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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 0-15190
OSI Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3159796
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
106 Charles Lindbergh Boulevard, Uniondale, New York 11553
(Address of principal executive offices) (Zip Code)
516-222-0023
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS:
At April 30, 2001 the registrant had outstanding 34,783,330 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, 2001 (unaudited) and September 30, 2000............................... 1
Consolidated Statements of Operations
- Three months ended March 31, 2001 and 2000 (unaudited).......................... 2
Consolidated Statements of Operations
- Six months ended March 31, 2001 and 2000 (unaudited)............................ 3
Consolidated Statements of Cash Flows
- Six months ended March 31, 2001 and 2000 (unaudited)............................ 4
Notes to Consolidated Financial Statements (unaudited)............................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................. 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk....................... 19
PART II - OTHER INFORMATION...................................................................... 20
Item 1. Legal Proceedings................................................................ 20
Item 2. Changes in Securities and Use of Proceeds........................................ 20
Item 3. Defaults Upon Senior Securities.................................................. 20
Item 4. Submission of Matters to a Vote of Security Holders.............................. 20
Item 5. Other Information................................................................ 21
Item 6. Exhibits and Reports on Form 8-K................................................. 23
SIGNATURES....................................................................................... 25
EXHIBIT INDEX.................................................................................... 26
i
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, September 30,
2001 2000
------------ -----------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents .............................................................. $ 372,376,944 $ 48,392,635
Investment securities .................................................................. 207,806,687 36,672,036
Receivables, including amounts due from related parties of $78,818 and $72,585 and trade
receivables of $43,259 and $98,956 at March 31, 2001 and September 30, 2000,
respectively ........................................................................ 346,652 287,035
Interest receivable .................................................................... 2,259,703 346,430
Grants receivable ...................................................................... 164,411 415,456
Prepaid expenses and other ............................................................. 1,636,222 1,165,674
------------- -------------
Total current assets ........................................................... 584,590,619 87,279,266
------------- -------------
Property, equipment and leasehold improvements - net ................................... 9,456,022 9,265,005
Compound library assets - net .......................................................... 1,397,801 2,330,896
Other assets ........................................................................... 1,239,185 118,630
Intangible assets - net ................................................................ 411,265 782,211
------------- -------------
$ 597,094,892 $ 99,776,008
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .................................................. $ 4,101,257 $ 6,317,492
Unearned revenue - current; including amounts received in advance
from related parties of $8,827,506 and $369,779 as of March 31, 2001
and September 30, 2000, respectively ................................................ 9,707,606 690,895
Loans payable - current ................................................................ 166,656 166,656
------------- -------------
Total current liabilities ...................................................... 13,975,519 7,175,043
------------- -------------
Other liabilities:
Unearned revenue - long-term; including amounts received in advance from
related parties of $14,880,952 and $333,333 as of March 31, 2001 and
September 30, 2000, respectively .................................................... 16,193,452 333,333
Loans payable - long-term .............................................................. 90,099 144,217
Deferred acquisition costs ............................................................. 365,258 355,518
Accrued postretirement benefit cost .................................................... 2,036,268 1,886,268
------------- -------------
Total liabilities .............................................................. 32,660,596 9,894,379
------------- -------------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares
issued at March 31, 2001 and September 30, 2000 ..................................... -- --
Common stock, $.01 par value; 50,000,000 shares authorized, 35,706,106 and 28,281,850
shares issued at March 31, 2001 and September 30, 2000, respectively
357,061 282,819
Additional paid-in capital ............................................................. 663,632,970 187,731,177
Deferred compensation .................................................................. (6,652,805) (8,767,030)
Accumulated deficit .................................................................... (86,283,818) (81,988,187)
Accumulated other comprehensive loss ................................................... (186,567) (944,448)
------------- -------------
570,866,841 96,314,331
Less: treasury stock, at cost; 939,618 and 939,641 shares at March 31, 2001 and
September 30, 2000, respectively ....................................................... (6,432,545) (6,432,702)
------------- -------------
Total stockholders' equity ........................................................ 564,434,296 89,881,629
------------- -------------
Commitments and contingencies
$ 597,094,892 $ 99,776,008
============= =============
See accompanying notes to unaudited consolidated financial statements.
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4
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
---------
2001 2000
---- ----
Revenues:
Collaborative program revenues,
principally from related parties .................................. $ 5,053,396 $ 5,836,654
License and related revenues ......................................... 2,302,083 100,000
Other revenues ....................................................... 175,946 159,079
------------ ------------
7,531,425 6,095,733
------------ ------------
Expenses:
Research and development ............................................. 10,778,075 8,487,462
Production and service costs ......................................... 74,752 249,680
Selling, general and administrative .................................. 2,774,535 2,452,854
Amortization of intangibles .......................................... 185,473 185,473
------------ ------------
13,812,835 11,375,469
------------ ------------
Loss from operations .................................. (6,281,410) (5,279,736)
Other income (expense):
Net investment income ................................................ 7,722,426 478,138
Other expense - net .................................................. (89,932) (15,236)
------------ ------------
Net income (loss) ....................................................... $ 1,351,084 $ (4,816,834)
============ ============
Weighted average number of shares of common stock outstanding:
Basic: ............................................................... 34,307,448 23,439,644
============ ============
Diluted: ............................................................. 36,603,669 23,439,644
============ ============
Net income (loss) per weighted average share of common stock outstanding:
Basic: ............................................................... $ .04 $ (.21)
============ ============
Diluted: ............................................................. $ .04 $ (.21)
============ ============
Pro forma Information:
Net loss, assuming new revenue recognition
policy is applied retroactively ...................................... $ (4,598,084)
============
Basic and diluted loss per share ........................................ $ (.20)
============
See accompanying notes to unaudited consolidated financial statements.
