<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000 .
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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
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OSI Pharmaceuticals, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-3159796
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
106 Charles Lindbergh Boulevard, Uniondale, New York 11553
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(Address of principal executive offices) (Zip Code)
516-222-0023
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS:
At July 31, 2000 the registrant had outstanding 26,499,780 shares of common
stock, $.01 par value.
<PAGE> 2
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION............................................................ 1
Item 1. Financial Statements
Consolidated Balance Sheets
- June 30, 2000 (unaudited) and September 30, 1999............................. 1
Consolidated Statements of Operations
- Three months ended June 30, 2000 and 1999 (unaudited)........................ 2
Consolidated Statements of Operations
- Nine months ended June 30, 2000 and 1999 (unaudited)......................... 3
Consolidated Statements of Cash Flows
- Nine months ended June 30, 2000 and 1999 (unaudited)......................... 4
Notes to Consolidated Financial Statements (unaudited)......................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................ 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................... 16
PART II - OTHER INFORMATION............................................................... 17
Item 1. Legal Proceedings.............................................................. 17
Item 2. Changes in Securities and Use of Proceeds...................................... 17
Item 3. Defaults Upon Senior Securities................................................ 17
Item 4. Submission of Matters to a Vote of Security Holders............................ 17
Item 5. Other Information.............................................................. 17
Item 6. Exhibits and Reports on Form 8-K............................................... 18
SIGNATURES................................................................................ 19
EXHIBIT INDEX............................................................................. 20
</TABLE>
i
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
------------ -----------
(unaudited)
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents................................... $ 66,412,771 $ 8,863,887
Investment securities....................................... 16,319,161 9,997,967
Receivables, including amounts due from related parties of
$16,430 and $363,580 and trade receivables of $127,308 and
$236,067 at June 30, 2000 and September 30, 1999,
respectively.............................................. 223,370 1,033,917
Receivable from sale of Anaderm common stock................ - 3,645,136
Interest receivable......................................... 58,107 171,340
Grants receivable........................................... 120,278 343,509
Prepaid expenses and other.................................. 1,264,955 1,088,318
------------ -----------
Total current assets...................................... 84,398,642 25,144,074
------------ -----------
Property, equipment and leasehold improvements - net........ 9,058,749 10,915,589
Compound library assets - net............................... 2,797,443 4,197,085
Other assets................................................ 149,722 374,288
Intangible assets - net..................................... 967,684 6,400,292
------------ -----------
$ 97,372,240 $47,031,328
============ ===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses....................... $ 3,411,078 $ 5,229,672
Unearned revenue - current, including amounts received in
advance from related parties of $404,356 and $524,636 as
of June 30, 2000 and September 30, 1999, respectively.... 879,530 5,185,410
Loans payable - current..................................... 166,656 166,656
------------ -----------
Total current liabilities................................. 4,457,264 10,581,738
------------ -----------
Other liabilities:
Unearned revenue - long-term, all relating to related
parties ................................................. 351,191 404,762
Loans payable - long-term................................... 188,975 277,791
Deferred acquisition costs.................................. 350,648 711,037
Accrued postretirement benefit cost......................... 1,684,622 1,691,054
------------ -----------
Total liabilities......................................... 7,032,700 13,666,382
------------ -----------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized,
no shares issued at June 30, 2000 and September 30, 1999.. - -
Common stock, $.01 par value; 50,000,000 shares authorized,
27,425,160 and 22,404,096 shares issued at June 30, 2000
and September 30, 1999, respectively...................... 274,252 224,041
Additional paid-in capital.................................. 167,360,725 105,173,158
Accumulated deficit......................................... (70,132,353) (65,640,618)
Accumulated other comprehensive losses ..................... (730,382) (333,933)
----------- -----------
96,772,242 39,422,648
Less: treasury stock, at cost; 939,641 and 865,386 shares at
June 30, 2000 and September 30, 1999, respectively.......... (6,432,702) (6,057,702)
------------ -----------
Total stockholders' equity................................ 90,339,540 33,364,946
------------ -----------
Commitments and contingencies
$ 97,372,240 $47,031,328
============ ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-1-
<PAGE> 4
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------
2000 1999
---- ----
<S> <C> <C>
Revenues:
Collaborative program revenues,
principally from related parties.................... $ 6,005,743 $ 4,559,455
Sales of products and services........................ 154,229 317,191
Other research revenue................................ 58,519 234,849
License revenue....................................... 50,000 121,016
------------ -----------
6,268,491 5,232,511
------------ -----------
Expenses:
Research and development.............................. 8,213,272 5,674,880
Production and service costs.......................... 172,457 388,293
