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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002 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)
<Table>
DELAWARE 13-3159796
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
</Table>
<Table>
58 SOUTH SERVICE ROAD, MELVILLE, N.Y. 11747
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</Table>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
(631) 962-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<Table>
<Caption>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
NONE NONE
</Table>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE, AND
SERIES SRPA JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 28, 2002, the aggregate market value of the Registrant's voting
stock held by non-affiliates was $1,057,560,516. For purposes of this
calculation, shares of common stock held by directors, officers and stockholders
whose ownership exceeds five percent of the common stock outstanding at March
28, 2002 were excluded. Exclusion of shares held by any person should not be
construed to indicate that the person possesses the power, direct or indirect,
to direct or cause the direction of the management or policies of the
Registrant, or that the person is controlled by or under common control with the
Registrant.
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). [X] Yes [ ] No
As of November 29, 2002, there were 36,418,319 shares of the Registrant's
common stock, par value $.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for its 2003 annual
meeting of stockholders are incorporated by reference into Part III of this Form
10-K.
THIS FORM 10-K/A IS BEING FILED TO AMEND TWO ITEMS OF THE ANNUAL REPORT ON
FORM 10-K OF OSI PHARMACEUTICALS, INC. FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
2002, WHICH WAS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER
12, 2002 AND AMENDED ON JANUARY 23, 2003. ITEM 7, MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, COMPARISON OF FISCAL
2002 AND FISCAL 2001, AND ITEM 8, CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, FOOTNOTE NUMBER
(3)(a) ARE AMENDED TO REVISE THE DISCLOSURE REGARDING THE ACQUISITION OF GILEAD
SCIENCES, INC.'S ONCOLOGY ASSETS.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a leading biotechnology company focused on the discovery,
development and commercialization of high-quality oncology products that both
extend life and improve the quality-of-life for cancer patients worldwide. We
have established a balanced pipeline of oncology drug candidates that includes
both next-generation cytotoxic chemotherapy agents and novel mechanism-based,
gene-targeted therapies. We currently have four proprietary candidates in
clinical trials and two additional candidates in clinical trials with Pfizer.
Our most advanced drug candidate, Tarceva(TM) (erlotinib HC1), is a small
molecule inhibitor of the epidermal growth factor receptor, or HER1/EGFR. The
protein product of the HER1/EGFR gene is a receptor tyrosine kinase that is
over-expressed or mutated in many major solid tumors. We believe HER1/EGFR
inhibitors represent an exciting new class of relatively safe and well tolerated
anti-cancer agents that may have utility in treating a wide range of cancer
patients. Tarceva(TM) is an oral once-a-day small molecule drug designed to
specifically block the activity of the HER1/EGFR protein. Currently, Tarceva(TM)
is being developed in an alliance with Genentech, Inc. and Roche. If the drug
receives regulatory approval, Genentech will lead the marketing effort in the
United States and Roche will market it in the rest of the world. We will receive
milestone payments from both Genentech and Roche, an equal profit share from
U.S. sales, and royalties on sales outside of the United States. Tarceva(TM) has
demonstrated encouraging indications of anti-cancer activity in single-agent,
open label Phase II trials in non-small cell lung cancer, head and neck cancer
and ovarian cancer. Tarceva(TM) is currently in Phase III clinical trials for
non-small cell lung cancer and pancreatic cancer.
Behind Tarceva(TM) we have five additional drug candidates in earlier
stages of clinical development. Three of these (OSI-211, OSI-7904L and OSI-7836)
are next generation cytotoxic chemotherapy agents and the other two (CP-547,632
and CP-724,714) are gene-targeted therapies currently being developed by Pfizer
Inc. We own commercial rights to the first three and will receive royalty
payments on the latter two if they are successfully commercialized.
Our next generation cytotoxic chemotherapy candidates are designed to
improve upon currently marketed products in the same drug class. OSI-211 is a
liposomal formulation of lurtotecan, a topoisomerase-1 inhibitor, that is being
developed to compete with topotecan (Hycamptin(R)). OSI-7904L is a liposomal
formulation of a thymidylate synthase inhibitor, GW1843, that is being developed
as a potential competitor to 5-Fluorouracil (5-FU) and capecitabine (Xeloda(R)),
and OSI-7836 is a nucleoside analog being developed to compete with gemcitabine
(Gemzar(R)). OSI-211 is in Phase II clinical trials, and OSI-7904L and OSI-7836
are in Phase I clinical trials. Like Tarceva(TM), the two gene-targeted
therapies are receptor tyrosine kinase inhibitors. CP-547,632 is a small
molecule targeting the vascular endothelial growth factor receptor, or VEGFR,
and CP-724,714 is a small molecule targeting HER2/erbB2. Both agents are
currently in Phase I clinical trials.
In order to support our clinical pipeline, we have established (through
acquisition and internal investment) a high quality oncology clinical
development and regulatory affairs capability and a pilot scale chemical
manufacturing and process chemistry group. Behind our clinical pipeline we have
an extensive, fully integrated small molecule drug discovery organization
designed to generate a pipeline of high quality oncology drug candidates to move
into clinical development. This research operation has been built upon our
historical strengths in high throughput screening, chemical libraries, medicinal
and combinational chemistry, and automated drug profiling technology platforms.
Key Business Transactions During Fiscal 2002
We believe that Tarceva(TM) has established a corporate presence for us in
the oncology field. Our strategy over the last several years has been designed
to capitalize upon this presence and to re-orient our business toward becoming a
world class oncology organization. To this end, we have raised capital, formed
alliances and engaged in merger and acquisition activity as set forth below.
1
On December 21, 2001, we acquired certain oncology assets from Gilead
Sciences, Inc., which included 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 Gilead employees retained by us provide us
with extensive expertise in clinical development, regulatory affairs, toxicology
and in vivo pharmacology. The acquisition forms a key part of our 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. We will also be
obligated to pay up to an additional $30 million in either cash, stock or a
combination of cash and common stock upon the achievement of certain milestones
related to the development of OSI-211 (formerly NX211). We also assumed certain
royalty and milestone obligations to third parties in connection with these
oncology products.
At the conclusion of fiscal 2001, we completed a transaction with British
Biotech plc whereby we assumed the leases for two state-of-the-art research and
development facilities in Oxford, England and acquired 58 employees, of whom 42
were engaged in research and development activities with the remainder in
administrative positions. During fiscal 2002, we ceased operations at our
Birmingham, England facility and relocated those operations and certain
personnel to our new Oxford facility and integrated the assets acquired from
British Biotech into our existing operations.
On February 1, 2002, we issued $200.0 million aggregate principal amount of
convertible senior subordinated notes in a private placement for net proceeds to
us of approximately $193.0 million. The notes are convertible into shares of our
common stock at a conversion price of $50 per share and mature on February 1,
2009. We are planning to use the proceeds from the sale of the notes for
continued development of our product pipeline, licensing and acquisition
opportunities that add oncology products and drug candidates, and general
corporate purposes. In August and September 2002, taking advantage of a market
opportunity, we retired a total of $40.0 million in principal amount of the
notes for an aggregate purchase price of $26.2 million, including accrued
interest of $133,000.
With oncology as our focus, we have made the strategic decision to divest
all non-oncology research programs by the end of our second quarter in fiscal
2003, and realign our internal resources toward an oncology strategy. In July
2002, we agreed to accelerate the conclusion of the phase-down period of our
funded research alliance with Anaderm Research Corporation, a wholly-owned
subsidiary of Pfizer focused on the development of novel treatments for skin and
hair conditions. As of September 30, 2002, we received $4.5 million of a total
$8.0 million phase-down fee for transferring to Anaderm all of our research
related to this collaboration. We will also receive royalties on the sale of
products for these treatments which may arise from compounds that we have
identified. We expect the transfer to be completed by January 2003. We also plan
to divest our diabetes program and certain of our adenosine receptor assets into
a newly formed and externally funded entity in which we will maintain a minority
interest. Our diabetes program includes a partnership with the Vanderbilt
University Diabetes Center, a funded alliance with Tanabe Seiyaku Co. Ltd., and
six proprietary gene-targeted discovery programs in the lead seeking and lead
optimization phases, primarily focused in the glucose regulation and obesity
fields. We also intend to transfer to this entity our existing diabetes teams
comprised of approximately 24 employees. If we are unable to obtain external
funding for this newly formed entity, we will consider other alternatives to
discontinue the diabetes program, including the out-licensing of diabetes assets
and employee headcount reductions.
Historically, our research organization had been established to provide
early stage discovery research services to our pharmaceutical industry partners
who funded these activities. Since some of our employee skill sets were from
this multi-disease drug discovery service focus of our past collaborations and
not ideally suited to an oncology-only strategy, in October 2002, we made the
decision to reduce our employee headcount by approximately 9% as we strive to
better balance our staff and skill sets to focus on oncology while maintaining
strict fiscal control of the business. This action left us with 429 employees
and will now allow us to hire additional oncology expertise, as needed.
2
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. Since our inception, we
have funded our operations primarily through public and private placements of
common stock, the private placement of convertible debt securities and payments
under collaborative research agreements with major pharmaceutical companies.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance with
accounting principles generally accepted in the United States. As such, we are
required to make certain estimates, judgments and assumptions that we believe
are reasonable based upon the information available. These estimates and
assumptions affect the reported amounts of assets and liabilities as of the date
of the consolidated financial statements and the reported amounts of revenue and
expenses during the periods presented. Actual results could differ significantly
from those estimates under different assumptions and conditions. We believe that
the following discussion addresses our most critical accounting policies which
are those that are most important to the portrayal of our financial condition
and results of operations and which require our most difficult and subjective
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. Note 1 to the accompanying consolidated
financial statements includes a summary of the significant accounting policies
used in the preparation of the consolidated financial statements.
Revenue Recognition
We recognize all nonrefundable upfront license fees, including upfront
technology access fees, as revenue 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, or SAB No. 101. Our most
significant application of this policy, to date, is the $25 million in upfront
fees received from Genentech and Roche in January 2001 which was originally
being recognized evenly over the expected three-year term of our required
research and development efforts under the terms of the agreement. The expected
term is subject to change based upon the parties' continuous monitoring of
current research data and their projections for the remaining development
period. A change in this expected term impacts the period over which the
remaining deferred revenue would be recognized. In the fourth quarter of fiscal
2002, the expected term was changed to four years to reflect the revised
estimated timing of our research and development commitment for Tarceva(TM)
under the alliance. The revision was a result of the review of the current
research data available, current developments in the HER1/EGFR targeted therapy
market and the involved parties' revised projections for the clinical
development plan. As a result of this revision, we recorded revenues of $1.3
million in the fourth quarter compared to $2.1 million had the upfront fees
continued to be recognized over a three-year period. 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
revenues are recognized pursuant to the terms of grants which provide
reimbursement of certain expenses related to our other research and development
activities. Collaborative and other 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.
Accruals for Clinical Research Organization and Clinical Site Costs
We make estimates of costs incurred to date but not yet invoiced in
relation to external clinical research organizations, or CROs, and clinical site
costs. We analyze the progress of clinical trials, including levels of patient
enrollment, invoices received and contracted costs when evaluating the adequacy
of the accrued liabilities. Significant judgments and estimates must be made and
used in determining the accrued balance in any accounting period. Actual results
could differ significantly from those estimates under different assumptions.
