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 December 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
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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.)
58 South Service Road, Suite 110, Melville, New York 11747
(Address of principal executive offices) (Zip Code)
631-962-2000
(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 January 31, 2002 the registrant had outstanding 36,159,312 shares of common
stock, $.01 par value.
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONTENTS
Page No.
PART I. FINANCIAL INFORMATION................................................................................1
Item 1. Financial Statements............................................................................1
Consolidated Balance Sheets
- December 31, 2001 (unaudited) and September 30, 2001..........................................1
Consolidated Statements Of Operations
-Three Months Ended December 31, 2001 and 2000 (unaudited)......................................2
Consolidated Statements Of Cash Flows
-Three Months Ended December 31, 2001 and 2000 (unaudited)......................................3
Notes to Consolidated Financial Statements......................................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations..................................................................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................18
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..............................................................................20
Item 6. Exhibits and Reports on Form 8-K...............................................................21
SIGNATURES ..................................................................................................22
EXHIBIT INDEX ...............................................................................................23
-i-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
2001 2001
-------------- ---------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 67,933,251 $ 225,149,872
Investment securities........................................................ 331,513,645 326,328,589
Receivables, including amounts due from related parties of $2,478,375 and
$2,359,625 and trade receivables of $448,497 and $9,702 at December 31,
2001 and September 30, 2001, respectively.................................. 3,134,953 2,577,407
Interest receivable.......................................................... 3,720,966 3,820,027
Grants receivable............................................................ 6,193 235,622
Prepaid expenses and other................................................... 3,715,162 3,120,605
-------------- --------------
Total current assets................................................... 410,024,170 561,232,122
-------------- --------------
Property, equipment and leasehold improvements -- net........................... 35,184,898 25,347,297
Compound library assets -- net.................................................. 732,498 923,668
Other assets.................................................................... 1,730,823 502,019
Intangible assets -- net........................................................ 39,052,612 3,684,081
-------------- -------------
$ 486,725,001 $ 591,689,187
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........................................ $ 13,775,099 $ 18,063,378
Unearned revenue -- current; including amounts received in advance from
related parties of $9,216,181 and $8,676,571 as of December 31, 2001 and
September 30, 2001, respectively........................................... 10,391,236 9,621,799
Loans and capital leases payable -- current.................................. 517,436 111,136
-------------- --------------
Total current liabilities.............................................. 24,683,771 27,796,313
-------------- --------------
Other liabilities:
Unearned revenue -- long-term; including amounts received in advance from
related parties of $8,577,381 and $10,678,572 as of December 31, 2001 and
September 30, 2001, respectively........................................... 9,233,631 11,553,571
Loans and capital leases payable -- long-term................................ 241,476 51,703
Deferred acquisition costs................................................... -- 375,000
Accrued postretirement benefit cost.......................................... 2,155,254 2,080,254
-------------- --------------
Total liabilities...................................................... 36,314,132 41,856,841
-------------- --------------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; no shares
issued at December 31, 2001 and September 30, 2001......................... -- --
Common stock, $.01 par value; 200,000,000 shares authorized; 36,998,702
and 35,901,318 shares issued at December 31, 2001 and September 30, 2001,
respectively .............................................................. 369,987 359,013
Additional paid-in capital................................................... 707,637,835 664,095,048
Deferred compensation........................................................ (3,631,077) (3,921,845)
Accumulated deficit.......................................................... (248,125,687) (105,743,621)
Accumulated other comprehensive income....................................... 592,356 1,476,296
-------------- --------------
456,843,414 556,264,891
Less: treasury stock, at cost; 939,618 shares at December 31, 2001 and
September 30, 2001,........................................................... (6,432,545) (6,432,545)
--------------- --------------
Total stockholders' equity............................................. 450,410,869 549,832,346
-------------- --------------
Commitments and contingencies
$ 486,725,001 $ 591,689,187
============== ==============
See accompanying notes to consolidated financial statements.
1
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
----------------------------------
2001 2000
------------- --------------
Revenues:
Collaborative program revenues,
principally from related parties..................... $ 3,115,622 $ 5,268,416
License and related revenues, including $2.1 million
from related parties in 2001......................... 2,343,749 293,750
Other research revenues................................ 432,818 132,788
-------------- --------------
5,892,189 5,694,954
-------------- --------------
Expenses:
Research and development .............................. 17,253,998 10,570,574
Acquired in-process research and development (see note 3) 130,200,000 --
Production and service costs........................... 49,803 129,365
Selling, general and administrative.................... 5,805,826 2,950,133
Amortization of intangibles............................ 309,381 185,473
-------------- --------------
153,619,008 13,835,545
-------------- --------------
Loss from operations............................... (147,726,819) (8,140,591)
Other income (expense):
Net investment income.................................. 4,574,141 5,139,524
Other income (expense) -- net.......................... 770,612 (20,648)
-------------- ---------------
Net loss before cumulative effect of accounting change.... (142,382,066) (3,021,715)
Cumulative effect of the change in accounting for the
recognition of upfront fees.......................... -- (2,625,000)
-------------- --------------
Net loss.................................................. $ (142,382,066) $ (5,646,715)
============== ==============
Weighted average number of shares of common stock outstanding:
Basic.................................................. 36,079,172 31,403,369
============== ==============
Diluted................................................ 36,079,172 31,403,369
============== ==============
Net loss per weighted average share of common stock outstanding:
Basic:
Before cumulative effect of accounting change........ $ (3.95) $ (0.10)
Cumulative effect of accounting change............... -- (0.08)
-------------- --------------
After cumulative effect of accounting change........ $ (3.95) $ (0.18)
============== ==============
Diluted:
Before cumulative effect of accounting change........ $ (3.95) $ (0.10)
Cumulative effect of accounting change............... -- (0.08)
-------------- --------------
After cumulative effect of accounting change......... $ (3.95) $ (0.18)
============== ==============
Pro forma information:
Net loss, assuming new revenue recognition policy is
applied retroactively.................................. $ (3,021,715)
==============
Basic loss per share...................................... $ (0.10)
==============
Diluted loss per share.................................... $ (0.10)
==============
See accompanying notes to consolidated financial statements.