Selling, general and administrative................... 1,997,672 2,039,274
Amortization of intangibles........................... 185,474 365,185
------------ -----------
10,568,875 8,467,632
------------ -----------
Loss from operations....................... (4,300,384) (3,235,121)
Other income (expense):
Net investment income................................. 1,131,055 210,645
Other expense - net................................... (21,298) (21,326)
------------ ------------
Net loss................................................ $(3,190,627) $(3,045,802)
============ ===========
Weighted average number of shares of
common stock outstanding.............................. 26,425,571 21,470,797
============ ===========
Basic and diluted net loss per weighted average
share of common stock outstanding..................... $ (.12) $ (.14)
============ ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-2-
<PAGE> 5
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
--------
2000 1999
---- ----
<S> <C> <C>
Revenues:
Collaborative program revenues,
principally from related parties.................... $ 17,841,481 $12,600,139
Technology access fee................................. 3,500,000 -
Sales of products and services........................ 463,989 915,608
Other research revenue................................ 252,459 814,203
License revenue....................................... 175,000 2,171,016
------------ -----------
22,232,929 16,500,966
------------ -----------
Expenses:
Research and development.............................. 25,468,586 15,561,868
Production and service costs.......................... 643,876 1,239,443
Selling, general and administrative................... 5,930,806 5,567,759
Amortization of intangibles........................... 684,288 1,095,555
------------ -----------
32,727,556 23,464,625
------------ -----------
Loss from operations....................... (10,494,627) (6,963,659)
Other income (expense):
Net investment income................................. 2,332,915 657,311
Other expense - net................................... (75,867) (54,060)
Gain on sale of diagnostics business.................. 3,745,844 -
------------ -----------
Net loss................................................ $(4,491,735) $(6,360,408)
============ ===========
Weighted average number of shares of
common stock outstanding.............................. 23,801,264 21,430,958
============ ===========
Basic and diluted net loss per weighted average
share of common stock outstanding..................... $ (.19) $ (.30)
============ ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-3-
<PAGE> 6
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
--------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $ (4,491,735) $ (6,360,408)
Adjustments to reconcile net loss to net cash used in
operating activities:
Gain on sale of diagnostics business.............. (3,745,844) -
Gain on sale of investments....................... (487,594) -
Loss on sale of equipment and leasehold
improvements ................................. 60,547 -
Depreciation and amortization..................... 2,108,158 1,496,530
Amortization of library assets.................... 1,399,642 1,201,616
Amortization of intangibles assets................ 684,287 1,095,555
Accretion of deferred acquisition costs........... 14,611 30,091
Issuance of treasury stock in connection
with services rendered........................ - 227,164
Changes in assets and liabilities, net of the effects
of the sale of diagnostics business:
Receivables....................................... 4,443,221 (592,129)
Interest receivable............................... 113,233 140,911
Grants receivable................................. 223,231 171,299
Prepaid expenses and other current assets......... (206,553) (117,191)
Other assets...................................... (39,814) 212,824
Accounts payable and accrued expenses............. (1,722,212) (580,907)
Unearned revenue.................................. (4,141,805) 295,297
Accrued postretirement benefits cost.............. 224,999 210,000
------------ -----------
Net cash used in operating activities................... (5,563,628) (2,569,348)
------------ ----------
Cash flows from investing activities:
Net proceeds from sale of diagnostics business........ 8,636,104 -
Proceeds from sale of equipment and leasehold
improvements ..................................... 375,000 -
Purchases of investments.............................. (10,638,904) (9,632,191)
Maturities and sales of investments................... 4,987,599 12,122,970
Additions to property, equipment and leasehold
improvements ..................................... (1,564,241) (1,180,244)
------------ ----------
Net cash provided by investing activities............... 1,795,558 1,310,535
------------ -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock............ 52,792,611 -
Proceeds from exercise of stock options, employee
stock purchase plan, and other...................... 9,070,167 87,531
Proceeds from loan payable............................ - 500,000
Payments on loan payable.............................. (86,808) (61,528)
Purchase of treasury stock ........................... (375,000) -
------------ -----------
Net cash provided by financing activities............... 61,400,970 526,003
------------ -----------
Net increase (decrease) in cash and cash equivalents.... 57,632,900 (732,810)
Effect of exchange rate changes on cash and cash
equivalents .......................................... (84,016) (84,993)
Cash and cash equivalents at beginning of period........ 8,863,887 11,315,166
------------ -----------
Cash and cash equivalents at end of period ............. $ 66,412,771 $10,497,363
============ ===========
Non-cash activities:
Issuance of common stock in satisfaction of deferred
acquisition costs................................... $ 375,000 $ -
============ ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
-4-
<PAGE> 7
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of OSI
Pharmaceuticals, Inc. and its subsidiaries, collectively referred to as OSI, as
of June 30, 2000 and September 30, 1999, their results of operations for the
three and nine months ended June 30, 2000 and 1999 and their cash flows for the
nine months ended June 30, 2000 and 1999. Certain reclassifications have been
made to the prior period consolidated financial statements to conform them to
the current presentation.