3
Intangible and Long-Lived Assets
Intangible and other long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. Our judgments regarding the existence of impairment
indicators are based on historical and projected future operating results,
changes in the manner of our use of the acquired assets or our overall business
strategy, and market and economic trends. In the future, events could cause us
to conclude that impairment indicators exist and that certain intangible assets
are impaired which might result in an adverse impact on our financial condition
and results of operations.
COMPARISON OF FISCAL 2002 AND FISCAL 2001
Results of Operations
Our fiscal 2002 net loss of $218.5 million increased $194.7 million
compared to our fiscal 2001 net loss of $23.8 million. The increase in the net
loss was primarily related to the one-time in-process research and development,
or in-process R&D, charge of $130.2 million in connection with the acquisition
of Gilead's oncology assets. Excluding the non-recurring charge of $130.2
million related to the in-process R&D acquired, the net loss for fiscal 2002
would have been $88.3 million or $2.45 per share, an increase of $64.5 million
compared to fiscal 2001. This increase in the net loss is primarily due to an
increase in development costs associated with Tarceva(TM) and the three clinical
candidates acquired from Gilead. Included in the net loss for fiscal 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
SAB No. 101 (see note 1(b)) to the accompanying consolidated financial
statements). Excluding the effect of this change in accounting principle, the
net loss for fiscal 2001 would have been $21.1 million or $0.62 per share.
Revenues
Total revenues of $21.8 million in fiscal 2002 decreased $4.2 million or
16% compared to fiscal 2001. Total collaborative program revenues of $12.0
million in fiscal 2002 decreased $6.0 million or 33% compared to fiscal 2001.
These decreases were primarily due to the phase-down of our collaboration with
Anaderm commencing in April 2002 and the conclusions of our funded
collaborations with Pfizer in April 2001, Sankyo Co., Ltd. in December 2001 and
Solvay Pharmaceuticals, Inc. in December 2000. In July 2002, we entered into an
agreement with Pfizer to accelerate the phase-down period of the collaboration
with Anaderm so that it will terminate no later than April 23, 2003. In
consideration for the work to be performed by us during the accelerated
phase-down period, we received $4.5 million in September 2002 and will receive
$3.5 million upon the successful completion of the transition period. The $4.5
million will be recognized as revenue ratably over the expected term of the
transition period and the $3.5 million will be recognized upon the successful
completion of the transition. We expect this transition to be completed by
January 2003. For fiscal 2002, we recognized $1.8 million of revenue related to
the phase-down. As we continue to focus our business away from
collaborative-based to independent drug discovery and development, we expect
collaborative revenue to continue to decrease.
License and related revenues of $8.7 million in fiscal 2002 increased $1.3
million or 17% compared to fiscal 2001. This increase was due primarily to the
recognition of the pro rata portion of the $25 million upfront fees received
from Genentech and Roche for 12 months in fiscal 2002 compared to only nine
months in fiscal 2001 (see note 5(a) to the accompanying consolidated financial
statements). In accordance with the provisions of SAB No. 101, we were
recognizing the $25 million received from Genentech and Roche evenly over the
expected three-year development phase of our agreement. In the fourth quarter of
fiscal 2002, we changed the expected term of the agreement to four years to
reflect the revised estimated timing of our research and development commitment
for Tarceva(TM) under the alliance. The revision was a result of the review of
the current research data available, current developments in the HER1/EGFR
targeted therapy market and the involved parties' revised projections for the
clinical development plan. In accordance with Accounting Principles Board
Opinion No. 20, "Accounting Change," the remaining deferred revenue will be
recognized prospectively over the revised term. As a result, we recorded
revenues of $1.3 million in the fourth
4
quarter of fiscal 2002 compared to $2.1 million had we continued to recognize
the upfront fees over a three-year period.
Other revenues of $1.2 million in fiscal 2002 were primarily related to
transition assistance services provided to Gilead and certain administrative
services provided to British Biotech during the transition periods under our
respective agreements with each of them.
Expenses
Operating expenses of $261.8 million increased $189.0 million or 260% in
fiscal 2002 compared to fiscal 2001. Operating expenses primarily included (i)
research and development, or R&D, expenses, which include expenses related to
the development of our lead clinical candidate, Tarceva(TM), and proprietary and
collaborative-based research; (ii) the $130.2 million charge related to the
acquired in-process R&D related to the oncology assets acquired from Gilead;
(iii) selling, general and administrative expenses; and (iv) amortization of
intangibles. We intend to hold our core operating costs, including expenses
related to Tarceva(TM) development, to approximately $140-145 million over the
next year.
Research and development expenses increased $46.2 million or 82% in fiscal
2002 compared to fiscal 2001. The increase was related primarily to increased
costs associated with (i) the clinical development of Tarceva(TM) under our
Tripartite Agreement with Genentech and Roche, (ii) increased investments in our
proprietary cancer programs, including oncology candidates acquired from Gilead
in December 2001; and (iii) increased investments in our core proprietary
research programs and facilities. These increases were slightly offset by a
decrease in collaborative-based research expenses, a reduction in certain stock
option based compensation charges in comparison to the prior year, and a
restructuring charge included in fiscal 2001 of approximately $4.4 million. This
restructuring charge related to the closing of our Tarrytown, New York and
Birmingham, England facilities, as further discussed below.
On August 17, 2000, the Board of Directors granted non-qualified stock
options to purchase up to 250,000 common shares to our then new President and
Head of Research and Development. The terms of this grant provided for an option
to purchase 100,000 shares of common stock with an exercise price equal to 50%
of the fair market value on the grant date vesting immediately upon his
employment date on September 28, 2000 (i.e., the measurement date), and an
option to purchase 150,000 shares of common stock with an exercise price equal
to the fair market value on the grant date vesting one-third in a year from the
measurement date and monthly thereafter for twenty-four months. The granting of
the options at 50% of fair market value resulted in a compensation charge of
$5.0 million in fiscal 2000. The granting of the other options resulted in
deferred compensation of $4.4 million as of September 30, 2000, which was to be
recognized as compensation expense over the vesting period. A significant
portion of this compensation expense was due to the high volatility of our
common stock price between the grant date and the measurement date. In fiscal
2002, $485,000 of compensation expense was included in R&D expenses compared to
$1.5 million in fiscal 2001. As a result of his resignation as an employee
effective February 1, 2002, no additional compensation expense has been recorded
subsequent to February 1, 2002 and the remaining deferred compensation of $2.4
million was reversed. In addition, other stock options granted to non-employees
in connection with their consulting arrangements resulted in the recognition of
$503,000 and $1.5 million in fiscal 2002 and fiscal 2001, respectively, and
deferred compensation of $49,000 and $1.0 million as of September 30, 2002 and
2001, respectively. 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 vesting
period.
In connection with the acquisition of certain assets from Gilead in fiscal
2002, we recorded an in-process R&D 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(a) to the accompanying consolidated financial statements). The value was
determined by estimating the costs to develop the purchased in-process
technology into commercially viable products, estimating the resulting net
5
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, R&D 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 R&D, 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
represented a reasonable estimate of the future benefits attributable to the
purchased in-process technology at the time of the acquisition. No assurance can
be given that actual results will not deviate from those assumptions in future
periods. The cumulative value of the R&D projects we acquired from Gilead was
divided between the three principal projects, OSI-211 (Phase II), OSI-7836
(Phase I), and OSI-7904L (Phase I). Value was assigned to each program ($19.9
million to OSI-211; $96.9 million to OSI-7836; $13.4 million to OSI-7904L) based
on the assessment of estimated value at the date of acquisition.
As of September 30, 2002, the technological feasibility of these three
projects had not yet been reached. For each project, we need 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 overall development and registration for these next
generation cytotoxic drugs 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 prior to the
development of comparable products by 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 such further development of certain or all of these
projects.
Selling, general and administrative expenses increased $12.3 million or 78%
in fiscal 2002 compared to fiscal 2001. The increase was primarily attributable
to the increased expenses for additional management and administrative personnel
and consultants, as well as an increase in facility and information technology
expenses and other professional fees associated with our expansion, corporate
development and governance activities. The increase was also due to increased
commercialization and marketing costs relating to Tarceva(TM) which are shared
with Genentech in accordance with the OSI/Genentech Agreement. Consulting
expenses include stock options granted to non-R&D consultants in connection with
their consulting arrangements which resulted in $109,000 in compensation
expenses in fiscal 2002 compared to $324,000 in fiscal 2001. We anticipate that
general and administrative expenses will remain relatively steady during fiscal
2003 with an increase in commercialization and marketing cost as we expand our
commercial operations in preparation for the launch of Tarceva(TM) and other
development programs.
During fiscal 2001, we made the strategic decision to (i) close our
Birmingham, England facility and relocate our Birmingham personnel to our new
Oxford, England facilities as a result of the acquisition of assets from British
Biotech, and (ii) close our Tarrytown, New York facility and relocate the
Tarrytown, New York personnel to our new research facility in Farmingdale, New
York. The estimated cost of closing these facilities of $5.1 million was accrued
as of September 30, 2001, of which $4.4 million was included in R&D expenses and
$613,000 in selling, general and administrative expenses in fiscal 2001.
Included in the closing costs were amounts associated with severance for
employees who would not be relocated, the lease cost from the anticipated
closing date through the lease termination date and the value of related
leasehold improvements and other capital items which were not being relocated.
Amortization of intangibles of $1.3 million were primarily related to the
amortization of the capitalized workforce and library license acquired from
British Biotech in September 2001.
Other Income and Expense
Net investment income decreased $11.2 million or 43% in fiscal 2002
compared to fiscal 2001. The decrease was primarily attributable to a decrease
in the average rate of return on our investments and to less funds available for
investment. Interest expense increased $5.2 million in fiscal 2002 compared to
fiscal 2001, primarily due to the interest expense incurred on the convertible
senior subordinated notes issued in February
6
2002 (see note 9 to the accompanying consolidated financial statements), a
portion of which were retired in August and September 2002. The convertible
senior subordinated notes bear interest at 4% per annum, payable semi-annually,
and mature on February 1, 2009. For fiscal 2002 and 2001, other expenses-net
were approximately $1.6 million and $228,000, respectively. Included in fiscal
2002 was the amortization of debt issuance costs of $642,000 and a charge of
$500,000 related to the writedown of our investment in a privately-owned
healthcare information company (see note 4(b) to the accompanying consolidated
financial statements). With respect to the early retirement of these notes, we
recognized a net gain of $12.6 million in fiscal 2002 representing the
difference between the purchase price of $26.2 million and the aggregate
principal of $40.0 million and related accrued interest less the writedown of
$1.3 million of related debt issuance costs (see note 9 to the accompanying
consolidated financial statements). Also in fiscal 2002, we recognized the $1.0
million contingent payment received from The Bayer Corporation in December 2001,
in connection with the sale of the diagnostic business in November 1999 (see
note 17 to the accompanying consolidated financial statements).
COMPARISON OF FISCAL 2001 AND FISCAL 2000
Results of Operations
Our fiscal 2001 net loss of $23.8 million increased $7.4 million or 45%
compared to our fiscal 2000 net loss of $16.3 million. This increase was
primarily related to the launch of the development program associated with
Tarceva(TM), an increased focus on our proprietary research and the closing and
consolidation of certain facilities. The increase in net loss was partially
offset by the recognition of $6.3 million of the upfront fees from Genentech and
Roche (see note 5(a) to the accompanying consolidated financial statements), and
higher interest income resulting from increased funds available for investment
as more fully discussed in "Other Income and Expense" below. Included in the
fiscal 2001 net loss 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 SAB. No. 101 (see note 1(b) to the
accompanying consolidated financial statements). Excluding the net effect of
this change in accounting principle, the fiscal 2001 net loss would have been
$22.0 million, or $.65 per share.
