schering-Plough and
Johnson & Johnson each have similar drug candidates. Several other biotechnology
and pharmaceutical companies are pursuing novel anti-cancer therapeutics.
Companies with related research and development activities also present
significant competition for us. For example, research efforts with respect to
gene sequencing and mapping are identifying new and possibly superior target
genes than our target genes. In addition, alternative drug discovery strategies,
such as rational drug design, may prove more effective than those pursued by us.
Furthermore, competitors may have access to more diverse compounds than we do
for testing by virtue of larger compound libraries or through combinatorial
chemistry skills or other means.
Our 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 chemistries. Pharmaceutical and
biotechnology companies and others are active in all of these areas and 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.
We believe that our ability to compete successfully will be based upon,
among other things, our ability to create and maintain scientifically advanced
technology, attract and retain scientific personnel possessing a broad range of
expertise, obtain patent protection or otherwise develop and protect proprietary
products or processes, enter into co-development and marketing arrangements with
our collaborative partners, conduct clinical trials, obtain required government
approvals on a timely basis and commercialize our products.
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GOVERNMENT REGULATION
We and our collaborative partners are subject to, and any potential
products discovered and developed by us 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.
The FDA Process
The process required by the FDA before pharmaceutical products may be
approved for marketing in the United States generally involves:
- pre-clinical laboratory and animal tests;
- submission to the FDA of an investigational new drug application, which
must become effective before clinical trials may begin;
- adequate and well controlled human clinical trials to establish the
safety and efficacy of the drug for its intended indication;
- submission to the FDA of a new drug application; and
- FDA review of the new drug application or product license application in
order to determine, among other things, whether the drug is safe and
effective for its intended uses.
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 good manufacturing practices. The results of the
pre-clinical tests are submitted to the FDA as part of an investigational new
drug application 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 investigational new drug application. Protocols must be conducted in
accordance with FDA regulations concerning good clinical practices to ensure the
quality and integrity of clinical trial results and data. Failure to adhere to
good clinical protocols may result in FDA rejection of clinical trial results
and data, and may delay ultimate FDA approval of the drug candidates.
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:
- evaluate preliminarily the efficacy of the product for specific, targeted
indications;
- determine dosage tolerance and optimal dosage; and
- 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 our own and our collaborators' products, including the
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.
Among the conditions for new drug application approval is the requirement
that the prospective manufacturer's procedures conform to good manufacturing
practices, which must be followed at all times. In
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complying with this requirement, 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, compliance with good manufacturing
practices. To supply products for use in the United States, foreign
manufacturing establishments must comply with good manufacturing practices and
are subject to periodic inspection by the FDA or by regulatory authorities in
certain countries under reciprocal agreements with the FDA.
Both before and after approval is obtained, a product, its manufacturer and
the holder of the new drug application for the product are subject to
comprehensive regulatory oversight. Violations of regulatory requirements at any
stage, 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 new drug application holder. In addition,
later discovery of previously unknown problems may result in restrictions on the
product, manufacturer or new drug application holder, including withdrawal of
the product from the market. Furthermore, new government requirements may be
established that could delay or prevent regulatory approval of our products
under development.
Other Regulatory Processes
For marketing outside the United States, we and our collaborators and the
drugs developed by us, 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 new drug application or comply with FDA regulations pertaining to
investigational new drug applications.
In addition to regulations enforced by the FDA, we 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 federal, state and local regulations. Our research and
development activities involve the controlled use of hazardous materials,
chemicals and various radioactive compounds. Although we believe that our 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.
OUR EMPLOYEES
We believe that our success is largely dependent upon our ability to
attract and retain qualified personnel in scientific and technical fields. As of
November 30, 2000, we employed 221 persons worldwide (155 in the United States),
of whom 171 were primarily involved in research and development activities, with
the remainder engaged in executive and administrative capacities. Although we
believe that we have been successful to date in attracting skilled and
experienced scientific personnel, competition for personnel is intense and we
cannot assure that we will continue to be able to attract and retain personnel
of high scientific caliber. We consider our employee relations to be good.
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CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
(Cautionary Statement 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 our plans, strategies and intentions, or our future performance
or goals for our 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. Stockholders and prospective stockholders are cautioned
that these statements are only projections. In addition, any forward-looking
statement that we make is intended to speak only as of the date on which we made
the statement. We 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 our 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 WE HAVE POTENTIAL PRODUCTS THAT APPEAR TO BE PROMISING AT EARLY STAGES
OF DEVELOPMENT AND IN CLINICAL TRIALS, NONE OF OUR POTENTIAL PRODUCTS MAY REACH
THE MARKET FOR A NUMBER OF REASONS.
Our success depends on the discovery of new drugs which we can
commercialize and take to market. None of our potential products, including
OSI-774, however, may ever reach the market for a number of reasons. They may be
found ineffective or cause harmful side-effects during pre-clinical testing or
clinical trials or fail to receive necessary regulatory approvals. We may find
that the products cannot be manufactured on a large scale basis, and therefore,
they may not be economical to produce. Our products could also fail to achieve
market acceptance or be precluded from commercialization by proprietary rights
of third parties.
We have a number of product candidates in very early stages of development,
and we do not expect them to be commercially available for several years, if at
all. All but two of our product candidates are in the pre-clinical development
phase. The two candidates that are in clinical trials will still require
significant research and development and regulatory approvals before we or our
collaborative partner will be able to market them.
IF WE HAVE A SETBACK IN OUR OSI-774 PROGRAM, OUR STOCK PRICE WOULD ALMOST
CERTAINLY DECLINE.
We are currently in Phase II clinical trials for OSI-774. If the results of
the trials are not satisfactory, we would need to conduct additional clinical
trials or abandon our OSI-774 program. Since OSI-774 is our most advanced
product candidate, a setback of this nature would almost certainly cause a
decline in our stock price.
IF WE ARE UNABLE TO DEMONSTRATE ACCEPTABLE SAFETY AND EFFICACY OF OSI-774 DURING
CLINICAL TRIALS, WE WILL NOT BE ABLE TO OBTAIN REGULATORY APPROVAL AND THUS WILL
NOT BE ABLE TO COMMERCIALIZE AND GENERATE REVENUES FROM OSI-774.
We must continue to demonstrate, through pre-clinical testing and clinical
trials, that OSI-774 is safe and effective. The results from pre-clinical
testing and early clinical trials may not be predictive of results obtained in
subsequent clinical trials, and we cannot be sure that our clinical trials will
demonstrate the safety and efficacy necessary to obtain regulatory approval for
OSI-774. A number of companies in the biotechnology and pharmaceutical
industries have suffered significant setbacks in advanced clinical trials, even
after obtaining promising results in earlier trials. In addition, certain
clinical trials are conducted with patients having the most advanced stages of
disease. During the course of treatment, these patients often die or suffer
other adverse medical effects for reasons that may not be related to the
pharmaceutical agent being tested. These events can cause our statistical
analysis of clinical trial results to be incorrect.
The completion of clinical trials of OSI-774 may be delayed by many
factors. One such factor is the rate of enrollment of patients. We cannot
control the rate at which patients present themselves for enrollment, and we
cannot be sure that the rate of patient enrollment will be consistent with our
expectations or be sufficient to enable clinical trials of our product
candidates to be completed in a timely manner. Any significant delays in,
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or termination of, clinical trials of our product candidates may hinder our
ability to obtain regulatory approval of OSI-774.
We cannot be sure that regulatory authorities will permit us to undertake
additional clinical trials for OSI-774. Any delays in obtaining or failure to
obtain regulatory approval will hinder us from commercializing and generating
revenues from OSI-774.
IF WE ARE UNABLE TO ENTER INTO AND MAINTAIN ARRANGEMENTS WITH THIRD PARTIES FOR
THE CO-DEVELOPMENT AND COMMERCIALIZATION OF OUR POTENTIAL PRODUCTS, INCLUDING
OSI-774, OUR ABILITY TO PROCEED WITH THE TIMELY AND PROFITABLE MANUFACTURING AND
SALE OF OUR PRODUCT CANDIDATES MAY BE LIMITED.
Our strategy is to develop our own drug candidates through the early stages
of clinical development prior to entering into co-development and
commercialization agreements with leading pharmaceutical companies in return for
a greater share of the revenues derived from product sales. If we fail to enter
into and maintain successful collaborative partnerships, we may not be able to
obtain the resources needed to commercialize potential products in certain drug
discovery efforts.
Successful commercialization of our product candidates is dependent upon
our ability to:
- manufacture our products in commercial quantities at reasonable costs;
- obtain reimbursement coverage for our products;
- compete favorably against other products; and
- market our products successfully.
For our most advanced drug candidate, OSI-774, we intend to seek a
co-development and marketing partnership with a major pharmaceutical company. We
do not have, and do not currently plan to develop, our own marketing capability.
The failure to build a co-development and marketing partnership on reasonable
terms could delay our development of OSI-774 and could require us to expend
greater financial resources because we would have to focus our efforts
internally. As our internal costs increase, we may have difficulty recovering
them.
IF OUR COMPETITORS SUCCEED IN DEVELOPING TECHNOLOGIES AND PRODUCTS THAT ARE MORE
EFFECTIVE THAN OUR OWN, OUR TECHNOLOGIES AND PRODUCTS MAY BE RENDERED LESS
COMPETITIVE.
We face significant competition from industry participants that are
pursuing the same technologies as we are, and from organizations that are
developing pharmaceutical products that are competitive with our potential
products. Where we are developing products independently, many of the
organizations competing with us have greater capital resources, larger research
and development staffs and facilities, and more extensive experience in drug
discovery and development, obtaining regulatory approval and pharmaceutical
product manufacturing and marketing. With these additional resources, our
competitors may be able to respond to the rapid and significant technological
changes in the biotechnology and pharmaceutical industries faster than we can.
Our future success will depend in large part on our ability to maintain a
competitive position with respect to these technologies. Rapid technological
development may result in our compounds, products or processes becoming obsolete
before we recover any of the expenses incurred to develop them.
In particular, we face significant competition from other biotechnology and
pharmaceutical companies which are currently developing drugs similar to OSI-774
that could decrease our potential sales of the product. We are aware of four
companies, two of which have resources substantially greater than we do, which
are currently developing drugs similar to OSI-774. AstraZeneca is developing a
small molecule with a close structural relationship to OSI-774, called
Iressa(TM), that is currently in Phase III trials. Pfizer/Warner-Lambert has a
compound, CI-1033, now in Phase I trials, which is structurally similar to
Iressa and OSI-774. ImClone and Abgenix are developing a different kind of
product, humanized antibodies, against the EGFR target. The ImClone product is
currently in Phase III trials and the Abgenix product is in Phase I trials.
AstraZeneca and ImClone may both enter the market ahead of us. If our
competitors succeed in developing drugs similar to
18
<PAGE> 19
OSI-774 that are more effective than our own, or if they enter the market with
their products before we do, our product may not gain widespread market
acceptance.
IF GOVERNMENT AGENCIES DO NOT GRANT US OR OUR COLLABORATIVE PARTNERS REQUIRED
APPROVALS FOR ANY OF OUR POTENTIAL PRODUCTS, THEN WE OR OUR COLLABORATIVE
PARTNERS WILL NOT BE ABLE TO MANUFACTURE OR SELL OUR PRODUCTS.
All of our newly discovered potential products 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
requires 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. The FDA and other
regulatory agencies may delay or deny the approval of our proposed products.
None of our products has yet received governmental approval and none may ever do
so.
Even if we obtain regulatory approval, a marketed product and its
manufacturer are subject to continuing review, including post-marketing
surveillance. We may be required to withdraw our product from the market if
previously unknown problems are discovered. Violations of regulatory
requirements at any stage may result in various unfavorable consequences to us,
including the FDA's imposition of criminal penalties against the manufacturer
and the holder of the new drug application.
WE HAVE INCURRED LOSSES SINCE OUR INCEPTION, AND WE EXPECT TO INCUR LOSSES OVER
THE NEXT SEVERAL YEARS WHICH MAY CAUSE THE VALUE OF OUR COMMON STOCK TO
DECREASE.
We have had net operating losses since our inception in 1983. At September
30, 2000, our accumulated deficit was approximately $82.0 million. Our losses
have resulted principally from costs incurred in research and development and
from general and administrative costs associated with our operations. These
costs have exceeded our revenues, which to date have been generated principally
from collaborative research agreements.
We expect to incur substantial additional operating expenses over the next
several years as a result of increases in our expenses for the development of
OSI-774 and our other research and development programs. These expenses include
enhancements in our drug discovery technologies and increases in the resources
we will devote to our internally funded proprietary projects, which are
undertaken without collaborative partners. We do not expect to generate revenues
from the sale of our potential products for a number of years and we expect to
continue to incur operating losses during this period.
IF WE CANNOT PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR ABILITY TO DEVELOP
AND COMMERCIALIZE OUR PRODUCTS WILL BE SEVERELY LIMITED.
We currently own 13 U.S. patents and 38 foreign patents. In addition, we
currently own 23 pending applications for U.S. patents, three of which have been
allowed, and 16 applications for foreign patents, one of which has been allowed.
We intend to continue to aggressively seek patent protection for all of the
product candidates that we have discovered or developed.
Our success depends, in part, on our ability and our collaborative
partners' ability to obtain patent protection for new product candidates,
maintain trade secret protection and operate without infringing the proprietary
rights of third parties. As with most biotechnology and pharmaceutical
companies, our patent position is highly uncertain and involves complex legal
and factual questions. Without patent and other similar protection, other
companies could offer substantially identical products for sale without
incurring the sizable discovery and development costs that we have incurred. Our
ability to recover these expenditures and realize profits upon the sale of
products could be diminished.
The process of obtaining patents can be time consuming and expensive. Even
if we spend the necessary time and money, a patent may not issue or it may
insufficiently protect the technology it was intended to protect. We can never
be certain that we were the first to develop the technology or that we were the
first to file a patent application for the particular technology because U.S.
patent applications are confidential until a patent issues and publications in
the scientific or patent literature lag behind actual discoveries.
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<PAGE> 20
The degree of future protection for our proprietary rights will remain
uncertain if our pending patent applications are not approved for any reason or
if we are unable to develop additional proprietary technologies that are
patentable. Furthermore, third parties may independently develop similar or
alternative technologies, duplicate some or all of our technologies, design
around our patented technologies and challenge issued patents.
IF WE CANNOT OBTAIN ADEQUATE FUNDING FOR OUR RESEARCH AND DEVELOPMENT EFFORTS,
WE MAY HAVE TO LIMIT THE SCOPE OF OUR PROPRIETARY PRODUCT DEVELOPMENT OR ENTER
INTO MORE RESTRICTIVE ARRANGEMENTS WITH COLLABORATIVE PARTNERS.
Our future capital requirements will depend on many factors, including the
size and complexity of our research and development programs, the progress of
pre-clinical testing and early stage clinical trials, the time and costs
involved in obtaining regulatory approvals for our product candidates, the costs
of manufacturing arrangements and the costs of commercialization activities.
We intend to raise funds through public or private sales of our securities,
including equity securities, as well as from collaborative partners. We may not
be able to obtain adequate funding from equity financings on reasonable or
acceptable terms, if at all. Furthermore, any additional equity financings may
dilute the value of the common stock held by our stockholders. If adequate funds
are not available, we may be required to significantly curtail one or more of
our research and development programs or obtain funds through arrangements with
collaborative partners or others that may require us to relinquish certain of
our rights to a number of our technologies or product candidates.
IF OUR COLLABORATIVE PARTNERS GIVE OTHER PRODUCTS GREATER PRIORITY THAN OUR
PRODUCTS, THEN OUR PRODUCTS MAY BE SUBJECT TO DELAYS IN RESEARCH AND DEVELOPMENT
AND MANUFACTURE THAT MAY IMPEDE OUR ABILITY TO TAKE THEM TO MARKET BEFORE OUR
COMPETITORS. THIS MAY RENDER OUR PRODUCTS OBSOLETE OR MAY RESULT IN LOWER THAN
ANTICIPATED REVENUES FOR US.
We rely on some of our collaborative partners to assist with research and
development as well as the manufacture of our potential products in their
FDA-approved manufacturing facilities. Our collaborative agreements allow our
partners significant discretion in electing whether or not to pursue the
activities that they have agreed to pursue for us. We cannot control the amount
and timing of resources our collaborative partners devote to our programs or
potential products. Our potential products may be in competition with other
products for priority of access to our collaborative partners' research and
development and manufacturing facilities. If our collaborative partners do not
give significant priority to the research and development or manufacture of our
potential products in an effective or timely manner, the clinical development of
our product candidates or their submission for regulatory approval could be
delayed, and our ability to deliver products to the market on a timely basis
could be impaired. Furthermore, we may not be able to enter into any necessary
third-party research and development or manufacturing arrangements on acceptable
terms, if at all.
IF OUR COLLABORATIVE AGREEMENTS WITH TANABE FOR DIABETES RESEARCH AND ANADERM
FOR COSMECEUTICALS RESEARCH ARE NOT RENEWED, OUR ABILITY TO PURSUE THE DRUG
DISCOVERY EFFORTS THAT ARE THE SUBJECT OF THE AGREEMENTS MAY BE LIMITED.
Because our collaborative programs with Tanabe and Anaderm have terms of
four and three years, respectively, which is less than the period required for
the discovery, clinical development and commercialization of most drugs, the
continuation of our drug discovery and development programs in the areas of
diabetes and cosmeceuticals is dependent on the periodic renewal of such
collaborative arrangements. Our collaborative partners can terminate our
collaborative research agreements under various circumstances, sometimes on
short notice without cause. The termination or non-renewal of these
collaborative relationships could delay our research and development efforts
arising from these collaborations because we would have to focus our efforts
internally in these areas and/or search for and engage new collaborative
partners. Our internal costs would inevitably increase as a result, and we could
have difficulty recovering these costs.
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<PAGE> 21
CONSOLIDATIONS AMONG COMPANIES WITH WHICH WE ARE ENGAGED IN PARTNERSHIPS OR
ALLIANCES CAN RESULT IN THE DIMINUTION OR TERMINATION OF, OR DELAYS IN, ONE OR
MORE OF OUR COLLABORATIVE PROGRAMS.