It is recommended that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto in
OSI's annual report on Form 10-K, as amended, for the fiscal year ended
September 30, 1999. Results for interim periods are not necessarily indicative
of results for the entire year.
(2) Revenue Recognition
Collaborative 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
OSI's other research and development 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.
License revenue includes 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.
License revenue for the nine months ended June 30, 2000 represented a $100,000
patent license fee received pursuant to the R.W. Johnson Research Institute
agreement, and $75,000 of maintenance fees from two other licensees.
-5-
<PAGE> 8
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(3) Comprehensive Loss
In October 1998, OSI adopted Statement of Financial Accounting Standards 130,
"Reporting Comprehensive Income", or SFAS 130. SFAS 130 establishes rules for
the reporting and display of comprehensive income and its components. SFAS 130
requires unrealized gains or losses on OSI's available-for-sale securities
(referred to as investment securities on the accompanying unaudited 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).
Comprehensive loss for the three months ended June 30, 2000 and 1999 was as
follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net loss $ (3,190,627) $ (3,045,802)
Other comprehensive loss:
Foreign currency translation adjustments (216,801) (76,494)
Unrealized holding losses arising during
period 9,890 78,090
--------------- ---------------
(206,911) 1,596
--------------- ---------------
Total comprehensive loss $ (3,397,538) $ (3,044,206)
=============== ==============
</TABLE>
Comprehensive loss for the nine months ended June 30, 2000 and 1999 was as
follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net loss $ (4,491,735) $ (6,360,408)
Other comprehensive loss:
Foreign currency translation adjustments (328,739) (244,264)
Unrealized holding losses arising during
period (67,710) (22,660)
--------------- --------------
(396,449) (266,924)
--------------- --------------
Total comprehensive loss $ (4,888,184) $ (6,627,332)
=============== ==============
</TABLE>
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<PAGE> 9
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The components of accumulated other comprehensive losses were as follows:
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
---- ----
<S> <C> <C>
Cumulative foreign currency translation
adjustment $ (496,042) $ (167,303)
Unrealized losses on available-for-sale securities (234,340) (166,630)
-------------- -------------
Accumulated other comprehensive losses $ (730,382) $ (333,933)
============== =============
</TABLE>
(4) Development and Marketing Rights of OSI-774 (formerly CP-358,774)
During the quarter ended June 30, 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 OSI. 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, OSI 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 OSI to
make any payments to Pfizer for the license. Currently, OSI is continuing the
development of OSI-774, but intends to seek a co-development and marketing
partnership with a major pharmaceutical company. OSI does not have, and does not
currently plan to develop, its own marketing capability.
(5) Cross License with Merck & Co., Inc.
Effective June 8, 2000, Merck & Co., Inc. became an additional licensee of OSI's
gene transcription patent estate. In exchange for such gene transcription
rights, Merck granted OSI 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. In July 1999, OSI acquired substantially all of the research assets of
Cadus Pharmaceutical Corporation after Sibia had successfully sued Cadus for
infringement of the TBA patents. By obtaining this cross-license agreement, OSI
has secured complete freedom to operate the core Cadus technology assets
covering G-protein coupled receptor, or GPCR, discovery acquired in the
original July 1999 deal with Cadus and in a subsequent licensing transaction
concluded in February 2000 as more fully described in Note 10 to the
accompanying unaudited consolidated financial statements. The TBA patents
consist of claims that cover assay systems designed to identify compounds that
bind to cell-surface receptors. Taken together with the OSI patent estate, this
also comprises a comprehensive intellectual property estate for drug discovery
-7-
<PAGE> 10
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
in the gene transcription area. The duration of each license is coextensive with
the life of the last to expire of the patents underlying each license.