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5
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended
March 31,
---------
2001 2000
---- ----
Revenues:
Collaborative program revenues,
principally from related parties ............................. $ 10,321,812 $ 11,835,738
License and related revenues .................................... 2,595,833 3,625,000
Other revenues .................................................. 308,734 503,700
------------ ----------
13,226,379 15,964,438
------------ ----------
Expenses:
Research and development ........................................ 21,348,649 16,598,944
Production and service costs .................................... 204,117 471,419
Selling, general and administrative ............................. 5,724,668 4,589,504
Amortization of intangibles ..................................... 370,946 498,814
------------ ----------
27,648,380 22,158,681
------------ ----------
Loss from operations ............................ (14,422,001) (6,194,243)
Other income (expense):
Net investment income ........................................... 12,861,950 1,201,860
Other expense - net ............................................. (110,580) (54,569)
Gain on sale of diagnostics business ............................ -- 3,745,844
------------ ----------
Net loss before cumulative effect of accounting change ............. (1,670,631) (1,301,108)
Cumulative effect of the change in accounting for the recognition
of upfront fees .............................................. (2,625,000) --
------------ ----------
Net loss ........................................................... $ (4,295,631) $ (1,301,108)
============ ==========
Weighted average number of shares of common stock outstanding:
Basic: .......................................................... 32,839,452 22,489,198
============ ==========
Diluted: ........................................................ 32,839,452 22,489,198
============ ==========
Net loss per weighted average share of common stock outstanding:
Basic:
Before cumulative effect of accounting change ................ $ (.05) $ (.06)
Cumulative effect of accounting change ....................... (.08) --
------------ ----------
After cumulative effect of accounting change ................. $ (.13) $ (.06)
============ ==========
Diluted:
Before cumulative effect of accounting change ................ $ (.05) $ (.06)
Cumulative effect of accounting change ....................... (.08) --
------------ ----------
After cumulative effect of accounting change ................. $ (.13) $ (.06)
============ ==========
Pro forma Information:
Net loss, assuming new revenue recognition
policy is applied retroactively................................... $ (4,363,608)
============
Basic and diluted loss per share ................................... $ (.19)
============
See accompanying notes to unaudited consolidated financial statements.
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6
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
March 31,
---------
2001 2000
---- ----
Cash flow from operating activities:
Net loss ............................................................. $ (4,295,631) $ (1,301,108)
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 ..................................... (208,074) (487,594)
Loss on sale of equipment ....................................... 64,865 60,547
Depreciation and amortization ................................... 1,434,502 1,466,159
Amortization of library assets .................................. 933,095 933,094
Amortization of intangibles assets .............................. 370,946 498,814
Accretion of deferred acquisition costs ......................... 9,741 9,741
Non-cash compensation charges-net ............................... 1,650,953 --
Cumulative effect of the change in accounting for the
recognition of upfront fees .................................. 2,625,000 --
Changes in assets and liabilities, net of the effects of a
sale of a business:
Receivables ..................................................... (60,915) 3,830,055
Interest receivable ............................................. (1,913,273) (66,091)
Grants receivable ............................................... 251,045 240,026
Prepaid expenses and other current assets ....................... (490,419) (373,670)
Other assets .................................................... (1,120,555) 12,300
Accounts payable and accrued expenses ........................... (2,195,782) 209,460
Unearned revenue ................................................ 22,251,968 (3,571,190)
Accrued postretirement benefit cost ............................. 150,000 150,000
------------- ------------
Net cash provided by (used in) operating activities ..................... 19,457,466 (2,135,301)
------------- ------------
Cash flows from investing activities:
Net proceeds from sale of diagnostics business ....................... -- 8,636,104
Proceeds from sale of equipment and leasehold improvements ........... 35,000 375,000
Purchases of investments ............................................. (280,887,622) (1,329,596)
Maturities and sales of short-term investments ....................... 110,893,926 1,737,599
Additions to property, equipment and leasehold improvements .......... (1,817,083) (827,159)
------------- ------------
Net cash (used in) provided by investing activities ..................... (171,775,779) 8,591,948
------------- ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock ........................... 474,254,619 52,802,259
Proceeds from exercise of stock options, stock warrants,
employee purchase plan and other .................................. 2,184,845 8,662,940
Payments on loan payable ............................................. (52,659) (83,327)
Purchase of treasury stock ........................................... -- (375,000)
------------- ------------
Net cash provided by financing activities ............................... 476,386,805 61,006,872
------------- ------------
Net increase in cash and cash equivalents ............................... 324,068,492 67,463,519
Effect of exchange rate changes on cash and cash equivalents ............ (84,183) (32,046)
Cash and cash equivalents at beginning of year .......................... 48,392,635 8,863,887
------------- ------------
Cash and cash equivalents at end of year ................................ $ 372,376,944 $ 76,295,360
============= ============
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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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 the
Company, as of March 31, 2001 and September 30, 2000, their results of
operations for the three and six months ended March 31, 2001 and 2000 and their
cash flows for the six months ended March 31, 2001 and 2000. 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 for the fiscal year ended September 30,
2000. Results for interim periods are not necessarily indicative of results for
the entire year.
(2) Revenue Recognition
Collaborative program revenues represent funding arrangements for the conduct of
research and development in the field of biotechnology and are recognized when
earned in accordance with the terms of the contracts and the related development
activities undertaken. Other research revenues are recognized pursuant to the
terms of grants which provide reimbursement of certain expenses related to the
Company's other research and development 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.
Included in license and related revenues are patent license fees, maintenance
fees, and technology access and other upfront fees. Technology access and other
upfront fees are recognized as revenue over the expected term of the related
research collaboration.
The Company previously recognized all nonrefundable license fees, including
upfront and technology access fees, as revenue when received and when all
contractual obligations of the Company relating to such fees had been fulfilled.
Effective October 1, 2000, the Company changed its method of accounting for
nonrefundable license fees to recognize such fees over the term of the related
research collaboration period. The Company believes that this change in
accounting principle is appropriate based on guidance provided in the Securities
and Exchange Commission's Staff Accounting Bulletin No. 101 - "Revenue
Recognition in Financial Statements," as amended ("SAB No. 101").
For the year ended September 30, 2000, the Company recognized the full $3.5
million technology access fee received from Tanabe Seiyaku Co., Ltd. ("Tanabe")
related to a four year term collaboration. The Company's adoption of SAB No. 101
has resulted in a $2.6 million cumulative effect of a change in accounting
principle related to the Tanabe fee and has
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8
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
been reported as a charge in the quarter ended December 31, 2000. The cumulative
effect was initially recorded as unearned revenue and will be recognized as
revenue over the remaining contractual term of the collaboration agreement.
During the six months ended March 31, 2001, the impact of the change in
accounting principle increased the net loss by $2.2 million, or $0.07 per share,
comprised of the $2.6 million cumulative effect of the change as described above
($0.08 per share), net of the $0.4 million of related deferred revenue that was
recognized as revenue during the six months ended March 31, 2001 ($0.01 per
share). Had the change in accounting principle been applied retroactively, the
net loss for the six months ended March 31, 2000 would have increased by $3.1
million, or $0.14 per basic and diluted weighted average number of shares of
common stock outstanding for the period ended March 31, 2000.