In 1995, the pharmaceutical operations of three companies with which we had
collaborative research agreements, Hoechst AG, Hoechst Roussel Pharmaceuticals,
Inc. and Marion Merrell Dow Inc., were combined into one entity, currently known
as Aventis. This combination resulted in delays in our collaborative programs
with each of the constituent companies and a reduction in the aggregate funding
received by us. The merger between Pfizer and Warner-Lambert and other possible
consolidations among large pharmaceutical companies with which we are engaged
could result in the diminution or termination of, or delays in, one or more of
our collaborative programs.
IF WE OR OUR COLLABORATIVE PARTNERS ARE REQUIRED TO OBTAIN LICENSES FROM THIRD
PARTIES, OUR REVENUES AND ROYALTIES ON ANY COMMERCIALIZED PRODUCTS COULD BE
REDUCED.
The development of some of our products may require the use of technology
developed by third parties. The extent to which efforts by other researchers
have resulted or will result in patents and the extent to which we or our
collaborative partners are forced to obtain licenses from others, if available,
is currently unknown. If we or our collaborative partners must obtain licenses
from third parties, fees must be paid for such licenses. These fees would reduce
the revenues and royalties we may receive on commercialized products.
IF OTHER COMPANIES CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS,
WE MAY BE SUBJECT TO COSTLY AND TIME-CONSUMING LITIGATION AND DELAYS IN PRODUCT
INTRODUCTION.
Our processes and potential products may conflict with patents which have
been or may be granted to competitors, academic institutions or others. As the
biotechnology industry expands and more patents are filed and issued, the risk
increases that our product candidates may give rise to a declaration of
interference by the Patent and Trademark Office, or to claims of patent
infringement by other companies, institutions or individuals. These entities or
persons could bring legal proceedings against us seeking substantial damages or
seeking to enjoin us from testing, manufacturing or marketing our products. If
any of these actions were successful, we may also be required to cease the
infringing activity or obtain the requisite licenses or rights to use the
technology which may not be available to us on acceptable terms, if at all. Any
litigation, regardless of the outcome, could be extremely costly to us.
THE USE OF ANY OF OUR POTENTIAL PRODUCTS IN CLINICAL TRIALS AND THE SALE OF ANY
APPROVED PRODUCTS MAY EXPOSE US TO LIABILITY CLAIMS RESULTING FROM THE USE OF
PRODUCTS OR PRODUCT CANDIDATES.
The nature of our business exposes us to potential liability risks inherent
in the testing, manufacturing and marketing of drug discovery candidates and
products. Using our drug candidates in clinical trials may expose us to product
liability claims. These risks will expand with respect to drugs, if any, that
receive regulatory approval for commercial sale. While we currently maintain
product liability insurance that we believe is adequate, such insurance may not
be available at reasonable rates, if at all, in the future. If we do not or
cannot maintain adequate insurance coverage, we may incur significant liability
if a product liability claim arises.
IF OTHER BIOTECHNOLOGY AND PHARMACEUTICAL COMPANIES ARE NOT WILLING TO PAY
APPROPRIATE ROYALTIES FOR THE USE OF OUR PATENTED "GENE TRANSCRIPTION ESTATE,"
THEN WE MAY CHOOSE TO EXPEND SUBSTANTIAL AMOUNTS OF FUNDS AND RESOURCES IN
ENFORCING THE PATENTS.
We are seeking to license to other companies rights to use our patented
"gene transcription estate" which consists of drug discovery assays that provide
a way to identify novel product candidates that can control the activity of
genes. We believe technology and practices covered by these patents are in
widespread use in the pharmaceutical and biotechnology industries. To date, we
have granted five licenses to use our gene transcription patent. If other
pharmaceutical and biotechnology companies which we believe are using our
patented technology are not willing to negotiate license arrangements with us on
reasonable terms, we may have to choose between abandoning our licensing
strategy or initiating legal proceedings against those companies. Legal action,
particularly patent infringement litigation, is extremely costly.
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<PAGE> 22
IF THE MARKET PRICE OF OUR COMMON STOCK, SIMILAR TO OTHER BIOTECHNOLOGY
COMPANIES, REMAINS HIGHLY VOLATILE, THEN OUR STOCKHOLDERS MAY NOT BE ABLE TO
SELL THEIR STOCK WHEN DESIRED OR AT DESIRABLE PRICES.
When the stock prices of biotechnology companies fall, our stock price will
most likely fall as well. The market price of the common stock of biotechnology
and pharmaceutical companies and our common stock has been volatile and may
remain volatile for the foreseeable future. If our stock price falls, our
stockholders may not be able to sell their stock when desired or at desirable
prices.
The following factors, among others, may also cause our stock price to
decline:
- fluctuations in operating results;
- announcements of technological innovations or new therapeutic products by
others;
- negative or neutral clinical trial results;
- developments concerning strategic alliance agreements;
- government regulation;
- developments in patent or other proprietary rights;
- public concern as to the safety of our products;
- future sales of substantial amounts of our common stock by existing
stockholders; and
- comments by securities analysts and general market conditions.
OUR CORPORATE GOVERNANCE DOCUMENTS AND STATE LAW PROVIDE CERTAIN ANTI-TAKEOVER
MEASURES WHICH WILL DISCOURAGE CERTAIN TYPES OF TRANSACTIONS INVOLVING AN ACTUAL
OR POTENTIAL CHANGE IN CONTROL OF THE COMPANY.
Under our certificate of incorporation, our board of directors has the
authority, without further action by the stockholders, to fix the rights and
preferences, and issue shares of, preferred stock. Since January 1999, we have
had a shareholders rights plan, which has recently been replaced with a new
plan, commonly referred to as a "poison pill." Further, we are subject to
Section 203 of the Delaware General Corporation Law which, subject to certain
exceptions, restricts certain transactions and business combinations between a
corporation and a stockholder owning 15% or more of the corporation's
outstanding voting stock for a period of three years from the date the
stockholder becomes an interested stockholder.
ITEM 2. PROPERTIES
We lease three facilities, one located at 106 Charles Lindbergh Boulevard,
Uniondale, New York, consisting of 30,000 square feet, one located at 777 Old
Saw Mill Road, Tarrytown, New York, consisting of 45,000 square feet, and
another located at 50 Charles Lindbergh Boulevard, Uniondale, New York,
consisting of 4,500 square feet. The larger Uniondale facility houses our
principal executive offices and drug discovery laboratory. The Tarrytown
facility houses an additional laboratory, which was acquired in the Cadus asset
acquisition on July 30, 1999. We have agreed to sublease approximately 9,100
square feet of this space in fiscal 2001. The smaller Uniondale facility houses
our finance, administrative and regulatory affairs offices. Our subsidiary,
OSI-UK, leases a 25,000 square foot facility located at 10 Holt Court South,
Aston Science Park, Birmingham, England.
During fiscal 2000, we recently received a commitment from the State of New
York to expand and refurbish a state-of-the-art discovery research and
headquarters facility located in the Broad Hollow BioScience Park on the SUNY
campus in Farmingdale, New York, which we will lease from the State. We expect
to move our headquarters and Uniondale research operations to this new facility
by the end of 2001. With this additional space, we believe that our facilities
will be adequate to meet current requirements.
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<PAGE> 23
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our security holders during
the fourth quarter of fiscal 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Our common stock is traded in the over-the-counter market and is included
for quotation on the NASDAQ National Market under the symbol OSIP. The following
is the range of high and low sales prices by quarter for our common stock from
the first quarter of fiscal 1999 through September 30, 2000 as reported on the
NASDAQ National Market:
<TABLE>
<CAPTION>
2000 FISCAL YEAR HIGH LOW
---------------- ------- -------
<S> <C> <C>
First Quarter............................................... $ 8.420 $ 4.063
Second Quarter.............................................. 30.750 7.000
Third Quarter............................................... 29.000 8.375
Fourth Quarter.............................................. 73.940 27.060
</TABLE>
<TABLE>
<CAPTION>
1999 FISCAL YEAR HIGH LOW
---------------- ------- -------
<S> <C> <C>
First Quarter............................................... $ 5.875 $ 2.250
Second Quarter.............................................. 5.063 2.686
Third Quarter............................................... 7.125 4.000
Fourth Quarter.............................................. 7.000 3.938
</TABLE>
As of November 30, 2000, there were approximately 455 holders of record of
our common stock. We have not paid any cash dividends since inception and we do
not intend to pay any cash dividends in the foreseeable future. Declaration of
dividends will depend, among other things, upon future earnings, our operating
and financial condition, our capital requirements and general business
conditions.
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<PAGE> 24
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data for
each of the years in the five-year period ended September 30, 2000. The
information below should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------------------
2000(A) 1999(B) 1998(C) 1997(D) 1996(E)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Revenues........................... $ 28,651,428 $ 22,652,303 $ 19,468,337 $ 14,777,323 $ 9,718,437
------------ ------------ ------------ ------------ ------------
Expenses:
Research and development......... 39,622,140 24,995,577 20,303,837 17,143,034 13,741,493
Production and service costs..... 834,870 1,753,474 813,464 635,768 134,529
Selling, general and
administrative................. 10,937,829 8,679,737 8,264,888 7,177,848 6,492,172
Amortization of intangibles...... 869,761 1,468,801 1,460,740 1,460,748 1,452,755
------------ ------------ ------------ ------------ ------------
Loss from operations............... $(23,613,172) $(14,245,286) $(11,374,592) $(11,640,075) $(12,102,512)
------------ ------------ ------------ ------------ ------------
Other income -- net................ 3,519,759 1,155,834 1,190,124 2,053,838 2,160,377
Gain on sale of Anaderm common
stock............................ -- 3,291,015 -- -- --
Gain on sale of diagnostic
business......................... 3,745,844 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss........................... $(16,347,569) $ (9,798,437) $(10,184,468) $ (9,586,237) $ (9,942,135)
============ ============ ============ ============ ============
Basic and diluted net loss per
weighted average share of common
stock outstanding................ $ (0.67) $ (0.46) $ (0.48) $ (0.44) $ (0.50)
============ ============ ============ ============ ============
Weighted average number of shares
of common stock outstanding...... 24,531,072 21,450,812 21,372,655 21,604,344 19,712,274
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents, and
investment securities............ $ 85,064,671 $ 18,861,854 $ 24,418,281 $ 31,834,669 $ 47,542,745
Receivables........................ 1,048,921 5,193,902 2,410,794 1,871,212 2,843,014
Working capital.................... 80,104,223 14,562,336 22,268,346 29,612,616 47,181,407
Total assets....................... 99,776,008 47,031,328 50,417,980 59,585,565 73,537,054
Long-term liabilities.............. 2,719,336 3,084,644 2,009,509 1,727,281 1,421,916
Stockholders' equity............... 89,881,629 33,364,946 43,059,246 52,944,868 68,286,959
</TABLE>
---------------
(a) The fiscal 2000 consolidated financial statements include a charge to
operations of $700,000 representing the cost of a license to use and
practice certain of Cadus Pharmaceutical Corporation's technology and
patents; a $3.5 million technology access fee received upon the execution of
a collaborative research and license agreement with Tanabe Seiyaku Co.,
Ltd.; non-cash compensation charges of approximately $6.8 million and
deferred compensation of approximately $8.8 million associated with options
issued to an employee and consultants; net proceeds of approximately $53
million from a private placement of common stock; and a $3.7 million gain
resulting from the sale of the Company's diagnostics business, including the
assets of our wholly-owned subsidiary, Oncogene Science Diagnostics, Inc.,
to Bayer Corporation. (See notes 2(e), 5(b), 9(a), 9(f), and 16 to the
accompanying consolidated financial statements.)
(b) The fiscal 1999 consolidated financial statements include the acquisition of
Cadus Pharmaceutical Corporation's research business for $2.2 million in
cash, including a $806,000 charge to operations for in-process R&D acquired;
a gain of $3.3 million on the sale of the Company's Anaderm Research
Corporation stock to Pfizer Inc.; and a $535,000 charge to operations for
the estimated costs of closing the Company's facilities in North Carolina.
(See notes 3(a), 5(a) and 15 to the accompanying consolidated financial
statements.)
(c) The fiscal 1998 consolidated financial statements include approximately
$702,000 of license revenue received upon execution of a license agreement
with Aurora Biosciences Corporation. (See note 2(a) to the accompanying
consolidated financial statements.)
(d) The fiscal 1997 consolidated financial statements include license fee
revenues received upon execution of collaborative research and license
agreements with Aventis Pharmaceuticals Inc. and Sankyo Co., Ltd.
aggregating $1.3 million; and the repurchase of all 1.25 million shares of
the Company's common stock held by Becton, Dickinson and Company for an
aggregate price of $8.8 million. (See notes 5(e) and 5(f) to the
accompanying consolidated financial statements.)
(e) The fiscal 1996 consolidated financial statements reflect approximately
$30.3 million of net proceeds from a public offering of common stock; the
acquisition of all of the outstanding capital stock of Aston Molecules Ltd.
for stock and rights to shares of stock aggregating approximately $3.6
million, including other direct costs of the acquisition; and the
acquisition of all of the outstanding shares of MYCOsearch, Inc. for cash,
stock and warrants aggregating approximately $5.3 million.
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<PAGE> 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since our inception in March 1983, we have devoted our resources to the
development of our technology platform and research and drug discovery programs.
To date, none of our proprietary or collaborative programs have resulted in a
commercial product; and therefore, we have not received any revenues or
royalties from the sale of products by us or by our collaborators. Furthermore,
we do not expect to generate any such revenues for several years, if at all. We
have incurred an accumulated deficit of approximately $82.0 million as of
September 30, 2000 and expect to continue to incur operating losses for several
years. We have funded our operations primarily through public and private
placements of equity securities and payments under collaborative research
agreements with major pharmaceutical companies.
Historically, we have conducted most of our drug discovery programs through
funded collaborations with major pharmaceutical companies. These arrangements
have typically included milestone and royalty payments on the successful
development and marketing of products discovered in the collaborations. Using
this business model, we have been able to leverage the research, development and
financial resources of our corporate partners to help build and sustain a large
pipeline of product opportunities supplemented by those within our own
proprietary programs. More recently, as we have generated the financial
resources to invest more fully in our own programs, we have begun a transition
away from a partner-funded alliance model in favor of OSI-owned and sponsored
drug candidates. We intend to develop our own drug candidates through the early
stages of clinical development prior to entering into co-development and
commercialization agreements with leading pharmaceutical companies in return for
a greater share of the revenues derived from product sales.
The most advanced of our product candidates is OSI-774, which has been
shown to be active and well-tolerated as a monotherapy in three ongoing
open-label, Phase II clinical trials for the treatment of non-small cell lung,
ovarian and head and neck cancers. We have an additional candidate in clinical
trials and nine candidates in late stage pre-clinical development. The
importance of this new class of drugs led to an antitrust finding by the U.S.
Federal Trade Commission in June 2000 during its investigation of Pfizer Inc.'s
merger with Warner-Lambert and the return of all rights to OSI-774 to us.
REVENUES
Total revenues of $28.7 million in fiscal 2000 increased approximately $6.0
million or 26% compared to fiscal 1999, and total revenues of $22.7 million in
fiscal 1999 increased approximately $3.2 million or 16% compared to fiscal 1998.
Collaborative research and development agreements with Pfizer, Anaderm, Tanabe,
Aventis, Sankyo, Solvay, Fujirebio, Bayer, and Helicon Therapeutics, Inc.
accounted for substantially all of our collaborative program revenues. Total
collaborative program revenues of approximately $23.7 million in fiscal 2000
increased approximately $5.5 million or 30% compared to fiscal 1999. This
increase was primarily due to increased funding for the Pfizer/Anaderm program
for the discovery and development of cosmeceuticals, funding from a research
agreement with Solvay assumed by us on July 30, 1999 with the acquisition of
certain assets from Cadus Pharmaceutical Corporation, and funding associated
with a collaborative research agreement with Tanabe initiated on October 1,
1999. Increases in collaborative program revenues for fiscal 2000 were partially
offset by the termination of the diagnostics collaboration with Bayer upon the
sale of diagnostics business to Bayer in November 1999, and, to lesser extents,
the reduction in funding under the extended collaboration agreement with Sankyo
and the conclusion of our funded collaborative research agreement with Helicon
in June 1999. Total collaborative program revenues of approximately $18.2
million in fiscal 1999 increased approximately $2.0 million or 12% compared to
fiscal 1998. This increase was primarily due to the expansion of the
Pfizer/Anaderm program as of April 1999 and the initiation of the research
agreement with Solvay. Collaborative program revenues were partially offset by
the conclusion in October 1998 of one of our funded collaborative programs with
Aventis relating to the discovery and development of orally active drugs for the
treatment of chronic anemia.
25
<PAGE> 26
We recognized a technology access fee of $3.5 million in October 1999 from
Tanabe in conjunction with the new collaborative research agreement as discussed
in notes 5(b) and 17 to the accompanying consolidated financial statements.
Sales of products and services derived from pharmaceutical services of our
UK subsidiary, OSI-UK, and from diagnostics sales of our U.S. subsidiary, OSDI,
Inc., or OSDI (formerly known as Oncogene Science Diagnostics, Inc.), decreased
approximately $619,000 or 51% in fiscal 2000 compared to fiscal 1999. The
decrease was due to a shift in focus of pharmaceutical services from external
sales to internal programs and to the sale of our diagnostics assets to Bayer in
November 1999. Additionally, we are currently in the process of winding down our
external sales from pharmaceutical services in order to focus entirely on our
internal programs. Sales of products and services in fiscal 1999 increased
approximately $99,000 or 9% compared to fiscal 1998. The increase was primarily
due to the growth in sales of the Company's diagnostic products.
Other research revenues, representing primarily government grants and other
research grants, decreased approximately $326,000 or 33% in fiscal 2000 compared
to fiscal 1999 and decreased approximately $435,000 or 30% in fiscal 1999
compared to fiscal 1998. These decreases were related to a reduction in the
number of government grant applications submitted as we narrowed our grant
program efforts to our disease areas of focus in order to more fully leverage
our resources.
License revenues decreased approximately $2.0 million or 90% in fiscal 2000
compared to fiscal 1999. The decrease was primarily due to the receipt of a
license fee of $2.0 million from a license agreement with BioChem Pharma, Inc.
in March 1999 which replaced an earlier collaborative program focused on
anti-viral drug discovery. License revenues for fiscal 2000 consisted of a
patent license fee of $100,000 paid by one licensee and $125,000 of maintenance
fees from three other licensees. License revenues increased approximately $1.5
million or 202% in fiscal 1999 compared to fiscal 1998. This increase was
primarily related to the aforementioned $2.0 million license fee. During fiscal
1998, we recognized license revenues of approximately $702,000 from the signing
of a license agreement with Aurora Biosciences Corporation covering our gene
transcription patent estate.