(6) Private Placement
On February 28, 2000, OSI 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. OSI intends to use the proceeds from this private
placement to advance its research and development programs, particularly its
OSI-774 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. OSI 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.
(7) Consolidation of Facilities
During fiscal 1999, OSI made the strategic decision to close down its facilities
in North Carolina and to 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 from the North Carolina facility
were relocated to the Tarrytown facility while a small facility is being
maintained in North Carolina. None of the employees in the North Carolina
facility will be relocating. Under the plan of relocation, 16 research and
administrative employees have received a severance package which included
continued payments of four months salary plus four months health insurance. OSI
has hired replacement staff at the Tarrytown facility. OSI accrued an estimate
of $535,000 for the estimated cost of closing this facility, which is included
in accrued expenses as of September 30, 1999. Over the nine months ended June
30, 2000, OSI incurred approximately $414,000 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 June 30,
2000, OSI has approximately $121,000 remaining in its accrual that it expects to
use for severance costs.
(8) Sale of Diagnostics Business
On November 30, 1999, OSI completed the sale of assets of its diagnostics
business to The Bayer Corporation including the assets of OSI's wholly-owned
U.S. subsidiary, Oncogene Science Diagnostics, Inc., or 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 OSI's diagnostics business. OSI recorded a gain on the sale of approximately
$3.7 million during the quarter ended December 31, 1999. The net gain was
calculated as follows (in thousands):
-8-
<PAGE> 11
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
<TABLE>
<S> <C>
Cash received from Bayer $9,151
Accrued expenses assumed by Bayer 599
Net book value of fixed assets sold (611)
Net book value of patent costs (intangibles) (4,748)
Professional and legal fees incurred (172)
Commission costs paid (315)
Other related costs (158)
--------
Gain on sale of diagnostics business $3,746
=======
</TABLE>
In connection with the sale, OSI and OSDI entered into certain agreements with
Bayer including an assignment and assumption of the lease with respect to the
OSDI facility located in Cambridge to Bayer and certain patent assignment and
license agreements. Certain employees of OSI and OSDI entered into employment
agreements with Bayer. Under the terms of the agreement, Bayer will make
additional contingent payments of $1.25 million if certain conditions are met in
the future.
(9) Collaborative Research and License Agreement with Tanabe Seiyaku Co.,
Ltd.
As more fully discussed in Note 5(c) to OSI's consolidated financial statements
in OSI's annual report on Form 10-K, as amended, for the fiscal year ended
September 30, 1999, OSI entered into a Collaborative Research and License
Agreement, effective as of October 1, 1999, with Tanabe Seiyaku Co., Ltd. The
collaboration is focused on discovering and developing novel pharmaceutical
products to treat diabetes. The agreement is for a term of four years, with the
option to extend for an additional two-year period. Tanabe, however, has the
right to terminate the agreement after two years under certain circumstances. On
the effective date of the agreement, Tanabe was required to pay OSI a
non-refundable technology access fee of $3.5 million and to fund OSI's research
and development activities during the term of the agreement. On September 28,
1999, OSI received $4,312,500 from Tanabe, which represented advanced funding of
the technology access fee of $3.5 million and research funding of $812,500 for
the first quarter of fiscal year 2000. The $4,312,500 had been recorded in
unearned revenue in the accompanying consolidated balance sheet as of September
30, 1999 and the research funding portion had been fully recognized as revenue
over the first six months of fiscal year 2000. During the first quarter ended
December 31, 1999, OSI recognized as revenue the technology access fee of $3.5
million in accordance with its accounting policy. Under the agreement, OSI is
responsible for identification of targets (subject to Tanabe's approval), assay
development, screening of compounds from OSI's library and Tanabe's library
against identified targets, identification of seed compounds meeting certain
criteria specified in the agreement, optimization of such seed compounds, and
identification of lead compounds meeting certain criteria specified in the
agreement. Tanabe maintains responsibility for further development and marketing
of a lead compound in exchange for milestone and royalty payments to OSI.
Concurrent with execution of the Tanabe agreement, OSI and Tanabe entered into
an Amended and Restated Collaborative Research, License, and Alliance Agreement
with Vanderbilt University. Vanderbilt will assist OSI in fulfilling its
obligations under the Tanabe/OSI research program by providing access to
Vanderbilt's diabetes research resources, including laboratories and assays.
