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 March 31, 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
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APPLICABLE ONLY TO CORPORATE ISSUERS:
At April 30, 2000 the registrant had outstanding 26,419,659 shares of common
stock, $.01 par value.
2
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONTENTS
Page No.
--------
PART I - FINANCIAL INFORMATION.................................................. 1
Item 1. Financial Statements
Consolidated Balance Sheets
- March 31, 2000 (unaudited) and September 30, 1999................... 1
Consolidated Statements of Operations
- Three months ended March 31, 2000 and 1999 (unaudited).............. 2
Consolidated Statements of Operations
- Six months ended March 31, 2000 and 1999 (unaudited)................ 3
Consolidated Statements of Cash Flows
- Six months ended March 31, 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................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk............ 15
PART II - OTHER INFORMATION..................................................... 16
Item 1. Legal Proceedings..................................................... 16
Item 2. Changes in Securities and Use of Proceeds............................. 16
Item 3. Defaults Upon Senior Securities....................................... 16
Item 4. Submission of Matters to a Vote of Security Holders................... 16
Item 5. Other Information..................................................... 17
Item 6. Exhibits and Reports on Form 8-K...................................... 18
SIGNATURES...................................................................... 19
EXHIBIT INDEX................................................................... 20
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, September 30,
2000 1999
------------- -------------
Assets (unaudited)
- ------
Current assets:
Cash and cash equivalents.................................................... $ 76,295,360 $ 8,863,887
Investment securities........................................................ 10,249,963 9,997,967
Receivables, including amounts due from related parties of $363,580 at
September 30, 1999 and trade receivables of $93,898 and $236,067 at
March 31, 2000 and September 30, 1999, respectively....................... 844,479 1,033,917
Receivable from sale of Anaderm common stock................................. - 3,645,136
Interest receivable.......................................................... 237,431 171,340
Grants receivable............................................................ 103,483 343,509
Prepaid expenses and other................................................... 1,445,907 1,088,318
------------------- ------------------
Total current assets...................................................... 89,176,623 25,144,074
------------------- ------------------
Property, equipment and leasehold improvements - net......................... 9,136,128 10,915,589
Compound library assets - net................................................ 3,263,991 4,197,085
Other assets................................................................. 97,608 374,288
Intangible assets - net...................................................... 1,153,157 6,400,292
------------------- ------------------
$ 102,827,507 $ 47,031,328
=================== ==================
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses........................................ $ 5,369,551 $ 5,229,672
Unearned revenue - current, including amounts received in advance
from related parties of $699,761 and $524,636, as of March 31, 2000
and September 30, 1999, respectively 1,432,889 5,185,410
Loans payable - current...................................................... 166,656 166,656
------------------- ------------------
Total current liabilities................................................. 6,969,096 10,581,738
------------------- ------------------
Other liabilities:
Unearned revenue - long-term, all relating to related parties................ 369,048 404,762
Loans payable - long-term.................................................... 194,464 277,791
Deferred acquisition costs................................................... 345,778 711,037
Accrued postretirement benefit cost.......................................... 1,609,622 1,691,054
------------------- ------------------
Total liabilities......................................................... 9,488,008 13,666,382
------------------- ------------------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares
issued at March 31, 2000 and September 30, 1999............................ - -
Common stock, $.01 par value; 50,000,000 shares authorized, 27,349,300
and 22,404,096 shares issued at March 31, 2000 and September 30,
1999, respectively......................................................... 273,493 224,041
Additional paid-in capital................................................... 166,963,905 105,173,158
Accumulated deficit.......................................................... (66,941,726) (65,640,618)
Accumulated other comprehensive losses ...................................... (523,471) (333,933)
------------------- ------------------
99,772,201 39,422,648
Less: treasury stock, at cost; 939,641 and 865,386 shares at March 31,
2000 and September 30, 1999, respectively .................................... (6,432,702) (6,057,702)
------------------- ------------------
Total stockholders' equity................................................ 93,339,499 33,364,946
------------------- ------------------
Commitments and contingencies
$ 102,827,507 $ 47,031,328
=================== ==================
See accompanying notes to unaudited consolidated financial statements.