Revenues
Total revenues of $26.0 million in fiscal 2001 decreased $2.6 million or 9%
compared to fiscal 2000 due to the focus of our business away from
collaborative-based to independent drug discovery and development. Total
collaborative program revenues of $18.0 million in fiscal 2001 decreased
approximately $5.7 million or 24% compared to fiscal 2000. This decrease was
primarily due to the conclusion of our funded collaborations with Aventis in
September 2000, Solvay in December 2000, and Pfizer in April 2001. These
decreases were partially offset by increased revenues from the Tanabe
collaboration.
License and related revenues of $7.4 million in fiscal 2001 increased $3.7
million or 99% compared to fiscal 2000. This increase was due to the recognition
of upfront fees received from Genentech and Roche of $6.3 million (see note 5(a)
to the accompanying consolidated financial statements). In accordance with the
provisions of SAB No. 101, we were recognizing the $25 million received from
Genentech and Roche evenly over the expected three-year development phase of our
agreement. In the fourth quarter of fiscal 2002, the expected term was changed
to four years to reflect our revised estimate of the term of the continued
involvement in the research and development efforts under the alliance. The
revision was a result of the review of the current research data available,
current developments in the HER1/EGFR targeted therapy market and the involved
parties' revised projections for the development involvement. The fiscal 2001
increase was offset by a one-time technology access fee of $3.5 million from
Tanabe recognized in fiscal 2000. In connection with a change in accounting
principle effective October 1, 2000 (see note 1(b) to the accompanying
consolidated financial statements) to comply with the provisions of SAB No. 101,
we will recognize this previously recognized technology access fee over the
expected term of the agreement, resulting in approximately $875,000 in revenue
recognition in fiscal 2001. Assuming the technology access fee received from
Tanabe had been recognized over the term of the agreement in fiscal 2000, total
revenues would have been $26 million in fiscal 2000.
7
Other revenues of $613,000 in fiscal 2001 decreased $656,000 or 52%
compared to fiscal 2000. This decrease related to a decrease in sales of
products and services derived from pharmaceutical services of OSI
Pharmaceuticals (UK) Ltd., our UK subsidiary, as we shifted in focus from
external programs to internal programs. This decrease was also due to a decrease
in our revenues from research relating to governmental and private research
grants.
Expenses
Operating expenses increased $20.5 million or 39% in fiscal 2001 compared
to fiscal 2000. Operating expenses primarily included (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) selling, general and administrative expenses; and (iii)
amortization of intangibles.
Research and development expenses increased $16.4 million or 41% in fiscal
2001 compared to fiscal 2000. The increase was related primarily to increased
costs associated with (i) the clinical development of Tarceva(TM) under our
Tripartite Agreement with Genentech and Roche; (ii) increased investments in our
proprietary drug discovery programs, including cancer, diabetes, and other new
opportunities arising from our existing research and development programs; and
(iii) consolidating laboratory facilities. These increases were offset by a
shift of collaborative-based research expenses from Aventis, Solvay, and Pfizer
to independent based drug discovery efforts and a reduction in certain stock
option based compensation charges in comparison to the prior year.
As discussed in the "Comparison of Fiscal 2002 to Fiscal 2001 Expenses"
section above, on August 17, 2000, the Board of Directors granted non-qualified
stock options to purchase up to 250,000 common shares to our then new President
and Head of Research and Development. The granting of these options resulted in
a compensation charge of $5.0 million in fiscal 2000 and deferred compensation
of $4.4 million as of September 30, 2000, which was to be recognized as
compensation expense over the vesting period. In fiscal 2001, $1.5 million of
this deferred compensation was recognized as compensation expense. A significant
portion of this compensation expense was due to the high volatility of the price
of our common stock between the grant date and the measurement date. In
addition, in accordance with EITF Issue 96-18, other stock options granted to
non-employees in connection with their consulting arrangements resulted in the
recognition of $1.5 million and $971,000 in fiscal 2001 and fiscal 2000,
respectively, and deferred compensation of $1.0 million and $4.4 million as of
September 30, 2001 and 2000, respectively.
Also included in R&D expenses in fiscal 2001 was $4.4 million relating to
the closing of the Birmingham, England and Tarrytown, New York facilities, as
discussed in the "Comparison of Fiscal 2002 to Fiscal 2001" section above.
Selling, general and administrative expenses increased $4.8 million or 44%
in fiscal 2001 compared to fiscal 2000. The increase was primarily attributable
to the increased expenses for additional management and administrative personnel
and consultants, as well as an increase in facility expenses and other
professional fees associated with our expansion and corporate development
activities. Consulting expenses included stock options granted to non-R&D
consultants in connection with their consulting arrangements which resulted in
$324,000 in compensation expense in fiscal 2001 compared to $812,000 in
compensation expenses in fiscal 2000. Also included in selling, general and
administrative expenses in fiscal 2001 was $612,000 relating to the closing of
the Birmingham, England and Tarrytown, New York facilities, as discussed in the
"Comparison of Fiscal 2002 to Fiscal 2001 Expenses" section above.
Amortization of intangibles in fiscal 2001 primarily represented
amortization of goodwill from the acquisition of Aston, which was fully
amortized as of September 30, 2001.
Other Income and Expense
Net investment income increased $22.2 million to $25.9 million in fiscal
2001 compared to $3.7 million in fiscal 2000. The increase in fiscal 2001 was
largely due to investment of funds generated from: (i) a private sale of common
stock to Genentech and Roche in January 2001; and (ii) the underwritten public
offering of
8
our common stock in November 2000. In fiscal 2000, we recorded a gain of $3.7
million relating to the sale of our diagnostics business unit to Bayer in
November 1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, working capital, representing primarily cash, cash
equivalents, and restricted and unrestricted short-term investments, aggregated
$444.6 million compared to $533.4 million at September 30, 2001. This decrease
of $88.9 million resulted primarily from the net cash paid for the acquisition
of Gilead's oncology assets in December 2001 and our net operating cash burn for
the year. This decrease was offset by the net proceeds from the issuance of the
convertible senior subordinated notes in February 2002, (less the early
retirement of a portion of the notes in August and September 2002) and 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 117 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 $135.7 million in cash, which
includes professional fees and the assumption of certain liabilities, and issued
924,984 shares of common stock, valued at $40.0 million. We are obligated to pay
contingent consideration of up to an additional $30.0 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. Additionally, we
assumed 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 $200.0 million aggregate principal amount of
convertible senior subordinated notes in a private placement for net proceeds to
us of approximately $193.0 million. The notes bear interest at 4% per annum,
payable semi-annually, and mature on February 1, 2009. We pledged $22.9 million
of U.S. government securities which will be sufficient to provide for the
payment in full of the first six scheduled interest payments on the notes when
due. 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 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. Upon a
change in control, as defined in the indenture governing the notes, the holders
of the notes will have the right to require us to repurchase all of the notes,
or a portion thereof, not previously called for redemption at a purchase price
equal to 100% of the principal amount of the notes purchased, plus accrued and
unpaid interest. We may elect to pay the purchase price in common stock instead
of cash. Accordingly, our liquidity position would not be affected by such a
call by the holders of the notes if we elect to pay the purchase price in stock.
The number of shares of common stock a holder would receive would equal the
repurchase price divided by 95% of the average of the closing prices of our
common stock for the five-trading day period ending on the third business day
prior to the repurchase date. If all or any portion of the notes have not been
converted into common stock prior to their maturity date of February 1, 2009, we
will be required to pay, in cash, the outstanding principal amount of the notes
plus any accrued but unpaid interest. This could have a significant impact on
our liquidity depending on our cash position at the time of maturity. If we do
not have sufficient cash to repay the debt, we may need to borrow additional
funds or sell additional equity in order to meet our debt obligations. In August
and September 2002, we retired a total of $40.0 million in principal amount of
the notes for an aggregate purchase price of approximately $26.2 million,
including accrued interest of $133,000. The difference between the purchase
price and the principal amount of the notes retired and accrued interest
resulted in a net gain on the early retirement of the notes in the fourth
quarter of fiscal 2002 of approximately
9
$12.6 million net of the write off of related debt issuance cost. Should
conditions warrant, we may from time-to-time continue to enter the market to
repurchase additional notes.
We expect to incur continued losses over the next several years as we
continue our investment in Tarceva(TM) and 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 2003 and, as a
result, we expect our operating expenses and cash burn to increase in fiscal
2003. Beyond fiscal 2003, as the Tarceva(TM) development expenses begin to wind
down, we expect a lower operating expense and cash burn base which we will
maintain until a successful Tarceva(TM) market launch. We have established a
goal of achieving profitability and positive cash flow within 18 to 24 months of
a successful market launch of Tarceva(TM). Although we believe that we have
sufficient cash for operations for the next few years, if the market launch of
Tarceva(TM) is delayed or if Tarceva(TM) does not receive FDA approval or if the
approval process is delayed or takes longer than expected, such events could
have a negative impact on our liquidity position, assuming our current cash
burn.
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 our existing cash resources provide a strong
financial base from which to fund our operations and capital requirements for at
least the next several years.
COMMITMENTS AND CONTINGENCIES
Our major outstanding contractual obligations relate to our senior
subordinated convertible debt and our facility leases. The following table
summarizes our significant contractual obligations at September 30, 2002 and the
effect such obligations are expected to have on our liquidity and cash flow in
future periods (in thousands):
<Table>
<Caption>
2008 &
2003 2004 2005 2006 2007 THEREAFTER TOTAL
------- ------- ------- ------- ------- ---------- --------
Contractual Obligations:
Senior convertible debt(a)...... $6,400 $6,400 $6,400 $6,400 $6,400 $169,600 $201,600
Operating leases................ 6,952 7,047 6,982 5,567 4,232 55,443 86,223
Construction commitments........ 510 -- -- -- -- -- 510
Loans payable(b)................ 550 14 -- -- -- -- 564
------- ------- ------- ------- ------- -------- --------
Total contractual
obligations................. $14,412 $13,461 $13,382 $11,967 $10,632 $225,043 $288,897
======= ======= ======= ======= ======= ======== ========
</Table>
- ---------------
(a) Includes interest payments at a rate of 4% per annum.
(b) Includes interest payments
Other significant commitments and contingencies include the following:
- We are committed to share equally with Genentech and Roche certain global
development costs of Tarceva(TM).
- In connection with the acquisition of certain of Gilead's oncology assets
in December 2001, we are obligated to pay up to an additional $30.0
million in either cash, common stock or a combination of cash and common
stock upon the achievement of certain milestones related to the
development of OSI-211, the most advanced of Gilead's oncology product
candidates acquired by us.
- Under agreements with external clinical research organizations, or CROs,
over the next 12 to 24 months we will continue to incur expenses relating
to the progress of Tarceva(TM) clinical trials. These disbursements can
be based upon the achievement of certain milestones, patient enrollment,
services rendered or as expenses are incurred by the CROs.
10
- In connection with our strategic decision to close down our Birmingham,
England facility, we expect to pay approximately $662,000 in
non-cancelable lease exit costs.
- We have a retirement plan which provides postretirement medical and life
insurance benefits to eligible employees, board members and qualified
dependents. Eligibility is determined based on age and years of service.
We have accrued postretirement benefit costs of approximately $2.5
million at September 30, 2002.