(3) Comprehensive Income (Loss)
Comprehensive income (loss) for the three months ended March 31, 2001 and 2000
was as follows:
For the three months ended
March 31,
---------
2001 2000
---- ----
Net income (loss) ............................. $ 1,351,084 $(4,816,834)
Other comprehensive income (loss):
Foreign currency translation adjustments (209,070) (57,215)
Unrealized holding gains (losses) arising
during period ....................... 1,085,894 (43,230)
Less: Reclassification adjustment for
gains realized in net income ........ (208,074) --
----------- -----------
668,750 (100,445)
----------- -----------
Total comprehensive income (loss) ............. $ 2,019,834 $(4,917,279)
=========== ===========
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9
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Comprehensive (loss) income for the six months ended March 31, 2001 and 2000 was
as follows:
For the six months ended
March 31,
---------
2001 2000
---- ----
Net loss ...................................... $(4,295,631) $(1,301,108)
Other comprehensive income (loss):
Foreign currency translation adjustments (174,999) (111,938)
Unrealized holding gains (losses) arising
during period ...................... 1,140,954 (77,600)
Less: Reclassification adjustment for
gains realized in net loss ......... (208,074) --
----------- -----------
757,881 (189,538)
----------- -----------
Total comprehensive loss ...................... $(3,537,750) $(1,490,646)
=========== ===========
The components of accumulated other comprehensive losses were as follows:
March 31, September 30,
2001 2000
---- ----
Cumulative foreign currency translation
adjustment .............................. $(872,167) $(697,168)
Unrealized gains (losses) on available-for-sale
securities .............................. 685,600 (247,280)
--------- ---------
Accumulated other comprehensive losses ........ $(186,567) $(944,448)
========= =========
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10
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) Net Income (Loss) per Common Share
A reconciliation between the numerators and the denominators of the basic and
diluted income (loss) per share computation is as follows:
For the three months ended
March 31,
---------
2001 2000
---- ----
Net income (loss) available for common
stockholders.............. $ 1,351,084 $ (4,816,834)
============ ==============
Weighted average common shares .................................. 34,307,448 23,439,644
Effect of dilutive stock options ................................ 2,296,221 --
------------ --------------
Weighted average common and potential
common shares outstanding................................... 36,603,669 23,439,644
============ ==============
Basic income (loss) per share ................................... $ .04 $ (.21)
============ ==============
Diluted income (loss) per share ................................. $ .04 $ (.21)
============ ==============
For the three months ended March 31, 2001, 127,000 stock options were excluded
in the net income per share calculation because they would have been
anti-dilutive. For the three months ended March 31, 2000, all outstanding stock
options were excluded in the net loss per share calculation because their effect
would have been anti-dilutive.
For the six months ended March 31, 2000 and 2001, all outstanding stock options
were excluded in the net loss per share calculations because their effect would
have been anti-dilutive.
(5) Stock Options Issued to Consultants
In December 2000, the Company granted options to certain non-employees to
purchase 127,000 shares of common stock as part of an arrangement with Nadler
Pharma Associates, L.L.C. to provide clinical development expertise to support
the Company's drug development program for OSI-774. Such options vest over a
three year period, based upon future service requirements. The Company recorded
net deferred compensation of $6.1 million based on the fair value of such
options as of December 31, 2000 as determined using a Black-Scholes option
pricing model. The remeasurement of the fair value of such options as of March
31, 2001 resulted in an adjusted net deferred compensation of $1.8 million due
to the Company's stock price decline during the quarter ended March 31, 2001.
Such compensation cost is amortized as expense over the respective vesting
periods using the method prescribed in FASB Interpretation No. 28. In accordance
with EITF Issue 96-18 - "Accounting For Equity
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11
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Instruments that Are Issued to Other Than Employees for Acquiring, or In
Conjunction with Selling, Goods or Services," the amount of compensation expense
to be recorded in future periods related to the non-employee grants is subject
to change each reporting period based upon the then fair value of the options,
using a Black-Scholes option pricing model, until expiration of the options'
vesting periods. The Company recorded compensation expense of approximately
$149,000 and $524,000 related to these grants for the three and six months ended
March 31, 2001, respectively.
(6) Sale of Diagnostics Business
On November 30, 1999, the Company sold assets of its diagnostics business to The
Bayer Corporation ("Bayer") including the assets of the Company's wholly-owned
diagnostics subsidiary, OSDI, Inc. ("OSDI") based in Cambridge, Massachusetts.
The assets sold included certain contracts, equipment and machinery, files and
records, intangible assets, intellectual property, inventory, prepaid expenses
and other assets primarily related to the operations of the diagnostics
business. In connection with the sale, the Company and OSDI entered into certain
agreements with Bayer including an Assignment and Assumption of Lease with
respect to OSDI's facility located in Cambridge and certain patent assignment
and license agreements. Certain employees of the Company and OSDI entered into
employment agreements with Bayer. Under the terms of the sale, the Company
received $9.2 million up-front from Bayer with additional contingent payments of
$1.25 million to be made to the Company by 2001. Bayer intended to retain all
employees of OSDI and maintain the unit's headquarters in Cambridge.
The Company recorded a gain on the sale of approximately $3.7 million
during fiscal 2000. The net gain was calculated as follows (in thousands):
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 assets of diagnostics business.............................................. $ 3,746
===============
(7) Public Offering
On November 6, 2000, the Company concluded a public offering of 5.35 million
shares of common stock at a price of $70.00 per share. Gross proceeds totaled
$374.5 million with net proceeds of approximately $351.5 million after all
underwriting and other related fees are deducted. In addition, on November 21,
2000, the underwriters associated with this offering
-9-
12
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
exercised their over-allotment option to purchase an additional 802,500 shares
of common stock at a price of $70.00 per share. Gross proceeds from the exercise
of the over-allotment option totaled $56.2 million with net proceeds of
approximately $52.8 million.
(8) Accounting for Derivative and Hedging Activities
Effective October 1, 2000, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 133 - "Accounting for Derivative Instruments
and Hedging Activities," as amended ("SFAS No. 133"), which establishes new
accounting and reporting guidelines for derivative instruments and hedging
activities. SFAS No. 133 requires the recognition of all derivative financial
instruments as either assets or liabilities in the consolidated balance sheet
and measurement of those instruments at fair value. Changes in fair values of
those derivatives will be reported in earnings or other comprehensive income
depending on the designation of the derivative and whether it qualifies for
hedge accounting. The accounting for gains and losses associated with changes in
the fair value of a derivative and the effect on the consolidated financial
statements will depend on its hedge designation and whether the hedge is highly
effective in achieving offsetting changes in the fair value or cash flows of the
asset or liability hedged. Under the provisions of SFAS No. 133 the method that
will be used for assessing the effectiveness of a hedging derivative, as well as
the measurement approach for determining the ineffective aspects of the hedge,
must be established at the inception of the hedging relationship. For
derivatives designated as cash flow hedges, the change in fair value of the
derivative instrument is adjusted to fair value and is reported in other
comprehensive income.
The Company believes it is prudent to minimize the risk caused by foreign
currency fluctuations. The Company, at times, minimizes this risk by hedging the
foreign currency exposure of the Company's net investment in foreign operations
through the purchase of forward foreign exchange contracts. For the quarter
ended March 31, 2001, the Company did not have any forward foreign currency
exchange contracts or other derivative instruments. The Company does not enter
into derivative instruments for any other purposes other than cash flow hedging;
the Company does not speculate using derivatives. The impact of adopting SFAS
No. 133 did not have any effect on the Company's consolidated financial
statements.