2
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
------------------------------------
2001 2000
--------------- ----------------
Cash flow from operating activities:
Net loss................................................ $ (142,382,066) $ (5,646,715)
Adjustments to reconcile net loss to net cash
used in operating activities:
In-process research and development charge on
acquisition of Gilead's oncology assets............ 130,200,000 --
Loss on sale of investments.......................... 269,243 --
Depreciation and amortization........................ 1,447,510 777,679
Amortization of library assets....................... 191,170 466,548
Amortization of intangibles assets................... 310,977 185,473
Accretion of deferred acquisition costs.............. -- 4,870
Non-cash compensation charges........................ 1,887,235 2,124,354
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
business acquisition:
Receivables.......................................... (556,556) (1,581)
Interest receivable.................................. 99,061 (1,444,403)
Grants receivable.................................... 229,429 362,331
Prepaid expenses and other current assets............ (609,652) 259,780
Other assets......................................... (565,635) 5,053
Accounts payable and accrued expenses................ (5,755,077) (2,281,009)
Unearned revenue..................................... (1,550,493) (432,592)
Accrued postretirement benefit cost.................. 75,000 75,000
-------------- --------------
Net cash used in operating activities..................... (16,709,854) (2,920,212)
--------------- ---------------
Cash flows from investing activities:
Payments for acquisition of Gilead's oncology assets.... (134,942,156) --
Purchases of investments................................ (85,624,065) (147,671,588)
Maturities and sales of investments..................... 79,540,347 13,052,000
Additions to property, equipment and leasehold improvements (942,764) (354,082)
--------------- ---------------
Net cash used in investing activities..................... (141,968,638) (134,973,670)
-------------- --------------
Cash flows from financing activities:
Net proceeds from issuance of common stock.............. -- 404,307,775
Proceeds from exercise of stock options, stock warrants,
employee purchase plan, and other..................... 1,582,294 714,611
Payments on loans payable............................... (31,806) (39,283)
-------------- --------------
Net cash provided by financing activities................. 1,550,488 404,983,103
-------------- --------------
Net increase (decrease) in cash and cash equivalents...... (157,128,004) 267,089,221
Effect of exchange rate changes on cash and cash equivalents (88,617) (28,989)
Cash and cash equivalents at beginning of year............ 225,149,872 48,392,635
-------------- --------------
Cash and cash equivalents at end of year.................. $ 67,933,251 $ 315,452,867
============== ==============
Non-cash activities:
Issuance of common stock in satisfaction of deferred
acquisition costs..................................... $ 375,000 $ --
============== =============
Issuance of common stock in connection with acquisition
of certain assets from Gilead......................... $ 40,000,000 $ --
============== =============
See accompanying notes to consolidated financial statements.
3
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 (the "Company") as of December 31,
2001, their results of operations for the three months ended December 31, 2001
and 2000 and their cash flows for the three months ended December 31, 2001 and
2000. Certain reclassifications have been made to the prior period 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,
2001. Results for interim periods are not necessarily indicative of results for
the entire year.
(2) Revenue Recognition
Prior to October 1, 2000, the Company recognized all nonrefundable up-front
license fees, including up-front 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 up-front nonrefundable technology access and other
up-front fees to recognize such fees over the term of the related research
collaboration period in accordance with the guidance provided in the Securities
and Exchange Commission's Staff Accounting Bulletin No. 101 - "Revenue
Recognition in Financial Statements," as amended ("SAB No. 101"). The Company
received a total of $25 million in up-front fees from Genentech and Roche in
January 2001 which is being recognized evenly over the expected three-year term
of the Company's required research and development efforts under the terms of
the agreements.
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, effective October 1, 2000, resulted in a $2.6 million cumulative effect of
a change in accounting principle related to the Tanabe fee and was reported as a
charge in the quarter ended December 31, 2000. The cumulative effect was
initially recorded as unearned revenue and is being recognized as revenue over
the remaining term of the collaboration agreement.
Collaborative program revenues represent funding arrangements for 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
4
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 up-front fees.
During the quarter ended December 31, 2000, the impact of the change in
accounting principle increased the net loss by $2.4 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 $0.2 million of related deferred revenue that was
recognized as revenue during the quarter ended December 31, 2000 ($0.01 per
share).
(3) Acquisition
On December 21, 2001, the Company acquired certain assets from Gilead Sciences,
Inc. ("Gilead"), pursuant to the terms of an Asset Purchase Agreement, dated as
of November 26, 2001. Gilead is a biopharmaceutical company that discovers,
develops, manufactures and commercializes proprietary therapeutics for
infectious diseases. The assets purchased by the Company include: (a)
a pipeline of three clinical oncology candidates, (b) certain related
intellectual property, and (c) rights to Gilead's leased facilities located in
Boulder, Colorado, as well as leasehold improvements and certain fixed assets.