- Under certain collaboration agreements with pharmaceutical companies and
educational institutions, we are required to pay royalties and/or
milestones upon the successful development and commercialization of
products.
- Under certain license agreements, we are required to pay license fees for
the use of technologies and products in our research and development
activities.
- We entered into a letter of credit with a commercial bank in relation to
one of our facilities. The irrevocable letter of credit expires annually
with a final expiration date of September 27, 2007. The amount under this
letter of credit is $2.1 million of which the full amount was available
on September 30, 2002.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS 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 were 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 Gilead
and the British Biotech acquisitions, which both occurred after July 1, 2001.
Upon full adoption of these standards in fiscal 2003, 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 $36.5 million in goodwill as of
September 30, 2002 which, in accordance with SFAS No. 142, is not amortized and
identifiable intangible assets in the amount of $2.6 million. As of September
30, 2001, we had goodwill which was fully amortized and unamortized identifiable
intangible assets in the amount of $3.7 million.
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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, among other things,
11
rescinds SFAS No. 4, which required all gains and losses from the extinguishment
of debt to be classified as an extraordinary item and amends SFAS No. 13 to
require that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. We adopted SFAS No. 145 effective April 1, 2002,
which was the beginning of the fiscal quarter in which this statement was
issued. As a result, we did not classify the net gain of $12.6 million realized
in the fourth quarter of fiscal year 2002 from the early retirement of a portion
of the our notes as an extraordinary item in the accompanying consolidated
statements of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", effective for exit or disposal
activities that are initiated after December 31, 2002. Under SAFS No. 146, a
liability for a cost associated with an exit or disposal activity must only be
recognized when the liability is incurred. Under the previous guidance of EITF
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity including Certain Costs Incurred in a Restructuring",
we recognized a liability for an exit or disposal activity cost at the date of
our commitment. If we were to commit to further exit or disposal activities
subsequent to the effective date, we would be subject to the new rules regarding
expense recognition.
FORWARD LOOKING STATEMENTS
A number of the matters and subject areas discussed in this Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," in Item 1 "Business" and elsewhere in this report that are not
historical or current facts deal with potential future circumstances and
developments. The discussion of these matters and subject areas is qualified by
the inherent risks and uncertainties surrounding future expectations generally,
and these discussions may materially differ from our actual future experience
involving any one or more of these matters and subject areas. These forward
looking statements are also subject generally to the other risks and
uncertainties that are described in this report in Item 1 "Business--Cautionary
Factors that May Affect Future Results."
12
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements:
<Table>
<Caption>
PAGE
NUMBER
------
Independent Auditors' Report................................ 14
Consolidated Balance Sheets -- September 30, 2002 and
2001...................................................... 15
Consolidated Statements of Operations -- Years ended
September 30, 2002, 2001 and 2000......................... 16
Consolidated Statements of Stockholders' Equity -- Years
ended
September 30, 2002, 2001 and 2000......................... 17
Consolidated Statements of Cash Flows -- Years ended
September 30, 2002, 2001 and 2000......................... 18
Notes to Consolidated Financial Statements.................. 19
</Table>
13
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
OSI Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of OSI
Pharmaceuticals, Inc. and subsidiaries (the "Company") as of September 30, 2002
and 2001, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
September 30, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of OSI
Pharmaceuticals, Inc. and subsidiaries as of September 30, 2002 and 2001, and
the results of their operations and their cash flows for each of the years in
the three-year period ended September 30, 2002, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in note 1(b) to the consolidated financial statements, the
Company changed its method of revenue recognition for certain upfront
non-refundable fees in 2001.
As discussed in notes 1(d) and 19 to the consolidated financial statements,
the Company adopted provisions of Statement of Financial Accounting Standards
No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible
Assets", for acquisitions consummated on or after July 1, 2001.
As discussed in notes 9 and 19 to the consolidated financial statements,
the Company adopted provisions of Statement of Financial Accounting Standards
No. 145 "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" relating to the classification of
the effect of early debt extinguishments in 2002.
/s/ KPMG LLP
Melville, New York
November 22, 2002
14
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND 2001
(IN THOUSANDS EXCEPT PER SHARE DATA)
<Table>
<Caption>
SEPTEMBER 30,
---------------------
2002 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 152,578 $ 225,150
Investment securities..................................... 304,388 326,329
Restricted investment securities -- short-term............ 7,938 --
Receivables, including amounts due from related parties of
$3,000 and $2,360 at September 30, 2002 and 2001,
respectively............................................ 3,253 2,813
Interest receivable....................................... 3,728 3,820
Prepaid expenses and other current assets................. 3,873 3,120
--------- ---------
Total current assets.................................... 475,758 561,232
--------- ---------
Restricted investment securities -- long-term............... 11,373 --
Property, equipment and leasehold improvements -- net....... 46,175 25,347
Debt issuance costs -- net.................................. 5,145 --
Intangible assets -- net.................................... 39,106 3,684
Other assets................................................ 1,487 1,426
--------- ---------
$ 579,044 $ 591,689
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses, including amounts
due to related parties of $2,190 and $276 at September
30, 2002 and 2001, respectively......................... $ 22,062 $ 18,063
Unearned revenue -- current; including amounts received in
advance from related parties of $7,687 and $8,677 as of
September 30, 2002 and 2001, respectively............... 8,613 9,622
Loans payable -- current.................................. 527 112
--------- ---------
Total current liabilities............................... 31,202 27,797
--------- ---------
Other liabilities:
Unearned revenue -- long-term, including amounts received
in advance from related parties of $6,250 and $10,679 as
of September 30, 2002 and 2001, respectively............ 6,250 11,554
Loans payable -- long-term................................ 14 52
Convertible senior subordinated notes..................... 160,000 --
Deferred acquisition costs................................ -- 375
Accrued postretirement benefit cost....................... 2,470 2,080
--------- ---------
Total liabilities....................................... 199,936 41,858
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares authorized;
no shares issued at September 30, 2002 and 2001......... -- --
Common stock, $.01 par value; 200,000 shares authorized,
37,335 and 35,901 shares issued at September 30, 2002
and 2001, respectively.................................. 373 359
Additional paid-in capital................................ 708,435 664,095
Deferred compensation..................................... (49) (3,922)
Accumulated deficit....................................... (324,223) (105,744)
Accumulated other comprehensive income.................... 1,005 1,476
--------- ---------
385,541 556,264
Less: treasury stock, at cost; 940 shares at September 30,
2002 and 2001............................................. (6,433) (6,433)
--------- ---------
Total stockholders' equity.............................. 379,108 549,831
--------- ---------
Commitments and contingencies
$ 579,044 $ 591,689
========= =========
</Table>
See accompanying notes to consolidated financial statements.
15
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<Table>
<Caption>
YEARS ENDED SEPTEMBER 30,
-------------------------------
2002 2001 2000
--------- -------- --------
Revenues:
Collaborative program revenues, including $7,824, $12,163
and $17,182 from related parties in 2002, 2001 and
2000, respectively..................................... $ 11,976 $ 17,984 $ 23,658
License and related revenues, including $7,500 and $6,250
from related parties in 2002 and 2001, respectively.... 8,683 7,425 3,725
Other revenues............................................ 1,157 613 1,269
--------- -------- --------
21,816 26,022 28,652
--------- -------- --------
Expenses:
Research and development.................................. 102,202 56,038 39,622
Acquired in-process research and development (note
3(a)).................................................. 130,200 -- --
Selling, general and administrative....................... 28,069 15,771 10,938
Amortization of intangibles............................... 1,255 742 870
Production and service costs.............................. 77 262 835
--------- -------- --------
261,803 72,813 52,265
--------- -------- --------
Loss from operations................................... (239,987) (46,791) (23,613)
Other income (expense):
Investment income -- net.................................. 14,729 25,910 3,737
Interest expense.......................................... (5,235) (21) (33)
Other expense -- net...................................... (1,590) (228) (185)
Gain on early retirement of convertible senior
subordinated notes -- net.............................. 12,604 -- --
Gain on sale of diagnostics business...................... 1,000 -- 3,746
--------- -------- --------
Loss before cumulative effect of accounting change.......... (218,479) (21,130) (16,348)
Cumulative effect of the change in accounting for the
recognition of upfront fees............................... -- (2,625) --
--------- -------- --------
Net loss.................................................... $(218,479) $(23,755) $(16,348)
========= ======== ========
Basic and diluted net loss per common share:
Loss before cumulative effect of change in accounting
policy................................................. $ (6.07) $ (0.62) $ (0.67)
Cumulative effect of change in accounting policy.......... $ -- $ (0.08) $ --
--------- -------- --------
Net loss.................................................. $ (6.07) $ (0.70) $ (0.67)
========= ======== ========
Weighted average shares of common stock outstanding......... 35,978 33,852 24,531
========= ======== ========
Proforma information assuming new revenue recognition policy
had been applied retroactively:
Net loss.................................................... $(21,130) $(18,973)
======== ========
Basic and diluted net loss per common share................. $ (0.62) $ (0.77)
======== ========
</Table>
See accompanying notes to consolidated financial statements.
16
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
(IN THOUSANDS)
<Table>
<Caption>
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE TOTAL
--------------- PAID-IN DEFERRED ACCUMULATED INCOME TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT (LOSS) STOCK EQUITY
------ ------ ---------- ------------ ----------- ------------- -------- -------------
BALANCE AT SEPTEMBER 30,
1999...................... 22,404 $224 $105,173 $ -- $ (65,641) $ (334) $(6,058) $ 33,364
Comprehensive income
(loss):
Net loss.................. -- -- -- -- (16,348) -- -- (16,348)
Unrealized holding loss on
investment securities,
net of reclassification
adjustment.............. -- -- -- -- -- (80) -- (80)
Translation adjustment.... -- -- -- -- -- (530) -- (530)
---------
Total comprehensive loss... (16,958)
---------
Options exercised.......... 2,371 24 13,237 -- -- -- -- 13,261
Warrants exercised......... 174 2 1,309 -- -- -- -- 1,311
Compensation expense in
connection with options
issued to an employee
below market.............. -- -- 4,975 -- -- -- -- 4,975
Issuance of common stock
for employee purchase plan
and other................. 8 -- 60 -- -- -- -- 60
Proceeds from issuance of
common stock, in
connection with a private
placement, net............ 3,325 33 52,683 -- -- -- -- 52,716
Accrued expenses in
connection with public
offering of common
stock..................... -- -- (318) -- -- -- -- (318)
Deferred compensation...... -- -- 10,612 (10,612) -- -- -- --
Amortization of deferred
compensation.............. -- -- -- 1,845 -- -- -- 1,845
Purchase of treasury
stock..................... -- -- -- -- -- -- (375) (375)
------ ---- -------- -------- --------- ------ ------- ---------
BALANCE AT SEPTEMBER 30,
2000...................... 28,282 283 187,731 (8,767) (81,989) (944) (6,433) 89,881
Comprehensive income
(loss):
Net loss.................. -- -- -- -- (23,755) -- -- (23,755)
Unrealized holding gain on
investment securities,
net of reclassification
adjustment.............. -- -- -- -- -- 2,738 -- 2,738
Translation adjustment.... -- -- -- -- -- (318) -- (318)
---------
Total comprehensive loss... (21,335)
---------
Options exercised.......... 538 5 3,699 -- -- -- -- 3,704
Issuance of common stock
for employee purchase plan
and other................. 4 -- 115 -- -- -- -- 115
Proceeds from issuance of
common stock, in
connection with public
offerings, net............ 6,152 62 404,141 -- -- -- -- 404,203
Change in deferred
compensation.............. -- -- (1,560) 1,560 -- -- -- --
Amortization of deferred
compensation.............. -- -- -- 3,285 -- -- -- 3,285
Proceeds from issuance of
common stock, in
connection with
collaboration agreements,
net....................... 925 9 69,969 -- -- -- -- 69,978
------ ---- -------- -------- --------- ------ ------- ---------
BALANCE AT SEPTEMBER 30,
2001...................... 35,901 359 664,095 (3,922) (105,744) 1,476 (6,433) 549,831
Comprehensive income
(loss):
Net loss.................. -- -- -- -- (218,479) -- -- (218,479)
Unrealized holding loss on
investment securities,
net of reclassification
adjustment.............. -- -- -- -- -- (1,166) -- (1,166)
Translation adjustment.... -- -- -- -- -- 695 -- 695
---------
Total comprehensive loss... (218,950)
---------
Options exercised.......... 432 4 5,676 -- -- -- -- 5,680
Warrants exercised......... 11 -- 375 -- -- -- -- 375
Issuance of common stock
for employee purchase plan
and other................. 66 1 1,074 -- -- -- -- 1,075
Change in deferred
compensation.............. -- -- (349) 349 -- -- -- --
Amortization of deferred
compensation.............. -- -- -- 1,097 -- -- -- 1,097
Reversal of deferred
compensation.............. -- -- (2,427) 2,427 -- -- -- --
Issuance of common stock,
in connection with
acquisition of Gilead
oncology assets........... 925 9 39,991 -- -- -- -- 40,000
------ ---- -------- -------- --------- ------ ------- ---------
BALANCE AT SEPTEMBER 30,
2002...................... 37,335 $373 $708,435 $ (49) $(324,223) $1,005 $(6,433) $ 379,108
====== ==== ======== ======== ========= ====== ======= =========
</Table>
See accompanying notes to consolidated financial statements.