During the
-9-
<PAGE> 12
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
quarter ended December 31, 1999, OSI paid a one-time success fee of $500,000 to
Vanderbilt as well as other direct costs of $250,000 in connection with OSI
entering into the Tanabe agreement, both amounts of which are included in
research and development expenses in the accompanying unaudited statement of
operations for the nine months ended June 30, 2000.
(10) License from Cadus Pharmaceutical Corporation
Effective February 15, 2000, Cadus Pharmaceutical Corporation granted to OSI 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, OSI may practice
the Cadus technology and patents with third parties under collaborative research
programs so long as OSI personnel conduct such research at OSI's facilities. The
cost of the license was $700,000 and was recorded in research and development
expense in the unaudited consolidated statement of operations for the
three-month period ended March 31, 2000. As part of this licensing arrangement,
Cadus granted to OSI a non-exclusive, non-transferable license to the use of
certain of Cadus' software related to its technology.
(11) Cross-License with American Home Products Corporation and
American Cyanamid Company
Effective January 3, 2000, the Company entered into a worldwide, non-exclusive
cross license agreement with American Home Products Corporation and 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.
(12) Adoption of the Non-Qualified Stock Option Plan for Former Employees of
Cadus Pharmaceutical Corporation
In connection with OSI's acquisition of certain assets of Cadus Pharmaceutical
Corporation, the Board of Directors adopted the Non-Qualified Stock Option Plan
for Former Employees of Cadus Pharmaceutical Corporation on July 30, 1999. OSI
had reserved 415,000 shares of common stock for issuance pursuant to the
exercise of options granted under the plan.
(13) Adoption of the 1999 Incentive and Non-Qualified Stock Option Plan
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
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<PAGE> 13
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
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.
(14) Staff Accounting Bulletin No. 101
On December 3, 1999, the Securities and Exchange Commission, or SEC, issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," or SAB No. 101. SAB No. 101 provides the SEC staff's views on the
recognition of revenue including nonrefundable technology access fees received
by biotechnology companies in connection with research collaborations with third
parties. SAB No. 101 states that in certain circumstances the SEC staff believes
that up-front fees, even if nonrefundable, should be deferred and recognized
systematically over the term of the research arrangement. SAB No. 101, 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
OSI). OSI is currently assessing the requirements of SAB No. 101, particularly
as it relates to the technology access fee from Tanabe recognized in the first
quarter of fiscal year 2000. OSI will not retroactively restate prior period
financial statements but rather report the effect, if any, of adopting the
provisions of the SAB as a change in accounting principle as of October 1, 2000
in accordance with APB No. 20.
(15) Derivative Financial Instruments
During the quarter ended June 30, 2000, OSI 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 June 30, 2000, OSI
had $2.2 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 June 30, 2000 was immaterial to the results of operations for
the quarter ended June 30, 2000.
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<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30,
2000 AND 1999
REVENUES
Revenues for the three and nine months ended June 30, 2000 were approximately
$6.3 million and $22.2 million, respectively, representing an increase of $1.0
million or 20% and $5.7 million or 35%, respectively, compared to revenues of
$5.2 million and $16.5 million for the three and nine months ended June 30,
1999, respectively. Collaborative research and development agreements with
Pfizer Inc., Anaderm Research Corporation, Aventis Pharmaceuticals Inc., Sankyo
Company Ltd., Tanabe Seiyaku Co., Ltd., and Solvay Pharmaceuticals, B.V.
accounted for substantially all of OSI's collaborative program revenues during
these periods. Total collaborative revenues of approximately $6.0 million and
$17.8 million for the three and nine months ended June 30, 2000, respectively,
increased approximately $1.4 million or 32% and $5.2 million or 42%,
respectively, compared to the three and nine months ended June 30, 1999. These
increases were primarily due to increased funding for the Pfizer/Anaderm program
for the discovery and development of cosmeceuticals. The balance of the increase
resulted from a research agreement with Solvay, assumed by OSI on July 30, 1999
with the acquisition of certain assets from Cadus Pharmaceutical Corporation,
and a collaborative research agreement with Tanabe, initiated on October 1,
1999. The Solvay program is directed toward G-protein coupled receptor, or GPCR,
drug discovery, and the Tanabe program is directed toward the discovery and
development of small molecule drugs for the treatment of non-insulin dependent,
or Type 2, diabetes mellitus. Increases in collaborative revenues for the three
and nine-month periods were partially offset by the termination of the
diagnostics collaboration with The Bayer Corporation upon the sale of OSI's
diagnostics business to Bayer in November 1999, as more fully described in Note
8 to the accompanying unaudited consolidated financial statements, and, to a
lesser extent, the conclusion of OSI's funded collaborative research agreement
with Helicon Therapeutics, Inc. in June 1999.