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
---------
2000 1999
---- ----
Revenues:
Collaborative program revenues,
principally from related parties............................. $ 5,836,654 $ 4,048,406
Sales of products and services.................................. 55,597 287,467
Other research revenue.......................................... 103,482 278,439
License revenue................................................. 100,000 2,000,000
------------------- ------------------
6,095,733 6,614,312
------------------- ------------------
Expenses:
Research and development........................................ 8,884,403 5,163,500
Production and service costs.................................... 249,680 485,742
Selling, general and administrative............................. 2,055,913 1,926,704
Amortization of intangibles..................................... 185,473 365,185
------------------- ------------------
11,375,469 7,941,131
------------------- ------------------
Loss from operations.......................... (5,279,736) (1,326,819)
Other income (expense):
Net investment income .......................................... 478,138 215,348
Other expense - net............................................. (15,236) (10,969)
------------------- --------------------
Net loss........................................................... $ (4,816,834) $ (1,122,440)
=================== ===================
Weighted average number of shares of
common stock outstanding 23,439,644 21,420,332
=================== ==================
Basic and diluted net loss per weighted average
share of common stock outstanding $ (.21) $ (.05)
=================== ===================
See accompanying notes to unaudited consolidated financial statements.
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended
March 31,
---------
2000 1999
---- ----
Revenues:
Collaborative program revenues,
principally from related parties........................ $ 11,835,738 $ 8,040,684
Technology access fee..................................... 3,500,000 -
Sales of products and services............................ 309,760 598,417
Other research revenue.................................... 193,940 579,354
License revenue........................................... 125,000 2,050,000
------------------- ------------------
15,964,438 11,268,455
------------------- ------------------
Expenses:
Research and development.................................. 17,255,314 9,886,988
Production and service costs.............................. 471,419 851,150
Selling, general and administrative....................... 3,933,134 3,528,485
Amortization of intangibles............................... 498,814 730,370
------------------- ------------------
22,158,681 14,996,993
------------------- ------------------
Loss from operations.................... (6,194,243) (3,728,538)
Other income (expense):
Net investment income..................................... 1,201,860 446,666
Other expense - net....................................... (54,569) (32,733)
Gain on sale of diagnostics business...................... 3,745,844 -
------------------- ------------------
Net loss...................................................... $ (1,301,108) $ (3,314,605)
=================== ===================
Weighted average number of shares of
common stock outstanding 22,489,198 21,411,174
=================== ==================
Basic and diluted net loss per weighted average
share of common stock outstanding $ (.06) $ (.15)
=================== =================
See accompanying notes to unaudited consolidated financial statements.
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
March 31,
---------
2000 1999
---- ----
Cash flows from operating activities:
Net loss.................................................................... $ (1,301,108) $ (3,314,605)
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......................................... 1,466,159 978,872
Amortization of library assets........................................ 933,094 874,820
Amortization of intangibles assets.................................... 498,814 730,370
Accretion of deferred acquisition costs............................... 9,741 20,061
Changes in assets and liabilities, net of the effects of the sale of
diagnostics business:
Receivables........................................................... 3,830,055 (985,351)
Interest receivable................................................... (66,091) 125,663
Grants receivable..................................................... 240,026 51,063
Prepaid expenses and other............................................ (373,670) 37,298
Other assets.......................................................... 12,300 23,970
Accounts payable and accrued expenses................................. 209,460 (1,269,248)
Unearned revenue...................................................... (3,571,190) (346,497)
Accrued postretirement benefit cost................................... 150,000 120,000
-------------------- ------------------
Net cash used in operating activities........................................... (2,135,301) (2,953,584)
-------------------- -------------------
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.................................................... (1,329,596) (7,289,636)
Maturities and sales of investments......................................... 1,737,599 12,122,970
Additions to property, equipment and leasehold improvements................. (827,159) (545,113)
-------------------- -------------------
Net cash provided by investing activities ...................................... 8,591,948 4,288,221
-------------------- ------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock.................................. 52,802,259 -
Proceeds from exercise of stock options, employee stock
purchase plan, and other.................................................. 8,662,940 121,090
Payments on loan payable.................................................... (83,327) (35,905)
Purchase of treasury stock ................................................. (375,000) -
-------------------- -------------------
Net cash provided by financing activities....................................... 61,006,872 85,185
-------------------- ------------------
Net increase in cash and cash equivalents....................................... 67,463,519 1,419,822
Effect of exchange rate changes on cash and cash equivalents ................... (32,046) (53,814)
Cash and cash equivalents at beginning of period................................ 8,863,887 11,315,166
------------------- -------------------
Cash and cash equivalents at end of period ..................................... $ 76,295,360 $ 12,681,174
=================== ===================
Non-cash activities:
Issuance of common stock in satisfaction of deferred acquisition costs...... $ 375,000 $ -
=================== ==================
See accompanying notes to unaudited consolidated financial statements.