EXPENSES
Operating expenses increased approximately $15.4 million or 42% in fiscal
2000 compared to fiscal 1999 and increased approximately $6.1 million or 20% in
fiscal 1999 compared to fiscal 1998. Research and development expenses increased
approximately $14.6 million or 59% in fiscal 2000 compared to fiscal 1999 and
increased approximately $4.7 million or 23% in fiscal 1999 compared to fiscal
1998. The increase in fiscal 2000 was related to: (i) our expanded collaboration
with Anaderm; (ii) our increased investment in proprietary drug discovery
programs, including GPCR directed drug discovery programs which were included in
the Cadus asset acquisition; (iii) the initiation of the agreement with Tanabe
and related costs; (iv) the initiation of clinical development of OSI-774; and
(v) certain non-cash, stock option-based compensation charges as discussed
below.
On August 17, 2000, the Board of Directors granted non-qualified stock
options to purchase up to 250,000 common shares to our new President and Head of
Research and Development. The terms of this grant provided for an option to
purchase 100,000 shares of common stock with an exercise price equal to 50% of
the fair market value on the grant date vesting immediately upon his employment
date on September 28, 2000 (i.e. the measurement date), and an option to
purchase 150,000 shares of common stock with an exercise price equal to the fair
market value on the grant date vesting one-third in a year from the measurement
date and monthly thereafter for twenty-four months. The granting of the options
at 50% of fair market value resulted in a compensation charge of approximately
$5.0 million. The granting of the other options resulted in deferred
compensation of approximately $4.4 million which will be recognized as
compensation expense over the vesting period. In addition, stock options granted
to non-employees in connection with their consulting arrangements resulted in
compensation expense recognized in fiscal 2000 of approximately $1.8 million and
deferred compensation of $4.4 million as of September 30, 2000. In accordance
with EITF Issue 96-18, "Accounting for Equity Instruments that Are Issued to
Other Than Employees for Acquiring, or In Conjunction with Selling, Goods or
Services," the amount of compensation expense to be recorded in future
26
<PAGE> 27
periods related to the non-employee grants is subject to change each reporting
period based upon the then fair value of these options, using a Black-Scholes
option pricing model, until expiration of the grant vesting period.
We expect to continue to increase investment in our proprietary drug
discovery programs, in particular development of OSI-774, for which we received
a royalty-free license to all rights for its further development, as more fully
described under "Liquidity and Capital Resources."
The increase in research and development expenses in fiscal 1999 compared
to fiscal 1998 was due to the Cadus asset acquisition on July 30, 1999. We
recorded a charge of $806,000 for in-process research and development acquired
in connection with the Cadus asset acquisition. Also contributing to the
increase was the continued expansion of our collaboration with Anaderm. We also
expanded our medicinal chemistry facility at our OSI-UK subsidiary to
accommodate the increased chemistry efforts required in the expanded Anaderm
collaboration. These costs were somewhat offset by the conclusion in October
1998 of our funded collaborative program with Aventis relating to the discovery
and development of orally active drugs for the treatment of chronic anemia.
Production and service costs decreased approximately $919,000 in fiscal
2000 compared to fiscal 1999 and increased approximately $940,000 in fiscal 1999
compared to fiscal 1998. The decrease in fiscal 2000 was related to the sale of
our diagnostics business, including the assets of OSDI, to Bayer on November 30,
1999. The increase in fiscal 1999 was related to increased investment in
developing OSDI.
Selling, general and administrative expenses increased approximately $2.3
million or 26% in fiscal 2000 compared to fiscal 1999 and increased
approximately $415,000 or 5% in fiscal 1999 compared to fiscal 1998. The
increase in fiscal 2000 was primarily related to the increased business
development costs associated with OSI-774 and other corporate development
activity during the fiscal year. In addition, we incurred increased
administration expenses associated with the acquired operation in Tarrytown, New
York from the Cadus asset acquisition, and the expansion of the chemistry
facility at OSI-UK. During fiscal 1999, we made the strategic decision to close
down our facilities in North Carolina and consolidate the natural products
operations into our Tarrytown facility in New York. The estimated cost of
closing this facility of approximately $535,000 was accrued as of September 30,
1999, and was included in research and development expenses ($395,000) and
selling, general and administrative expenses ($140,000) in fiscal 1999.
Amortization of intangibles in fiscal 2000 decreased approximately $599,000
or 41%. The decrease was related to the inclusion of our diagnostic patent
estate in the sale of the diagnostics business to Bayer, which eliminated the
related amortization expense effective November 30, 1999. Amortization of
intangibles in fiscal 1999 and 1998 represented primarily amortization of
patents that resulted from the acquisition of the diagnostics business in fiscal
1991 and goodwill from the acquisition of OSI-UK in fiscal 1996.
OTHER INCOME AND EXPENSE
Net investment income increased approximately $2.4 million or 190% in
fiscal 2000 compared to fiscal 1999 and decreased $177,000 or 12% in fiscal 1999
compared to fiscal 1998. The increase in fiscal 2000 was largely due to
investment of funds generated from: (i) a private placement of our common stock;
(ii) the exercise of options and warrants; and (iii) sale of the diagnostics
business unit in November 1999. These financing activities are more fully
explained in "Liquidity and Capital Resources" below. The decrease in fiscal
1999 was a result of the decline in principal balance invested offset by a gain
of approximately $436,000 from the sale of 75,000 shares of Aurora Biosciences'
common stock. Other income in fiscal 1999 includes the gain recognized on the
sale of Anaderm common stock. On September 23, 1999, we exercised our right and
sold to Pfizer all of our shares of common stock in Anaderm for approximately
$3.6 million. The sale, net of the carrying value of the investment, resulted in
a gain of approximately $3.3 million.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, working capital, representing primarily cash, cash
equivalents and short-term investments, aggregated approximately $80.1 million
compared to $14.6 million at September 30, 1999. This increase resulted
primarily from: (i) the closing of a private placement of 3,325,000 shares of
common stock in
27
<PAGE> 28
February 2000, for net proceeds of approximately $53.0 million; (ii) the
exercise of options and warrants (net of a subsequent purchase by the Company of
shares issued upon the exercise of the warrants) for approximately 2.5 million
shares of common stock by management and employees during the fiscal year, for
net proceeds of approximately $14.5 million; and (iii) the sale of our
diagnostics business in November 1999, for cash proceeds of approximately $9.2
million.
In June 2000, we received a license to develop and market OSI-774 from
Pfizer. Prior to this acquisition, our strategic plan had been focused on
increasing investment in our own drug development programs and seeking an
opportunity to license rights to a drug candidate from another company for
development by us. As a result of obtaining the license to OSI-774, the
preceding goal for in-licensing a clinical development candidate from another
company has been superceded. We expect our cash burn will increase significantly
during fiscal 2001 as a result of OSI-774, up to approximately $50 million. We
are currently seeking a co-development and marketing partnership with a major
pharmaceutical company to maximize the healthcare benefit and commercialization
of OSI-774 while maintaining a significant economic interest in the product.
On November 6, 2000, subsequent to the end of fiscal 2000, we concluded a
public offering of 5.35 million shares of common stock at a price of $70.00 per
share. Gross proceeds totaled $374.5 million with net proceeds of approximately
$350.0 million after all related fees are included. In addition, on November 21,
2000, underwriters associated with this offering exercised their over-allotment
option to purchase an additional 802,500 shares of our common stock at a price
of $70.00 per share. Gross proceeds from the exercise of the over-allotment
option totaled $56.2 million with net proceeds of approximately $52.8 million.
We believe that the proceeds from this offering together with existing cash
resources and projected funding from collaborative research and development
programs will be sufficient to fund the operations and capital requirements for
at least the next seven years.
We expect to incur additional losses over the next several years as we
increase our investment in OSI-774 and other internal proprietary programs.
Additionally, as we shift our focus toward internal drug development, we expect
collaborative revenues to decrease in the future. The funded phase of our
collaboration with Aventis ended on September 30, 2000. Also, we do not expect
the funded phase of our cancer collaboration with Pfizer to renew beyond its
scheduled termination of April 1, 2001. To achieve profitability, we, alone or
with others, must successfully develop and commercialize our technologies and
products, conduct pre-clinical studies and clinical trials, obtain required
regulatory approvals and obtain adequate assistance to successfully manufacture,
introduce and market such technologies and products. The time required to reach
profitability is highly uncertain.
During fiscal 2000, we recently received a commitment from the State of New
York to expand and refurbish a state-of-the-art discovery research and
headquarters facility located in the Broad Hollow BioScience Park on the SUNY
campus in Farmingdale, New York, which we will lease from the State. We expect
to move our headquarters and Uniondale research operations to this new facility
by the end of 2001. With this additional available space, we believe that our
facilities will be adequate to meet our current requirements.
NEW ACCOUNTING PRONOUNCEMENTS
On December 3, 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 -- "Revenue Recognition in Financial
Statements", or SAB No. 101. SAB No. 101 provides the SEC staff's views on the
recognition of revenue including nonrefundable technology access fees received
by biotechnology companies in connection with research collaborations with third
parties. SAB No. 101 states that in certain circumstances the SEC staff believes
that up-front fees, even if nonrefundable, should be deferred and recognized
systematically over the term of the research arrangement. SAB No. 101, as
amended by SAB No. 101B, requires registrants to adopt the accounting guidance
contained therein by no later than the fourth fiscal quarter of the fiscal year
beginning after December 15, 1999 (fiscal year ending September 30, 2001 for
us). We will report the effect of adopting the provisions of the SAB as a change
in accounting principle as of October 1, 2000 in accordance with APB Opinion No.
20 rather than retroactively restate prior period financial statements. We have
assessed the financial impact of complying with SAB No. 101, and we
28
<PAGE> 29
believe that the change in accounting principle will primarily result in the
recognition of the technology access fee of $3,500,000 received from Tanabe
evenly over the term of the collaboration between us and Tanabe, that had been
previously recognized as revenue in the first quarter of fiscal 2000.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", or SFAS 133, which is effective for all quarters of
fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. In
accordance with SFAS 133, an entity is required to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gain and losses to offset related results on the hedged
item in the income statement and requires that a company formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. We do not believe that the implementation of SFAS 133 will have a
material effect on our results of operations and financial position.
FORWARD LOOKING STATEMENTS
A number of the matters and subject areas discussed in this Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," in Item 1 "Business" and elsewhere in this report that are not
historical or current facts deal with potential future circumstances and
developments. The discussion of these matters and subject areas is qualified by
the inherent risks and uncertainties surrounding future expectations generally,
and these discussions may materially differ from our actual future experience
involving any one or more of these matters and subject areas. These forward
looking statements are also subject generally to the other risks and
uncertainties that are described in this report in Item 1 "Business --
Cautionary Factors that May Affect Future Results."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Our cash flow and earnings are subject to fluctuations due to changes in
interest rates in our investment portfolio of debt securities, to the fair value
of equity instruments held, and, to an immaterial extent, to foreign currency
exchange rates. We maintain an investment portfolio of various issuers, types
and maturities. These securities are generally classified as available-for-sale
and, consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a component of accumulated other
comprehensive income (loss) included in stockholders' equity. Our investments in
certain biotechnology companies are carried on the equity method of accounting.
Other-than-temporary losses are recorded against earnings in the same period the
loss was deemed to have occurred. It is uncertain whether other-than-temporary
losses will be material to our results of operations in the future. Other than
foreign currency exchange rates, we do not currently hedge these exposures. We
hedge some of our foreign currency exchange rates exposure through forward
contracts as more fully described in note 11(d) to the accompanying consolidated
financial statements.
29
<PAGE> 30
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements:
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Independent Auditors' Report................................ 31
Consolidated Balance Sheets -- September 30, 2000 and
1999...................................................... 32
Consolidated Statements of Operations -- Years ended
September 30, 2000, 1999 and 1998......................... 33
Consolidated Statements of Stockholders' Equity -- Years
ended September 30, 2000, 1999 and 1998................... 34
Consolidated Statements of Cash Flows -- Years ended
September 30, 2000, 1999 and 1998......................... 35
Notes to Consolidated Financial Statements.................. 36
</TABLE>
30
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
OSI Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of OSI
Pharmaceuticals, Inc. and subsidiaries (the "Company") as of September 30, 2000
and 1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
September 30, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of OSI
Pharmaceuticals, Inc. and subsidiaries at September 30, 2000 and 1999, and the
results of their operations, and their cash flows for each of the years in the
three-year period ended September 30, 2000 in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Melville, New York
December 2, 2000
31
<PAGE> 32
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 48,392,635 $ 8,863,887
Investment securities..................................... 36,672,036 9,997,967
Receivables, including amounts due from related parties of
$72,585 and $363,580, and trade receivables of $98,956
and $236,067 at September 30, 2000 and 1999,
respectively........................................... 287,035 1,033,917
Receivable from sale of Anaderm common stock.............. -- 3,645,136
Interest receivable....................................... 346,430 171,340
Grants receivable......................................... 415,456 343,509
Prepaid expenses and other................................ 1,165,674 1,088,318
------------ ------------
Total current assets.............................. 87,279,266 25,144,074
------------ ------------
Property, equipment and leasehold improvements -- net....... 9,265,005 10,915,589
Compound library assets -- net.............................. 2,330,896 4,197,085
Other assets................................................ 118,630 374,288
Intangible assets -- net.................................... 782,211 6,400,292
------------ ------------
$ 99,776,008 $ 47,031,328
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 6,317,492 $ 5,229,672
Unearned revenue -- current; including amounts received in
advance from related parties of $369,779 and $524,636
as of September 30, 2000 and 1999, respectively........ 690,895 5,185,410
Loans payable -- current.................................. 166,656 166,656
------------ ------------
Total current liabilities......................... 7,175,043 10,581,738
------------ ------------
Other liabilities:
Unearned revenue -- long-term, all relating to related
parties................................................ 333,333 404,762
Loans payable -- long-term................................ 144,217 277,791
Deferred acquisition costs................................ 355,518 711,037
Accrued postretirement benefit cost....................... 1,886,268 1,691,054
------------ ------------
Total liabilities................................. 9,894,379 13,666,382
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; no shares issued at September 30, 2000 and
1999................................................... -- --
Common stock, $.01 par value; 50,000,000 shares
authorized, 28,281,850 and 22,404,096 shares issued at
September 30, 2000 and 1999, respectively.............. 282,819 224,041
Additional paid-in capital................................ 187,731,177 105,173,158
Deferred compensation..................................... (8,767,030) --
Accumulated deficit....................................... (81,988,187) (65,640,618)
Accumulated other comprehensive loss...................... (944,448) (333,933)
------------ ------------
96,314,331 39,422,648
Less: treasury stock, at cost; 939,641 and 865,386 shares at
September 30, 2000 and 1999, respectively................. (6,432,702) (6,057,702)
------------ ------------
Total stockholders' equity........................ 89,881,629 33,364,946
------------ ------------
Commitments and contingencies
$ 99,776,008 $ 47,031,328
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 33
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Collaborative program revenues, principally
from related parties........................ $ 23,657,601 $ 18,166,693 $ 16,165,613
Technology access fee.......................... 3,500,000 -- --
Sales of products and services................. 600,912 1,220,317 1,121,449
Other research revenues........................ 667,915 994,277 1,428,853
License revenues............................... 225,000 2,271,016 752,422
------------ ------------ ------------
28,651,428 22,652,303 19,468,337
------------ ------------ ------------
Expenses:
Research and development....................... 39,622,140 24,995,577 20,303,837
Production and service costs................... 834,870 1,753,474 813,464
Selling, general and administrative............ 10,937,829 8,679,737 8,264,888
Amortization of intangibles.................... 869,761 1,468,801 1,460,740
------------ ------------ ------------
52,264,600 36,897,589 30,842,929
------------ ------------ ------------
Loss from operations........................ (23,613,172) (14,245,286) (11,374,592)
Other income (expense):
Net investment income.......................... 3,737,290 1,290,611 1,467,412
Other expense -- net........................... (217,531) (134,777) (277,288)
Gain on sale of Anaderm common stock........... -- 3,291,015 --
Gain on sale of diagnostics business........... 3,745,844 -- --
------------ ------------ ------------
Net loss......................................... $(16,347,569) $ (9,798,437) $(10,184,468)
============ ============ ============
Weighted average number of shares of common stock
outstanding.................................... 24,531,072 21,450,812 21,372,655
============ ============ ============
Basic and diluted net loss per weighted average
share of common stock outstanding.............. $ (0.67) $ (0.46) $ (0.48)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE> 34
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
--------------------- PAID-IN DEFERRED ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT INCOME (LOSS)
---------- -------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1997...... 22,262,220 $222,622 $104,864,056 $ -- $(45,657,713) $(199,231)
Comprehensive income (loss):
Net loss......................... -- -- -- -- (10,184,468) --
Unrealized holding gain on
investment securities, net of
reclassification adjustment.... -- -- -- -- -- 116,780
Translation adjustment........... -- -- -- -- -- 82,776
Total comprehensive loss...........
Options exercised.................. 5,699 57 24,007 -- -- --
Issuance of common stock for
employee purchase plan........... 20,664 207 75,019 -- -- --
---------- -------- ------------ ------------ ------------ ---------
BALANCE AT SEPTEMBER 30, 1998...... 22,288,583 222,886 104,963,082 -- (55,842,181) 325
Comprehensive income (loss):
Net loss......................... -- -- -- -- (9,798,437) --
Unrealized holding loss on
investment securities, net of
reclassification adjustment.... -- -- -- -- -- (185,710)
Translation adjustment........... -- -- -- -- -- (148,548)
Total comprehensive loss...........
Options exercised.................. 92,187 922 269,143 -- -- --
Issuance of common stock for
employee purchase plan........... 23,326 233 68,097 -- -- --
Issuance of treasury stock for
consulting services.............. -- -- (127,164) -- -- --
---------- -------- ------------ ------------ ------------ ---------
BALANCE AT SEPTEMBER 30, 1999...... 22,404,096 224,041 105,173,158 -- (65,640,618) (333,933)
Comprehensive income (loss):
Net loss......................... -- -- -- -- (16,347,569) --
Unrealized holding loss on
investment securities, net of
reclassification adjustment.... -- -- -- -- -- (80,650)
Translation adjustment........... -- -- -- -- -- (529,865)
Total comprehensive loss...........