In connection with the acquisition, the Company retained 121 Gilead employees
representing expertise in clinical operations, regulatory affairs, toxicology
and in vivo pharmacology. The results of operations of Gilead's oncology assets
have been included in the consolidated statement of operations as of the date of
the closing. In consideration for the assets, the Company paid approximately
$134.9 million in cash, which includes professional fees and the assumption of
certain liabilities, and issued 924,984 shares of common stock, valued at $40
million. The value of the 924,984 common shares issued was determined based on
the closing price of the Company's stock on the date of closing. The Company
would also be obligated to pay contingent consideration of up to an additional
$30 million in either cash or a combination of cash and common stock, at its
option, upon the achievement of certain milestones related to the development of
OSI-211 (formerly NX211), the most advanced of Gilead's oncology product
candidates acquired by the Company. Additionally, the Company assumed certain
royalty and milestone obligations to third parties in connection with the
oncology candidates acquired as part of the acquisition.
The acquisition was accounted for under the purchase method of accounting. The
purchase price has been allocated to the assets and liabilities assumed based on
the fair values as of the date of the acquisition. The Company obtained a
third-party valuation to assist management in determining the fair value of
certain assets. The excess of the purchase price paid over the fair value of the
net assets acquired representing goodwill was approximately $35.7 million. In
accordance with Financial Accounting Standards Board SFAS, No. 142, "Goodwill
and Other Intangible Assets," which is applicable to acquisitions occurring
after July 1, 2001, such goodwill will not be amortized. The value assigned to
the acquired in-process research and development was determined by identifying
those acquired in-process research projects for
5
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
which, (a) technological feasibility had not been established at the acquisition
date, (b) there was no alternative future use, and (c) the fair value was
estimable based on reasonable assumptions. The acquired in-process research and
development ("R&D") was valued at approximately $130.2 million and expensed at
the acquisition date in the accompanying consolidated statement of operations
for the three months ended December 31, 2001. The portion of the purchase price
assigned to the acquired in-process R&D was allocated to the following three
clinical oncology candidates: OSI-211 (formerly NX211), a liposomal lurtotecan
($19.9 million), OSI-7904 (formerly GS7904L), a liposomal thymidylate ($13.4
million) and OSI-7836 (formerly GS7836), a Gemzar(C) analog ($96.9 million).
The purchase price was allocated as follows (in thousands):
In-process R&D acquired............................... $130,200.0
Fixed assets.......................................... 10,528.7
Goodwill.............................................. 35,727.9
Prepaid expenses and other assets..................... 663.5
------------
Total assets and in-process R&D acquired.............. 177,120.1
Less liabilities assumed.............................. (2,177.6)
------------
Cash and common stock paid............................ $174,942.5
============
The value of the acquired in-process R&D was determined by estimating the
projected net cash flows related to products under development, based upon the
future revenues to be earned upon commercialization of such products. In
determining the value of the in-process R&D, the assumed commercialization dates
for these products ranged from 2004 to 2008. Given the risks associated with the
development of new drugs, the revenue and expense forecasts were
probability-adjusted to reflect the risk of advancement through the approval
process. The risk adjustments applied were based on each compound's stage of
development at the time of assessment and the historical probability of
successful advancement for compounds at that stage. These modeled cash flows
were discounted back to their net present value. The projected net cash flows
from such projects were based on management's estimates of revenues and
operating profits related to such projects. The in-process R&D was valued based
on the income approach that focuses on the income-producing capability of the
assets. The underlying premise of this approach is that the value of an asset
can be measured by the present worth of the net economic benefit (cash receipts
less cash outlays) to be received over the life of the asset. Significant
assumptions and estimates used in the valuation of in-process R&D included: the
stage of development for each of the three projects; future revenues; growth
rates for each product; product sales cycles; the estimated life of a product's
underlying technology; future operating expenses; probability adjustments to
reflect the risk of developing the acquired technology into commercially viable
products; and a discount rate of 18% to reflect present value.
In connection with the acquisition, the Company adopted a Non-Qualified Stock
Option Plan for Former Employees of Gilead Sciences, Inc. The Company granted
ten-year options to
6
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
purchase an aggregate of 693,582 shares of common stock of the Company at a
purchase price of $45.01 per share, which represents the fair value of the
Company's stock at the date granted. The options vest one-third in a year from
the date of grant and monthly thereafter for twenty-four months.
The following pro forma financial information presents a summary of the
consolidated results of operations of the Company for the three months ended
December 31, 2001 and 2000 assuming the acquisition had taken place as of
October 1, 2001 and 2000, respectively (in thousands, except per share
information):
For the three months ended
December 31,
----------------------------------
2001 2000
-------------- ------------
Revenues............................................................... $ 5,892 $ 5,695
Loss before non-recurring charge related to the
acquisition and cumulative effect of accounting change ............ (21,389) (14,178)
Net loss before non-recurring charge related to the
acquisition ...................................................... (21,389) (16,803)
Basic and diluted net loss per share:
Before cumulative effect of accounting change...................... $ (0.58) $ (0.44)
Cumulative effect of accounting change............................. $ -- $ (0.08)
Net loss before non-recurring charge related to the
acquisition........................................................ $ (0.58) $ (0.52)
The pro forma information includes the historical unaudited results of Gilead's
oncology assets for the period from October 1, 2001 through December 21, 2001
and for the three months ended December 31, 2000. The pro forma financial
information includes adjustments to the Company's historical results to reflect
incremental depreciation expense related to the mark-up of fixed assets to fair
value, reduced interest income generated from cash that was used for the
acquisition, additional interest expense and the issuance of 924,984 shares of
common stock and excludes the nonrecurring charge of $130.2 million related to
the acquired in-process R&D. The pro forma information does not purport to be
indicative of operating results that would have been achieved had the
acquisition taken place on the dates indicated or the results that may be
obtained in the future.