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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 the
Company, as of March 31, 2000 and September 30, 1999, their results of
operations for the three and six months ended March 31, 2000 and 1999 and their
cash flows for the six months ended March 31, 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 the
Company'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 the
Company'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 six months ended March 31, 2000 represented a $100,000
patent license fee received pursuant to the R.W. Johnson Research Institute
agreement and $25,000 of maintenance fees from another licensee.
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(3) Comprehensive Loss
In October 1998, the Company 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 the Company'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 March 31, 2000 and 1999 was as
follows:
2000 1999
---- ----
Net loss $ (4,816,834) $ (1,122,440)
Other comprehensive loss:
Foreign currency translation adjustments (57,215) (86,378)
Unrealized holding losses arising during
period (43,230) (67,090)
------------------ -----------------
(100,445) (153,468)
------------------ -----------------
Total comprehensive loss $ (4,917,279) $ (1,275,908)
================= =================
Comprehensive loss for the six months ended March 31, 2000 and 1999 was as
follows:
2000 1999
---- ----
Net loss $ (1,301,108) $ (3,314,605)
Other comprehensive loss:
Foreign currency translation adjustments (111,938) (167,770)
Unrealized holding losses arising during
period (77,600) (100,750)
---------------- ----------------
(189,538) (268,520)
---------------- ----------------
Total comprehensive loss $ (1,490,646) $ (3,583,125)
================ ================
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The components of accumulated other comprehensive losses were as follows:
March 31, September 30,
2000 1999
---- ----
Cumulative foreign currency translation
adjustment $ (279,241) $ (167,303)
Unrealized losses on available-for-sale securities (244,230) (166,630)
------------- --------------
Accumulated other comprehensive losses $ (523,471) $ (333,933)
============= ==============
(4) 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.
(5) License from Cadus Pharmaceutical Corporation
Effective February 15, 2000, Cadus Pharmaceutical Corporation 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 Company personnel conduct such
research at the Company's facilities. The cost of the license was $700,000 and
has been recorded in research and development expense in the accompanying
unaudited consolidated statement of operations for the three-month period ended
March 31, 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.
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10
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(6) 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 GPCR-directed drug development and functional genomics programs and its
proprietary cancer discovery 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 has filed a
registration statement on Form S-3 with the Securities and Exchange Commission
which has not yet become effective.
(7) Consolidation of Facilities
During fiscal 1999, the Company 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. The
Company has hired replacement staff at the Tarrytown facility. The Company
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 six
months ended March 31, 2000, the Company incurred approximately $196,000 in
severance, relocation, 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 March 31, 2000, the Company has approximately $339,000
remaining in its accrual, and, by the end of the fiscal year, expects to use an
estimated $250,000 for severance costs, and the balance for other
facility-closing related costs.