OSI recognized a technology access fee of $3.5 million in October 1999 from
Tanabe in conjunction with the new collaborative research agreement, as more
fully described in Note 9 to the accompanying unaudited consolidated financial
statements.
Sales of products and services derived from pharmaceutical services of OSI's UK
subsidiary, OSI Pharmaceuticals, UK Ltd., or OSI-UK (formerly known as Aston
Molecules Ltd.), and from diagnostics sales of OSI's U.S. subsidiary, Oncogene
Science Diagnostics Inc., or OSDI, decreased approximately $163,000 or 51% and
$452,000 or 49% for the three and nine months ended June 30, 2000, respectively,
compared to the three and nine months ended June 30, 1999. The decreases were
due to a shift in focus of pharmaceutical services from external sales to
internal programs and to the sale of OSI's diagnostics assets to Bayer in
November 1999. During the last quarter of the current fiscal year, OSI intends
to wind-down its external sales from pharmaceutical services in order to focus
on internal programs.
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<PAGE> 15
Other research revenues, representing primarily government grants and other
research grants, decreased $176,000 or 75% and $562,000 or 69% for the three and
nine months ended June 30, 2000, respectively, compared to the three and nine
months ended June 30, 1999. The decreases were due to a reduction in the number
of government grant applications submitted.
License revenues decreased $71,000 or 59% and $2.0 million or 92% for the three
and nine months ended June 30, 2000, respectively, compared to the three and
nine months ended June 30, 1999. The decreases were primarily due to the receipt
of a license fee of $2.0 million from BioChem Pharma, Inc. in March 1999.
License revenues for the nine months ended June 30, 2000 represented a
patent license fee of $100,000 paid by R.W. Johnson Research Institute and
$75,000 of maintenance fees from two other licensees.
EXPENSES
Operating expenses increased approximately $2.1 million or 25% and $9.3 million
or 39% for the three and nine months ended June 30, 2000, respectively, compared
to the three and nine months ended June 30, 1999. Research and development
expenses for the three and nine-month periods increased $2.5 million or 45% and
$9.9 million or 64%, respectively, compared to the three and nine months ended
June 30, 1999. Increases in research and development expenses were attributable
to: (i) OSI's expanded collaboration with Anaderm for the discovery and
development of novel compounds to treat pigmentation disorders, wrinkles and
baldness; (ii) OSI's payment of $700,000 in February 2000 to Cadus for the
non-exclusive, royalty-free worldwide right and license to use and practice
Cadus' technology and patents involving Cadus' GPCR patent estate, as more fully
described in Note 10 to the accompanying unaudited consolidated financial
statements; (iii) the initiation of the agreement with Tanabe as more fully
described in Note 9 to the accompanying unaudited consolidated financial
statements; and (iv) a one-time fee of $500,000 paid to Vanderbilt
University in October 1999 in respect of OSI entering into the research
agreement with Tanabe. The increases were also related to the acquisition of
certain assets from Cadus on July 30, 1999, which included the assumption of
operations of Cadus' fully-equipped research facility in Tarrytown, New York
and the retention of 47 employees. OSI has also increased its investment in its
proprietary drug discovery programs including its GPCR-directed drug discovery
programs which were included in the Cadus asset acquisition. OSI expects to
continue to increase investment in its proprietary drug discovery programs, in
particular its development of OSI-774 (formerly CP-358,774) for which it
received a royalty-free license to all rights for further development, as more
fully described under Liquidity and Capital Resources below as well as in Note
4 to the accompanying unaudited consolidated financial statements.
Production and service costs decreased approximately $216,000 or 56% and
$596,000 or 48% for the three and nine months ended June 30, 2000, respectively,
compared to the three and nine months ended June 30, 1999. The decreases were
primarily related to the sale of OSI's diagnostics assets to Bayer in November
1999.
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<PAGE> 16
Selling, general and administrative expenses decreased by $42,000 or 2% for the
three months ended June 30, 2000 as compared to the three months ended June 30,
1999, and increased by $363,000 or 7% for the nine months ended June 30, 2000 as
compared to the nine months ended June 30, 1999. The nine month increase was
primarily related to the additional administration expenses associated with the
acquired operations in Tarrytown, New York from the Cadus asset acquisition, the
expansion of the chemistry facility at OSI-UK, and OSI's current corporate
development activities.