7
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) Comprehensive (Loss) Income
Comprehensive loss for the three months ended December 31, 2001 and 2000 was as
follows:
For the three months ended
December 31,
------------
2001 2000
---- ----
Net loss............................................... $(142,382,066) $(5,646,715)
Other comprehensive income (loss):
Foreign currency translation adjustments.......... (254,521) 34,071
Unrealized holding gain (loss) arising
during period................................. (898,663) 55,060
Less: Reclassification adjustment for
losses realized in income..................... 269,243 --
-------------- -----------
(883,941) 89,131
-------------- -----------
Total comprehensive loss............................... $(143,266,007) $(5,557,584)
============== ===========
The components of accumulated other comprehensive income were as follows:
December 31, September 30,
2001 2001
---- ----
Cumulative foreign currency translation
adjustment........................................ $ (1,269,354) $ (1,014,834)
Unrealized gains on investments........................ 1,861,710 2,491,130
------------ -------------
Accumulated other comprehensive income................. $ 592,356 $ 1,476,296
============ ============
8
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(5) Net Loss per Common Share
A reconciliation between the numerators and the denominators of the basic and
diluted loss per share computation is as follows:
For the three months ended
December 31,
------------
2001 2000
---- ----
Net loss............................................... $(142,382,066) $(5,646,715)
============== ===============
Weighted average common shares......................... 36,079,172 31,403,369
Effect of dilutive stock options....................... -- --
-------------- ---------------
Weighted average common and potential common shares outstanding
36,079,172 31,403,369
=============== ==============
Basic loss per share................................... $ (3.95) $ (.18)
=============== ==============
Diluted loss per share................................. $ (3.95) $ (.18)
=============== ==============
For the three months ended December 31, 2001, all stock options were not
included in the net loss per share calculation because their effect would have
been anti-dilutive. For the three months ended December 31, 2001 and 2000,
3,596,481 and 3,186,419 respectively, stock options were not included in the net
loss per share calculation because they would have been anti-dilutive.
(6) Sale of Diagnostics Business
On November 30, 1999, the Company sold assets of its diagnostics business to
Bayer Corporation including the assets of the Company's wholly-owned diagnostics
subsidiary, 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. Under the terms
of the agreement, the Company received a contingent payment of $1.0 million in
December 2001, which is included in other income for the three months ended
December 31, 2001.
(7) Subsequent Event - Note Offering
On February 1, 2002, the Company issued $200 million aggregate principal amount
of convertible senior subordinated notes ("Notes") in a private placement for
proceeds to the Company, after deducting the initial purchasers' discount and
before out-of-pocket expenses, of approximately $193.5 million. The Notes bear
interest at 4% per annum, payable semi-annually, and mature on February 1, 2009.
The Notes are convertible into shares of the
9
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Company's common stock at a conversion price of $50 per share, subject to normal
and customary adjustments such as stock dividends or other dilutive
transactions. The Company may redeem the Notes, in whole or in part, at any time
before February 1, 2005 if the closing price of the Company's common stock has
exceeded 150% of the conversion price then in effect for a specified period of
time ("Provisional Redemption"). Upon any such Provisional Redemption, the
Company is required to pay interest that would have been due through February 1,
2005. The Company may also redeem some or all of the Notes at any time on or
after February 1, 2005 if the closing price of the Company's common stock has
exceeded 140% of the conversion price then in effect for a specified period of
time. The Company pledged $22.9 million of U.S. government securities which will
be sufficient upon receipt of scheduled principal and interest payments to
provide for the payment in full of the first six scheduled interest payments on
the Notes when due.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
OVERVIEW
We are a biopharmaceutical company primarily focused on the discovery,
development and commercialization of novel products for the treatment of cancer.
We have built a pipeline of discovery programs and drug candidates addressing
unmet needs in cancer complemented by selected opportunities arising from our
extensive drug discovery research programs that represent significant commercial
opportunities outside of cancer, particularly diabetes. We have seven candidates
in clinical trials and seven candidates in late stage pre-clinical development.
Our lead product candidate, Tarceva(TM) is a potent, selective and
orally active, small molecule inhibitor of the epidermal growth factor receptor,
or EGFR. A high proportion of the approximately 1.2 million new U.S. solid tumor
patients each year may benefit from EGFR targeted drugs. We, therefore, believe
that this new class of EGFR inhibitors has significant market potential.
Tarceva(TM) has demonstrated encouraging indications of activity in cancer and
has exhibited a well-tolerated side-effect profile as a monotherapy in three
open-label Phase II clinical trials for the treatment of non-small cell lung,
ovarian and head and neck cancers. In January 2001, we entered into concurrent
agreements with Genentech, Inc. and Roche for the global co-development and
commercialization of Tarceva(TM) and have since initiated Phase III clinical
trials in pancreatic cancer and lung cancer . To date, we have received up-front
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 the commercialization of Tarceva(TM) 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 are split equally among
the three parties.