(8) Sale of Diagnostics Business
On November 30, 1999, the Company completed the sale of assets of its
diagnostics business to The Bayer Corporation including the assets of the
Company'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 the Company's diagnostics business. The Company
recorded a gain on the sale of approximately $3.7 million during the quarter
ended December 31, 1999. The net gain was calculated as follows (in thousands):
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11
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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
======
In connection with the sale, the Company and OSDI entered into certain
agreements with Bayer including an assignment and assumption of the lease with
respect to the OSDI facility located in Cambridge to Bayer and certain patent
assignment and license agreements. Certain employees of the Company and OSDI
entered into employment agreements with Bayer. Under the terms of the agreement,
Bayer may make additional contingent payments of $1.25 million if certain
conditions are met in the future.
(9) Collaborative Research and License Agreement with Tanabe Seiyaku
Co., Ltd.
As more fully discussed in Note 5(c) to the Company's consolidated
financial statements in the Company's annual report on Form 10-K, as amended,
for the fiscal year ended September 30, 1999, the Company entered into a
Collaborative Research and License Agreement, effective as of October 1, 1999,
with Tanabe Seiyaku Co., Ltd. The collaboration is focused on discovering and
developing novel pharmaceutical products to treat diabetes. The agreement is for
a term of four years, with the option to extend for an additional two-year
period. Tanabe, however, has the right to terminate the agreement after two
years under certain circumstances. On the effective date of the agreement,
Tanabe was required to pay the Company a non-refundable technology access fee of
$3.5 million and to fund the Company's research and development activities
during the term of the agreement. On September 28, 1999, the Company received
$4,312,500 from Tanabe, which represented advanced funding of the technology
access fee of $3.5 million and research funding of $812,500 for the first
quarter of fiscal year 2000. This amount had been recorded in unearned revenue
in the accompanying consolidated balance sheet as of September 30, 1999 and has
been fully recognized as revenue over the first six months of fiscal year 2000.
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. Under the agreement, the Company is responsible for
identification of targets (subject to Tanabe's approval), assay development,
screening of compounds from the Company's library and Tanabe's library against
identified targets, identification of seed compounds meeting certain criteria
specified in the agreement, optimization of such seed compounds, and
identification of lead compounds meeting certain criteria specified in the
agreement. Tanabe maintains responsibility for further development and marketing
of a lead compound in exchange for milestone and royalty payments to the
Company. Concurrent with execution of the Tanabe agreement, the Company and
Tanabe entered into an Amended and Restated Collaborative Research, License, and
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Alliance Agreement with Vanderbilt University. Vanderbilt will assist the
Company in fulfilling its obligations under the Tanabe/OSI research program by
providing access to Vanderbilt's drug discovery resources, including
laboratories and assays. During the quarter ended December 31, 1999, the Company
paid a one-time success fee of $500,000 to Vanderbilt as well as other direct
costs of $250,000 in connection with the Company entering into the Tanabe
agreement, both amounts of which are included in research and development
expenses in the accompanying unaudited statement of operations for the six
months ended March 31, 2000.
(10) 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 requires
registrants to adopt the accounting guidance contained therein by no later than
the first fiscal quarter of the fiscal year beginning after December 15, 1999
(fiscal year ending September 30, 2001 for the Company). The Company is
currently assessing the requirements of SAB No. 101, particularly as it relates
to the technology access fee from Tanabe recognized in the first quarter of
fiscal year 2000. The Company 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.
(11) 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 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 Company has reserved
2,000,000 shares of its common stock for issuance pursuant to the exercise of
options granted under the plan.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31,
2000 AND 1999
REVENUES
Revenues for the three and six months ended March 31, 2000 were approximately
$6.1 million and $16.0 million, respectively, representing a decrease of $0.5
million or 8% and an increase of $4.7 million or 42%, respectively, compared to
revenues of $6.6 million and $11.3 million for the three and six months ended
March 31, 1999, respectively. Collaborative research and development agreements
with Pfizer Inc., Anaderm Research Corporation, Aventis Pharmaceuticals Inc.
(formerly Hoechst Marion Roussel, Inc.), Sankyo Company Ltd., Tanabe Seiyaku
Co., Ltd., and Solvay Pharmaceuticals, B.V. accounted for substantially all of
the Company's collaborative program revenues. Total collaborative revenues of
$5.8 million and $11.8 million for the three and six months ended March 31,
2000, respectively, increased approximately $1.8 million or 44% and $3.8 million
or 47%, respectively, compared to the three and six months ended March 31, 1999.