Options exercised.................. 2,370,938 23,709 13,237,156 -- -- --
Warrants exercised................. 174,255 1,743 1,308,907 -- -- --
Compensation expense in connection
with options issued to an
employee below market............ -- -- 4,975,000 -- -- --
Issuance of common stock for
employee purchase plan........... 7,561 76 60,417 -- -- --
Proceeds from issuance of common
stock, in connection with a
private placement net of
$3,808,875 of cost............... 3,325,000 33,250 52,682,875 -- -- --
Accrued expenses in connection with
public offering of common
stock............................ -- -- (318,042) -- -- --
Deferred compensation.............. -- -- 10,611,706 (10,611,706) -- --
Amortization of deferred
compensation..................... -- -- -- 1,844,676 -- --
Purchase of treasury stock......... -- -- -- -- -- --
---------- -------- ------------ ------------ ------------ ---------
BALANCE AT SEPTEMBER 30, 2000...... 28,281,850 $282,819 $187,731,177 $ (8,767,030) $(81,988,187) $(944,448)
========== ======== ============ ============ ============ =========
<CAPTION>
TOTAL
TREASURY STOCKHOLDERS'
STOCK EQUITY
----------- -------------
<S> <C> <C>
BALANCE AT SEPTEMBER 30, 1997...... $(6,284,866) $ 52,944,868
Comprehensive income (loss):
Net loss......................... -- (10,184,468)
Unrealized holding gain on
investment securities, net of
reclassification adjustment.... -- 116,780
Translation adjustment........... -- 82,776
------------
Total comprehensive loss........... (9,984,912)
------------
Options exercised.................. -- 24,064
Issuance of common stock for
employee purchase plan........... -- 75,226
----------- ------------
BALANCE AT SEPTEMBER 30, 1998...... (6,284,866) 43,059,246
Comprehensive income (loss):
Net loss......................... -- (9,798,437)
Unrealized holding loss on
investment securities, net of
reclassification adjustment.... -- (185,710)
Translation adjustment........... -- (148,548)
------------
Total comprehensive loss........... (10,132,695)
------------
Options exercised.................. -- 270,065
Issuance of common stock for
employee purchase plan........... -- 68,330
Issuance of treasury stock for
consulting services.............. 227,164 100,000
----------- ------------
BALANCE AT SEPTEMBER 30, 1999...... (6,057,702) 33,364,946
Comprehensive income (loss):
Net loss......................... -- (16,347,569)
Unrealized holding loss on
investment securities, net of
reclassification adjustment.... -- (80,650)
Translation adjustment........... -- (529,865)
------------
Total comprehensive loss........... (16,958,084)
------------
Options exercised.................. -- 13,260,865
Warrants exercised................. -- 1,310,650
Compensation expense in connection
with options issued to an
employee below market............ -- 4,975,000
Issuance of common stock for
employee purchase plan........... -- 60,493
Proceeds from issuance of common
stock, in connection with a
private placement net of
$3,808,875 of cost............... -- 52,716,125
Accrued expenses in connection with
public offering of common
stock............................ -- (318,042)
Deferred compensation.............. -- --
Amortization of deferred
compensation..................... -- 1,844,676
Purchase of treasury stock......... (375,000) (375,000)
----------- ------------
BALANCE AT SEPTEMBER 30, 2000...... $(6,432,702) $ 89,881,629
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE> 35
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net loss.................................................. $(16,347,569) $ (9,798,437) $(10,184,468)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Gain on sale of Anaderm common stock.................... -- (3,291,015) --
Gain on sale of diagnostic business..................... (3,745,844) -- --
(Gain) loss on sale of investments...................... (487,594) (435,907) 45,847
Loss on sale of equipment and leasehold improvements.... 60,547 -- --
Depreciation and amortization........................... 2,940,903 2,574,776 1,944,344
In-process research and development charge on
acquisition of Cadus' research business................ -- 806,065 --
Amortization of library assets.......................... 1,866,189 1,761,809 1,811,583
Amortization of intangibles assets...................... 869,760 1,468,800 1,460,740
Accretion of deferred acquisition costs................. 19,481 40,121 40,120
Common stock received for patent license fee............ -- -- (402,422)
Issuance of treasury stock for services rendered........ -- 100,000 --
Non-cash compensation charges........................... 6,819,676 -- --
Changes in assets and liabilities, net of the effects of
an acquisition and sale of a business:
Receivables........................................... 4,375,566 680,934 (505,065)
Interest receivable................................... (175,090) 112,568 191,892
Grants receivable..................................... (71,947) 62,640 (226,409)
Prepaid expenses and other current assets............. (136,968) 55,516 31,655
Other assets.......................................... (8,722) 835,933 33,963
Accounts payable and accrued expenses................. 1,227,720 764,348 52,501
Unearned revenue...................................... (4,348,266) 4,247,075 383,308
Accrued postretirement used in benefit cost........... 426,645 401,787 344,767
------------ ------------ ------------
Net cash provided by (used in) operating activities......... (6,715,513) 387,013 (4,977,644)
------------ ------------ ------------
Cash flows from investing activities:
Payments for acquisition of Cadus' research business...... -- (2,216,682) --
Net proceeds from sale of diagnostic business............. 8,636,104 -- --
Purchases of investments.................................. (31,004,719) (10,676,970) (4,004,770)
Proceeds from sale of equipment and leasehold
improvements............................................ 375,000 -- --
Maturities and sales of short-term investments............ 4,987,599 14,032,315 14,573,046
Change in other assets.................................... -- -- (276,200)
Additions to property, equipment and leasehold
improvements............................................ (2,728,149) (4,519,678) (2,188,613)
Additions to compound library assets...................... -- (107,517) (526,694)
------------ ------------ ------------
Net cash provided by (used in) investing activities......... (19,734,165) (3,488,532) 7,576,769
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock................ 52,716,125 -- --
Proceeds from exercise of stock options, stock warrants,
employee purchase plan, and other....................... 13,938,965 338,395 99,290
Proceeds from loan payable................................ -- 500,000 --
Payments on loan payable.................................. (131,071) (102,741) (102,659)
Purchase of treasury stock................................ (375,000) -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities......... 66,149,019 735,654 (3,369)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents........ 39,699,341 (2,365,865) 2,595,756
Effect of exchange rate changes on cash and cash
equivalents............................................... (170,593) (85,414) 82,776
Cash and cash equivalents at beginning of year.............. 8,863,887 11,315,166 8,636,634
------------ ------------ ------------
Cash and cash equivalents at end of year.................... $ 48,392,635 $ 8,863,887 $ 11,315,166
============ ============ ============
Non-cash activities:
Issuance of common stock in satisfaction of deferred
acquisition costs....................................... $ 375,000 $ -- $ --
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE> 36
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of OSI Pharmaceuticals, Inc., formerly known as Oncogene Science, Inc. prior to
October 1, 1997, and its wholly-owned subsidiaries, OSI Pharmaceuticals (UK)
Limited (formerly known as Aston Molecules Ltd. prior to March 22, 2000)
(OSI-UK), MYCOsearch, Inc., OSDI, Inc., (formerly known as Oncogene Science
Diagnostics, Inc. prior to December 3, 1999), and Applied bioTechnology, Inc.
All intercompany balances and transactions have been eliminated in
consolidation. The Company operates in one segment and utilizes a platform of
drug discovery technologies in order to discover and develop novel, small
molecule compounds for the treatment of major human diseases. It conducts the
full range of drug discovery activities, from target identification to
development of drug candidates.
(b) Revenue Recognition
Collaborative program revenues represent funding arrangements for the
conduct of research and development in the field of biotechnology and are
recognized when earned in accordance with the terms of the contracts and the
related development activities undertaken. Other research revenues are
recognized pursuant to the terms of grants which provide reimbursement of
certain expenses related to the Company's other research and development, or
R&D, activities. Collaborative and other research revenues are accrued for
expenses incurred in advance of the reimbursement and deferred for cash payments
received in advance of expenditures. Such deferred revenues are recorded as
revenue when earned (see note 5).
License revenues include patent license fees, maintenance fees and
milestone payments. Patent license fees received upon the signing of an
agreement are generally recognized upon the inception of the license term.
Maintenance fees are recognized as revenue in the period stipulated in the
license agreements. All related milestone and royalty payments are recognized as
revenue when earned in accordance with the terms of the corresponding agreement.
Revenue from the sale of diagnostic and research reagent products is
recognized at time of shipment. Revenues from the performance of chemistry
services provided by OSI-UK are recognized when performed.
See note 17 for a discussion of SEC Staff Accounting Bulletin No. 101 on
revenue recognition.
(c) Patents and Goodwill
As a result of the Company's R&D programs, including programs funded
pursuant to R&D funding agreements (see note 5), the Company has applied for a
number of patents in the United States and abroad. Such patent rights are of
significant importance to the Company to protect products and processes
developed. Costs incurred in connection with patent applications for the
Company's R&D programs have been expensed as incurred.
Goodwill is amortized on a straight-line basis over five years. The Company
continually evaluates the recoverability of its intangible assets by assessing
whether the unamortized value can be recovered through expected future results.
(d) Deferred Acquisition Costs
Deferred acquisition costs represent common stock purchase rights issued in
connection with the Company's acquisition of OSI-UK on September 19, 1996. The
Company issued rights exercisable at the end of three and five years following
the closing date which was September 19, 1996 (for an aggregate exercise price
of $7,500) to obtain a number of shares of the Company's common stock having an
aggregate value of
36
<PAGE> 37
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
$750,000 (based on the current market value on the date of exercise). In
December 1999, one half of these rights were exercised in exchange for 74,255
shares of the Company's common stock. Following this exercise, the Company
purchased these shares at the fair market value for $375,000. These shares are
currently held in treasury stock. The present value of such rights amounted to
$355,518 and $711,037 as of September 30, 2000 and 1999, respectively. The
remaining rights are exercisable at the end of five years from the closing date.
(e) Research and Development Costs
R&D costs are charged to operations as incurred and include direct costs of
research scientists and equipment and an allocation of laboratory facility and
other core scientific services. In fiscal years 2000, 1999 and 1998, R&D
activities included approximately $20,733,000, $12,805,000 and $5,772,000 of
independent R&D, respectively. Included in R&D expenses in fiscal 2000 is
$4,975,000 of compensation expense related to the issuing of an option to
purchase 100,000 shares of common stock to the Company's new President and Head
of Research and Development. In addition, stock options have been granted to
non-employees over the past three years that have resulted in approximately
$971,000 of compensation expense in fiscal 2000 (see note 9(a)). Included in R&D
expenses in fiscal 1999 is $806,000 of in-process R&D acquired in connection
with the acquisition of Cadus Pharmaceutical Corporation's research business
(see note 3(a)). Independent R&D represents those R&D activities, including R&D
activities funded by government research grants, substantially all the rights to
which the Company will retain. The balance of R&D represents expenses under the
collaborative agreements and co-ventures with Pfizer Inc., Anaderm Research
Corporation, Tanabe Seiyaku Co., Ltd., Vanderbilt University, Sankyo Co., Ltd.,
Aventis Pharmaceuticals Inc. (formerly Hoechst Marion Roussel, Inc.), Solvay
Pharmaceutical, B.V., Novartis Pharma AG, Helicon Therapeutics, Inc., Sepracor
Inc., Bayer Corporation, Fujirebio Inc., and BioChem Pharma, Inc.
(f) Depreciation and Amortization
Depreciation of equipment is recognized over the estimated useful lives of
the respective asset groups on a straight-line basis. Leasehold improvements are
amortized on a straight-line basis over the lesser of the estimated useful lives
or the remainder of the lease term.
Amortization of the fungal cultures and compounds acquired in connection
with the acquisition of Cadus' research business in fiscal 1999 (see note 3(a)),
the acquisition of The Dow Company compound library license in fiscal 1997 (see
note 3(b)), and the acquisition of MYCOsearch in fiscal 1996 are on a
straight-line basis over five years, which represents the estimated period over
which the fungal cultures, compounds and license will be used in the Company's
R&D efforts.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(h) Investments
Investment securities at September 30, 2000 and 1999 consist of U.S.
Treasury obligations and corporate debt and equity securities. The Company
classifies its investments as available-for-sale. These securities are recorded
at their fair value. Unrealized holding gains and losses, net of the related tax
effect, on available-for-
37
<PAGE> 38
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
sale securities are excluded from earnings and are reported in accumulated other
comprehensive income (loss), a separate component of stockholders' equity, until
realized. The specific identification basis is utilized to calculate the cost to
determine realized gains and losses from the sale of available-for-sale
securities.
A decline in the market value of any available-for-sale security below cost
that is deemed to be other than temporary results in a reduction in carrying
amount to fair value. The impairment is charged to earnings and a new cost basis
for the security is established. Dividend and interest income are recognized
when earned.
As further discussed in note 5(i), the Company received an equity interest
in a research and development company in exchange for research services provided
to this company. The Company has recorded its investment in the company based on
the cost of services rendered. The Company recognizes its share of the operating
losses of this company based on its percentage ownership interest under the
equity method of accounting.
(i) Net Loss Per Share
Basic and diluted net loss per share is computed by dividing the net loss
by the weighted average number of common shares outstanding during the period.
The diluted loss per share presented excludes the effect of common share
equivalents (stock options and warrants), since such inclusion in the
computation would be anti-dilutive. Such options and warrants amounted to
3,307,409 for fiscal 2000.
(j) Cash and Cash Equivalents
The Company includes as cash equivalents reverse repurchase agreements,
treasury bills, and time deposits with original maturities of three months or
less. Such cash equivalents amounted to $40,137,647 and $2,582,281 as of
September 30, 2000 and 1999, respectively.
(k) Use of Estimates
Management of the Company has made a number of estimates and assumptions
related to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(l) Comprehensive Income (Loss)
In October 1998, the Company adopted Statement of Financial Accounting
Standards 130, "Reporting Comprehensive Income". SFAS 130 established new rules
for the reporting and display of comprehensive income and its components. SFAS
130 requires unrealized gains or losses on the Company's available-for-sale
securities (referred to as investment securities on the accompanying
consolidated balance sheets) and foreign currency translation adjustments, which
prior to adoption were reported separately in stockholders' equity, to be
included in other comprehensive income (loss).
The components of accumulated other comprehensive loss were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
Cumulative foreign currency translation adjustment... $(697,168) $(167,303)
Unrealized losses on available-for-sale securities... (247,280) (166,630)
--------- ---------
Accumulated other comprehensive loss................. $(944,448) $(333,933)
========= =========
</TABLE>
38
<PAGE> 39
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
(m) Basis of Presentation
Certain reclassifications have been made to the prior period consolidated
financial statements to conform them to current presentations.
(2) LICENSE AGREEMENTS
(a) Aurora Biosciences
Pursuant to a license agreement effective May 26, 1998, the Company granted
to Aurora Biosciences Corporation a non-exclusive worldwide license to practice
the technology under the Company's patent for live-cell gene transcription
assays utilizing a reporter gene. The Company also granted Aurora an option to
obtain a non-exclusive license to practice the technology under the Company's
patent concerning methods of modulation. The duration of each license is to be
coextensive with the life of the last to expire of the underlying patents. Under
the license agreement, Aurora has the right to grant sublicenses. The Company
received 75,000 shares of Aurora's common stock with an estimated fair market
value of $402,000 and a license fee of $300,000 upon execution of the agreement.
In addition, Aurora will pay the Company an annual fee of $50,000, milestone
payments and royalties on sales of products derived from the licensed patents,
if any. The shares of common stock were subsequently sold in September 1999 at a
then fair market value of $909,000. The resulting realized gain of approximately
$436,000 is included in net investment income in the accompanying consolidated
statement of operations for fiscal 1999. The Company has exclusive control over
prosecution, maintenance and enforcement of the patents subject to the
agreement.
(b) Pharmacia & UpJohn
Pursuant to a license agreement effective July 29, 1999, the Company
granted to Pharmacia & UpJohn SpA a non-exclusive, non-transferable, worldwide,
royalty-bearing license of certain gene transcription patents for drug discovery
and development of product candidates for human therapeutic or diagnostic
purposes (other than in the area of cosmeceuticals). Following April 24, 2002,
the scope of the non-exclusive license will be expanded to include the discovery
and development of cosmeceuticals. The duration of the license is to be
coextensive with the life of the last to expire of the underlying patents. Upon
signing the license agreement, Pharmacia & UpJohn paid the Company $100,000. In
addition, Pharmacia & UpJohn will pay the Company an annual fee of $50,000, and
milestone and royalty payments on sales of products derived from the licensed
patents, if any. The Company has exclusive control over prosecution, maintenance
and enforcement of the patents subject to the agreement.
(c) American Home Products and American Cyanamid
Effective January 3, 2000, the Company entered into a worldwide,
non-exclusive cross license agreement with American Home Products Corporation
and its wholly-owned subsidiary, American Cyanamid Company, involving the
Company's gene transcription patent estate and patents covering yeast screening
technologies developed by American Cyanamid. The agreement provides the Company
access to American Cyanamid's technology covered in four issued U.S. patents
which include claims for recombinant expression of a variety of targets in
yeast, including G-protein coupled receptors, or GPCRs, hybrid GPCRs and orphan
receptors for use in human therapeutics. The agreement also allows American
Cyanamid to retain exclusive rights to the use of the Company's GPCR
technologies in the agricultural field. The duration of each license is to be
coextensive with the life of the last to expire of the patents underlying each
license.
39
<PAGE> 40
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
(d) Merck & Co.
Effective June 8, 2000, Merck & Co., Inc. became an additional licensee of
the Company's gene transcription patent estate. In exchange for such gene
transcription rights, Merck granted the Company a worldwide, non-exclusive
license to certain patents referred to as the Transcription Based Assay, or TBA,
patents which were previously the property of Sibia Neurosciences, Inc. prior to
their acquisition by Merck. The TBA patents consist of claims that cover assay
systems designed to identify compounds that bind to cell-surface receptors. The
duration of each license is coextensive with the life of the last to expire of
the patents underlying each license.
(e) Cadus Pharmaceutical
Effective February 15, 2000, Cadus granted to the Company a non-exclusive,
royalty-free, worldwide right and license (without the right to sublicense) to
use and practice Cadus' technology and patents involving Cadus' yeast GPCR
patent estate; to access various reagents; to use a library of over 30,000 yeast
strains; and to use Cadus' proprietary bi-informatics software for the mining of
genomic databases.