17
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
YEARS ENDED SEPTEMBER 30,
--------------------------------
2002 2001 2000
--------- --------- --------
Cash flow from operating activities:
Net loss.................................................. $(218,479) $ (23,755) $(16,348)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Gain on early retirement of convertible senior
subordinated notes -- net.............................. (12,604) -- --
Gain on sale of diagnostic business..................... (1,000) -- (3,746)
Loss/(gain) on sale of investments...................... 143 (278) (488)
Loss on sale and disposals of equipment and leasehold
improvements........................................... 359 115 61
Depreciation and amortization of equipment and leasehold
improvements........................................... 8,439 3,836 2,941
In-process research and development charge on
acquisition of Gilead's oncology assets................ 130,200 -- --
Amortization of intangible and other assets............. 2,663 2,149 2,736
Accretion of deferred acquisition costs................. -- 19 19
Non-cash compensation charges........................... 1,606 3,286 6,820
Write down of investment in privately-owned company..... 500 -- --
Bad debt expense........................................ 178 -- --
Cumulative effect of accounting change.................. -- 2,625 --
Changes in assets and liabilities, net of the effects of
acquisitions and sale of a business:
Receivables........................................... (520) (5,586) 4,129
Prepaid expenses and other current assets............. (686) (1,325) (137)
Other assets.......................................... 304 37 (9)
Accounts payable and accrued expenses................. 2,250 11,648 1,228
Unearned revenue...................................... (6,312) 17,526 (4,348)
Accrued postretirement benefit cost................... 390 194 427
--------- --------- --------
Net cash provided by (used in) operating activities......... (92,569) 10,491 (6,715)
--------- --------- --------
Cash flows from investing activities:
Payments for acquisitions................................. (135,742) (13,869) --
Net proceeds from sale of diagnostic business............. 1,000 -- 8,636
Purchases of investments (restricted and unrestricted).... (400,951) (535,099) (31,005)
Maturities and sales of investments (restricted and
unrestricted)........................................... 402,318 248,458 4,988
Additions to property, equipment and leasehold
improvements............................................ (18,295) (10,625) (2,728)
Additions to compound library assets...................... (92) -- --
Proceeds from sale of equipment and leasehold
improvements............................................ 114 35 375
Investments in privately-owned companies.................. (870) (420) --
--------- --------- --------
Net cash used in investing activities....................... (152,518) (311,520) (19,734)
--------- --------- --------
Cash flows from financing activities:
Net proceeds from the issuance of common stock............ -- 474,181 52,716
Proceeds from the exercise of stock options, stock
warrants, employee purchase plan, and other............. 6,247 3,819 13,939
Proceeds from the issuance of convertible senior
subordinated notes...................................... 200,000 -- --
Retirement of convertible senior subordinated notes....... (26,098) -- --
Debt issuance costs....................................... (7,084) -- --
Payments on loans and capital leases payable -- net....... (268) (149) (131)
Purchase of treasury stock................................ -- -- (375)
--------- --------- --------
Net cash provided by financing activities................... 172,797 477,851 66,149
--------- --------- --------
Net increase (decrease) in cash and cash equivalents........ (72,290) 176,822 39,700
Effect of exchange rate changes on cash and cash
equivalents............................................... (282) (65) (171)
Cash and cash equivalents at beginning of year.............. 225,150 48,393 8,864
--------- --------- --------
Cash and cash equivalents at end of year.................... $ 152,578 $ 225,150 $ 48,393
--------- --------- --------
Non-cash activities:
Issuance of common stock in satisfaction of deferred
acquisition costs....................................... $ 375 $ -- $ 375
========= ========= ========
Issuance of common stock in connection of acquisition of
Gilead's oncology assets................................ $ 40,000 $ -- $ --
========= ========= ========
Issuance of common stock to employees..................... $ 450 $ -- $ --
========= ========= ========
</Table>
See accompanying notes to consolidated financial statements.
18
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of OSI Pharmaceuticals, Inc., and its wholly-owned subsidiaries, OSI
Pharmaceuticals (UK) Limited (OSI-UK), MYCOsearch, Inc., OSDI, Inc., and Applied
bioTechnology, Inc. All intercompany balances and transactions have been
eliminated in consolidation. The Company operates in one segment. The Company is
primarily focused on the discovery, development and commercialization of
high-quality oncology products that both extend life and improve the
quality-of-life for cancer patients worldwide.
(b) Revenue Recognition
Included in license and related revenues are patent license fees,
maintenance fees, and technology access and other upfront fees. Prior to October
1, 2000, the Company 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
upfront nonrefundable technology access and other upfront 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. The Company received a total of $25.0 million in upfront fees from
Genentech, Inc. and Roche in January 2001 which was being recognized on a
straight-line basis evenly over the expected three-year term of the Company's
required research and development efforts under the terms of the agreement. In
the fourth quarter of fiscal 2002, the expected term was changed to four years
to reflect the Company's revised estimate of the term of the continued
involvement in the research and development efforts under the Tripartite
Agreement (see note 5(a)). The revision was a result of the review of the
current research data available, current developments in the HER1/EGFR targeted
therapy market and the involved parties' revised projections for the development
involvement. In accordance with Accounting Principle Board Opinion No. 20
"Accounting Change," the remaining deferred revenue will be recognized
prospectively over the revised term. As a result, the Company recorded revenues
of $1.3 million in the fourth quarter of fiscal 2002 compared to $2.1 million
had the upfront fees continued to be recognized over a three-year period. This
change in estimate increased the basic and diluted loss by $.02 per share for
fiscal 2002.
For the year ended September 30, 2000, the Company recognized as revenue
the full $3.5 million technology access fee received from Tanabe Seiyaku Co.,
Ltd. 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 which 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. During the year ended
September 30, 2001, the impact of the change in accounting principle increased
the net loss by approximately $1.8 million, or $.05 per share, comprised of the
$2.6 million cumulative effect of the change as described above ($.08 per
share), net of the $0.9 million of related deferred revenue that was recognized
as revenue during the year ended September 30, 2001 ($.03 per share). Had the
change in accounting principle been applied retroactively, the net loss for the
year ended September 30, 2000 would have increased by $2.6 million, or $.11 per
basic and diluted shares.
Collaborative program revenues represent funding arrangements for research
and development, (R&D), in the field of biotechnology and are recognized when
earned in accordance with the terms of the contracts and the related development
activities undertaken. Collaborative 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.
19
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
Other revenues are recognized pursuant to the terms of arrangements, which
provide reimbursement of certain expenses related to the Company's other
research and development activities. Other revenues are accrued for expenses
incurred in advance of the reimbursement and deferred for cash payments received
in advance of expenditures
(c) Accrual for clinical research organization and clinical site costs
The Company records accruals for estimated clinical study costs. Clinical
study costs represent costs incurred by clinical research organizations (CROs)
and clinical sites. These costs are recorded as a component of R&D expenses.
Management accrues costs for these clinical studies based on the progress of the
clinical trials, including levels of patient enrollment, invoices received and
contracted costs when evaluating the adequacy of the accrued liabilities.
Significant judgments and estimates must be made and used in determining the
accrued balance in any accounting period. Actual costs incurred may or may not
match the estimated costs for a given accounting period. Actual results could
differ from those estimates under different assumptions. The accrued CRO and
site costs as of September 30, 2002 and 2001 were $3.1 million and $1.3 million,
respectively.
(d) Goodwill and Intangible Assets
In July 2001, the Financial Accounting Standards Board issued SFAS 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. 142 is effective for fiscal years beginning on or after December
15, 2001; however this statement was effective for acquisitions and other
intangibles acquired on or after July 1, 2001. For the Company's two
acquisitions consummated after June 30, 2001, goodwill was not amortized during
2002 in accordance with SFAS No. 142. All intangible assets acquired prior to
July 1, 2001 and intangible assets with finite lives acquired after June 30,
2001 were amortized on a straight-line basis over their estimated periods to be
benefited. Goodwill that was acquired prior to July 1, 2001 was amortized on a
straight-line basis over five years and was fully amortized as of September 30,
2001. Upon full adoption of these standards in fiscal 2003, the Company will
evaluate its existing intangible assets that were acquired in prior business
combinations, and make any necessary reclassifications in order to conform with
the new criteria in SFAS No. 141 for recognition apart from goodwill. The
Company 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, the Company 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 of September 30,
2002, the carrying amount of goodwill was $36.5 million and the carrying amount
of identifiable intangible assets was $2.6 million. The Company is currently
assessing the impact of the adoption of these accounting standards.
As a result of the Company's R&D programs, including programs funded
pursuant to R&D funding agreements (see note 5), the Company has applied for a
number of patents in the United States and abroad.
20
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
Costs incurred in connection with patent applications for the Company's R&D
programs have been expensed as incurred.
(e) Deferred Acquisition Costs
Deferred acquisition costs represent common stock purchase rights issued in
connection with the Company's acquisition of OSI-UK on September 19, 1996. The
Company issued rights exercisable at the end of three and five years following
the closing date which was September 19, 1996 (for an aggregate exercise price
of $7,500) to obtain a number of shares of the Company's common stock having an
aggregate value of $750,000 (based on the current market value on the date of
exercise). In December 1999, one half of these rights were exercised in exchange
for 74,255 shares of the Company's common stock. Following this exercise, the
Company purchased these shares at the fair market value for $375,000. These
shares are currently held in treasury stock. The present value of such remaining
rights amounted to $375,000 as of September 30, 2001. In December 2001, the
remaining rights were exercised in exchange for 10,543 shares of the Company's
common stock.