The three and six-month 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 the Company 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 six-month periods were partially offset
by the termination of the diagnostics collaboration with The Bayer Corporation
upon the sale of the Company'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 the Company's
funded collaborative research agreement with Helicon Therapeutics, Inc. in June
1999.
The Company 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 the
Company's UK subsidiary, OSI Pharmaceuticals, UK Ltd., or OSI-UK (formerly known
as Aston Molecules Ltd.), and from diagnostic sales of the Company's U.S.
subsidiary, Oncogene Science Diagnostics Inc., or OSDI, decreased approximately
$232,000 or 81% and $289,000 or 48% for the three and six months ended March
31, 2000, respectively, compared to the three and six months ended March 31,
1999. The decreases were due to a shift in focus of pharmaceutical services from
external sales to internal programs and to the sale of the Company's diagnostics
business to Bayer in November 1999.
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Other research revenues, representing primarily government grants and other
research grants, decreased $175,000 or 63% and $385,000 or 67% for the three and
six months ended March 31, 2000, respectively, compared to the three and six
months ended March 31, 1999. The decreases were due to a reduction in the number
of government grant applications submitted, in an effort to focus the Company's
research and development resources on a smaller number of targets.
License revenues decreased $1.9 million or 95% and $1.925 million or 94% for the
three and six months ended March 31, 2000, respectively, compared to the three
and six months ended March 31, 1999. The decreases were primarily due to the
receipt of a license fee of $2 million from BioChem Pharma, Inc. during the six
months ended March 31, 1999. License revenues for the six months ended March 31,
2000 represented a patent license fee of $100,000 paid by R.W. Johnson Research
Institute and maintenance fees of $25,000 from another licensee.
EXPENSES
Operating expenses increased approximately $3.4 million or 43% and $7.2 million
or 48% for the three and six months ended March 31, 2000, respectively, compared
to the three and six months ended March 31, 1999. Research and development
expenses for the three and six-month periods increased $3.7 million or 72% and
$7.4 million or 75%, respectively, compared to the three and six months ended
March 31, 1999. The increases were related, in part, 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. The Company has increased its investment in its
proprietary drug discovery programs and expects to continue to do so in the
future. This includes its GPCR-directed drug discovery programs which were
included in the Cadus asset acquisition, as well as its proprietary cancer
program. The Company also expanded its collaboration with Anaderm for the
discovery and development of novel compounds to treat pigmentation disorders,
wrinkles and baldness which included the expansion of the Company's medicinal
chemistry facility at OSI-UK to accommodate increased chemistry efforts.
Increases in research and development expenses were also attributable to the
initiation of the agreement with Tanabe. The following also contributed to the
increase in research and development expenses: (i) the Company'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 5 to the accompanying
unaudited consolidated financial statements; and (ii) a one-time fee of $500,000
paid to Vanderbilt University in October 1999 in respect of the Company entering
into the research agreement with Tanabe.
Production and service costs decreased approximately $236,000 or 49% and
$380,000 or 45% for the three and six months ended March 31, 2000, respectively,
compared to the three and six months ended March 31, 1999. The decreases were
primarily related to the sale of the Company's diagnostics business to Bayer in
November 1999.
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Selling, general and administrative expenses for the three and six months ended
March 31, 2000 increased by $129,000 or 7% and $405,000 or 11%, respectively,
compared to the three and six months ended March 31, 1999. The increases were
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 the Company's current
corporate development activities.
Amortization of intangibles for the three and six months ended March 31, 2000
decreased $180,000 or 49% and $232,000 or 32%, respectively, compared to the
three and six months ended March 31, 1999. The decreases were related to the
inclusion of the Company's diagnostic patent estate in the sale of the
diagnostics business to Bayer, which eliminated the related amortization expense
effective November 30, 1999.