In cancer, we are building the infrastructure and capabilities required
for the full commercialization of products arising from our cancer research and
development efforts. In our diabetes and other proprietary programs, 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 significant
milestone and royalty payments on product sales.
To date, none of our proprietary or collaborative programs have
resulted in commercial products; 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.
11
In November 2001, we received the return of full commercial rights to
OSI-754 (formerly CP-609,754), a farnesyl transferase inhibitor, that was
undergoing Phase I trials with Pfizer Inc. OSI-754 was jointly discovered in our
collaboration with Pfizer as part of our longstanding alliance in cancer drug
discovery and was being developed by Pfizer as a targeted therapy for use in
major solid tumor indications (i.e., colon and lung). We have plans to develop
OSI-754 for tumors such as bladder cancer. If the drug is successfully
developed, we will pay Pfizer a royalty on sales.
On December 21, 2001, we acquired certain assets from Gilead Sciences,
Inc., which include a pipeline of three clinical oncology candidates and certain
related intellectual property, as well as Gilead's Boulder, Colorado operations,
including clinical research and drug development personnel, infrastructure and
facilities. The 121 Gilead employees retained by us represent an extensive level
of expertise in clinical development, regulatory affairs, toxicology and in vivo
pharmacology. The acquisition forms a key part of management's strategy to build
a completely integrated and high quality drug discovery, development and
commercial organization in oncology. The acquisition has complemented and
enhanced our ability to successfully execute key components of our business
strategy, including carrying out our obligations for the development and
registration of Tarceva(TM) in our alliance with Genentech and Roche. In
consideration for these assets, we paid Gilead $130 million in cash and issued
to Gilead 924,984 shares of common stock valued at $40 million as of the closing
date. We would also be obligated to pay up to an additional $30 million in
either cash or a combination of cash and common stock upon the achievement of
certain milestones related to the development of OSI-211 (formerly NX211), the
most advanced of Gilead's oncology product candidates acquired by us. We are
also assuming certain royalty and milestone obligations to third parties in
connection with these oncology products.
For the three months ended December 31, 2001, we had a net loss of
$142.4 million compared to a net loss of $5.6 million for the three months ended
December 31, 2000. This increase was primarily related to the in-process
research and development charge of $130.2 million in connection with the
acquisition of Gilead's oncology assets, the development program associated with
Tarceva(TM), and an increased focus on our proprietary research programs. The
increase in net loss was slightly offset by the recognition of $2.1 million of
the up-front fees from Genentech and Roche, and the $1.0 million contingent
payment received from Bayer Corporation, in connection with the sale of the
diagnostic business in November 1999. Excluding the non-recurring charge of
$130.2 million related to the in-process R&D acquired, the net loss for the
three months ended December 31, 2001 would have been $12.2 million, or $0.34 per
share. Included in the net loss for the three months ended December 31, 2000 was
a non-cash charge of $2.6 million related to the cumulative effect of a change
in accounting principle for the recognition of up-front fees upon the adoption
of the Securities and Exchange Commission 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 three months
ended December 31, 2000 would have been $3.0 million.
12
REVENUES
Revenues for the three months ended December 31, 2001 were
approximately $5.9 million, an increase of $197,000 or 3% compared to revenues
of $5.7 million for the three months ended December 31, 2000. This increase
related primarily to the recognition of $2.1 million in up-front fees from
Genentech and Roche for the three months ended December 31, 2001, which was
offset by a decrease in collaborative revenues.
Collaborative program revenues decreased approximately $2.2 million or
41% for the three months ended December 31, 2001 compared to the three months
ended December 31, 2000. This decrease was primarily due to the conclusion of
our funded collaborations with Solvay Pharmaceuticals, B.V. in December 2000 and
Pfizer in April 2001 and a decrease in revenues from the Tanabe Seiyaku Co.,
Ltd. and Anderm Research Corporation collaborations. As we focus our business
away from collaborative-based to independent drug discovery and development, we
expect collaborative revenues to continue to decrease.
License and related revenues for the three months ended December 31,
2001 increased approximately $2.0 million compared to the three months ended
December 31, 2000. The increase relates to the recognition of up-front fees
received from Genentech and Roche of $2.1 million during the three months ended
December 31, 2001. In accordance with the provisions of Staff Accounting
Bulletin No. 101, the $25 million up-front fee received from Genentech and Roche
is being recognized evenly over the expected three-year development phase of our
contractual agreement.
Other research revenues for the three months ended December 31, 2001
increased approximately $300,000 compared to the three months ended December 31,
2000. The increase was primarily related to certain administrative services
provided to British Biotech plc during the transitional period. This increase
was offset by a decrease in grant-related revenues.
EXPENSES
Operating expenses increased approximately $139.8 million for the three
months ended December 31, 2001 compared to three months ended December 31, 2000.