Under the license agreement, the Company may practice the Cadus technology
and patents with third parties under collaborative research programs so long as
the Company's personnel conduct such research at the Company's facilities. The
cost of the license was $700,000 and was recorded in research and development
expense in the accompanying consolidated statement of operations for fiscal
2000. As part of this licensing arrangement, Cadus granted to the Company a
non-exclusive, non-transferable license to the use of certain of Cadus' software
related to its technology. In addition, the Company is required to remit to
Cadus an annual maintenance fee of $100,000 in each of the next ten years.
(3) ACQUISITIONS
(a) Cadus Pharmaceutical
On July 30, 1999, the Company acquired certain assets from Cadus for
approximately $2.2 million in cash, which includes professional fees and other
costs and the assumption of certain liabilities. The acquisition was accounted
for under the purchase method of accounting. The purchase price has been
allocated to the assets and the liabilities assumed based on the fair values at
the date of acquisition. The excess of the fair value of the net assets acquired
over the purchase price paid representing negative goodwill was approximately
$2.9 million. The negative goodwill was allocated proportionately to reduce the
value of the noncurrent assets acquired and the in-process R&D which was charged
to operations. The in-process R&D charge is included in R&D expenses in the
accompanying consolidated statement of operations for fiscal 1999. The purchase
price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Prepaid expenses and other current assets................... $ 362
Work force intangible....................................... 145
In-process R&D acquired..................................... 806
Compound library............................................ 336
Fixed assets................................................ 1,045
------
Total assets and in-process R&D acquired.................... 2,694
Less liabilities assumed.................................... (477)
------
Cash paid................................................... $2,217
======
</TABLE>
The value of the purchased in-process R&D from the acquisition was
determined by estimating the projected net cash flows related to products under
development, based upon the future revenues to be earned
40
<PAGE> 41
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
upon commercialization of such products. The percentage of the cash flow
allocated to purchased in-process research and development was based upon the
estimated percentage complete for each of the R&D projects. These cash flows
were discounted back to their net present value. The resulting projected net
cash flows from such projects were based on management's estimates of revenues
and operating profits related to such projects. The in-process R&D was valued
based on the income approach that focuses on the income-producing capability of
the assets. The underlying premise of this approach is that the value of an
asset can be measured by the present worth of the net economic benefit (cash
receipts less cash outlays) to be received over the life of the asset.
Significant assumptions and estimates used in the valuation of in-process R&D
included: the stage of development for each of the five projects; future
revenues based on royalties; growth rates for each product; individual product
revenues; product sales cycles; the estimated life of a product's underlying
technology of seven years from the date of introduction; future operating
expenses; and a discount rate of 60% to reflect present value and risk of
developing the acquired technology into commercially viable products.
The assets purchased include (a) certain assets associated with certain of
Cadus' research programs (including the GPCR-directed drug discovery program and
a collaboration with Solvay), (b) Cadus' compound library of 150,000 components,
(c) the purchase or license of certain intellectual property rights, and (d)
certain furniture, equipment, inventory, and supplies. Several assets were
retained by Cadus, including (a) monies in escrow in connection with the
judgment of SIBIA Neurosciences, Inc. against Cadus, (b) cash and accounts
receivable, (c) Cadus' Living Chip Technology, (d) Cadus' Functional Genomics
Program, and (e) Cadus' Research Collaboration and License Agreement with
SmithKline Beecham Corporation. Forty-seven Cadus employees were hired by the
Company. The Company intends to utilize the acquired assets in the GPCR Directed
Chemistry Program and the collaboration with Solvay, but expects to deploy the
balance of the assets in other research areas.
The Company also assumed Cadus' facility lease in Tarrytown, New York
(approximately 45,569 square feet) as of July 1, 1999 (approximately $898,249 in
rental payments per annum through December 31, 2002) and an equipment lease with
General Electric Capital Corporation (GECC). In fiscal 2001, the Company has
agreed to sublease approximately 9,100 square feet of the facility. On August
23, 1999, the Company elected to payoff the GECC lease in exchange for a payment
of $2.8 million and obtained ownership of the fixed assets covered by the lease
agreement. On September 21, 1999, Cadus reimbursed the Company $308,000 in
exchange for those fixed assets that have been retained by Cadus for its own
use. The source of the cash portion of the purchase price and the subsequent
decision to payoff the lease agreement with GECC was the Company's existing cash
resources. Liabilities and the facility lease obligation assumed will be paid
from existing cash resources and working capital to be generated in future
periods.
In connection with the acquisition, the Company entered into the following
additional agreements with Cadus: (a) a Patent License Agreement, (b) a
Technology License Agreement, and (c) a Software License Agreement, pursuant to
which the Company obtained non-exclusive licenses for the use and practice of
certain of Cadus' patents, Cadus' technology and Cadus' software programs,
respectively. The Company and Cadus also entered into another Patent License
Agreement under which the Company will license back to Cadus on a non-exclusive
basis certain of the patents which were assigned to the Company as part of the
acquisition.
In connection with the acquisition, the Company adopted a Non-Qualified
Stock Option Plan for Former Employees of Cadus. The Company granted ten-year
options to purchase an aggregate of 415,000 shares of common stock of the
Company at a purchase price of $5.00 per share, which represents the fair value
of the Company's stock at the date granted. These options became exercisable on
July 30, 2000, one year from the date of the grant.
Effective February 15, 2000, Cadus granted the Company a non-exclusive,
royalty-free, worldwide right and license (without the right to sublicense) to
use and practice Cadus' technology and patents involving
41
<PAGE> 42
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
Cadus' yeast GPCR patent estate; to access various reagents; to use a library of
over 30,000 yeast strains; and to use Cadus' proprietary bi-informatics software
for the mining of genomic databases. (see note 2(e)).
The operating results of Cadus' research business have been included in the
consolidated statements of operations from July 30, 1999. The following
unaudited pro forma information presents a summary of consolidated results of
operations for fiscal 1999 and 1998 assuming the asset acquisition had taken
place as of October 1, 1998 and October 1, 1997, respectively (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $ 24,902 $ 22,168
Net loss.................................................... (15,013) (16,452)
Net loss per share.......................................... (0.70) (0.77)
</TABLE>
The pro forma results give effect to the amortization of acquired
intangibles and reduction of investment income. The pro forma information is not
necessarily indicative of the results of operations had the asset acquisition
been affected on the assumed date.
(b) Compound Library License
On March 18, 1997, the Company entered into a license agreement with The
Dow Chemical Company giving the Company exclusive worldwide rights to use more
than 140,000 compounds for screening and potential development of small molecule
drugs and cosmeceuticals. The initial payment for the license was 352,162 shares
of the Company's common stock with a fair market value of approximately
$2,500,000. Dow Chemical is also entitled, in certain instances where
pre-existing Dow Chemical patents are in effect, to royalty payments from any
new drug products that may result from the screening of the subset of the
compound library covered by such patents. The common stock issued to Dow
Chemical was from the shares held in treasury. The Company will amortize the
license agreement cost on a straight-line basis over a five-year period, which
represents the estimated period over which the compounds will be used in the
Company's research and development efforts. Since the Company did not conduct
significant research utilizing these compounds during fiscal 1997, the Company
began amortizing the license agreement cost in October 1997 and recorded
$505,446 of amortization expense in fiscal 2000, 1999 and 1998.
(4) INVESTMENTS
The Company invests its excess cash in U.S. Government securities and debt
and equity instruments of financial institutions and corporations with strong
credit ratings. The Company has established guidelines relative to
diversification of its investments and their maturities that should maintain
safety and liquidity. These guidelines are periodically reviewed and modified to
take advantage of trends in yields and interest rates. The Company uses the
specific identification method to determine the cost of securities sold.
The following is a summary of available-for-sale securities as of September
30, 2000 and 1999:
<TABLE>
<CAPTION>
GROSS
UNREALIZED
2000 COST (LOSSES) GAINS FAIR VALUE
---- ----------- -------------- -----------
<S> <C> <C> <C>
U.S. Treasury Securities and obligations
of U.S. Government agencies........... $21,251,426 $(123,170) $21,128,256
Corporate debt securities............... 15,667,890 (124,110) 15,543,780
----------- --------- -----------
Total......................... $36,919,316 $(247,280) $36,672,036
=========== ========= ===========
</TABLE>
42
<PAGE> 43
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
GROSS
UNREALIZED FAIR
1999 COST (LOSSES) GAINS VALUE
---- ----------- -------------- ----------
<S> <C> <C> <C>
U.S. Treasury Securities and obligations
of U.S. Government agencies............ $ 9,149,811 $(166,905) $8,982,906
Corporate debt securities................ 1,014,786 275 1,015,061
----------- --------- ----------
Total.......................... $10,164,597 $(166,630) $9,997,967
=========== ========= ==========
</TABLE>
Government and corporate debt securities include approximately $4.2 million
and $2.8 million as of September 30, 2000 and 1999, respectively, of interests
in mutual funds which are invested principally in government and corporate debt
securities. Net realized gains on sales of investments during fiscal 2000 and
1999 were approximately $487,000 and $436,000, respectively, and net realized
losses on sales of investments during fiscal 1998 were approximately $46,000.
Maturities of debt securities classified as available-for-sale were as
follows at September 30, 2000:
<TABLE>
<CAPTION>
FAIR
YEARS ENDED SEPTEMBER 30, COST VALUE
------------------------- ----------- -----------
<S> <C> <C>
2001...................................................... $23,669,322 $23,654,254
2002...................................................... 5,509,770 5,502,530
2003...................................................... 1,935,000 1,942,856
2004...................................................... -- --
2005...................................................... -- --
2006 and thereafter....................................... 1,390,565 1,390,438
----------- -----------
$32,504,657 $32,490,078
=========== ===========
</TABLE>
As further discussed in note 5(a) and 5(i), the Company has collaborative
research agreements with Anaderm and Helicon, and the Company's investments in
such companies were carried based on the equity method of accounting. On
September 23, 1999, the Company exercised its right to require Pfizer to
purchase all of its shares of Anaderm common stock at a sale price of $3.6
million. As of September 30, 1999, the Company recognized a gain of $3.3 million
on the sale of the Anaderm common stock and recorded a receivable of $3.6
million. On November 10, 1999, the Company received a cash payment of this
receivable from Pfizer. As of September 30, 2000 and 1999, the Company fully
reserved its investment in Helicon as more fully discussed in note 5(i).
As of September 30, 1999, the Company had an investment in Tularik Inc.
amounting to $250,000 which was carried at cost and approximated fair market
value (see note 12). In December 1999, the Company sold its investment in
Tularik Inc. resulting in a gain of approximately $488,000 which is included in
net investment income in the accompanying consolidated statement of operations
for fiscal 2000.
(5) PRODUCT DEVELOPMENT CONTRACTS
(a) Anaderm
On April 23, 1996, in connection with the formation of Anaderm, the Company
entered into a Stockholders' Agreement with Pfizer, Anaderm, New York University
and certain NYU faculty members, and a Collaborative Research Agreement with
Pfizer and Anaderm. Anaderm issued common stock to Pfizer and the Company and
options to purchase common stock to NYU and the faculty members. NYU and the
faculty members exercised their options fully, and until September 23, 1999,
Pfizer held 82%, the Company held 14% and NYU and the faculty members
collectively held 4% of Anaderm's common stock. In exchange
43
<PAGE> 44
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
for its 14% of the outstanding shares of Anaderm common stock, the Company
provided formatting for high throughput screens and conducted compound screening
for 18 months at its own expense under the research agreement. Upon the
completion of the initial phase of the research agreement, the funded phase
commenced on October 1, 1997. During this phase, Anaderm made payments to the
Company equal to its research costs, including overhead, plus 10%. Anaderm or
Pfizer will pay royalties to the Company on the sales of products resulting from
this collaboration. In December 1997, the Company and Pfizer entered into an
agreement for a second round of equity financing for Anaderm. The agreement
called for an equity contribution of $14.0 million, of which the Company
contributed $2.0 million in drug discovery resources, including assay biology,
high throughout screening, lead optimization and chemistry, through 1999.
In April 1999, the Company amended its Collaborative Research Agreement
with Pfizer and Anaderm to expand the collaborative program and amended its
Stockholders' Agreement with Pfizer, Anaderm, NYU and the faculty members. The
amended research agreement is for a term of three years. Pfizer may terminate
the agreement early in its sole discretion after consultation with Anaderm and
the Company to determine whether satisfactory progress has been made in the
research program during the previous year. The agreement provides for funding by
Pfizer of up to $35.0 million in total payments to Anaderm to fund the Company's
research and development activities during the three-year term and up to $15.0
million in phase-down funding following expiration of the three-year term or
earlier termination by Pfizer. Under the expanded program, the Company provides
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. Anaderm or Pfizer
will pay royalties to the Company on the sales of products resulting from the
collaboration. The Company anticipates a significant increase in its staffing of
the program to conduct its drug discovery efforts during the term of the amended
research agreement.
As discussed in note 4, the Company exercised an option, pursuant to the
April 1999 amendment to the Stockholders' Agreement, to sell its Anaderm common
stock to Pfizer on September 23, 1999 for a total sale price of $3.6 million.
The Company's net investment in Anaderm at the date of the sale was
approximately $354,000 resulting in a net gain of $3.3 million on the sale of
common stock.
(b) Tanabe
Effective as of October 1, 1999, the Company entered into a Collaborative
Research and License Agreement with Tanabe focused on discovering and developing
novel pharmaceutical products to treat diabetes. Under the agreement, the
Company is responsible for identification of targets (subject to Tanabe's
approval), assay development, screening of compounds from the Company's library
and Tanabe's library against identified targets, identification of seed
compounds meeting certain criteria specified in the agreement, optimization of
these seed compounds and identification of lead compounds meeting certain
criteria specified in the agreement. Tanabe maintains responsibility for further
development and marketing of a lead compound in exchange for milestone and
royalty payments to the Company.
If Tanabe determines to initiate further development of lead compounds
identified by the Company, the Company will grant to Tanabe exclusive, worldwide
licenses to, among other things, use, manufacture and sell all products
containing these lead compounds directed to the identified targets in exchange
for license fees and royalties on product sales. The duration of the licenses is
coextensive with the lives of the patents related to the licensed compound or
ten years from first commercial sale, whichever is longer. If Tanabe determines
not to initiate further development of a lead compound or if Tanabe discontinues
development of candidate compounds, the Company will have the sole and exclusive
right to develop, use, manufacture and sell all products resulting from the
collaboration, and it will pay royalties to Tanabe.
Generally, both Tanabe and the Company are prohibited during the term of
the contract from pursuing independently or sponsoring directly or indirectly,
research and development of compounds and products in
44
<PAGE> 45
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
the diabetes area relating to the identified targets in the agreement. 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 September 28, 1999,
the Company received approximately $4.3 million from Tanabe, which represented
advanced funding of the technology access fee of $3.5 million and research
funding of $812,500 for the first quarter of fiscal 2000. This amount was
recorded in unearned revenue-current in the accompanying consolidated balance
sheet as of September 30, 1999. During the first quarter ended December 31,
1999, the Company recognized as revenue the technology access fee of $3.5
million in accordance with its accounting policy. See note 17 for a discussion
of SEC Staff Accounting Bulletin No. 101 on revenue recognition of technology
access fees.
(c) Vanderbilt
Effective as of April 28, 1998, the Company entered into a Collaborative
Research, Option and Alliance Agreement with Vanderbilt University to conduct a
collaborative research program and seek a corporate partner to fund a technology
collaboration for the discovery and development of drugs to treat diabetes. The
agreement was for a term of one year, and was extended until the Company
executed a third-party research collaboration agreement, which the Company
entered into with Tanabe.
Concurrently with the execution of the Tanabe agreement, the Company
entered into an Amended and Restated Collaborative Research, License and
Alliance Agreement with Vanderbilt and Tanabe with an effective date of August
31, 1999. The term of the research program conducted by the Company and
Vanderbilt commenced on April 28, 1998 and will end upon termination of the
contract period under the Tanabe agreement unless mutually extended by the
Company and Vanderbilt. The OSI/Vanderbilt research program is comprised of both
research directed toward the targets identified, as well as targets not
identified, in the Tanabe agreement. The Company may offer to Tanabe any of the
additional targets for inclusion in the OSI/Tanabe research program. As part of
the OSI/Vanderbilt research program, Vanderbilt will assist the Company in
fulfilling its obligations under the OSI/Tanabe research program by providing
access to Vanderbilt's drug discovery resources, including laboratories and
assays.
The Company will provide funding to Vanderbilt to conduct the
OSI/Vanderbilt research program. A portion of this funding will come from
Tanabe's funding of the OSI/Tanabe research program. The Company will also pay
to Vanderbilt a percentage of the revenues it receives from Tanabe and any other
third party which commercializes products resulting from the OSI/Tanabe research
program based on the extent to which Vanderbilt technology and patents
contributed to the product generating the revenue. The Company paid Vanderbilt a
one-time success fee in the amount of $500,000 as well as other directed costs
of $250,000 in October 1999 in connection with the Company entering into the
Tanabe agreement.
(d) Pfizer
In April 1986, the Company entered into a collaborative research agreement
and several other related agreements with Pfizer. During the first five years of
the collaboration, the Company focused principally on understanding the
molecular biology of oncogenes. In 1991, the Company 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. In April 1996, the Company
renewed the collaboration for a new five-year term by entering into new
collaborative research and license agreements. Under these agreements, Pfizer
committed to provide research funding to the Company in an aggregate amount of
approximately $18.8 million. Pursuant to a schedule set forth in the
collaborative research agreement, Pfizer will make maximum annual research
funding payments to the Company, which will increase from approximately $3.5
million in the first year of the five-year term to approximately $4 million in
45
<PAGE> 46
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
the fifth year. Pfizer was originally responsible for the clinical development,
regulatory approval, manufacturing and marketing of any products derived from
the collaborative research program. This changed with the divestiture of OSI-774
to the Company in June 2000, as discussed below. The funded phase of the
collaborative research agreement will expire on April 1, 2001, and the Company
expects that the agreement will not be renewed.
Effective as of April 1, 1999, the Company entered into a Development
Agreement with Pfizer for the development of certain compounds derived from the
collaborative research agreement described above for the treatment of psoriasis.