OTHER INCOME AND EXPENSE
Net investment income increased approximately $263,000 or 122% and $755,000 or
169% for the three and six months ended March 31, 2000, respectively, compared
to the three and six months ended March 31, 1999. This increase is largely due
to investment of the approximately $9 million of net proceeds from the Company's
sale of its diagnostics assets to Bayer in November 1999 and the approximately
$53 million of net proceeds from the private sale of the Company's common stock
in February 2000, as more fully described in Note 6 of the accompanying
unaudited consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had cash, cash equivalents and investment
securities of approximately $86.5 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
1,400,000 shares of common stock by management and employees during the three
months ended March 31, 2000, for net proceeds to the Company of approximately $9
million; and (iii) cash received from the sale of the Company's diagnostics
business in November 1999, for approximately $9 million.
The Company intends to use its greater cash resources to expand its internal
proprietary drug discovery programs including the early clinical development of
selected drug candidates and to enhance its drug discovery technology. The
Company believes that the anticipated funding from its collaborative research
programs and its existing cash resources will be sufficient to support its
operations in the foreseeable future.
The Company anticipates incurring additional losses over at least the next
several years as it increases its investment in internal proprietary programs.
To achieve profitability, the Company, alone or with others, must successfully
develop and commercialize its technologies and products, conduct pre-clinical
studies and clinical trials, obtain required regulatory
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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 requires
registrants to adopt the accounting guidance contained therein by no later than
the first fiscal quarter of the fiscal year beginning after December 15, 1999
(fiscal year ending September 30, 2001 for the Company). The Company is
currently assessing the requirements of SAB No. 101, particularly as it relates
to the technology access fee from Tanabe recognized in the first quarter of
fiscal year 2000. The Company 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. 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. The Company does not believe that the implementation
of SFAS 133 will have a material effect on its results of operations and
financial position.
FORWARD-LOOKING STATEMENTS
Certain of the matters and subject areas discussed in this report that are not
statements of current or historical fact are "forward-looking statements" that
convey information about potential future circumstances and developments. These
forward-looking statements are necessarily based on various assumptions, involve
known and unknown risks and generally are subject to the inherent risks and
uncertainties surrounding expectations regarding future occurrences. As a
result, the Company's actual future experience may differ materially from the
results, achievements or performance described or implied in such statements.
Factors that might cause the Company's actual future experience to differ
materially from the forward-
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looking statements include, but are not limited to, (i) the Company's absence of
commercialized drug products, (ii) the Company's dependence, to an extent, on
third parties for clinical development and commercialization of potential
products, (iii) the potential failure of the Company's lead compounds currently
in clinical trials to progress successfully through clinical development, (iv)
the potential failure of any drug candidates that emerge from the Company's
discovery operations to progress successfully to or through clinical
development, (v) competition, (vi) government regulation, and (vii)
pharmaceutical pricing. Certain of these and additional factors that may cause
the Company's actual future experience to differ materially from the
forward-looking statements contained in this report are discussed in the
Company's annual report on Form 10-K, as amended, for the fiscal year ended
September 30, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's cash flow and earnings are subject to fluctuations due to changes
in interest rates in its investment portfolio of debt securities, to the fair
value of equity instruments held, and, to an immaterial extent, to foreign
currency exchange rates. The Company maintains an investment portfolio of
various issuers, types and maturities. These securities are generally classified
as available-for-sale and, consequently, are recorded on the balance sheet at
fair value with unrealized gains or losses reported as a component of
accumulated other comprehensive losses included in stockholders' equity. The
Company's investments in certain biotechnology companies are carried on the
equity method of accounting. Other-than-temporary losses are recorded against
earnings in the same period the loss was deemed to have occurred. The Company