Operating expenses primarily include: (i) research and development expenses,
which include expenses related to the development of our lead clinical
candidate, Tarceva(TM), and proprietary and collaborative-based research
expenses; (ii) the acquired in-process research and development; and (iii)
selling, general and administrative expenses. Research and development expenses
increased approximately $6.7 million for the three months ended December 31,
2001 compared to the three months ended December 31, 2000. This increase was
primarily related to the clinical development of Tarceva(TM) under our
Tripartite Agreement with Genentech and Roche and our increased investment in
proprietary drug discovery programs, including cancer and diabetes. Also
included in research and development expenses for the three months ended
December 31, 2001, is a charge of approximately $700,000 related to the license
agreement with Cydex, Inc. for the CAPTISOL(R) technology. The licensing of the
CAPTISOL(R) technology allows us to
13
evaluate intravenous (IV) and other liquid formulations for Tarceva(TM) that
offer additional treatment choices to physicians and patients. Under the terms
of the license agreement, we agreed to pay royalties on net sales of the liquid
formulation of Tarceva(TM) in addition to certain milestone payments. Our
ability to shift our resources from collaborative research efforts to
proprietary efforts has been enhanced as a result of the conclusion of our
Solvay Pharmaceuticals, B.V. and Pfizer collaborations in December 2000 and
April 2001, respectively. Certain non-cash, stock option based compensation
charges also impacted research and development expenses, 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 December 31, 2001 resulted in
compensation expense of approximately $1.3 million for the three months ended
December 31, 2001, related to stock options issued to consultants involved in
research and development activities. Deferred compensation for stock options
issued to non-employee consultants was approximately $934,000 as of December 31,
2001, which will be recognized as compensation expense over the vesting period
of the options.
For the three months ended December 31, 2001, we recorded approximately
$364,000 in compensation expense related to stock options granted in September
2000 to our President and Head of Research and Development. As a result of his
resignation as an employee effective February 1, 2002, no additional
compensation expense will be recorded subsequent to February 1, 2002 and the
remaining deferred compensation will be reversed.
In connection with the acquisition of certain assets from Gilead, we
recorded an in-process research and development charge of $130.2 million
representing the estimated fair value of the acquired in-process technology,
that had not yet reached technological feasibility and had no
alternative future use (see note 3 to the accompanying consolidated financial
statements). We obtained a third party valuation to assist us in determining the
fair value of certain assets. The value was determined by estimating the costs
to develop the purchased in-process technology into commercially viable
products, estimating the resulting net cash flow from such projects, and
discounting the net cash flows back to their present value. These cash flows
were probability-adjusted to take into account the uncertainty surrounding the
successful development and commercialization of the acquired in-process
technology. The resulting net cash flows were based on estimated revenue, cost
of sales, research and development costs, selling, general and administrative
costs and the net cash flow reflects the assumptions that would be used by
market participants. In determining the value of the in-process research and
development, the assumed commercialization dates for these products ranged from
2004 to 2008. We believe that the assumptions used in the valuation of purchased
in-process technology represent a reasonable estimate of the future benefits
attributable to the purchased in-process technology. No assurance can be given
that actual results will not deviate from those assumptions in future periods.
14
Below is a brief description of the in-process research and development
projects we acquired from Gilead, the development status for each project and
the estimated value at the date of acquisition.
VALUE AT
ACQUISITION DATE
PROJECT PROJECT DESCRIPTION DEVELOPMENT STATUS (IN MILLIONS)
OSI-211 (formerly NX211) a liposomal formulation of lurtotecan Phase II clinical $ 19.9
trials
OSI-7904 (formerly GS7904L) a liposomal formulation of a Phase I clinical trials $ 13.4
thymidylate synthase inhibitor
OSI-7836 (formerly GS7836) a nucleoside analog of Gemzar(C) Phase I clinical trials $ 96.9
---------------
$ 130.2
As of December 31, 2001, the technological feasibility of the projects
had not yet been reached. Each project needs to successfully complete a series
of clinical trials and to receive FDA or other regulatory approvals prior to
commercialization. Our current estimates of the required investments for the
full development and registration for these next generation cytotoxic drugs
can range from $80 to $120 million per drug. There can be no assurances that
any of these projects will ever reach feasibility or develop into products that
can be marketed profitably, nor can there be assurance we will be able to
develop and commercialize these products before our competitors. If it is
determined that it is not cost beneficial to pursue the further development of
any of these projects, we may discontinue the further development of certain or
all of these projects. If these projects are not successfully developed, our
revenue and profitability may be adversely affected in future periods and the
value of the goodwill acquired may become impaired.
Selling, general and administrative expenses increased approximately
$2.9 million for the three months ended December 31, 2001 compared to the three
months ended December 31, 2000. The increases were primarily attributable to the
increased expenses for additional management and administrative personnel and
consultants, as well as an increase in facilities expenses, including relocation
cost related to the consolidation of facilities, and other professional fees
associated with expansion and corporate development activities. Consulting
expenses include the remeasurement of the value of stock options at December 31,
2001 granted to non-research and development consultants in connection with
their consulting arrangements which resulted in $195,000 in compensation expense
for the three months ended December 31, 2001. We expect that general and
administrative expenses will increase with the acquisition of Gilead's oncology
assets and as we continue to support and expand our clinical trial programs and
research and development efforts.
Amortization of intangibles increased approximately $124,000 for the
three months ended December 31, 2001 compared to the three months ended December
31, 2000. The increase related to the amortization of the capitalized workforce
and library license acquired from British Biotech.