(9) Collaborations with and Sale of Stock to Roche and Genentech
On January 8, 2001, the Company entered into certain agreements (the
"Collaboration Agreements") with Genentech, Inc. ("Genentech") and F.Hoffmann-La
Roche Ltd ("Roche") for the global co-development and commercialization of the
Company's lead anti-cancer drug, OSI-774. The Collaboration Agreements consist
of a Development and Marketing Collaboration Agreement between the Company and
Genentech (the "OSI/Genentech Agreement"); a Development Collaboration and
Licensing Agreement between the Company and Roche (the "OSI/Roche Agreement");
and a Tripartite Agreement by and among the Company, Genentech
-10-
13
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
and Roche (the "Tripartite Agreement"). The Company received upfront fees of $25
million related to these agreements, which will be recognized evenly over the
expected three-year term of the Company's required research and development
efforts under these agreements. For the quarter ended March 31, 2001, the
Company recognized approximately $2.1 million of the upfront fees.
Under the OSI/Genentech Agreement, the Company and Genentech agreed to
collaborate in the product development of OSI-774 with the goal of obtaining
regulatory approval for commercial marketing and sale in the United States of
products resulting from the collaboration. Under the OSI/Genentech Agreement,
the parties established a joint steering committee composed of representatives
from each of the Company and Genentech. The responsibility of the joint steering
committee is, among other things, to approve overall strategy of the
collaboration; review and approve development, clinical trial strategies and
budgets; review and approve manufacturing activities; review and approve
marketing and sales budgets; and perform other similar functions. The parties
have also established a joint project team responsible for formulating overall
development plans and budgets.
The parties will conduct clinical trials of indications for licensed products as
defined in the OSI/Genentech Agreement in accordance with such agreement.
Consistent with the parties' development plan under the OSI/Genentech Agreement,
and with the approval of the joint steering committee, the parties will agree as
to who will own and be responsible for the filing of drug approval applications
with the Food and Drug Administration other than the first new drug application
which the Company will own and be responsible for filing and the first
supplemental new drug application which the Company will have the option to own
and be responsible for filing. Genentech will have responsibility for the design
and implementation of all product launch activities and the promotion, marketing
and sales of all products resulting from the collaboration in the United States,
its territories and Puerto Rico, while the Company will have certain
co-promotion rights. Genentech will pay the Company certain milestone payments
and the Company will share equally in the operating profits or losses on
products resulting from the collaboration.
Under the OSI/Genentech Agreement, the Company granted to Genentech a
non-transferable (except under certain circumstances), non-sublicensable (except
under certain circumstances), co-exclusive license under the Company's patents
related to OSI-774 to use, sell, offer for sale and import products resulting
from the collaboration. In addition, Genentech granted to the Company a
non-transferable (except under certain circumstances), non-sublicensable (except
under certain circumstances), co-exclusive license to certain patents held by
Genentech to use, make, have made, sell, offer for sale and import products
resulting from the collaboration. Each party is generally responsible for its
own patent filings. In addition, each party, generally, has the right, but not
the obligation, to institute, prosecute and control against patent infringement
claims. The term of the OSI/Genentech Agreement continues until the date on
which the parties are no longer entitled to receive a share of the operating
profits or losses on any products resulting from the collaboration. The
OSI/Genentech Agreement is subject to early termination
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
in the event of certain defaults by either party and early termination by
Genentech under certain circumstances.
Under the OSI/Roche Agreement, the Company granted to Roche a license under the
Company's intellectual property rights with respect to OSI-774. Roche will
collaborate with the Company and Genentech in the product development of OSI-774
and will be responsible for future marketing and commercialization of OSI-774
outside of the United States in certain territories as defined in the OSI/Roche
Agreement. The grant is a royalty-bearing, non-transferable (except under
certain circumstances), non-sublicensable (except with consent), sole and
exclusive license to use, sell, offer for sale and import products resulting
from the development of OSI-774 in the world, other than the territories covered
by the OSI/Genentech Agreement. In addition, Roche has the right, but not the
obligation, to manufacture OSI-774 for its territory, subject to certain
exceptions. Roche will pay milestone and royalty payments to the Company. The
Company has primary responsibility for patent filings for the basic patents
protecting OSI-774, and, in addition, has the right, but not the obligation, to
institute, prosecute and control against patent infringement claims. The term of
the OSI/Roche Agreement continues until the date on which the Company is no
longer entitled to receive a royalty on products resulting from the development
of OSI-774. The OSI/Roche Agreement is subject to early termination in the event
of certain defaults by either party. In addition, after two and one half years
from the effective date, Roche may terminate the agreement on a
country-by-country basis. OSI may also have the right to terminate the agreement
on a country-by-country basis if Roche has not launched or marketed a product in
such country under certain circumstances.
Under the Tripartite Agreement, the Company, Genentech and Roche have agreed to
establish a structure which is intended generally to result in the optimization
of the use of each party's resources to develop OSI-774 in certain countries
around the world, and share certain global development costs on an equal basis;
to share information generated under a global development plan, as defined in
the Tripartite Agreement; to facilitate attainment of necessary regulatory
approvals of OSI-774 products for commercial marketing and sale in the world;
and to work together on such matters as the parties agree from time to time
during the development of OSI-774. The Tripartite Agreement requires each party
to spend equally up to a specified amount for the further development of
OSI-774. Under the Tripartite Agreement, the parties have established a global
development committee composed of representatives from each party. The global
development committee is generally responsible for, among other things,
approving material changes to the global development plan, including the annual
budget; overseeing execution of the global development plan; resolving disputes
concerning overall strategy or funding; and performing other similar functions.
The parties have also established a liaison team to work with the teams
organized under the OSI/Roche and OSI/Genentech Agreements. The responsibilities
of the liaison team include coordination of pre-clinical activities, clinical
team activity, regulatory activity, manufacturing activity, and communication
and publication strategy. In addition, the liaison team must prepare budgets and
updates to present to the global development committee and prioritize and
allocate the supply of OSI-774. Each party may at its own expense conduct
clinical and pre-clinical activities for additional indications for OSI-774 not
called for under the
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
global development plan, subject to certain conditions. The Tripartite Agreement
will terminate when either the OSI/Genentech Agreement or the OSI/Roche
Agreement terminates.