does not currently hedge this exposure and it is uncertain whether
other-than-temporary losses will not be detrimental to the Company's results of
operations in the future.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 28, 2000, the Company sold 3,325,000 newly-issued shares of its
common stock to a select group of institutional investors. The purchase price of
the shares was $17.00 per share, or an aggregate of $56,525,000 in gross cash
proceeds. The Company engaged FleetBoston Robertson Stephens Inc. to act as
placement agent for the private placement. Prudential Vector Healthcare Group, a
unit of Prudential Securities, Incorporated and Lazard Freres & Co. served as
financial advisors with respect to the private placement. The placement agent
and the two other investment banking firms received from the Company a total of
6.0% of the gross proceeds of the sale of the shares. The private placement was
exempt from registration under Section 4(2) of the Securities Act of 1933. The
Company agreed to register the resale of the shares of common stock issued in
the private placement, and has filed a registration statement on Form S-3 with
the Securities and Exchange Commission which has not yet become effective.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on March 15, 2000. The
following ten directors were elected:
Votes For Votes Withheld
--------- --------------
1. Gary E. Frashier 17,516,000 80,540
2. Edwin A. Gee, Ph.D. 17,514,220 82,320
3. Colin Goddard, Ph.D. 17,527,607 68,933
4. G. Morgan Browne 17,527,507 69,033
5. John H. French II 17,517,140 79,400
6. Daryl K. Granner, M.D. 17,527,292 69,248
7. Walter M. Lovenberg, Ph.D. 17,527,120 69,420
8. Viren Mehta 17,527,320 69,220
9. Steve M. Peltzman 17,428,577 167,963
10. John P. White 17,512,965 83,575
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In addition, the following matters were voted upon: (i) a proposal to adopt the
Company's 1999 Incentive and Non-Qualified Stock Option Plan was approved
(7,531,006 shares voted in favor, 1,268,533 shares voted against, 135,819 shares
abstained and there were 8,661,182 broker non-votes); and (ii) the appointment
of KPMG LLP as auditors for fiscal year ended September 30, 2000 was ratified
(17,500,940 shares voted in favor, 61,998 shares voted against, 33,602 shares
abstained and there were no broker non-votes).
ITEM 5. OTHER INFORMATION
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.
License from Cadus Pharmaceutical Corporation
Effective February 15, 2000, Cadus Pharmaceutical Corporation 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 Company personnel conduct such
research at the Company's facilities. The cost of the license was $700,000 and
has been recorded in research and development expense in the accompanying
unaudited consolidated statement of operations for the three-month period ended
March 31, 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.
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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 License Agreement, dated as of January 3, 2000,
by and between the Company and American Home
Products Corporation and American Cyanamid Company
10.2 Yeast Technology Agreement, dated as of February
15, 2000, by and between the Company and Cadus
Pharmaceutical Corporation
27 Financial Data Schedule
-----------------------------
(1) Included as an exhibit to the Company's quarterly
report on Form 10-Q for the quarter ended March 31,
1999, filed on May 14, 1999, and incorporated herein
by reference.
(2) Included as an exhibit to the Company's current report
on Form 8-K, filed on January 8, 1999, and incorporated
herein by reference.
* 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
The Company filed a current report on Form 8-K on March 1,
2000 with the Securities and Exchange Commission via EDGAR,
pertaining to the private sale of 3.325 million shares of
common stock. The earliest event covered by the report
occurred on February 25, 2000.
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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: May 15, 2000 /s/ Colin Goddard, Ph.D.
------------------------------------------
Colin Goddard, Ph.D.
President and Chief Executive Officer
Date: May 15, 2000 /s/ Robert L. Van Nostrand
------------------------------------------
Robert L. Van Nostrand
Vice President and Chief Financial Officer
(Principal Financial Officer)
22
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation, as amended (1)
3.2 Amended and Restated By-Laws (2)
*10.1 License Agreement, dated as of January 3, 2000, by and between the
Company and American Home Products Corporation and American
Cyanamid Company
10.2 Yeast Technology Agreement, dated as of February 15, 2000, by and
between the Company and Cadus Pharmaceutical Corporation
27 Financial Data Schedule
------------------------------
(1) Included as an exhibit to the Company's quarterly report on Form 10-Q for the quarter ended
March 31, 1999, filed on May 14, 1999, and incorporated herein by reference.
(2) Included as an exhibit to the Company's current report on Form 8-K, filed on January 8,
1999, and incorporated herein by reference.
* 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.