15
OTHER INCOME AND EXPENSE
Net investment income decreased by approximately $565,000 for the three
months ended December 31, 2001 compared to the three months ended December 31,
2000. The decrease in net investment income is primarily due to a decrease in
the average rate of return on our investments for the three months ended
December 31, 2001 compared to the three months ended December 31, 2000 and to a
lesser extent due to a decrease in funds available for investments. The decrease
in funds available for investment is primarily due to the Gilead acquisition, as
more fully discussed in "Liquidity and Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, working capital, representing primarily cash,
cash equivalents and short-term investments, aggregated approximately $385.3
million compared to $533.4 million at September 30, 2001. This decrease of
approximately $148.1 million or 28% resulted primarily from the cash paid for
the acquisition of Gilead's oncology assets and related expenses and our
operating cash burn for the three months ended December 31, 2001 offset by the
cash proceeds from the exercise of stock options.
On December 21, 2001, we acquired certain assets from Gilead, pursuant
to the terms of an Asset Purchase Agreement, dated as of November 26, 2001. The
assets purchased include: (a) a pipeline of three clinical oncology candidates,
(b) related intellectual property, and (c) rights to Gilead's leased facilities
located in Boulder, Colorado, as well as leasehold improvements and certain
fixed assets. In connection with the acquisition, we retained 121 Gilead
employees. The results of operations of the acquired Gilead oncology assets have
been included in the consolidated statement of operations since the date of
closing. In consideration for the assets, we paid $134.9 million in cash, which
includes professional fees and the assumption of certain liabilities, and issued
924,984 shares of common stock, valued at $40 million. The value of the 924,984
shares of common stock issued was determined based on the closing price of our
stock on the date of closing. We would also be obligated to pay contingent
consideration of up to an additional $30 million in either cash or a combination
of cash and common stock, at our option, upon the achievement of certain
milestones related to the development of OSI-211 (formerly NX211). Additionally,
we are assuming certain royalty and milestone obligations to third parties in
connection with the oncology candidates acquired as part of the acquisition.
On February 1, 2002, we issued $200 million aggregate principal amount
of convertible senior subordinated notes in a private placement for proceeds to
us, after deducting the initial purchasers' discount and before out-of-pocket
expenses, of approximately $193.5 million. The notes bear interest at 4% per
annum, payable semi-annually, and mature on February 1, 2009. The notes are
convertible into shares of our common stock at a conversion price of $50 per
share, subject to adjustment in certain circumstances. We may redeem the notes,
in whole or in part, at any time before February 1, 2005 if the closing price of
our common stock has exceeded 150% of the conversion price then in effect for a
specified period of time. Upon any such early redemption, we are required to pay
interest that would have been due through February 1, 2005. We may also redeem
some or all of the notes at any
16
time on or after February 1, 2005 if the closing price of our common stock has
exceeded 140% of the conversion price then in effect for a specified period of
time. We pledged $22.9 million of U.S. government securities which will be
sufficient upon receipt of scheduled principal and interest payments to provide
for the payment in full of the first six scheduled interest payments on the
notes when due. With the proceeds of this issuance, our cash and investment
securities totaled approximately $580 million as of February 1, 2002. We intend
to use the proceeds from this issuance for the development of our product
pipeline, licensing and acquisition opportunities that add oncology products and
late stage drug candidates and general corporate purposes.
We expect to incur additional losses over the next several years as we
increase our investment in Tarceva(TM), OSI-754 and the development of
candidates from the Gilead acquisition and other internal proprietary programs.
Additionally, as we shift our focus toward internal drug development, we expect
collaborative revenues to decrease. To achieve profitability, we, alone or with
others, must successfully develop and commercialize our technologies and
products, conduct pre-clinical studies and clinical trials, secure 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 the private placement of senior subordinated notes, existing cash
resources, and projected funding from collaborative research and development
programs provide a strong financial base from which to fund our operations and
capital requirements for at least the next several years.
We expect our cash burn to increase over the next several years as we
invest in the clinical development of Tarceva(TM) as well as other product
candidates in our pipeline. The major expenses associated with the broad-based
Phase III development program for Tarceva(TM) are expected to occur in 2002 and
2003. We anticipate our operating cash burn will approximate $115 to $130
million for each of these years as we fulfill our obligations on the Tarceva(TM)
development program and continue our ongoing research and development
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all future business combinations. It
specifies the criteria which intangible assets acquired in a business
combination must meet in order to be recognized and reported apart from
goodwill. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives, and reviewed for
impairment in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 141 and
No. 142 are effective for fiscal years beginning on or after December 15, 2001;
however, both of these statements are effective for acquisitions and other
intangibles acquired on or after July 1, 2001. We adopted the applicable
provisions of these statements for the accounting of the
17
Gilead and the British Biotech acquisitions, which occurred after July 1, 2001.
Upon full adoption, we will evaluate our existing intangible assets
that were acquired in prior purchase business combinations, and make any
necessary reclassifications in order to conform with the new criteria in SFAS
No. 141 for recognition apart from goodwill. We will be required to reassess the
useful lives and residual values of all intangible assets acquired, and make any
necessary amortization period adjustments. In addition, we will be required to
test goodwill and, to the extent an intangible asset is identified as having an
indefinite useful life, the intangible asset for impairment in accordance with
SFAS No. 142. Any impairment loss will be measured as of the date of adoption
and recognized as the cumulative effect of a change in accounting principle. As
a result of the acquisition of certain assets from Gilead on December 21, 2001,
we have $35.7 million in goodwill as of December 31, 2001, which in accordance
with SFAS No. 142, will not be amortized. As of September 30, 2001, we had
goodwill which was fully amortized and unamortized identifiable intangible
assets in the amount of $3.7 million. We are currently assessing the impact of
the full adoption of these accounting standards.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which supercedes SFAS No. 121. SFAS
No. 144 requires, among other things, that long-lived assets be measured at the
lower of carrying amount or fair value, less cost to sell, whether reported in
continuing operations or in discontinued operations. SFAS No. 144 is effective
for fiscal years beginning after December 15, 2001 and interim periods within
those fiscal years. We are currently assessing the impact of adopting SFAS No.