Concurrently with the execution of the Collaboration Agreements, the Company
entered into separate Stock Purchase Agreements (the "Stock Purchase
Agreements") on January 8, 2001 with each of Genentech and Roche Holdings, Inc.
for the sale to each of 462,570 newly-issued shares of the Company's common
stock. The purchase price was $75.664 per share, or an aggregate purchase price
of $35 million each. No underwriters or placement agents were involved in the
purchase and sale of the securities. The sale of the securities was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, as
sales to accredited investors in a private placement. The Company agreed to
register the resale of the shares of common stock issued in the private
placement and filed a registration statement on Form S-3 with the Securities and
Exchange Commission on March 28, 2001, which was declared effective on April 3,
2001. The transactions contemplated under the Collaboration Agreements and Stock
Purchase Agreements closed on January 30, 2001.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED MARCH 31, 2001 AND 2000
OVERVIEW
We are engaged in the discovery and development of gene targeted, small molecule
drugs, primarily in the area of cancer, diabetes, respiratory diseases and
cosmeceuticals. To date, none of our proprietary or collaborative programs have
resulted in a commercial product; and therefore, we have not received any
revenues or royalties from the sale of products by us or by our collaborators.
We have funded our operations primarily through public and private placements of
equity securities and payments under collaborative research agreements with
major pharmaceutical companies.
Historically, we have conducted most of our drug discovery programs through
funded collaborations with major pharmaceutical companies. These arrangements
have typically included milestone and royalty payments on the successful
development and marketing of products discovered in the collaborations. Using
this business model, we were able to leverage the research, development and
financial resources of our corporate partners to help build and sustain a
fully-integrated drug discovery capability and a large pipeline of product
opportunities supplemented by those within our own proprietary programs. More
recently, as we have generated the financial resources to invest more fully in
our own programs, we are transitioning away from a partner-funded alliance model
in favor of OSI-owned and sponsored drug candidates. We intend to develop our
own drug candidates through the early stages of clinical development prior to
entering into co-development and commercialization agreements with leading
pharmaceutical companies in return for a greater share of the revenues derived
from product sales.
The most advanced of our product candidates is OSI-774, which has demonstrated
encouraging indications of activity and has, to date, exhibited a well-tolerated
side-effect profile as a monotherapy in three ongoing open-label, Phase II
clinical trials for the treatment of non-small cell lung, ovarian and head and
neck cancers. On January 8, 2001, we entered into concurrent agreements with
Genentech, Inc. and F.Hoffmann-La Roche Ltd for the global co-development and
commercialization of OSI-774. To date, we have received upfront fees and equity
investments totaling $95 million under these agreements. In addition, we may
receive scheduled milestone payments of up to $92 million based on the
successful filing and registration of the drug in major markets. In the United
States, we will employ an essentially equal cost and profit sharing arrangement
for commercialization with Genentech. Outside of the United States, we will
receive royalties from Roche on net sales of products. The overall costs of the
development program will be split equally among the three parties. In addition
to our OSI-774 program, our collaborative partner in cancer, Pfizer Inc., is
conducting Phase I clinical trials for two additional candidates. We also have a
total of eleven candidates in late stage pre-clinical development in cancer and
other programs.
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For the three months ended March 31, 2001, we had a net income of $1.4 million
compared to a net loss of $4.8 million for the three months ended March 31,
2000. For the six months ended March 31, 2001, we had a net loss of $4.3 million
compared to a net loss of $1.3 million for the six months ended March 31, 2000.
Included in the net income for the three months ended March 31, 2001 was the
recognition of $2.1 million of the upfront fees from Genentech and Roche (see
notes 2 and 9 to the accompanying consolidated financial statements). Also
contributing to net income was increased interest income of approximately $7.7
million resulting from increased funds as more fully discussed in "Liquidity and
Capital Resources" below. Included in the loss for the six months ended March
31, 2001 was a non-cash charge of $2.6 million related to the cumulative effect
of a change in accounting principle for the recognition of upfront fees upon the
adoption of SEC Staff Accounting Bulletin No. 101 (see note 2 to the
accompanying consolidated financial statements). Excluding the effect of this
change in accounting principle, the net loss for the six months ended March 31,
2001 would have been $2.1 million, or $.06 per share.
REVENUES
Revenues increased approximately $1.4 million or 24%, and decreased
approximately $2.7 million or 17% for the three and six months ended March 31,
2001, respectively, compared to the three and six months ended March 31, 2000.
The three month increase is due primarily to the prorated recognition of upfront
fees received from Genentech and Roche of $2.1 million (see notes 2 and 9 to the
accompanying consolidated financial statements). In accordance with the
provisions of Staff Accounting Bulletin No. 101, we will recognize the $25
million received from Genentech and Roche evenly over the expected three-year
development phase of our contractual agreement. The six month decrease is due
primarily to a one-time technology access fee of $3.5 million from Tanabe
Seiyaku Co., Ltd. recognized in October 1999. In connection with a change in
accounting principle effective October 1, 2000 (see note 2 to the accompanying
consolidated financial statements) to comply with the provisions of Staff
Accounting Bulletin No. 101, this previously recognized technology access fee
will be recognized over the four-year term of the agreement, resulting in
approximately $219,000 and $438,000 in revenue recognition for the three and six
months ended March 31, 2001, respectively. Assuming the technology access fee
received from Tanabe had been recognized over the term of the agreement in
fiscal 2000, revenues would have been $6.3 million and $12.9 million for the
three and six months ended March 31, 2000, respectively.
Total collaborative program revenues decreased approximately $783,000 or 13% and
$1.5 million or 13%, respectively, for the three and six months ended March 31,
2001, compared to the three and six months ended March 31, 2000. The decreases
were primarily due to the conclusion in September 2000 of our funded
collaborative research agreement with Aventis Pharmaceuticals Inc., the
conclusion of our funded collaborative research agreement with Solvay
Pharmaceuticals, B.V., and, to a lesser extent, the termination of our
diagnostics collaboration with The Bayer Corporation upon the sale of the assets
of our diagnostics business to Bayer in November 1999. This decrease was
partially offset by increased revenues
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from the Tanabe collaboration, which is focused on discovering and developing
pharmaceutical products to treat diabetes.
Included in other revenues are sales of products and services derived from
pharmaceutical services of our UK subsidiary, OSI Pharmaceuticals (UK) Limited,
and from diagnostics sales of our U.S. subsidiary, OSDI, Inc. of $12,000 and
$96,000 for the three and six months ended March 31, 2001, respectively. Sales
of products and services decreased approximately $44,000 or 79% and $214,000 or
69%, respectively, for the three and six months ended March 31, 2001, compared
to the three and six months ended March 31, 2000. The decrease was due to a
shift in focus of pharmaceutical services from external sales to internal
programs and to the sale of our diagnostics assets to Bayer in November 1999.