(f) Research and Development Costs
Research and development costs are charged to operations as incurred and
include direct costs of R&D scientists and equipment, contracted costs, and an
allocation of laboratory facility and other core scientific services. In fiscal
years 2002, 2001 and 2000, R&D activities included $95.1 million, $44.6 million
and $20.7 million respectively, of independent R&D. Independent R&D includes the
Company's proportionate share of development expenses related to the Tripartite
Agreement (see note 5(a)), and R&D activities funded by government research
grants and other proprietary R&D programs. The balance of R&D represents
expenses under the collaborative agreements and co-ventures with Pfizer Inc.,
Anaderm Research Corporation, Tanabe, Vanderbilt University, Sankyo Co., Ltd.,
Aventis Pharmaceuticals, Inc., Solvay Pharmaceuticals, Inc., Helicon
Therapeutics, Inc., and The Bayer Corporation. Included in R&D expense is the
impact of stock options granted to non-employees over the past three years that
have resulted in approximately $503,000, $1.5 million and $971,000 of
compensation expense in fiscal 2002, 2001 and 2000, respectively (see note
10(a)). Also included in R&D expense in fiscal 2002 and 2001 is approximately
$534,000 and $4.4 million, respectively, related to the closing of the
Tarrytown, New York and Birmingham, England facilities (see notes 16(a) and
16(b)). Included in R&D expenses in fiscal 2002, 2001 and 2000 is $485,000, $1.5
million and $5.0 million, respectively of compensation expense related to the
issuing of an option to purchase shares of common stock to the Company's then
President and Head of Research and Development (see note 10(a)).
(g) Depreciation and Amortization
Depreciation of equipment is recognized over the estimated useful lives of
the respective asset groups on a straight-line basis utilizing the half-year
convention. Leasehold improvements are amortized on a straight-line basis over
the lesser of the estimated useful lives or the remainder of the lease term.
Amortization of the fungal cultures and compounds acquired in connection
with the acquisition of the research business of Cadus Pharmaceutical
Corporation in fiscal 1999, the acquisition of a compound library license from
The Dow Chemical Company in fiscal 1997, and the acquisition of MYCOsearch, Inc.
in fiscal 1996 are on a straight-line basis over five years.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
21
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(i) Investments
Investment securities at September 30, 2002 and 2001 consist of U.S.
Treasury obligations, municipal obligations and corporate debt and equity
securities. The Company classifies its investments as available-for-sale. These
securities are recorded at their fair value. Unrealized holding gains and
losses, net of the related tax effect, if any, on available-for-sale securities
are excluded from earnings and are reported in accumulated other comprehensive
income (loss), a separate component of stockholders' equity, until realized. The
specific identification basis is utilized to calculate the cost to determine
realized gains and losses from the sale of available-for-sale securities.
A decline in the market value of any available-for-sale security below cost
that is deemed to be other than temporary results in a reduction in carrying
amount to fair value. The impairment is charged to earnings and a new cost basis
for the security is established. Dividend and interest income are recognized
when earned.
In February 2002, in connection with the issuance of convertible senior
subordinated notes (see note 9), the Company pledged $22.9 million of U.S.
government securities (restricted investment securities) with maturities at
various dates through November 2004. Upon maturity, the proceeds of the
restricted investment securities will be sufficient to pay the first six
scheduled interest payments on the convertible senior subordinated notes when
due. The Company considers its restricted investment securities to be held-to-
maturity, as defined by SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." These securities are reported at their amortized
cost, which includes the direct costs to acquire the securities, plus the
amortization of any discount or premium, and accrued interest earned on the
securities.
As further discussed in note 5(f), the Company received an equity interest
in a research and development company in exchange for research services
provided. The Company has recorded its investment in the company based on the
cost of services rendered. The Company recognized its share of the operating
losses of this company based on its percentage ownership interest under the
equity method of accounting.
The Company has certain investments in privately-owned companies that are
carried on the cost method of accounting. Other than temporary losses are
recorded against earnings in the period the decrease in value of the investment
is deemed to have occurred.
(j) Net Loss Per Share
Basic and diluted net loss per share is computed by dividing the net loss
by the weighted average number of common shares outstanding during the period.
The diluted loss per share presented excludes the effect of common share
equivalents (stock options, warrants and convertible debt), since such inclusion
in the computation would be anti-dilutive. Such common share equivalents
(options and convertible debt) amounted to 4,894,588 for fiscal 2002. Such
common share equivalents (options and warrants) amounted to 2,105,676 and
1,511,821 for fiscal 2001 and 2000, respectively.
(k) Accounting for Stock-Based Compensation
The Company follows the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation". The provisions of SFAS No. 123 allow the Company to
either expense the estimated fair value of stock options or to continue to
follow the intrinsic value method set forth in Accounting Principles Board (APB)
22
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
Opinion No. 25 "Accounting for Stock Issued to Employees", but disclose the pro
forma effect on net income (loss) had the fair value of the options been
expensed. The Company has elected to continue to apply APB No. 25 in accounting
for stock options issued to employees.
(l) Cash and Cash Equivalents
The Company includes as cash equivalents reverse repurchase agreements,
treasury bills and time deposits with original maturities of three months or
less. Such cash equivalents amounted to $142.8 million and $220.4 million as of
September 30, 2002 and 2001, respectively.
(m) Use of Estimates
The Company has made a number of estimates and assumptions related to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements in conformity
with accounting principles generally accepted in the United States. Actual
results could differ from those estimates.
(n) Foreign Currency Translation
The assets and liabilities of the Company's non-U.S. subsidiary, OSI-UK,
which operates in its local currency is translated to U.S. dollars at exchange
rates in effect at the balance sheet date with resulting translation adjustments
directly recorded as a separate component of accumulated other comprehensive
income (loss). Income and expense accounts are translated at the average
exchange rates during the year.
(o) Comprehensive Income (Loss)
Comprehensive income includes foreign currency translation adjustments and
unrealized gains or losses on the Company's available-for-sale securities.
As of September 30, the components of accumulated other comprehensive
income were as follows (in thousands):
<Table>
<Caption>
2002 2001
------ -------
Cumulative foreign currency translation adjustment.......... $ (320) $(1,015)
Unrealized gains on available-for-sale securities........... 1,325 2,491
------ -------
Accumulated other comprehensive income...................... $1,005 $ 1,476
====== =======
</Table>
(p) Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of
The Company accounts for its long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of." SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by comparison of the carrying amount of an asset to
the future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less cost to sell.
23
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
(q) Computer Software Costs
The Company records the costs of computer software in accordance with AICPA
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Development or Obtained for Internal Use." SOP 98-1 requires that certain
internal-use computer software costs be capitalized and amortized over the
useful life of the asset.
(r) Derivatives
The Company accounts for its derivative instruments and hedging activities
in accordance with SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments as either assets or liabilities
in the statement of financial position based on their fair values. Changes in
the fair values are reported in earnings or other comprehensive income depending
on the use of the derivative and whether it qualifies for hedge accounting.
Derivative instruments are designated and accounted for as either a hedge of a
recognized asset or liability (fair value hedge) or a hedge of a forecasted
transaction (cash flow hedge). For derivatives designated as effective cash flow
hedges, changes in fair values are recognized in other comprehensive income.
Changes in fair values related to fair value hedges as well as the ineffective
portion of cash flow hedges are recognized in earnings. Changes in the fair
value of the underlying hedged item of a fair value hedge are also recognized in
earnings.
(s) Basis of Presentation
Certain reclassifications have been made to the prior period consolidated
financial statements to conform them to current presentations.
(2) LICENSE AGREEMENTS
The Company has entered into various license agreements with third parties
to grant the use of the Company's proprietary assets. These licenses include the
use of the Company's patented gene transcription estate which consists of drug
discovery assays that provide a way to identify novel product candidates that
can control the activity of genes. Licensees may be obligated to pay the Company
license fees, annual fees, and milestones and royalties based on the development
and sale of products derived from the licensed patents. Generally, the duration
of each license is to be coextensive with the life of the last to expire of the
underlying patents. To date, the Company has granted seven licenses to use our
gene transcription patent. In fiscal 2002, 2001, and 2000, total license
revenues were $308,000, $300,000, and $225,000 respectively.
(3) ACQUISITIONS
(a) Gilead's Oncology Assets
On December 21, 2001, the Company acquired certain assets from Gilead
Sciences, Inc. 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 included: (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 117 Gilead employees 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 commencing as of the date of the closing.
In consideration for the assets, the Company paid approximately $135.7 million,
which includes professional fees and the assumption of certain
24
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
liabilities, and issued 924,984 shares of common stock, valued at $40.0 million.
The value of the 924,984 common shares issued was based on the average closing
price of the Company's stock for the five days prior to the date of closing. The
Company would also be obligated to pay contingent consideration of up to an
additional $30.0 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 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.
Included in the assets acquired were certain employee home purchase loans
and a home bridge loan in connection with the acquisition. The total amount of
the loans acquired amounted to $623,000. Under the terms of the home purchase
loan agreements, 50% of the original principal is forgiven over years six to ten
of the loan provided the employees are continuously employed during the term of
the loan. If the employee is terminated, the loan is due within 90 days from
date of termination. The loans are non-interest bearing unless the employee
terminates. During fiscal 2002, the home bridge loan in the amount of $250,000
was repaid in full. The carrying amount of the remaining loans outstanding was
$344,000 and is included in other assets, on the accompanying consolidated
balance sheet as of September 30, 2002.
The acquisition was accounted for under the purchase method of accounting.
The purchase price was allocated to the acquired assets and liabilities assumed
based on the fair values as of the date of the acquisition. The excess of the
purchase price paid over the fair value of the net identifiable assets acquired
representing goodwill was $35.7 million. During fiscal 2002, the Company
recorded an increase of $800,000 to the goodwill for additional payments to
Gilead for acquisition-related costs. In accordance with 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 R&D was determined by identifying those acquired
in-process research projects for 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 R&D was valued at $130.2 million and expensed at the
acquisition date and is included in the accompanying consolidated statement of
operations for fiscal 2002. 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-7904L (formerly GS7904L), a liposomal thymidylate ($13.4 million) and
OSI-7836 (formerly GS7836), a nucleoside analog ($96.9 million).
The purchase price was allocated as follows (in thousands):
<Table>
In-process R&D acquired..................................... $130,200
Fixed assets................................................ 10,529
Goodwill.................................................... 36,528
Prepaid expenses and other assets........................... 663
--------
Total assets and in-process R&D acquired.................... 177,920
Less liabilities assumed.................................... (2,178)
--------
Cash and common stock paid.................................. $175,742
========
</Table>
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
25
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
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 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 24 months.
The following unaudited pro forma financial information presents a summary
of the consolidated results of operations of the Company for the years ended
September 30, 2002 and 2001 assuming the acquisition had taken place as of
October 1, 2001 and 2000, respectively (in thousands, except per share
information):
<Table>
<Caption>
YEAR ENDED
SEPTEMBER 30,
-------------------
2002 2001
-------- --------
Revenues.................................................... $ 21,816 $ 26,022
Loss before non-recurring charge related to the acquisition
and cumulative effect of accounting change................ $(98,922) $(59,654)
Loss before non-recurring charge related to the
acquisition............................................... $(98,922) $(62,279)
Basic and diluted loss per share:
Before non-recurring charge related to acquisition
and cumulative effect of accounting change...... $ (2.70) $ (1.71)
Cumulative effect of accounting change............ $ -- $ (0.08)
-------- --------
Before non-recurring charge related to the
acquisition..................................... $ (2.70) $ (1.79)
======== ========
</Table>
The unaudited pro forma financial information has been prepared for
comparative purposes only. The pro forma information includes the historical
unaudited results of Gilead's oncology assets for the respective periods. 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.