Under the Development Agreement, the Company will conduct a 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. Pfizer has granted to the Company 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 the Company if it intends to continue
development and commercialization of a compound within three months following
receipt of the data package from the clinical studies. If Pfizer notifies the
Company of this intention, it will have an exclusive, world-wide license, with
the right to grant sublicenses, to make, use, sell, offer for sale and import
products developed in the course of the development program subject to the
reimbursement of clinical development costs. If Pfizer fails to notify the
Company, the Company will receive an exclusive, world-wide, royalty-bearing
license, including the right to grant sublicenses, to manufacture, use, sell,
offer for sale and import products developed in the course of the development
program. The Company is, however, under no obligation 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.
During fiscal 2000, Pfizer Inc., in order to meet Federal Trade Commission
requirements for its merger with Warner-Lambert Company, granted all development
and marketing rights of OSI-774 (formerly CP-358,774), an epidermal growth
factor receptor, or EGFR, inhibitor, to the Company. The reason for the
divestiture was the determination by the FTC of an anti-trust issue in the
emerging EGFR cancer market arising as a result of the development by
Warner-Lambert of an EGFR inhibitor that is currently in early Phase I studies.
The divestiture of OSI-774 through the vehicle of the existing OSI/Pfizer
collaboration presented the most expeditious resolution of the anti-trust issue.
Under terms of a May 23, 2000 agreement with Pfizer, which became effective upon
issuance and publication of the FTC's order on June 19, 2000, the Company
received a royalty-free license to all rights for the further development and
commercialization of OSI-774. The terms of the agreement did not require the
Company to make any payments to Pfizer for the license. Currently, the Company
is continuing the development of OSI-774, but intends to seek a co-development
and marketing partnership with a major pharmaceutical company. The Company does
not have, and does not currently plan to develop, its own marketing capability.
(e) Aventis
Pursuant to an amended collaborative research and license agreement
effective April 1, 1997, the Company had been conducting research and
development activities with Aventis, which had focused specifically on the
Company's expertise in live-cell assay technology. Aventis was responsible for
all lead development activities. The Company had identified several compounds,
which Aventis is optimizing for further development. The most advanced of these
compounds are in advanced pre-clinical development for atherosclerosis and
asthma.
The Company has granted to Aventis an exclusive, worldwide license, and
rights to acquire additional licenses, with respect to, among other things, the
use, manufacture and sale of products resulting from the
46
<PAGE> 47
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
Company's lead seeking efforts against individual drug targets. In exchange for
these licenses, Aventis will pay royalties to the Company on sales of products
arising out of the collaboration. The funded phase of the agreement terminated
on September 30, 2000. The agreement states that the license expires on the
later of March 31, 2002 or the last to expire of any obligations of Aventis to
pay royalties.
(f) Sankyo
Effective as of February 12, 1997, the Company entered into a Collaborative
Research and License Agreement with Sankyo to be conducted in partnership with
MRC Collaborative Center, London, U.K. The collaboration is focused on
discovering and developing novel pharmaceutical products to treat influenza. The
Company is responsible for conducting research including, without limitation,
compound screening in exchange for research funding from Sankyo. Sankyo has the
responsibility and the exclusive right to conduct pre-clinical and clinical
development of all candidate compounds in exchange for milestone payments to the
Company. The agreement was 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
each party. The collaboration was renewed for an additional two years in
November 1999. The agreement is subject to early termination in the event of
certain defaults by each party.
(g) Solvay
With the acquisition of the assets of Cadus in July 1999, the Company
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. The Company's fields of use include
cancer, asthma and inflammatory diseases. Solvay's fields of use include
cardiovascular, central nervous system disorders and gastrointestinal diseases.
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.
The term of the research program expires on December 31, 2000, and the
Company has elected not to continue the collaboration with Solvay, but rather to
focus its research in cancer in its proprietary programs.
(h) Novartis
In May 1999, the Company amended a prior agreement with Novartis for the
development of TGF-Beta 3. Specifically, oral mucositis and the healing of soft
wound tissue were removed from the licensed indications. Novartis acknowledged
that it has discontinued development of products for the indications of oral
mucositis and healing of soft wound tissue. The parties agreed that all licenses
theretofore granted to Novartis with respect to such discontinued indications
are terminated and that the Company is free to continue development work and to
grant licenses to third parties with respect to such discontinued indications.
The Company is also free to use the results of any development work with respect
to the discontinued indications carried out by Novartis prior to the date of the
amendment provided that the Company pays to Novartis royalties and/or certain
other agreed-upon amounts with respect to sales of products resulting from any
such continued development work by the Company or a licensee thereof. Under the
amended agreement, the new licensed indications are bone, cartilage and tendon
repair. Novartis' exclusive option has been amended to include in the
definitions of licensed indications, the treatment of transplant patients (e.g.,
graft protection), the treatment of ischemia (e.g., angina pectoris and
peripheral vascular disease), the treatment of stroke patients, and the
treatment of inflammatory bowel disease, and Novartis also has a non-exclusive
option to include any other additional indications relating to TGF-Betas (other
than the discontinued indications) upon payment of a milestone payment. The
exercise of the option will result in Novartis making a milestone payment of
$5.0 million or purchasing $5.0 million of the Company's common stock at a per
share price equal
47
<PAGE> 48
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
to 115% of the average closing price for the 30-day period ending on the date of
purchase. The time period to exercise the option was extended until May 31,
2003. The Company's agreement with Novartis ends upon the expiration of the last
of the Company's patents relating to TGF-Beta 3.
(i) Helicon
In July 1997, the Company, Cold Spring Harbor Laboratory and Hoffman-La
Roche Inc. formed Helicon Therapeutics, Inc., a new Delaware corporation. In
exchange for approximately 30% of Helicon's outstanding capital stock, the
Company contributed to Helicon molecular screening services which were completed
in fiscal 1998 and a nonexclusive license with respect to certain screening
technology. Cold Spring Harbor contributed a royalty-free license to
commercialize certain technology relating to genes associated with long-term
memory in exchange for a portion of Helicon's outstanding capital stock.
Hoffman-La Roche contributed cash for a portion of Helicon's outstanding capital
stock. Certain individuals associated with Cold Spring Harbor hold the remaining
outstanding capital stock of Helicon.
The parties entered into various collaborative research and license
agreements pursuant to which they were to jointly pursue the discovery,
development and commercialization of novel drugs for the treatment of long-term
memory disorders and other central nervous system dysfunctions. Although the
collaborations terminated in fiscal 1999, the Company is currently contributing
funds to Helicon on an as-needed basis in amounts required to cover the costs of
conducting research activities, which amounts are charged to R&D expense.
As of September 30, 1998, the Company had capitalized $1.0 million as the
cost of the Company's 30% interest in Helicon, which was offset by the Company's
equity interest in the losses of Helicon and a reserve for impairment based on
the uncertainty of Helicon's future profitability. At September 30, 1999, the
Company's net investment was reduced by recognition of its equity interest in
Helicon's net losses and the balance of the equity interest was written off in
recognition of the impairment of the investment upon the termination of the
Hoffman-La Roche research collaboration in fiscal 1999.
(j) Sepracor
Pursuant to an Amendatory and Collaborative Agreement dated March 31, 1998,
the Company and Sepracor amended their Collaborative Research, Development and
Commercialization Agreement dated March 7, 1997, terminating certain provisions
contained therein, including, without limitation, provisions establishing the
research program. Each party will be free to independently pursue the discovery
of new compounds in the anti-infective area without incurring any responsibility
to the other party. To the extent Sepracor commercializes certain compounds
arising out of the joint venture, however, it will pay royalties to the Company.
The Company provided discovery biology and certain other services to Sepracor
until September 1, 1998, in exchange for fees.
(k) Bayer
Effective January 1, 1997, the Company and Bayer entered into an agreement
to develop serum-based cancer diagnostic products. Bayer owned all the
technology, and has the exclusive right to commercialize automated clinical
diagnostic products derived from the collaboration. The Company retained rights
and was actively selling non-automated or manual, versions of these tests to the
clinical research market and retained the right to commercialize automated the
manual versions in the clinical diagnostic market. Bayer provided funding for
the Company's research under the collaboration in the amount of $1.5 million for
each of the first two contract years, and $1 million for each subsequent year.
After the first two contract years, the Company was required to provide up to
$500,000 in annual funding for the collaboration to the extent the Company
derived net revenues from out-licensing any cancer diagnostics technology or the
sale of any clinical diagnostic
48
<PAGE> 49
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
or clinical research products. The agreement was to terminate on December 31,
2002. Upon the sale of the Company's diagnostic business to Bayer, the agreement
terminated. See note 16 for sale of the Company's diagnostic business to Bayer
on November 30, 1999.
(l) Fujirebio
The Company, through its wholly-owned subsidiary, OSDI, entered into a
Research Collaboration and License Agreement with Fujirebio effective April 1,
1998, creating a collaborative program focused on discovering and developing
certain proprietary cancer assays and commercializing cancer products. Under the
agreement, Fujirebio funded the Company's research and development of cancer
assays over a four-year term. The Company provided Fujirebio with antibodies,
antigens and other substances necessary to manufacture the diagnostic products
derived from the collaboration. Upon the sale of the Company's diagnostics
business to Bayer, the agreement was assigned to Bayer. See note 16 for sale of
the Company's diagnostic business to Bayer on November 30, 1999.
(m) BioChem
Pursuant to an Agreement, dated March 19, 1999, the Company and BioChem
Pharma, Inc. (formerly BioChem Pharma (International) Inc.) amended their
Collaborative Research, Development and Commercialization Agreement, effective
as of May 1, 1996, terminating certain provisions contained therein, including,
without limitation, provisions establishing the research program. Under the
amended agreement, BioChem received from the Company a worldwide, irrevocable,
exclusive license, and right to grant sublicenses, in a certain anti-viral
target for a license fee of $2 million in cash, which is included in license fee
income for fiscal 1999. In addition, each party will be free to independently
pursue the discovery of new compounds in the Hepatitis B and HIV areas without
incurring any responsibility to the other party. To the extent BioChem completes
any clinical trials or pursues any regulatory approvals for any products covered
by the license, it will pay milestones to the Company. In addition, to the
extent BioChem commercializes certain compounds arising out of the joint
venture, it will pay royalties to the Company.
(n) Other
Under the terms of aforementioned collaborative research agreements, the
collaborative partners will pay the Company royalties ranging from 2% to 8% of
net sales of products resulting from these research programs. To date, the
Company has not received any royalties pursuant to these agreements. The Company
or its collaborative partners may terminate each of the collaborative research
programs upon the occurrence of certain events.
Total program research revenues under the aforementioned agreements are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Related Parties:
Anaderm................................... $10,288,148 $ 6,633,536 $ 3,467,203
Pfizer.................................... 3,897,930 4,001,043 3,682,056
Aventis................................... 2,995,984 2,420,787 4,301,263
Helicon................................... -- 641,640 203,437
BioChem Pharma............................ -- 80,000 100,000
----------- ----------- -----------
Total related parties............. 17,182,062 13,777,006 11,753,959
</TABLE>
49
<PAGE> 50
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Tanabe.................................... 2,751,146 -- --
Sankyo.................................... 1,268,156 2,082,570 2,614,297
Solvay.................................... 2,239,487 447,368 --
Bayer..................................... 166,750 1,125,000 1,500,000
Fujirebio................................. 50,000 433,333 100,000
SmithKline Beecham........................ -- 227,000 --
Sepracor.................................. -- 74,416 197,357
----------- ----------- -----------
Total............................. $23,657,601 $18,166,693 $16,165,613
=========== =========== ===========
</TABLE>
(6) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are recorded at cost and
consist of the following:
<TABLE>
<CAPTION>
ESTIMATED SEPTEMBER 30,
LIFE --------------------------
(YEARS) 2000 1999
------------- ----------- -----------
<S> <C> <C> <C>
Laboratory equipment....................... 5-15 $14,028,807 $14,209,633
Office furniture and equipment............. 5-10 5,117,985 4,870,206
Automobile equipment....................... 3 119,520 119,654
Leasehold improvements..................... Life of lease 5,617,658 6,582,509
----------- -----------
24,883,970 25,782,002
Less: accumulated depreciation and
amortization............................. 15,618,965 14,866,413
----------- -----------
Net property, equipment and leasehold
improvements............................. $ 9,265,005 $10,915,589
=========== ===========
</TABLE>
(7) INTANGIBLE ASSETS
The components of intangible assets, net are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
2000 1999
-------- ----------
<S> <C> <C>
Patents..................................................... $ -- $4,876,189
Goodwill.................................................... 693,544 1,387,072
Acquired work force......................................... 88,667 137,031
-------- ----------
$782,211 $6,400,292
======== ==========
</TABLE>
The above amounts reflect accumulated amortization of $2,830,537 and
$8,226,456 at September 30, 2000 and 1999, respectively. Diagnostics patents
acquired and goodwill have been capitalized and are being amortized on a
straight-line basis over the remaining lives of the respective patents, and over
five years for goodwill. On November 30, 1999 the Company sold all of its
capitalized patents in the sale of assets of its diagnostics business to Bayer
(see note 16).
50
<PAGE> 51
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at September 30, 2000 and 1999 are
comprised of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Accounts payable............................................ $1,597,184 $1,357,400
Accrued future lease escalations............................ 407,346 465,765
Accrued payroll and employee benefits....................... 999,512 638,530
Accrued incentive compensation.............................. 950,000 750,000
Accrued facility closing costs (see note 15)................ 102,951 535,000
Accrued expenses............................................ 2,260,499 1,482,977
---------- ----------
$6,317,492 $5,229,672
========== ==========
</TABLE>
(9) STOCKHOLDERS' EQUITY
(a) Stock Option Plans
The Company has established six stock option plans for its employees,
officers, directors and consultants, including a stock option plan adopted upon
the acquisition of Cadus' research business (see note 3(a)). The plans are
administered by the Compensation Committee of the Board of Directors, which may
grant either non-qualified or incentive stock options. The Committee determines
the exercise price and vesting schedule at the time the option is granted.
Options vest over various periods and expire no later than 10 years from date of
grant. The total authorized shares under these plans is 7,815,000.
On June 23, 1999, the Board of Directors adopted the 1999 Incentive and
Non-Qualified Stock Option Plan which was approved by the stockholders at the
annual meeting of stockholders on March 15, 2000. Under the plan, the Company
may grant incentive stock options and non-qualified stock options. Participation
in the plan is limited to directors, officers, employees and consultants of the
Company or a parent or subsidiary of the Company. The plan also continues the
automatic, formula-based grants of non-qualified stock options to directors who
are not employees of the Company.
The following table summarizes changes in the number of common shares
subject to options in the stock option plans:
<TABLE>
<CAPTION>
EXERCISE PRICE
-----------------------------------------
WEIGHTED
SHARES LOW HIGH AVERAGE
---------- ----- ------ --------
<S> <C> <C> <C> <C>
Balance at September 30, 1997
Unexercised.............................. 2,985,052 $1.75 $ 9.32 $ 6.07
Granted.................................. 840,250 3.25 6.75 5.26
Exercised................................ (5,699) 3.50 9.25 4.22
Forfeited................................ (37,872) 3.75 9.00 6.66
---------- ----- ------ ------
Balance at September 30, 1998
Unexercised.............................. 3,781,731 $1.75 $ 9.32 $ 5.89
Granted.................................. 996,258 2.94 6.00 4.36
Exercised................................ (92,187) 1.75 4.13 2.93
Forfeited................................ (251,033) 1.94 9.00 4.38
---------- ----- ------ ------
</TABLE>
51
<PAGE> 52
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
EXERCISE PRICE
-----------------------------------------
WEIGHTED
SHARES LOW HIGH AVERAGE
---------- ----- ------ --------
<S> <C> <C> <C> <C>
Balance at September 30, 1999
Unexercised.............................. 4,434,769 $1.75 $ 9.32 $ 5.70
Granted.................................. 1,242,625 5.38 41.25 23.70
Exercised................................ (2,268,958) 1.75 9.32 5.49
Forfeited................................ (139,047) 4.25 23.25 5.90
---------- ----- ------ ------
Balance at September 30, 2000
Unexercised.............................. 3,269,389 $3.25 $41.25 $12.70
========== ===== ====== ======
</TABLE>
At September 30, 2000, the Company has reserved 4,382,947 shares of its
authorized common stock for all shares issuable under options. At September 30,
2000, 1999, and 1998 options exercisable were 1,752,084, 3,077,028 and
2,454,082, respectively.
Excluded from the aforementioned stock option plans is a plan established
for certain employees of OSI-UK upon the acquisition of that subsidiary and a
former plan for directors. During fiscal 2000, 1999 and 1998, 86,980, 0 and 0
options, respectively, were exercised under the OSI-UK plan and 15,000, 0 and 0
options respectively were exercised under the directors plan. As of September
30, 2000, 38,020 shares and 0 shares remain outstanding under these plans,
respectively.
Information regarding stock options outstanding as of September 30, 2000,
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------- -------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
SHARES EXERCISE CONTRACTUAL SHARES EXERCISE
PRICE RANGE (IN THOUSANDS) PRICE LIFE (IN THOUSANDS) PRICE
----------- -------------- -------- ----------- -------------- --------
<S> <C> <C> <C> <C> <C>
Under $6.00 1,105 4.49 7.3 711 4.52
$6.00 - $15.00 1,025 7.88 6.1 941 7.61
Over $15.00 1,139 24.93 8.7 100 20.63
</TABLE>
Stock option grants are generally set at the closing price of the Company's
common stock on the date of grant and the related number of shares granted are
fixed at that point in time except to one employee as noted below. Therefore
under the principles of APB Opinion No. 25, the Company does not recognize
compensation expense associated with the grant of stock options. SFAS 123,
"Accounting for Stock-Based Compensation," requires the use of option valuation
models to determine the fair value of options granted after 1995. Pro forma
information regarding net loss and loss per share shown below was determined as
if the Company had accounted for its employee stock options and shares sold
under its stock purchase plan under the fair value method of SFAS 123.
The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for fiscal 2000, 1999 and 1998, respectively: risk-free interest
rates of 5.95%, 5.75% and 4.38%; dividend yields of 0%; volatility factors of
the expected market price of the Company's common stock of 84.0%, 60.7% and
64.9%; expected life of the employees' options of 4.2 years, 3.7 years and 3.7
years; and expected life of the consultants' options equal to the remaining
contractual life of the options. These assumptions resulted in weighted-average
fair values of $23.08, $2.22 and $2.87 per share for stock options granted in
fiscal 2000, 1999 and 1998, respectively.