EXPENSES
Operating expenses increased approximately $2.4 million or 21% and $5.5 million
or 25%, respectively, for the three and six months ended March 31, 2001,
compared to the three and six months ended March 31, 2000. Research and
development expenses increased approximately $2.3 million or 27% and $4.7
million or 29%, respectively, for the three and six months ended March 31, 2001,
compared to the three and six months ended March 31, 2000. These increases were
primarily related to the initiation of clinical development of OSI-774 upon the
return of all rights to us from Pfizer in June 2000. These increases also result
from our increased investment in our proprietary drug discovery programs,
including cancer and diabetes. As a result of the conclusion of our Aventis and
Solvay collaborations, on September 30, 2000 and December 31, 2000,
respectively, as well as the conclusion of the funded phase of our collaboration
with Pfizer on March 31, 2001, we will continue to shift our resources from
collaborative research efforts to proprietary efforts. Research and development
expenses were also impacted by certain non-cash, stock option-based compensation
charges as discussed below.
In accordance with EITF Issue 96-18 "Accounting For Equity Instruments that Are
Issued to Other Than Employees for Acquiring, or In Conjunction with Selling,
Goods or Services," the amount of compensation expense to be recorded in future
periods related to the non-employee grants is subject to change each reporting
period based upon the then fair value of these options, using a Black-Scholes
option pricing model, until expiration of the grant vesting period. The
remeasurement of the value of these options at March 31, 2001 resulted in the
recapture of approximately $439,000 of previously recognized compensation
expense for the three months ended March 31, 2001, and $812,000 in compensation
expense for the six months ended March 31, 2001, related to stock options issued
to non-employee consultants. Deferred compensation for stock options issued to
non-employee consultants was approximately $2.6 million as of March 31, 2001,
which will be recognized as compensation expense over the vesting period of the
options.
At September 30, 2000, we had recorded approximately $4.4 million of deferred
compensation expense related to stock options granted to our new President and
Head of Research and Development. This amount will be recognized as compensation
expense on a straight line basis over the vesting period of the options. For the
three and six months ended March 31,
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2001, this grant resulted in compensation expense of approximately $364,000 and
$728,000, respectively.
Production and service costs decreased approximately $175,000 or 70% and
$267,000 or 57%, respectively, for the three and six months ended March 31,
2001, compared to the three and six months ended March 31, 2000. The decrease
was due to a shift in focus of pharmaceutical services from external sales to
internal programs and to the sale of our diagnostics assets to Bayer in November
1999.
Selling, general and administrative expenses increased approximately $322,000 or
13% and $1.1 million or 25%, respectively, for the three and six months ended
March 31, 2001, compared to the three and six months ended March 31, 2000. The
increase was primarily attributable to the increased expenses for additional
management and administrative personnel and consultants, as well as an increase
in facilities expenses and other professional fees associated with expansion and
development activities. Consulting expenses include stock options granted to
non-research and development consultants in connection with their consulting
arrangements which resulted in the recapture of approximately $398,000 of
previously recognized compensation expense for the three months ended March 31,
2001, and $111,000 in compensation expense for the six months ended March 31,
2001. We expect that general and administrative expenses will continue to
increase as we continue to support our clinical trials and expand research and
development efforts.
Amortization of intangibles decreased approximately $128,000 or 26% for the six
months ended March 31, 2001. The decrease was related to the inclusion of our
diagnostic patent estate in the sale of our diagnostics assets to Bayer, which
eliminated the related amortization expense effective November 30, 1999.
OTHER INCOME AND EXPENSE
Net investment income increased approximately $7.2 million or 1,515% and $11.7
million or 970%, respectively, for the three and six months ended March 31,
2001, compared to the three and six months ended March 31, 2000. The increases
were primarily due to investment of funds generated from: (i) a private sale of
our common stock to Genentech and Roche in January 2001; (ii) the underwritten
public offering in November 2000; (iii) a private placement of our common stock
in February 2000; and (iv) the exercise of options and warrants since April
2000. The sale of common stock in January 2001 and the public offering are more
fully discussed in "Liquidity and Capital Resources" below. Other income during
the six months ended March 31, 2000 includes the gain of approximately $3.7
million on the sale of the assets of our diagnostics business to Bayer.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, working capital, representing primarily cash, cash
equivalents and short-term investments, aggregated approximately $570.6 million
compared to $80.1 million at September 30, 2000. This increase resulted
primarily from the $95 million received from
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Genentech and Roche upon the commencement of our collaborations in January 2001,
and the closing of a public offering of 6,152,500 shares of our common stock in
November 2000, for net proceeds of approximately $404.3 million.
In January 2001, we secured co-development and marketing partnerships with
Genentech and Roche to maximize the healthcare benefit and commercialization of
OSI-774, and received $95 million in upfront fees and equity investments. The
alliance will divide the work and associated research and development costs of
OSI-774 development equally among the parties. As a result of this alliance, we
anticipate only a modest increase in our fiscal 2001 operating cash burn over
fiscal 2000, since the increased OSI-774 expenses will be offset somewhat by
upfront fees and higher interest earnings. We anticipate a more significant
increase in our fiscal 2002 operating cash burn over fiscal 2001, due to an
increase in OSI-774 expenses, a decrease in our collaborative revenue base, and
the absence of upfront fees. Our goal for OSI-774 is to seek rapid regulatory
approval, assess its utility in combination with existing chemotherapy agents,
demonstrate a survival benefit for earlier stage cancer patients enabling its
front-line use in major cancers, and broaden its application to additional
cancers.
On November 6, 2000, we concluded a public offering of 5.35 million shares of
common stock at a price of $70.00 per share. Gross proceeds totaled $374.5
million with net proceeds of approximately $351.5 million after all underwriting
and other related fees are deducted. In addition, on November 21, 2000, the
underwriters associated with this offering exercised their over-allotment option
to purchase an additional 802,500 shares of our common stock at a price of
$70.00 per share. Gross proceeds from the exercise of the over-allotment option
totaled $56.2 million with net proceeds of approximately $52.8 million.
We expect to incur additional losses over the next several years as we increase
our investment in OSI-774 and other internal proprietary programs. Accordingly
we do not anticipate to maintain near term profitability. Additionally, as we
shift our focus toward internal drug development, we expect collaborative
revenues to decrease in the future. The funded phases of our collaborations with
Aventis and Solvay ended on September 30, 2000 and December 31, 2000,
respectively. The funded phase of our cancer collaboration with Pfizer concluded
at the end of the funding period on March 31, 2001. To achieve profitability,
we, alone or with others, must successfully develop and commercialize our
technologies and products, conduct pre-clinical studies and clinical trials,
obtain required regulatory approvals and obtain adequate assistance to
successfully manufacture, introduce and market such technologies and products.
The ability and time required to reach profitability is uncertain. We believe
that amounts received from Genentech and Roche, proceeds from our public
offering, existing cash resources, and projected funding from collaborative
research and development programs will be sufficient to fund the operations and
capital requirements for at least the next several years.