Amortization of intangibles for the three and nine months ended June 30, 2000
decreased $180,000 or 49% and $411,000 or 38%, respectively, compared to the
three and nine months ended June 30, 1999. The decreases were related to the
inclusion of OSI's diagnostic patent estate in the sale of the diagnostics
business to Bayer, which eliminated the related amortization expense effective
November 30, 1999.
OTHER INCOME AND EXPENSE
Net investment income increased approximately $920,000 or 437% and $1.7 million
or 255% for the three and nine months ended June 30, 2000, respectively,
compared to the three and nine months ended June 30, 1999. This increase was
largely due to investment of funds generated from the financing activities
described more fully under Liquidity and Capital Resources below.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, OSI had cash, cash equivalents and investment securities of
approximately $82.7 million compared to $18.9 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 February 2000, for net proceeds of
approximately $53 million; (ii) the exercise of options for approximately
1,600,000 shares of common stock by management and employees during the nine
months ended June 30, 2000, for net proceeds to OSI of approximately $9.1
million; and (iii) the sale of OSI's diagnostics business in November 1999,
for cash proceeds of approximately $9 million.
Prior to OSI's acquisition of the license to develop and market OSI-774 from
Pfizer, as more fully described in Note 4 of the accompanying unaudited
consolidated financial statements, OSI's strategic plan had been focused on
increasing investment in its own drug development programs and seeking an
opportunity to license rights to a drug candidate from another company for
development by OSI. This plan envisioned significant increases in OSI's cash
burn rate over the next several years, with a projected operating cash burn of
approximately $20-22 million per year for fiscal years 2001 and 2002. As a
result of OSI's acquisition of the license to OSI-774, OSI's preceding goal for
in-licensing a clinical development candidate from another company has been
superceded. OSI anticipates an investment of approximately $25-$30 million in
development of OSI-774 over the next several years. OSI expects an operating
cash burn of up to $12 million for fiscal year 2000. Although, as a result of
the acquisition of OSI-774, the cash burn may increase significantly during
fiscal year 2001, OSI
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<PAGE> 17
does not intend to eliminate any existing programs. OSI believes that the
projected funding from collaborative research and development programs and its
existing cash resources are sufficient to support an incremental investment in
OSI-774 development.
OSI expects to incur additional losses over at least the next several years as
it increases its investment in OSI-774 and its other internal proprietary
programs. To achieve profitability, OSI, alone or with others, must successfully
develop and commercialize its 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.
NEW ACCOUNTING PRONOUNCEMENTS
On December 3, 1999, the Securities and Exchange Commission, or SEC, issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," or SAB No. 101. SAB No. 101 provides the SEC staff's views on the
recognition of revenue including nonrefundable technology access fees received
by biotechnology companies in connection with research collaborations with third
parties. SAB No. 101 states that in certain circumstances the SEC staff believes
that up-front fees, even if nonrefundable, should be deferred and recognized
systematically over the term of the research arrangement. SAB No. 101, 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
OSI). OSI is currently assessing the requirements of SAB No. 101, particularly
as it relates to the technology access fee from Tanabe recognized in the first
quarter of fiscal year 2000. OSI will not retroactively restate prior period
financial statements but rather report the effect, if any, of adopting the
provisions of the SAB as a change in accounting principle as of October 1, 2000
in accordance with APB No. 20.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," or SFAS 133, which is effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000, as amended by SFAS 137. In
June 2000, SFAS 138 was issued which amended certain provisions of SFAS 133.
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. OSI does not believe that the
implementation of SFAS 133, as amended, will have a material effect on its
results of operations and financial position.
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<PAGE> 18
FORWARD-LOOKING STATEMENTS
Certain of the matters and subject areas discussed in this report that are not
statements of current or historical fact are "forward-looking statements" that
convey information about potential future circumstances and developments. These
forward-looking statements are necessarily based on various assumptions, involve
known and unknown risks and generally are subject to the inherent risks and
uncertainties surrounding expectations regarding future occurrences. As a
result, OSI's actual future experience may differ materially from the results,
achievements or performance described or implied in such statements. Factors
that might cause OSI's actual future experience to differ materially from the
forward-looking statements include, but are not limited to: (i) OSI's inability
to competitively develop and market OSI-774, (ii) OSI's failure to commercialize
drug products from its pipeline of drug candidates, (iii) OSI's dependence, to
an extent, on third parties for clinical development and commercialization of
potential products, (iv) the potential failure of OSI's lead compounds currently
in clinical trials to progress successfully through clinical development, (v)
the potential failure of any drug candidates that emerge from OSI's discovery
operations to progress successfully to or through clinical development, (vi)
competition, (vii) government regulation, and (viii) pharmaceutical pricing.