52
<PAGE> 53
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The pro forma effect on
net loss for the periods presented is not representative of the pro forma effect
on net income or loss in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1997. Pro forma information in future years will reflect the amortization of a
larger number of stock options granted in several succeeding years. The
Company's pro forma information is as follows (in thousands, except per share
information):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------
2000 1999 1998
-------- ------------- --------
<S> <C> <C> <C>
Pro forma net loss............................. $(21,542) $(12,810) $(12,802)
Pro forma basic net loss per share............. $ (0.88) $ (0.60) $ (0.60)
</TABLE>
On August 17, 2000, the Board of Directors granted non-qualified options to
purchase up to 250,000 shares of common stock to the Company's new President and
Head of Research and Development. The terms of this grant provided for an option
to purchase 100,000 shares of common stock with an exercise price equal to 50%
of the fair market value on the grant date, vesting immediately upon his
employment on September 28, 2000 and an option to purchase 150,000 shares of
common stock with an exercise price equal to the fair market value on the grant
date, vesting one-third in a year from the effective date of his employment and
monthly thereafter for twenty-four months. Compensation expense resulting from
these awards was measured as of September 28, 2000, the effective date of
employment. The granting of the options at 50% of fair market value resulted in
a compensation charge of $4,975,000, which is included in research and
development expense in the accompanying consolidated statement of operations for
fiscal 2000. The granting of the other options resulted in deferred compensation
of approximately $4.4 million which will be recognized as compensation expense
on a straight line basis over the vesting period.
On August 17, 2000, one member of the Company's Board of Directors retired
as a director but will continue to provide consulting services to the Company
under an existing consulting arrangement (see note 12). In connection with his
retirement, the Board of Directors declared the then outstanding unvested
options held by this director as immediately vested. Absent this acceleration in
vesting, the unvested options would have continued to vest pursuant to the
original terms of the option award. The modification to the vesting schedule
caused a new measurement date for the unvested options which resulted in an
incremental intrinsic value of $1.6 million. The incremental intrinsic value has
not been reflected as compensation in the accompanying consolidated statement of
operations for fiscal 2000 as the individual continues to provide services to
the Company. If those services cease before the original vesting period of such
options, a compensation charge would then be recognized.
In fiscal 2000, 1999, and 1998 the Company granted options to certain
non-employees to purchase 80,000, 10,000 and 23,750 shares of common stock,
respectively. Such options vest over a three year period, based upon future
service requirements. The Company recorded deferred compensation of $4,398,000
based on the fair value of such options at the date of grant as determined using
a Black-Scholes option pricing model. These amounts were calculated based upon
the fair value at September 30, 2000, as determined using a Black-Scholes option
pricing model (see above for weighted average assumptions used). Such
compensation cost is amortized to expense using the methodology prescribed in
FASB Interpretation No. 28 over the respective vesting periods. In accordance
with EITF Issue 96-18, "Accounting For Equity Instruments that Are Issued to
Other Than Employees for Acquiring, or In Conjunction with Selling, Goods or
Services," the amount of compensation expense to be recorded in future periods
related to the non-employee grants is subject to change each reporting period
based upon the then fair value of these options, using a Black-Scholes option
pricing model, until expiration of the grant vesting period. The Company
recorded compensation expense in fiscal 2000 of approximately $1,845,000 for
shares granted in fiscal 2000, 1999, and 1998.
53
<PAGE> 54
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
In April 1999, new tax regulations became effective in the UK requiring
employers to remit a national insurance contribution (NIC) tax on gains on the
exercise of stock options by employees. This NIC tax applies to the Company's
grants of options to its UK employees in June 1999 and June 2000. Based on the
fair market of the Company's stock on September 30, 2000, the NIC liability
would be approximately $1.2 million, of which the Company has obtained
indemnification agreements from the employees (optionees) for approximately
$900,000 of this estimated liability. The NIC tax liability is not recognized in
the Company's financial statements until the option is exercised, which is when
the actual amount of such liability is estimatable.
(b) Shareholder Rights Plan
On September 27, 2000, the Board of Directors adopted a new shareholder
rights plan, declared a dividend distribution of one Series SRPA Junior
Participating Preferred Stock Purchase Right on each outstanding share of its
common stock, and authorized the redemption of the rights issued pursuant to the
Company's then current shareholder rights plan. The Company distributed new
rights to all shareholders of record at the close of business on September 27,
2000, the record date. These rights entitle the holder to buy one one-thousandth
of a share of Series SRP Junior Participating Preferred Stock upon a triggering
event as discussed below.
The new rights become exercisable upon the occurrence of a triggering
event, such as the announcement by a potential acquirer of the intention to
initiate a tender offer that would result in the acquisition of 17.5% or more of
the outstanding shares of the Company or the actual acquisition of 17.5% or more
of the outstanding shares of the Company by any person or group of affiliated or
associated persons.
Upon the actual acquisition of 17.5% or more of the outstanding common
stock of the Company by a person or group, the new rights held by all holders
other than the acquiring person or group will be modified automatically to be
rights to purchase shares of common stock (instead of rights to purchase
preferred stock) at 50% of the then market value of such common stock.
Furthermore, such rightholders will have the further right to purchase shares of
common stock at the same discount if the Company merges with, or sells 50% or
more of its assets or earning power to, the acquiring person or group or any
person acting for or with the acquiring person or group. If the transaction
takes the form of a merger of the Company into another corporation, these
rightholders will have the right to acquire at the same percentage discount
shares of common stock of the acquiring person or other ultimate parent of such
merger party.
The Company can redeem the new rights at any time before (but not after) a
person has acquired 17.5% or more of the Company's common stock, with certain
exceptions. The rights will expire on August 31, 2010 if not redeemed prior to
such date.
The rights issued and outstanding under the Company's shareholder rights
plan dated June 23, 1999 at the close of business on September 27, 2000 were
redeemed with the redemption price of $0.001 per existing right payable on
October 4, 2000. The prior rights plan terminated upon the redemption of the
existing rights.
(c) Preferred Stock
During fiscal 1999, the Company adopted certain amendments to its
certificate of incorporation which included the authorization of 5,000,000
shares of preferred stock with a par value of $.01 per share with such
designations, preferences, privileges, and restrictions as may be determined
from time to time by the Company's Board of Directors.
54
<PAGE> 55
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
(d) Sale of Common Stock and Warrant to Marion Merrell Dow
In December 1992, the Company entered into common stock and common stock
warrant purchase agreements with Marion Merrell Dow. The Company issued
1,090,909 shares of common stock at $5.50 per share and a warrant to purchase up
to 500,000 additional shares $5.50 per share which expired December 10, 1999.
(e) Employee Stock Purchase Plan
On May 1, 1993, the Company adopted an Employee Stock Purchase Plan under
which eligible employees may contribute up to 10% of their base earnings toward
the quarterly purchase of the Company's common stock. The employee's purchase
price is derived from a formula based on the fair market value of the common
stock. No compensation expense is recorded in connection with the plan. During
fiscal 2000, 1999 and 1998, 6,811, 23,326 and 20,664 shares were issued with 48,
55 and 52 employees participating in the plan, respectively. At September 30,
2000, the Company has reserved 500,000 shares of its authorized common stock in
connection with this plan.
(f) Private Placement
On February 28, 2000, the Company sold 3.325 million newly-issued shares of
its common stock to a select group of institutional investors for net proceeds
of approximately $53 million. The Company intends to use the proceeds from this
private placement to advance its research and development programs, particularly
its OSI-774 (note 5(d)) development and commercialization program and its
GPCR-directed drug development and functional genomics programs, as well as for
commercial development and other general corporate purposes. The Company agreed
to register the resale of the shares of common stock issued in the private
placement, and filed a registration statement on Form S-3 with the Securities
and Exchange Commission which became effective on June 21, 2000.
(10) INCOME TAXES
There is no provision (benefit) for federal or state income taxes, since
the Company has incurred operating losses since inception and has established a
valuation allowance equal to the total deferred tax assets.
The tax effect of temporary differences, net operating loss carry forwards
and research and development tax credit carry forwards as of September 30, 2000
and 1999 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards....................... $ 24,993,288 $ 19,530,528
Research and development credits........................ 886,681 867,171
Intangible assets....................................... 655,174 695,702
Other................................................... 6,072,712 2,845,293
------------ ------------
32,607,855 23,938,694
Valuation allowance..................................... (32,607,855) (23,938,694)
------------ ------------
$ -- $ --
============ ============
</TABLE>
As of September 30, 2000, the Company has available federal net operating
loss carry forwards of approximately $64 million which will expire in various
years from 2002 to 2020, and may be subject to certain
55
<PAGE> 56
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
annual limitations. The Company's research and development tax credit carry
forwards expire in various years from 2001 to 2020.
During fiscal 2000, employee stock options were exercised which resulted in
income tax deductions in excess of the related compensation expense recorded for
financial statement purposes in the amount of approximately $52 million. Of this
amount, approximately $247,000 was recognized for tax purposes in fiscal 2000
and the balance will be recognized for tax purposes in fiscal 2001. The tax
benefit of the deduction for the exercise of these employee stock options will
be credited to additional paid-in capital in the period that such tax benefit is
recognized for financial statement purposes.
(11) COMMITMENTS AND CONTINGENCIES
(a) Lease Commitments
The Company leases office, operating and laboratory space under various
lease agreements.
Rent expense was approximately $1,970,000, $1,533,000 and $1,090,000 for
fiscal 2000, 1999, and 1998, respectively.
The following is a schedule by fiscal years of future minimum rental
payments required as of September 30, 2000, assuming expiration of the leases
for the two Uniondale facilities on July 31, 2003 and June 30, 2006,
respectively, the Tarrytown facility on June 30, 2008, and the UK facility on
April 30, 2006. The future minimum rental payments have been reduced by
approximately $1.8 million of rental payments to be received under the seven
year sublease of approximately 9,100 square feet of the Tarrytown facility
commencing in fiscal 2001.
<TABLE>
<S> <C>
2001........................................................ $ 1,901,547
2002........................................................ 1,858,415
2003........................................................ 1,858,688
2004........................................................ 1,775,408
2005........................................................ 1,788,608
2006 and thereafter......................................... 2,533,782
-----------
$11,716,448
===========
</TABLE>
During fiscal 2000, the Company received a commitment from the State of New
York to expand and refurbish a state-of-the-art discovery research and
headquarters facility located in the Broad Hollow BioScience Park on the SUNY
campus in Farmingdale, New York, which the Company will lease from the State.
Management anticipates that the lease and relocation to this new facility will
occur by the end of 2001.
(b) Contingencies
The Company has received several letters from other companies and
universities advising the Company that various products under research and
development by the Company may be infringing on existing patents of such
entities. These matters are presently under review by management and outside
counsel for the Company. Where valid patents of other parties are found by the
Company to be in place, management will consider entering into licensing
arrangements with the universities and/or other companies or modify the conduct
of its research. The Company's future royalties, if any, may be reduced by up to
50% if its licensees or collaborative partners are required to obtain licenses
from third parties whose patent rights are infringed by the Company's products,
technology or operations. In addition, should any infringement claims result in
a patent infringement lawsuit, the Company could incur substantial costs in
defense of such a suit, which could have a
56
<PAGE> 57
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
material adverse effect on the Company's business, financial condition and
results of operations, regardless of whether the Company were successful in the
defense.
(c) Borrowings
As of September 30, 2000, the Company had a line of credit with a
commercial bank in the amount of $10 million. This line expires annually on
March 31st, and its current rate of interest is prime plus 3/4. There were no
amounts outstanding under the line of credit as of September 30, 2000. In
addition, in 1999, the Company obtained a secured loan of $500,000 from the same
bank. The loan is payable over a three-year period, with monthly principal
payments of $13,888, plus interest at 8.12%. The carrying value of the loan
approximates fair value at September 30, 2000, based on borrowing rates
currently available for similar loans with similar terms.
(d) Derivative Financial Instruments
During fiscal 2000, the Company entered into forward foreign exchange
contracts through a financial institution in order to reduce the risk of
exchange rate fluctuations in the British pound, in connection with its ongoing
funding of the operations of its UK subsidiary. At September 30, 2000, the
Company had $1.0 million in such contracts, with remaining terms not exceeding
six months. The difference between the foreign currency rate in the contract and
such rate as of September 30, 2000 was immaterial to the results of operations
for fiscal 2000. See note 17 for discussion of SFAS 133 "Accounting For
Derivative Instruments and Hedging Activities."
(12) RELATED PARTY TRANSACTIONS
Effective January 1, 1995, the Company compensates its independent outside
directors on a $1,500 retainer per month. For fiscal 2000, 1999 and 1998, such
fees amounted to $165,000, $141,000 and $135,000, respectively. The Company also
has compensated certain directors for services performed pursuant to consultant
arrangements. For the years ended September 30, 2000, 1999 and 1998, consulting
fees in the amounts of approximately $292,000, $465,000 and $157,000,
respectively, were paid by the Company pursuant to these arrangements.
One director is a partner in a law firm which represents the Company on its
patent and license matters. Fees paid to this firm for the years ended September
30, 2000, 1999 and 1998 were approximately $482,000, $525,000 and $604,000,
respectively.
One director is a controlling member of Mehta Partners, LLC with which the
Company has a strategic and financial services arrangement. In fiscal 2000, the
Company paid Mehta approximately $490,000 for consulting services received. In
fiscal 1999, the Company paid Mehta $75,000 in cash and issued 32,452 shares of
treasury stock with a fair value of $100,000 in exchange for consulting services
received.
A director is an officer of Cold Spring Harbor Laboratory which was a
founder of Amplicon (which was acquired by Tularik) and Helicon. The Company's
former chairman was a member of the board of directors of Anaderm through
September 23, 1999 and is on the board of directors of Helicon. An executive
officer of the Company is vice president of Helicon. A director is a board
member of Helicon, and was the chief executive officer through December 1999.
The Company has a fully reserved investment in Helicon and sold its investment
in Tularik in December 1999. A director is on the faculty of Vanderbilt with
which the Company has a collaborative research agreement, and also has a
consulting agreement with the Company.
57
<PAGE> 58
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
(13) EMPLOYEE SAVINGS AND INVESTMENT PLAN
The Company sponsors an Employee Savings and Investment Plan under Section
401(k) of the Internal Revenue Code. The plan allows employees to defer from 2%
to 10% of their income on a pre-tax basis through contributions into designated
investment funds. For each dollar the employee invests up to 6% of his or her
earnings, the Company will contribute an additional 50 cents into the funds. For
fiscal 2000, 1999, and 1998, the Company's expenses related to the plan were
approximately $277,000, $203,000 and $197,000, respectively.
(14) EMPLOYEE RETIREMENT PLAN
On November 10, 1992, the Company adopted a plan which provides
postretirement medical and life insurance benefits to eligible employees, board
members and qualified dependents. Eligibility is determined based on age and
service requirements. These benefits are subject to deductibles, co-payment
provisions and other limitations.
The Company utilizes SFAS 106, "Employer's Accounting for Postretirement
Benefits Other Than Pensions" to account for the benefits to be provided by the
plan. Under SFAS 106 the cost of postretirement medical and life insurance
benefits is accrued over the active service periods of employees to the date
they attain full eligibility for such benefits. As permitted by SFAS 106, the
Company elected to amortize over a 20 year period the accumulated postretirement
benefit obligation related to prior service costs.
On October 1, 1998, the Company adopted SFAS 132, "Employers' Disclosures
about Pension and Other Postretirement Benefits". SFAS 132 revises employers'
disclosures about pension and other postretirement benefit plans. SFAS 132 does
not change the method of accounting for such plans.
Net postretirement benefit cost for fiscal 2000, 1999 and 1998 includes the
following components:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Service cost for benefits earned during the
period........................................... $152,145 $278,219 $220,785
Interest cost on accumulated postretirement benefit
obligation....................................... 156,157 122,122 104,831
Amortization of unrecognized net loss.............. -- -- 3,327
Amortization of initial benefits attributed to past
service.......................................... 5,774 19,803 17,493
-------- -------- --------
Net postretirement benefit cost.................... $314,076 $420,144 $346,436
======== ======== ========
</TABLE>
The accrued postretirement benefit cost at September 30, 2000 and 1999 was
as follows:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Accumulated postretirement benefit obligation-fully eligible
active plan participants.................................. $2,141,524 $2,193,325
Unrecognized prior service cost............................. -- (203,893)
Unrecognized cumulative net loss............................ (136,138) (65,764)
Unrecognized transition obligation.......................... (119,118) (232,614)
---------- ----------
Accrued postretirement benefit cost......................... $1,886,268 $1,691,054
========== ==========
</TABLE>
58
<PAGE> 59
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
The changes in the accumulated postretirement benefit obligation during
fiscals 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Balance at beginning of year.............................. $(2,193,325) $(1,721,206)
Benefit payments........................................ 118,862 18,357
Plan amendments/acquisitions............................ 311,615 (206,203)
Gain/(loss) experience.................................. (70,374) 116,068
Service cost............................................ (152,145) (278,219)
Interest cost........................................... (156,157) (122,122)
----------- -----------
Balance at end of year.................................... $(2,141,524) $(2,193,325)
=========== ===========
</TABLE>
The accumulated postretirement benefit obligation was determined using a
discount rate of 7.5 percent in 2000 and in 1999 and a health care cost trend
rate of approximately 5 percent in 1999 and thereafter. Increasing the assumed
health care cost trend rates by one percentage point in each year and holding
all other assumptions constant would increase the accumulated postretirement
benefit obligation as of September 30, 2000 by approximately $336,000 and the
net postretirement benefit cost by approximately $55,000. Benefits paid during
fiscal 2000, 1999 and 1998 were $118,862, $18,357 and $1,669, respectively.
(15) CONSOLIDATION OF FACILITIES
During fiscal 1999 the Company made the strategic decision to close down
its facilities in North Carolina and consolidate its natural products operations
into its Tarrytown facility in New York. This close down occurred on March 31,
2000. The fungal extract libraries and certain equipment were relocated to the
Tarrytown facility. None of the employees at the North Carolina facility were
relocated. Under the plan for relocating this facility, 16 research and
administrative employees received a severance package which included continued
payments of four months salary, plus four months of continuous health insurance.