During fiscal 2000, we received a commitment from the State of New York to
expand and refurbish a state-of-the-art discovery research facility located in
the Broad Hollow BioScience Park on the SUNY campus in Farmingdale, New York,
which we will lease from the State. We expect to move certain research
operations to this new facility by the end of 2001. During the quarter ended
March 31, 2001, we deposited $750,000 with the State University of New
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York Construction Fund. These funds will be used toward the construction of our
new research facility if the costs of the project exceed the amount appropriated
by the State. The funds will be returned to us if they are not utilized.
FORWARD-LOOKING STATEMENTS
A number of the matters and subject areas discussed in this Item 2 "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
elsewhere in this report that are not historical or current facts deal with
potential future circumstances and developments. The discussion of these matters
and subject areas is qualified by the inherent risks and uncertainties
surrounding future expectations generally, and these discussions may materially
differ from our actual future experience involving any one or more of these
matters and subject areas. These forward looking statements are also subject
generally to the other risks and uncertainties that are described in our annual
report on Form 10-K for the fiscal year ended September 30, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash flow and earnings are subject to fluctuations due to changes in
interest rates in our investment portfolio of debt securities, to the fair value
of equity instruments held, and, to an immaterial extent, to foreign currency
exchange rates. We maintain an investment portfolio of various issuers, types
and maturities. These securities are generally classified as available-for-sale
and, consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a component of accumulated other
comprehensive income (loss) included in stockholders' equity. Our investments in
certain biotechnology companies are carried on the equity method of accounting.
Other-than-temporary losses are recorded against earnings in the same period the
loss was deemed to have occurred. It is uncertain whether other-than-temporary
losses will be material to our results of operations in the future. Other than
foreign currency exchange rates, we do not currently hedge these exposures. We
hedge some of our foreign currency exchange rates exposure through forward
contracts as more fully described in note 11(d) to the consolidated financial
statements contained in our annual report on Form 10-K for the fiscal year ended
September 30, 2000.
At March 31, 2001, we maintained a portion of our cash and cash equivalents in
financial instruments with original maturities of three months or less. We also
maintained a short-term investment portfolio containing financial instruments in
which the majority have original maturities of less than twelve months. These
financial instruments, principally comprised of government and government agency
obligations and to a lesser extent of corporate obligations, are subject to
interest rate risk and will decline in value if interest rates increase. A
hypothetical ten percent change in interest rates during the quarter ended March
31, 2001 would have resulted in approximately a $0.8 million change in pretax
income. We have not used derivative financial instruments in our investment
portfolio.
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22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company entered into separate Stock Purchase Agreements (the "Stock Purchase
Agreements") on January 8, 2001 with each of Genentech and Roche Holdings, Inc.
for the sale to each of 462,570 newly-issued shares of the Company's common
stock. The purchase price was $75.664 per share, or an aggregate purchase price
of $35 million each. No underwriters or placement agents were involved in the
purchase and sale of the securities. The sale of the securities was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, as
sales to accredited investors in a private placement. The Company agreed to
register the resale of the shares of common stock issued in the private
placement and filed a registration statement on Form S-3 with the Securities and
Exchange Commission on March 28, 2001, which was declared effective on April 3,
2001. The transactions contemplated under the Stock Purchase Agreements closed
on January 30, 2001. In conjunction with the Stock Purchase Agreements, the
Company entered into collaborations with Genentech and Roche. These
collaborations are discussed in more detail in Part II, Item 5 of this report.
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 14, 2001. The
following nine directors were elected:
Votes For Votes Withheld
--------- --------------
1. Colin Goddard, Ph.D. 23,295,519 5,574,688
2. Edwin A. Gee, Ph.D. 25,145,876 3,724,331
3. G. Morgan Browne 25,146,856 3,723,351
4. John H. French II 25,146,039 3,724,168
5. Daryl K. Granner, M.D. 25,137,736 3,732,471
6. Walter M. Lovenberg, Ph.D. 25,138,219 3,731,988
7. Viren Mehta 25,131,499 3,738,708
8. Sir Mark Richmond 25,146,316 3,723,891
9. John P. White 25,075,340 3,794,867
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In addition, the appointment of KPMG LLP as auditors for fiscal year ending
September 30, 2001 was ratified (28,847,847 shares voted in favor, 9,650 shares
voted against, 12,710 shares abstained, and no broker non-votes).
ITEM 5. OTHER INFORMATION
Collaborations with and Sale of Stock to Roche and Genentech
On January 8, 2001, the Company entered into certain agreements (the
"Collaboration Agreements") with Genentech, Inc. ("Genentech") and F.Hoffmann-La
Roche Ltd ("Roche") for the global co-development and commercialization of the
Company's lead anti-cancer drug, OSI-774. The Collaboration Agreements consist
of a Development and Marketing Collaboration Agreement between the Company and
Genentech (the "OSI/Genentech Agreement"); a Development Collaboration and
Licensing Agreement between the Company and Roche (the "OSI/Roche Agreement");
and a Tripartite Agreement by and among the Company, Genentech and Roche (the
"Tripartite Agreement"). The Company received upfront fees of $25 million
related to these agreements, which will be recognized evenly over the expected
three-year term of the Company's required research and development efforts under
these agreements.
Under the OSI/Genentech Agreement, the Company and Genentech agreed to
collaborate in the product development of OSI-774 with the goal of obtaining
regulatory approval for commercial marketing and sale in the United States of
products resulting from the collaboration. Under the OSI/Genentech Agreement,
the parties established a joint steering committee composed of representatives
from each of the Company and Genentech. The responsibility of the joint steering
committee is, among other things, to approve overall strategy of the
collaboration; review and approve development, clinical trial strategies and
budgets; review and approve manufacturing activities; review and approve
marketing and sales budgets; and perform other similar functions. The parties
have also established a joint project team responsible for formulating overall
development plans and budgets.
The parties will conduct clinical trials of indications for licensed products as
defined in the OSI/Genentech Agreement in accordance with such agreement.
Consistent with the parties' development plan under the OSI/Genentech Agreement,
and with the approval of the joint steering committee, the parties will agree as
to who will own and be responsible for the filing of drug approval applications
with the Food and Drug Administration other than the first new drug application
which the Company will own and be responsible for filing and the first
supplemental new drug application which the Company will have the option to own
and be responsible for filing. Genentech will have responsibility for the design
and implementation of all product launch activities and the promotion, marketing
and sales of all products resulting from the collaboration in the United States,
its territories and Puerto Rico, while the Company will have certain
co-promotion rights. Genentech will pay the Company certain milestone payments
and the Company will share equally in the operating profits or losses on
products resulting from the collaboration.
Under the OSI/Genentech Agreement, the Company granted to Genentech a
non-transferable (except under certain circumstances), non-sublicensable (except
under certain circumstances), co-
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exclusive license under the Company's patents related to OSI-774 to use, sell,
offer for sale and import products resulting from the collaboration. In
addition, Genentech granted to the Company a non-transferable (except under
certain circumstances), non-sublicensable (except under certain circumstances),
co-exclusive license to certain patents held by Genentech to use, make, have
made, sell, offer for sale and import products resulting from the collaboration.