Certain of these and additional factors that may cause OSI's actual future
experience to differ materially from the forward-looking statements contained in
this report are discussed in OSI's annual report on Form 10-K, as amended, for
the fiscal year ended September 30, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
OSI's cash flow and earnings are subject to fluctuations due to changes in
interest rates in its investment portfolio of debt securities, to the fair value
of equity instruments held, and, to an immaterial extent, to foreign currency
exchange rates. OSI maintains an investment portfolio of various issuers, types
and maturities. These securities are generally classified as available-for-sale
and, consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a component of accumulated other
comprehensive losses included in stockholders' equity. OSI's 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 OSI's results of operations in the future. Other than
foreign currency exchange rates, OSI does not currently hedge these exposures.
OSI hedges some of its foreign currency exchange rates exposure through forward
contracts, as more fully described in Note 15 to the accompanying unaudited
consolidated financial statements.
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<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
(1) Development and Marketing Rights of OSI-774 (formerly CP-358,774)
During the quarter ended June 30, 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 OSI.
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, OSI 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 OSI to make any payments to Pfizer for the license. Currently, OSI is
continuing the development of OSI-774, but intends to seek a co-development and
marketing partnership with a major pharmaceutical company. OSI does not have,
and does not currently plan to develop, its own marketing capability.
(2) Cross License with Merck & Co., Inc.
Effective June 8, 2000, Merck & Co., Inc. became an additional
licensee of OSI's gene transcription patent estate. In exchange for such gene
transcription rights, Merck granted OSI 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
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<PAGE> 20
Neurosciences, Inc. prior to their acquisition by Merck. In July 1999, OSI
acquired substantially all of the research assets of Cadus Pharmaceutical
Corporation after Sibia had successfully sued Cadus for infringement of the TBA
patents. By obtaining this cross-license agreement, OSI has secured complete
freedom to operate the core Cadus technology assets covering G-protein coupled
receptor discovery acquired in the original July 1999 deal with Cadus and in a
subsequent licensing transaction concluded in February 2000. The TBA patents
consist of claims that cover assay systems designed to identify compounds that
bind to cell-surface receptors. Taken together with the OSI patent estate, this
also comprises a comprehensive intellectual property estate for drug discovery
in the gene transcription area. The duration of each license is coextensive with
the life of the last to expire of the patents underlying each license.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 Certificate of Incorporation, as amended (1)
3.2 Amended and Restated By-Laws (2)
* 10.1 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.
27 Financial Data Schedule
-----------------------------
(1) Included as an exhibit to OSI's quarterly report on Form
10-Q for the quarter ended March 31, 1999, filed on May
14, 1999, and incorporated herein by reference.
(2) Included as an exhibit to OSI's current report on Form
8-K, filed on January 8, 1999, and incorporated herein
by reference.
* Portions of this exhibit have been redacted and are the
subject of 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.
(b) REPORTS ON FORM 8-K
OSI filed a current report on Form 8-K on June 20, 2000 with
the Securities and Exchange Commission via EDGAR, pertaining to
the grant by Pfizer Inc. to OSI of all development and
marketing rights for Pfizer's anti-cancer compound, OSI-774
(formerly CP-358,774). The earliest event covered by the
report occurred on June 19, 2000.
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<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
OSI PHARMACEUTICALS, INC.
------------------------------------
(Registrant)
Date: August 14, 2000 /s/ Colin Goddard, Ph.D.
-------------------------------------------
Colin Goddard, Ph.D.
President and Chief Executive Officer
Date: August 14, 2000 /s/ Robert L. Van Nostrand
-------------------------------------------
Robert L. Van Nostrand
Vice President and Chief Financial Officer
(Principal Financial Officer)
<PAGE> 22
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation, as amended (1)
3.2 Amended and Restated By-Laws (2)
* 10.1 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.
27 Financial Data Schedule
------------------------------
(1) Included as an exhibit to OSI's quarterly report on Form 10-Q for
the quarter ended March 31, 1999, filed on May 14, 1999, and
incorporated herein by reference.
(2) Included as an exhibit to OSI's current report on Form 8-K, filed
on January 8, 1999, and incorporated herein by reference.
* Portions of this exhibit have been redacted and are the
subject of 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.