The leases in North Carolina expire in 2004. The Company accrued an estimate of
a reserve for an expected delay in finalizing a new tenant and its assumption of
our existing lease. The estimated cost of closing this facility was
approximately $535,000, and was included in the accompanying consolidated
balance sheet in accrued expenses as of September 30, 1999, and in R&D expense
($395,000) and selling, general and administrative expenses ($140,000) in the
accompanying consolidated statement of operations for fiscal 1999. During fiscal
2000, the Company incurred approximately $432,000 principally in severance and
subleasing-related costs, including a $61,000 loss resulting from the assumption
of a lease and related leasehold improvements by a third party. As of September
30, 2000, the Company has approximately $103,000 remaining in its accrual that
it expects to use for severance costs associated with this consolidation.
(16) SALE OF DIAGNOSTIC BUSINESS
On November 30, 1999, the Company sold assets of its diagnostics business
to Bayer including the assets of the Company's wholly-owned diagnostics
subsidiary, OSDI, based in Cambridge, Massachusetts. The assets sold include
certain contracts, equipment and machinery, files and records, intangible
assets, intellectual property, inventory, prepaid expenses and other assets
primarily related to the operations of the diagnostics business. In connection
with the sale, the Company and OSDI entered into certain agreements with Bayer
including an Assignment and Assumption of Lease with respect to the OSDI
facility located in Cambridge and certain patent assignment and license
agreements. Certain employees of the Company and OSDI entered into employment
agreements with Bayer. Under the terms of the agreement, the Company received
$9.2 million up-front from Bayer with additional contingent payments of $1.25
million to be made to the Company
59
<PAGE> 60
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
by 2001. Bayer intends to retain all employees of OSDI and will maintain the
unit's headquarters in Cambridge.
The Company recorded a gain on the sale of approximately $3.7 million
during fiscal 2000. The net gain was calculated as follows (in thousands):
<TABLE>
<S> <C>
Cash received from Bayer.................................... $ 9,151
Accrued expenses assumed by Bayer........................... 599
Net book value of fixed assets sold......................... (611)
Net book value of patent costs (intangibles)................ (4,748)
Professional and legal fees incurred........................ (172)
Commission costs paid....................................... (315)
Other related costs......................................... (158)
-------
Gain on sale of diagnostics business........................ $ 3,746
=======
</TABLE>
(17) NEW ACCOUNTING PRONOUNCEMENTS
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 -- "Revenue Recognition in Financial Statements".
SAB No. 101 provides the SEC staff's views on the recognition of revenue
including nonrefundable technology access fees received by biotechnology
companies in connection with research collaborations with third parties. SAB No.
101 states that in certain circumstances the SEC staff believes that up-front
fees, even if nonrefundable, should be deferred and recognized systematically
over the term of the research arrangement. SAB No. 101, as amended by SAB No.
101B, requires registrants to adopt the accounting guidance contained therein by
no later than the fourth fiscal quarter of the fiscal year beginning after
December 15, 1999 (fiscal year ending September 30, 2001 for us). The Company
will report the effect of adopting the provisions of the SAB as a change in
accounting principle as of October 1, 2000 in accordance with APB Opinion No. 20
rather than retroactively restate prior period financial statements. The Company
assessed the financial impact of complying with SAB No. 101, and it believes
that the change in accounting principle will primarily result in the recognition
of the technology access fee of $3,500,000 received from Tanabe evenly over the
term of the collaboration between the Company and Tanabe, that had been
previously recognized as revenue in the first quarter of fiscal 2000.
In June 1998, the Financial Accounting Standard Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000, as amended by SFAS 137 and 138. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. In
accordance with SFAS 133, an entity is required to recognize all derivatives as
assets or liabilities in the statement of financial position and measure those
instruments at fair value. SFAS 133 requires that changes in the derivative's
fair value as recognized currently in earnings unless specific hedge accountings
are met. Special accounting for qualifying hedging allows a derivative's gain
and losses to offset related results on the hedged item in the income statement
and requires that a company formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. The Company does
not believe that the implementation of SFAS 133, as amended, will have a
material effect on our results of operations and financial position.
(18) SUBSEQUENT EVENTS -- PUBLIC OFFERING
On November 6, 2000, subsequent to the end of fiscal 2000, the Company
concluded a public offering of 5.35 million shares of common stock at a price of
$70.00 per share. Gross proceeds totaled $374.5 million with
60
<PAGE> 61
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
net proceeds of approximately $350.0 million after all related fees are
included. In addition, on November 21, 2000, underwriters associated with this
offering exercised their over-allotment option to purchase an additional 802,500
shares of our common stock at a price of $70.00 per share. Gross proceeds from
the exercise of the over-allotment option totaled $56.2 million with net
proceeds of approximately $52.8 million.
61
<PAGE> 62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
similarly named section of our Proxy Statement for our 2001 Annual Meeting to be
filed with the Securities and Exchange Commission not later than 120 days after
September 30, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
similarly named section of our Proxy Statement for our 2001 Annual Meeting to be
filed with the Securities and Exchange Commission not later than 120 days after
September 30, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
similarly named section of our Proxy Statement for our 2001 Annual Meeting to be
filed with the Securities and Exchange Commission not later than 120 days after
September 30, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
similarly named section of our Proxy Statement for our 2001 Annual Meeting to be
filed with the Securities and Exchange Commission not later than 120 days after
September 30, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements are included in
Part II, Item 8 of this report:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) All schedules are omitted as the required information is
inapplicable or the information is presented in the financial
statements or related notes.
(3) The exhibits listed in the Index to Exhibits are attached or
incorporated herein by reference and filed as a part of this
report.
(b) Reports on Form 8-K
We filed a current report on Form 8-K on September 27, 2000 with the
Securities and Exchange Commission via EDGAR, pertaining to our
Shareholder Rights Plan. The earliest event covered by the report
occurred on September 27, 2000.
62
<PAGE> 63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
OSI PHARMACEUTICALS, INC.
By: /s/ COLIN GODDARD, PH.D.
------------------------------------
Colin Goddard, Ph.D.
Chairman and Chief Executive Officer
Date: December 15, 2000
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the days indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ COLIN GODDARD, PH.D Chairman of the Board and Chief December 15, 2000
--------------------------------------------- Executive Officer (principal
Colin Goddard, Ph.D executive officer)
/s/ ROBERT L. VAN NOSTRAND Vice President, Chief Financial December 15, 2000
--------------------------------------------- Officer (principal financial and
Robert L. Van Nostrand accounting officer)
/s/ G. MORGAN BROWN Director December 15, 2000
---------------------------------------------
G. Morgan Brown
/s/ JOHN H. FRENCH, II Director December 15, 2000
---------------------------------------------
John H. French, II
/s/ EDWIN A. GEE, PH.D. Director December 15, 2000
---------------------------------------------
Edwin A. Gee, Ph.D.
/s/ DARYL K. GRANNER, M.D. Director December 15, 2000
---------------------------------------------
Daryl K. Granner, M.D.
/s/ WALTER M. LOVENBERG, PH.D. Director December 15, 2000
---------------------------------------------
Walter M. Lovenberg, Ph.D.
/s/ VIREN MEHTA Director December 15, 2000
---------------------------------------------
Viren Mehta
/s/ SIR MARK RICHMOND, PH.D. Director December 15, 2000
---------------------------------------------
Sir Mark Richmond, Ph.D.
/s/ JOHN P. WHITE, ESQUIRE Director December 15, 2000
---------------------------------------------
John P. White, Esquire
</TABLE>
63
<PAGE> 64
INDEX TO EXHIBITS
<TABLE>
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EXHIBIT
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<C> <S>
2.1+ Asset Purchase Agreement, dated July 30, 1999, by and
between Cadus Pharmaceutical Corporation and OSI
Pharmaceuticals, Inc.(1)
2.2 OSI Pharmaceuticals, Inc. Non-Qualified Stock Option Plan
for Former Employees of Cadus Pharmaceutical Corporation(1)
2.3+ Asset Purchase Agreement, dated November 17, 1999, by and
among OSI Pharmaceuticals, Inc., Oncogene Science
Diagnostics, Inc. and Bayer Corporation(2)
2.4 Amendment No. 1 to Asset Purchase Agreement, dated November
30, 1999, by and among OSI Pharmaceuticals, Inc., Oncogene
Science Diagnostics, Inc. and Bayer Corporation(2)
3.1 Certificate of Incorporation, as amended(3)
3.2 Amended and Restated By-Laws(4)
4.1 Stock Purchase Agreements, dated February 24, 2000, by and
between OSI Pharmaceuticals, Inc. and each of Biotechnology
Value Fund L.P., American Variable Insurance Series Global
Small Capitalization Fund, Asset Management Holding Co.,
Biotechnology Value Fund, II L.P., Chelsey Capital,
Forstmann International Fund, LTD, Forstmann Partners, L.P.,
Galleon Healthcare Overseas, Ltd., Galleon Healthcare
Partners, LP, International Biotechnology Trust PLC,
Investment 10, L.L.C., Janus Investment Fund, Lone Balsam,
L.P., Lone Cypress, LTD, Lone Sequoia, L.P., Lone Spruce,
L.P., Merlin BioMed LP, Merlin BioMed Intl LTD, Moore Global
Investments, Ltd., Remington Investment Strategies, L.P.,
Sands Point Partners, SMALLCAP World Fund, Inc., United
Capital Management, Inc. and Ziff Asset Management, L.P.(5)
4.2 Rights Agreement, dated as of September 27, 2000, between
OSI Pharmaceuticals, Inc. and The Bank of New York as Rights
Agent, including Terms of Series SRP Junior Participating
Preferred Stock, Summary of Rights to Purchase Preferred
Stock and Form of Right Certificate(6)
10.1 1985 Stock Option Plan (filed as an exhibit to OSI
Pharmaceuticals, Inc.'s registration statement on Form S-8
(file no. 33-8980), and incorporated herein by reference)
10.2 1989 Incentive and Non-Qualified Stock Option Plan (filed as
an exhibit to OSI Pharmaceuticals, Inc.'s registration
statement on Form S-8 (file no. 33-38443), and incorporated
herein by reference)
10.3 1993 Incentive and Non-Qualified Stock Option Plan, as
amended (filed as an exhibit to OSI Pharmaceuticals, Inc.'s
registration statement on Form S-8 (file no. 33-64713), and
incorporated herein by reference)
10.4 Stock Purchase Plan for Non-Employee Directors (filed as an
exhibit to OSI Pharmaceuticals, Inc.'s registration
statement on Form S-8 (file no. 333-06861), and incorporated
herein by reference)
10.5 1995 Employee Stock Purchase Plan (filed as an exhibit to
OSI Pharmaceuticals, Inc.'s registration statement on Form
S-8 (file no. 333-06861), and incorporated herein by
reference)
10.6 1997 Incentive and Non-Qualified Stock Option Plan (filed as
an exhibit to OSI Pharmaceuticals, Inc.'s registration
statement on Form S-8 (file no. 333-39509), and incorporated
herein by reference)
10.7 1999 Incentive and Non-Qualified Stock Option Plan (filed as
an exhibit to OSI Pharmaceuticals, Inc.'s registration
statement on Form S-8 (file no. 333-42274), and incorporated
herein by reference)
10.8+ Collaborative Research Agreement, dated April 1, 1996,
between OSI Pharmaceuticals, Inc. and Pfizer Inc.(7)
10.9+ License Agreement, dated April 1, 1996, between OSI
Pharmaceuticals, Inc. and Pfizer Inc.(7)
</TABLE>
<PAGE> 65
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EXHIBIT
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<C> <S>
10.10+ Stockholders' Agreement, dated April 23, 1996, among Anaderm
Research Corp., OSI Pharmaceuticals, Inc., Pfizer Inc., New
York University and certain individuals(7)
10.11+ Collaborative Research Agreement, dated April 23,1996, among
OSI Pharmaceuticals, Inc., Pfizer Inc. and Anaderm Research
Corp.(7)
10.12 Form of Warrants issued by OSI Pharmaceuticals, Inc. to the
former stockholders of MYCOsearch, Inc. and their designees
covering an aggregate of 100,000 shares of common stock(7)
10.13 Common Stock Purchase Warrant granted to Marion Merrell Dow,
Inc. dated December 11, 1992(8)
10.14 Collaborative Agreement, dated April 19, 1995, between OSI
Pharmaceuticals, Inc. and Novartis Pharma AG(9)
10.15 Letter Agreement, dated April 19, 1995, between OSI
Pharmaceuticals, Inc. and Novartis Pharma AG(9)
10.16+ Collaborative Research and License Agreement, dated January
1, 1997, between OSI Pharmaceuticals, Inc. and Bayer
Corporation(10)
10.17+ Collaborative Research, Development and License Agreement,
dated February 12, 1997, by and among OSI Pharmaceuticals,
Inc., Sankyo Co., Ltd., and MRC Collaborative Center(11)
10.18+ License Agreement, dated March 18, 1997, between OSI
Pharmaceuticals, Inc. and The Dow Chemical Company(11)
10.19+ Amended and Restated Collaborative Research and License
Agreement, effective April 1, 1997, by and among OSI
Pharmaceuticals, Inc., Hoechst Marion Roussel, Inc. and
Hoechst Aktiengesellschaft(12)
10.20+ Stock Subscription Agreement, dated July 17, 1997, by and
between OSI Pharmaceuticals, Inc. and Helicon Therapeutics,
Inc.(8)
10.21+ License and Services Agreement, dated July 17, 1997, by and
between OSI Pharmaceuticals, Inc. and Helicon Therapeutics,
Inc.(8)
10.22+ Stockholders' Agreement, dated July 17, 1997, by and among
Helicon Therapeutics, Inc. and certain stockholders of
Helicon Therapeutics, Inc.(8)
10.23+ Convertible Preferred Stock Purchase Agreement, dated July
17, 1997, by and among Helicon Therapeutics, Inc., OSI
Pharmaceuticals, Inc., Hoffman-La Roche, Inc. and Cold
Spring Harbor Laboratory(8)
10.24+ Collaborative Research and License Agreement, effective July
1, 1997, by and between Hoffman-La Roche, Inc. and Helicon
Therapeutics, Inc.(8)
10.25 Employment Agreement, dated April 30, 1998, between OSI
Pharmaceuticals, Inc. and Colin Goddard, Ph.D.(13)
10.26+ Amendatory and Collaborative Agreement, dated as of March
31, 1998, by and between OSI Pharmaceuticals, Inc. and
Sepracor, Inc.(13)
10.27+ Research Collaboration and License Agreement, dated April 1,
1998, by and among OSI Pharmaceuticals, Inc., Oncogene
Science Diagnostics, Inc. and Fujirebio Inc.(13)
10.28+ License Agreement, dated May 26, 1998, by and between OSI
Pharmaceuticals, Inc. and Aurora Biosciences Corporation(13)
10.29 Consulting Agreement, dated October 1, 1998, between OSI
Pharmaceuticals, Inc. and Gary E. Frashier(14)
10.30+ Agreement, dated March 19, 1999, by and between OSI
Pharmaceuticals, Inc. and BioChem Pharma Inc.(3)
</TABLE>
<PAGE> 66
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
10.31+ Collaborative Research Agreement, dated April 23, 1999, by
and among Pfizer, Inc., OSI Pharmaceuticals, Inc. and
Anaderm Research Corp.(1)
10.32+ Anaderm Research Corp. Amended and Restated Stockholders'
Agreement, dated April 23, 1999(1)
10.33+ Development Agreement, dated April 1, 1999, by and between
Pfizer Inc. and OSI Pharmaceuticals, Inc.(1)
10.34 Amendment No. 1, dated May 31, 1999, by and between Novartis
Pharma AG and OSI Pharmaceuticals, Inc.(1)
10.35+ Amendment No. 2, dated April 13, 1999, by and between
Novartis Pharma AG and OSI Pharmaceuticals, Inc.(1)
10.36+ Collaborative Research, License and Alliance Agreement,
dated August 31, 1999, by and between OSI Pharmaceuticals,
Inc. and Vanderbilt University(15)
10.37+ Collaborative Research and License Agreement, dated October
1, 1999, by and between OSI Pharmaceuticals, Inc. and Tanabe
Seiyaku Co. Ltd.(15)
10.38+ License Agreement, dated as of January 3, 2000, by and
between OSI Pharmaceuticals, Inc. and American Home Products
Corporation and American Cynamid Company(16)
10.39 Yeast Technology Agreement, dated as of February 15, 2000,
by and between OSI Pharmaceuticals, Inc. and Cadus
Pharmaceutical Corporation(17)
10.40 Agreement, dated as of May 23, 2000, by and between OSI
Pharmaceuticals, Inc. and Pfizer, Inc.(18)
10.41+ Non-Exclusive Cross License Agreement, effective as of June
8, 2000, by and among Merck & Co., Inc., Merck and Company,
Incorporated and OSI Pharmaceuticals, Inc.(19)
10.42* Employment Agreement, dated September 28, 2000, between OSI
Pharmaceuticals, Inc. and Nicholas G. Bacopoulous, Ph.D.
21* Subsidiaries of OSI Pharmaceuticals, Inc.
23* Consent of KPMG LLP, independent public accountants
27* Financial Data Schedule
</TABLE>
---------------
* Filed herewith.
+ Portions of this exhibit have been redacted and are subject to a
confidential treatment request filed with the Secretary of the Securities
and Exchange Commission pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended.
(1) Filed as an exhibit to OSI Pharmaceuticals, Inc.'s quarterly report on Form
10-Q for the fiscal quarter ended June 30, 1999, and incorporated herein by
reference.
(2) Filed as an exhibit to OSI Pharmaceuticals, Inc.'s current report on Form
8-K filed on December 15, 1999, and incorporated herein by reference.
(3) Filed as an exhibit to OSI Pharmaceuticals, Inc.'s quarterly report filed
on Form 10-Q for the quarter ended March 31, 1999, and incorporated herein
by reference.
(4) Filed as an exhibit to OSI Pharmaceuticals, Inc.'s current report on Form
8-K filed on January 8, 1999, and incorporated herein by reference.
(5) Filed as an exhibit to OSI Pharmaceuticals, Inc.'s current report on Form
8-K filed on March 1, 2000, and incorporated herein by reference.
(6) Filed as an exhibit to OSI Pharmaceuticals, Inc.'s registration statement
on Form 8-A (file no. 000-15190), and incorporated herein by reference.