26
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
(b) British Biotech
On September 28, 2001, the Company acquired certain assets from British
Biotech plc for $13.9 million in cash, which includes professional fees and
other related costs. Accordingly, the acquisition was accounted for as an asset
acquisition and the purchase price was allocated to the tangible and intangible
assets based on the relative fair values at the date of acquisition. The
purchase price was allocated as follows (in thousands):
<Table>
Equipment and leasehold improvements........................ $ 9,537
Work force intangible....................................... 3,040
License to compound libraries............................... 657
Prepaid expenses............................................ 635
-------
Total assets acquired....................................... $13,869
=======
</Table>
The Company also assumed two British Biotech facility leases in Oxford,
England as of September 28, 2001. The leases for these two facilities expire in
August 2009 and April 2021. In connection with the acquisition, the Company
acquired a non-exclusive license to compound libraries and the Company agreed to
pay royalties of 2.5% on the sales of products arising out of the use of these
libraries. The cost of the license is being amortized on a straight-line basis
over three years, which represents the estimated period over which the compound
will be used. Also in connection with the acquisition, the Company acquired 58
employees of which 42 were in research and development, two were in information
technology and the remainder were in administrative positions.
In relation to one of the facility leases, the Company entered into a
letter of credit with a commercial bank. The irrevocable letter of credit
expires annually on September 27th, with a final expiration date of September
27, 2007. The amount under this letter of credit is $2.1 million of which the
full amount was available on September 30, 2002. The Company maintains a
collateralized investment account with the same commercial bank for securities
held as collateral against the letter of credit. Included in the accompanying
consolidated balance sheet as of September 30, 2002 in cash and cash equivalents
and investment securities is $1.0 and $2.0 million, respectively, relating to
these collateralized securities.
(4) INVESTMENTS
(a) Investment Securities
The Company invests its excess cash in U.S. Government securities,
municipal obligations and debt and equity instruments of financial institutions
and corporations with strong credit ratings. The Company has established
guidelines relative to diversification of its investments and their maturities
with the objective of maintaining safety and liquidity. These guidelines are
periodically reviewed and modified to take advantage of trends in yields and
interest rates.
The following is a summary of available-for-sale securities as of September
30 (in thousands):
<Table>
<Caption>
GROSS
UNREALIZED
2002 COST GAINS FAIR VALUE
---- -------- ---------- ----------
U.S. Treasury securities and obligations of U.S.
Government agencies................................ $210,509 $ 513 $211,022
Municipal securities................................. 4,000 -- 4,000
Corporate debt securities............................ 88,507 859 89,366
-------- ------ --------
Total........................................... $303,016 $1,372 $304,388
======== ====== ========
</Table>
27
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
<Table>
<Caption>
GROSS
UNREALIZED
2001 COST GAINS FAIR VALUE
---- -------- ---------- ----------
U.S. Treasury securities and obligations of U.S.
Government agencies................................ $232,036 $1,968 $234,004
Corporate debt securities............................ 91,802 523 92,325
-------- ------ --------
Total........................................... $323,838 $2,491 $326,329
======== ====== ========
</Table>
Government and corporate debt securities include $15.7 million and $20.0
million as of September 30, 2002 and 2001, respectively, of interests in mutual
funds which are invested principally in government and corporate debt
securities. Net realized gains (losses) on sales of investments during fiscal
2002, 2001 and 2000 were $(143,000), $278,000, and $488,000, respectively.
Maturities of debt securities classified as available-for-sale were as
follows at September 30, 2002 (in thousands):
<Table>
<Caption>
COST FAIR VALUE
-------- ----------
2003........................................................ $129,096 $129,768
2004........................................................ 79,427 79,733
2005........................................................ 77,643 77,691
2006........................................................ -- --
2007........................................................ 72 73
2008 and thereafter......................................... 1,396 1,412
-------- --------
$287,634 $288,677
======== ========
</Table>
(b) Other Investments
As further discussed in notes 5(b) and 5(f), the Company has collaborative
research agreements with Anaderm and Helicon, and the Company's investments in
such companies were carried based on the equity method of accounting. On
September 23, 1999, the Company exercised its right to require Pfizer to
purchase all of its shares of Anaderm common stock at a sale price of $3.6
million. As of September 30, 1999, the Company recognized a gain of $3.3 million
on the sale of the Anaderm common stock and recorded a receivable of $3.6
million. On November 10, 1999, the Company received a cash payment of this
receivable from Pfizer. As of September 30, 2002 and 2001, the Company fully
reserved its investment in Helicon as more fully discussed in note 5(f).
The Company has an investment in and a license and technology development
agreement with a privately-owned healthcare information company that develops
and provides web-based products and services for the clinical trial process,
including facilitation of patient accrual. During fiscal 2002, the Company
determined that there was an other than temporary decline in fair value for this
investment and recorded a charge of $500,000 in other expense-net, on the
accompanying consolidated statement of operations. The investment was fully
reserved as of September 30, 2002. In addition, in fiscal 2002 the Company
wrote-off a portion of the prepaid balance pertaining to the license agreement
in order to reflect the remaining expected future benefit of this asset. The
write-off resulted in a charge of $700,000, which is reflected in R&D in the
accompanying consolidated statement of operations.
As of September 30, 1999, the Company had an investment in Tularik, Inc.
amounting to $250,000 which was carried at cost and approximated fair market
value (see note 13). In December 1999, the Company sold
28
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
its investment in Tularik resulting in a gain of approximately $488,000 which is
included in net investment income in the accompanying consolidated statement of
operations for fiscal 2000.
(5) PRODUCT DEVELOPMENT CONTRACTS
(a) Roche and Genentech
On January 8, 2001, the Company entered into certain agreements with
Genentech and Roche for the global co-development and commercialization of the
Company's lead anti-cancer drug, Tarceva(TM). The Company received upfront fees
of $25.0 million related to these agreements, which was being recognized evenly
over the expected three-year term of the Company's required R&D efforts under
these agreements. In the fourth quarter of fiscal 2002, the expected term was
revised to four years to more accurately reflect the Company's continued
involvement in the R&D efforts under the alliance. The revision was a result of
the review of the current research data available, current developments in the
HER1/EGFR targeted therapy market and the involved parties' revised projections
for the development involvement. In accordance with Accounting Principle Board
Opinion No. 20 "Accounting Change," the remaining deferred revenue will be
recognized prospectively over the revised term. For the years ended September
30, 2002 and 2001, the Company recognized $7.5 and $6.3 million, respectively,
of the upfront fees which is included in license and related revenues in the
accompanying consolidated statements of operations.
Under the OSI/Genentech Agreement, the Company and Genentech agreed to
collaborate in the product development of Tarceva(TM) with the goal of obtaining
regulatory approval for commercial marketing and sale in the United States, its
territories and Puerto Rico, of products resulting from the collaboration. The
parties are conducting 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 U.S. 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 has primary
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. The
Company has certain co-promotion rights that may be enacted by mutual agreement
at any time provided that the Company has established a commercial operation
independent of Tarceva(TM). 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
and know-how related to Tarceva(TM) to use, sell, offer for sale and import
products resulting from the collaboration in the United States, its territories
and Puerto Rico. In addition, Genentech granted to the Company a royalty-free
non-transferable (except under certain circumstances), non-sublicensable (except
under certain circumstances), co-exclusive license to certain patents and
know-how held by Genentech to use, make, have made, sell, offer for sale and
import products resulting from the collaboration in the United States, its
territories and Puerto Rico. The Company has primary responsibility for patent
filings for the base patents protecting Tarceva(TM) and, in addition, has the
right, but not the obligation, to institute, prosecute and control patent
infringement claims relating to the base patents. The term of the OSI/ Genentech
Agreement continues until the date on which both the Company and Genentech 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. The agreement is
also subject to early termination under certain circumstances.
29
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
Under the OSI/Roche Agreement, the Company granted to Roche a license under
the Company's intellectual property rights with respect to Tarceva(TM). Roche is
collaborating with the Company and Genentech in the product development of
Tarceva(TM) and is responsible for future marketing and commercialization of
Tarceva(TM) outside of the United States in certain territories as defined in
the agreement. The grant is a royalty-bearing, non-transferable (except under
certain circumstances), non-sublicensable (except under certain circumstances),
sole and exclusive license to use, sell, offer for sale and import products
resulting from the development of Tarceva(TM) in the world, other than the
territories covered by the OSI/Genentech Agreement. In addition, Roche has the
right, which it has exercised, to manufacture commercial supplies of Tarceva(TM)
for its territory, subject to certain exceptions. Roche will pay milestone and
royalty payments to the Company on sales of products resulting from the
collaboration. The Company has primary responsibility for patent filings for the
base patents protecting Tarceva(TM) and, in addition, has the right, but not the
obligation, to institute, prosecute and control patent infringement claims
relating to the base patents. 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 Tarceva(TM). The OSI/Roche
Agreement is subject to early termination in the event of certain defaults. In
addition, after two and one half years from the effective date, Roche may
terminate the agreement on a country-by-country basis. The Company 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 agreed to
optimize the use of each party's resources to develop Tarceva(TM) 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, to
facilitate attainment of necessary regulatory approvals of Tarceva(TM) 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
Tarceva(TM). The Tripartite Agreement requires each party to spend equally up to
a specified amount for the further development of Tarceva(TM). Each party may
conduct clinical and pre-clinical activities for additional indications for
Tarceva(TM) 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. Any
reimbursement from or additional payments to Genentech or Roche for R&D costs
under the cost sharing arrangement of the Tripartite Agreement are recorded as
an increase or decrease to R&D expenses in the accompanying consolidated
statements of operations.
As discussed in note 10(g), concurrent with the execution of these
agreements, the Company entered into separate 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 for $35.0
million each.
(b) Anaderm
On April 23, 1996, the Company formed Anaderm with Pfizer and New York
University for the discovery and development of novel compounds to treat
conditions such as baldness, wrinkles and pigmentation disorders. In April 1999,
the Company amended a prior research agreement with Pfizer and Anaderm to expand
the collaborative program. On September 23, 1999 the Company sold its interest
in Anaderm to Pfizer. The amended research agreement expired in April 2002,
followed by a three-year phase-down period. On April 24, 2002, pursuant to the
terms of the Collaborative Research Agreement, the Company entered into the
phase-down period of the collaboration. In July 2002, the Company entered into
an agreement with Pfizer to accelerate such phase-down period so that it will
terminate no later than April 23, 2003. During the phase-down period, the
Company will transfer to Anaderm all of the research related to the
collaboration. In consideration for the work to be performed by the Company
during the accelerated phase-down period, the Company received $4.5 million in
September 2002 and will receive $3.5 million upon the successful
30
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
completion of the transition period. The Company will retain its rights to
receive royalties on the sales of products resulting from the collaboration. The
$4.5 million will be recognized as revenue ratably over the expected term of the
transition period and the $3.5 million will be recognized upon the successful
completion of the transition. For the year ended September 30, 2002, the Company
recognized approximately $1.8 million of collaborative program revenues relating
to the phase-down.