Each party is generally responsible for its own patent filings. In addition,
each party, generally, has the right, but not the obligation, to institute,
prosecute and control against patent infringement claims. The term of the
OSI/Genentech Agreement continues until the date on which the parties are no
longer entitled to receive a share of the operating profits or losses on any
products resulting from the collaboration. The OSI/Genentech Agreement is
subject to early termination in the event of certain defaults by either party
and early termination by Genentech under certain circumstances.
Under the OSI/Roche Agreement, the Company granted to Roche a license under the
Company's intellectual property rights with respect to OSI-774. Roche will
collaborate with the Company and Genentech in the product development of OSI-774
and will be responsible for future marketing and commercialization of OSI-774
outside of the United States in certain territories as defined in the OSI/Roche
Agreement. The grant is a royalty-bearing, non-transferable (except under
certain circumstances), non-sublicensable (except with consent), sole and
exclusive license to use, sell, offer for sale and import products resulting
from the development of OSI-774 in the world, other than the territories covered
by the OSI/Genentech Agreement. In addition, Roche has the right, but not the
obligation, to manufacture OSI-774 for its territory, subject to certain
exceptions. Roche will pay milestone and royalty payments to the Company. The
Company has primary responsibility for patent filings for the basic patents
protecting OSI-774, and, in addition, has the right, but not the obligation, to
institute, prosecute and control against patent infringement claims. The term of
the OSI/Roche Agreement continues until the date on which the Company is no
longer entitled to receive a royalty on products resulting from the development
of OSI-774. The OSI/Roche Agreement is subject to early termination in the event
of certain defaults by either party. In addition, after two and one half years
from the effective date, Roche may terminate the agreement on a
country-by-country basis. OSI may also have the right to terminate the agreement
on a country-by-country basis if Roche has not launched or marketed a product in
such country under certain circumstances.
Under the Tripartite Agreement, the Company, Genentech and Roche have agreed to
establish a structure which is intended generally to result in the optimization
of the use of each party's resources to develop OSI-774 in certain countries
around the world, and share certain global development costs on an equal basis;
to share information generated under a global development plan, as defined in
the Tripartite Agreement; to facilitate attainment of necessary regulatory
approvals of OSI-774 products for commercial marketing and sale in the world;
and to work together on such matters as the parties agree from time to time
during the development of OSI-774. The Tripartite Agreement requires each party
to spend equally up to a specified amount for the further development of
OSI-774. Under the Tripartite Agreement, the parties have established a global
development committee composed of representatives from each party. The global
development committee is generally responsible for, among other things,
approving material changes to the global development plan, including the annual
budget; overseeing execution of the global development plan; resolving disputes
concerning overall strategy or funding; and performing other similar
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functions. The parties have also established a liaison team to work with the
teams organized under the OSI/Roche and OSI/Genentech Agreements. The
responsibilities of the liaison team include coordination of pre-clinical
activities, clinical team activity, regulatory activity, manufacturing activity,
and communication and publication strategy. In addition, the liaison team must
prepare budgets and updates to present to the global development committee and
prioritize and allocate the supply of OSI-774. Each party may at its own expense
conduct clinical and pre-clinical activities for additional indications for
OSI-774 not called for under the global development plan, subject to certain
conditions. The Tripartite Agreement will terminate when either the
OSI/Genentech Agreement or the OSI/Roche Agreement terminates. The transactions
contemplated under the Collaboration Agreements closed on January 30, 2001.
Concurrently with the execution of the Collaboration Agreements, the Company
entered into the Stock Purchase Agreements described under Part II, Item 2 of
this report.
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)
4.1 Stock Purchase Agreement, dated January 8,
2001, by and between OSI Pharmaceuticals, Inc.
and Genentech, Inc. (3)
4.2 Stock Purchase Agreement, dated January 8,
2001, by and between OSI Pharmaceuticals, Inc.
and Roche Holdings, Inc. (3)
*10.1 Development and Marketing Collaboration
Agreement, dated January 8, 2001, between OSI
Pharmaceuticals, Inc. and Genentech, Inc. (3)
*10.2 Development Collaboration and Licensing
Agreement, dated January 8, 2001, between OSI
Pharmaceuticals, Inc. and F. Hoffmann-La Roche
Ltd (3)
*10.3 Tripartite Agreement, dated January 8, 2001, by
and among OSI Pharmaceuticals, Inc., Genentech,
Inc. and F. Hoffmann-La Roche Ltd (3)
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(1) Included as an exhibit to the Company's
quarterly report on Form 10-Q for the quarter
ended December 31, 2000, filed on February 14,
2001, and incorporated herein by reference.
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(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.
(3) Included as an exhibit to the Company's current
report on Form 8-K, filed on February 14, 2001,
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 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 February 14, 2001
with the Securities and Exchange Commission via EDGAR, pertaining to
collaborations with and sale of stock to Roche and Genentech. The
earliest event covered by the report occurred on January 8, 2001.
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27
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 3, 2001 /s/ Colin Goddard, Ph.D.
---------------------------------
Colin Goddard, Ph.D.
Chairman of the Board and
Chief Executive Officer
Date: May 3, 2001 /s/ Robert L. Van Nostrand
---------------------------------
Robert L. Van Nostrand
Vice President and Chief
Financial Officer (Principal
Financial Officer)
28
EXHIBIT INDEX
Exhibit No. Description
3.1 Certificate of Incorporation, as amended (1)
3.2 Amended and Restated By-Laws (2)
4.1 Stock Purchase Agreement, dated January 8, 2001, by and
between OSI Pharmaceuticals, Inc. and Genentech, Inc. (3)
4.2 Stock Purchase Agreement, dated January 8, 2001, by and
between OSI Pharmaceuticals, Inc. and Roche Holdings, Inc.
(3)
*10.1 Development and Marketing Collaboration Agreement, dated
January 8, 2001, between OSI Pharmaceuticals, Inc. and
Genentech, Inc. (3)
*10.2 Development Collaboration and Licensing Agreement, dated
January 8, 2001, between OSI Pharmaceuticals, Inc. and F.
Hoffmann-La Roche Ltd (3)
*10.3 Tripartite Agreement, dated January 8, 2001, by and among
OSI Pharmaceuticals, Inc., Genentech, Inc. and F.
Hoffmann-La Roche Ltd (3)
------------------------------
(1) Included as an exhibit to the Company's quarterly report
on Form 10-Q for the quarter ended December 31, 2000,
filed on February 14, 2001, 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.
(3) Included as an exhibit to the Company's current report on
Form 8-K, filed on February 14, 2001, 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 Exchange Commission pursuant
to Rule 24b-2 under the Securities Exchange Act of 1934,
as amended.