144.
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 31, 2001.
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 limited
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
18
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, 2001.
At December 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 an investment portfolio containing financial
instruments of which approximately 38% have original maturities of less than 12
months. These financial instruments, principally comprised of government and
government agency obligations and 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 three months ended December 31,
2001 would have resulted in approximately a $457,000 change in our net loss. We
have not used derivative financial instruments in our investment portfolio.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On December 21, 2001, we acquired certain assets from Gilead Sciences,
Inc., pursuant to the terms of an Asset Purchase Agreement, dated as of November
26, 2001. In consideration for the assets, we paid Gilead $130 million in cash
and issued to Gilead 924,984 shares of common stock valued at $40 million as of
the closing date of the acquisition. No underwriters or placement agents were
involved in the issuance of the securities. The issuance of the securities was
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended, as a sale to an accredited investor in a private placement. We 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 January 2, 2002. Further details regarding the
transaction are provided 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
Not applicable.
ITEM 5. OTHER INFORMATION
Acquisition of the Oncology Business of Gilead
On December 21, 2001, we acquired certain assets from Gilead, pursuant
to the terms of an Asset Purchase Agreement, dated as of November 26, 2001. The
assets purchased by us include: (a) a pipeline of three clinical oncology
candidates, (b) certain related intellectual property, and (c) rights to
Gilead's leased facilities located in Boulder, Colorado, as well as leasehold
improvements and certain fixed assets. In connection with the acquisition, we
retained 121 Gilead employees. We expect these employees to complement our
development and commercialization capabilities in oncology. Additionally, our
pipeline of gene-targeted small molecule therapeutics for cancer is augmented
with several acquired promising next-generation cytotoxics currently in clinical
development.
In consideration for the assets, we paid Gilead $130 million in cash
and issued to Gilead 924,984 shares of common stock valued at $40 million as of
the closing date. We would also be obligated to pay to Gilead up to an
additional $30 million in either cash or a combination of cash and common stock,
at its option, upon the achievement of certain milestones related to the
development of OSI-211 (formerly NX211), the most advanced of
20
Gilead's oncology product candidates acquired by us. Pursuant to the agreements
entered into in connection with the acquisition, we received exclusive,
worldwide development and commercialization rights to Gilead's three clinical
oncology candidates: NX211, GS7836 and GS7904L, since renamed OSI-211, OSI-7836
and OSI-7904, respectively, and we have assumed certain royalty and milestone
obligations to third parties with respect to the oncology candidates acquired.
In connection with the acquisition, we adopted the Non-Qualified Stock
Option Plan for Former Employees of Gilead Sciences, Inc. We granted ten-year
options to purchase an aggregate of 693,582 shares of our common stock at a
purchase price of $45.01 per share, which represents the fair value of our stock
at the date granted. The options vest one-third in a year from the date of grant
and monthly thereafter for twenty-four months.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
3.1 Certificate of Incorporation, as amended, filed by OSI
Pharmaceuticals, Inc. as an exhibit to the Form 10-K
for the fiscal year ended September 30, 2001 (file no.
000-15190), and incorporated herein by reference.
3.2 Amended and Restated Bylaws, filed by OSI
Pharmaceuticals, Inc. as an exhibit to the Form 10-K
for the fiscal year ended September 30, 2001 (file no.
000-15190), and incorporated herein by reference.
(B) REPORTS ON FORM 8-K
We filed two current reports on Forms 8-K on October 18, 2001
and December 11, 2001, respectively, with the Securities and Exchange Commission
via EDGAR, pertaining to the acquisition of certain pre-clinical operations of
British Biotech plc and an agreement to acquire certain oncology assets of
Gilead Sciences, Inc., respectively. The earliest event covered by the British
Biotech plc report occurred on September 28, 2001. The earliest event covered by
the Gilead Sciences, Inc. report occurred on November 26, 2001.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
OSI PHARMACEUTICALS, INC.
-----------------------------------
(Registrant)
Date: February 14, 2002 /s/ Colin Goddard, Ph.D.
----------------------------------
Colin Goddard, Ph.D.
Chairman of the Board and
Chief Executive Officer
Date: February 14, 2002 /s/ Robert L. Van Nostrand
----------------------------------
Robert L. Van Nostrand
Vice President and Chief Financial Officer
(Principal Financial Officer)
22
INDEX TO EXHIBITS
Exhibit
3.1 Certificate of Incorporation, as amended, filed by OSI
Pharmaceuticals, Inc. as an exhibit to the Form 10-K for the
fiscal year ended September 30, 2001 (file no. 000-15190), and
incorporated herein by reference.
3.2 Amended and Restated Bylaws, filed by OSI Pharmaceuticals, Inc.
as an exhibit to the Form 10-K for the fiscal year ended
September 30, 2001 (file no. 000-15190), and incorporated herein
by reference.
23