(c) Tanabe
Effective as of October 1, 1999, the Company entered into a Collaborative
Research and License Agreement with Tanabe focused on discovering and developing
novel pharmaceutical products to treat diabetes. Under the agreement, the
Company is responsible for identification of targets (subject to Tanabe's
approval), assay development, screening of compounds from the Company's library
and Tanabe's library against identified targets, identification of seed
compounds meeting certain criteria specified in the agreement, optimization of
these seed compounds and identification of lead compounds meeting certain
criteria specified in the agreement. Tanabe maintains responsibility for further
development and marketing of a lead compound in exchange for milestone and
royalty payments to the Company. If Tanabe determines not to initiate further
development of a lead compound or if Tanabe discontinues development of
candidate compounds, the Company will have the sole and exclusive right to
develop, use, manufacture and sell all products resulting from the
collaboration, and it will pay royalties to Tanabe.
The agreement is for a term of four years, with the option to extend for an
additional two-year period. On September 28, 1999, the Company received
approximately $4.3 million from Tanabe, which represented advanced funding of
the technology access fee of $3.5 million and research funding of $812,500 for
the first quarter of fiscal 2000. During the first quarter ended December 31,
1999, the Company recognized as revenue the technology access fee of $3.5
million in accordance with its accounting policy at that time. As a result of
the adoption of SAB No. 101 on October 1, 2000, the Company changed its method
of accounting for such non-refundable upfront fees to recognize such fees over
the term of the related research agreement. This change resulted in a cumulative
effect of an accounting change of $2.6 million recorded in the accompanying
consolidated statement of operations for fiscal 2001 (see note 1(b)).
(d) Vanderbilt
Effective as of April 28, 1998, the Company entered into a Collaborative
Research, Option and Alliance Agreement with Vanderbilt University to conduct a
collaborative research program and seek a corporate partner to fund a technology
collaboration for the discovery and development of drugs to treat diabetes. The
agreement was for a term of one year, and was extended until the Company
executed a third-party research collaboration agreement, which the Company
entered into with Tanabe.
Concurrently with the execution of the Tanabe agreement, the Company
entered into an Amended and Restated Collaborative Research, License and
Alliance Agreement with Vanderbilt and Tanabe with an effective date of August
31, 1999. The term of the research program conducted by the Company and
Vanderbilt commenced on April 28, 1998 and will end upon termination of the
contract period under the Tanabe agreement unless mutually extended by the
Company and Vanderbilt.
The Company is providing funding to Vanderbilt to conduct the
OSI/Vanderbilt research program. A portion of this funding comes from Tanabe's
funding of the OSI/Tanabe research program. The Company will also pay to
Vanderbilt a percentage of the revenues it receives from Tanabe and any other
third party which commercializes products resulting from the OSI/Tanabe research
program based on the extent to which Vanderbilt technology and patents
contributed to the product generating the revenue.
31
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
(e) Pfizer
In April 1986, the Company entered into a collaborative research agreement
and a license agreement with Pfizer. The Company renewed the collaboration for
additional five-year terms in 1991 and 1996, respectively. On April 1, 2001, the
funded phase of the collaborative research agreement expired and was not
renewed. Following the expiration of the collaborative research agreement,
Pfizer is continuing to develop certain specified drug candidates which emanated
from the collaborative research agreement and for which Pfizer will owe the
Company a royalty if ultimately commercialized. The Company continues to have
rights in joint technology developed during the collaboration.
In June 2000, the Company gained full development and marketing rights to
Tarceva(TM) in order to allow Pfizer to meet certain requirements of the U.S.
Federal Trade Commission arising from the FTC's review of Pfizer's merger with
Warner-Lambert Company. Under terms of the agreement with Pfizer, which became
effective upon issuance and publication of the FTC's order on June 19, 2000, the
Company received a royalty-free license to all rights for the further
development and commercialization of Tarceva(TM). The terms of the agreement did
not require the Company to make any payments to Pfizer for the license. In
January 2001, the Company entered into a co-development and marketing
partnership with Genentech and Roche for Tarceva(TM) (see note 5(a)).
(f) Helicon
In July 1997, the Company, Cold Spring Harbor Laboratory and Roche formed
Helicon Therapeutics, Inc., a Delaware corporation. In exchange for
approximately 30% of Helicon's outstanding capital stock, the Company
contributed to Helicon molecular screening services which were completed in
fiscal 1998 and a nonexclusive license with respect to certain screening
technology. As of September 30, 2002 and 2001, the Company's investment in
Helicon was fully reserved.
Effective as of August 15, 2001, the Company entered into a new compound
screening and technology license agreement to provide molecular screening
services to Helicon. Under the terms of the agreement, Helicon retains the right
to use the screening data solely for its own internal research purposes. Helicon
maintains the right for further development of the selected compound in exchange
for royalties and milestone payments to the Company. If Helicon determines to
further develop the selected compounds identified by the Company, the Company
will grant to Helicon a worldwide exclusive license to, among other things, use,
manufacture and sell these compounds in exchange for milestones and royalties on
product sales. If Helicon determines not to further develop any of the
identified selected compounds, the selected compounds and all related data shall
be returned to the Company.
(g) Bayer
Effective January 1, 1997, the Company and Bayer entered into an agreement
to develop serum-based cancer diagnostic products. Upon the sale of the
Company's diagnostic business to Bayer, the agreement terminated. See note 17
for sale of the Company's diagnostic business to Bayer on November 30, 1999.
(h) Other
Under the terms of the aforementioned and other collaborative research
agreements, with terms similar to the aforementioned agreements, certain
collaborative partners will pay the Company royalties on net sales of products
resulting from these research programs in addition to the research revenues
described below. To date, the Company has not received any royalties pursuant to
these agreements. The Company or its collaborative partners may terminate each
of the collaborative research programs upon the occurrence of certain events.
32
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
Total collaborative program revenues under the Company's collaborative
research agreements are as follows (in thousands):
<Table>
<Caption>
YEARS ENDED SEPTEMBER 30,
---------------------------
2002 2001 2000
------- ------- -------
Related Parties:
Anaderm............................................... $ 7,649 $10,244 $10,288
Pfizer................................................ -- 1,909 3,898
Aventis............................................... -- -- 2,996
Helicon............................................... 175 10 --
------- ------- -------
Total related parties.............................. 7,824 12,163 17,182
Tanabe................................................ 4,077 4,335 2,751
Sankyo................................................ 75 1,007 1,268
Solvay................................................ -- 479 2,240
Bayer................................................. -- -- 167
Other................................................. -- -- 50
------- ------- -------
Total.............................................. $11,976 $17,984 $23,658
======= ======= =======
</Table>
(6) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are recorded at cost and
consist of the following (in thousands):
<Table>
<Caption>
SEPTEMBER 30,
ESTIMATED LIFE -----------------
(YEARS) 2002 2001
-------------- ------- -------
Laboratory equipment................................ 5-15 $25,639 $20,166
Office furniture & equipment and computer
equipment......................................... 3-10 12,536 7,822
Capitalized software................................ 3 2,718 1,580
Leasehold improvements.............................. Life of lease 29,146 14,772
------- -------
70,039 44,340
Less: accumulated depreciation and amortization..... 23,864 18,993
------- -------
Property, equipment and leasehold
improvements -- net............................... $46,175 $25,347
======= =======
</Table>
The Company capitalized $2.7 and $1.6 million of computer software cost as
of September 30, 2002 and 2001, respectively, of which $980,000 and $263,000 was
amortized as of September 30, 2002 and 2001, respectively.
33
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
(7) INTANGIBLE ASSETS
The components of intangible assets, net are as follows (in thousands):
<Table>
<Caption>
SEPTEMBER 30,
----------------
2002 2001
------- ------
Goodwill.................................................... $36,528 $ --
License to compound libraries............................... 458 647
Acquired work force......................................... 2,120 3,037
------- ------
$39,106 $3,684
======= ======
</Table>
The above amounts reflect accumulated amortization for license to compound
libraries and acquired work forces of $1.4 million and $105,000 as of September
30, 2002 and 2001, respectively. The goodwill acquired in connection with the
acquisition of certain oncology assets from Gilead, which occurred after July 1,
2001 is not being amortized, in accordance with the provisions of SFAS No. 142.
Goodwill acquired prior to July 1, 2001 was fully amortized as of September 30,
2002 and 2001.
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at September 30, 2002 and 2001 are
comprised of (in thousands):
<Table>
<Caption>
SEPTEMBER 30,
-----------------
2002 2001
------- -------
Accounts payable............................................ $ 1,949 $ 5,332
Accrued future lease escalations............................ 1,144 319
Accrued payroll and employee benefits....................... 2,050 775
Accrued incentive compensation.............................. 2,300 1,315
Accrued facility closing costs (see note 16(b))............. 1,630 5,059
Accrued interest (see note 9)............................... 1,067 --
Accrued clinical research organization and site costs....... 3,061 1,297
Other accrued expenses...................................... 8,861 3,966
------- -------
$22,062 $18,063
======= =======
</Table>
(9) CONVERTIBLE SENIOR SUBORDINATED NOTES
On February 1, 2002, the Company issued $200.0 million aggregate principal
amount of convertible senior subordinated notes (Notes) in a private placement
for net proceeds to the Company of $192.9 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 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. Upon a change in control, as defined in the
indenture governing the Notes, the holders of the Notes will have the right to
require the
34
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
Company to repurchase all of the Notes, or a portion thereof, not previously
called for redemption at a purchase price equal to 100% of the principal amount
of the Notes purchased, plus accrued and unpaid interest. The Company may elect
to pay the purchase price in common stock instead of cash. The number of shares
of common stock a holder will receive will equal the repurchase price divided by
95% of the average of the closing prices of the Company's common stock for the
five-trading day period ending on the third business day prior to the repurchase
date. The related debt issuance costs of $7.1 million were deferred and are
being amortized on a straight-line basis over the term of the Notes.
With respect to the Notes, the Company pledged $22.9 million of U.S.
government securities (Restricted Investment Securities) with maturities at
various dates through November 2004. Upon maturity, the proceeds of the
Restricted Investment Securities will be sufficient to pay the first six
scheduled interest payments on the Notes when due. The Company considers its
Restricted Investment Securities to be held-to-maturity, as defined by SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities." These
securities are reported at their amortized cost, which includes the direct costs
to acquire the securities, plus the amortization of any discount or premium, and
accrued interest earned on the securities. The aggregate fair value and
amortized cost of the Restricted Investment Securities at September 30, 2002
were $19.6 million and $19.3 million, respectively.
In August and September 2002, the Company retired a total of $40.0 million
in principal amount of the Notes for an aggregate purchase price of $26.2
million, including accrued interest of $133,000. The difference between the
purchase price and the principal amount of the Notes retired and accrued
interest, resulted in a net gain on the early retirement of the Notes in the
fourth quarter of fiscal 2002 of $12.6 million, including the write off of
approximately $1.3 million of the related debt issuance costs. The Company
adopted SFAS No. 145, "Recission of FASB Statements No. 4, 44 and 64, Amendment
of FABB Statement No. 13, and Technical Corrections," effective April 1, 2002
and as a result, the Company did not classify the net gain of $12.6 million
realized in the fourth quarter of fiscal 2002 as an extraordinary item in the
accompanying consolidated statements of operations.
At September 30, 2002, the fair value of the outstanding Notes was
approximately $105.9 million based on quoted market value.
(10) STOCKHOLDERS EQUITY
(a) Stock Option Plans
The Company has established eight stock option plans for its employees,
officers, directors and consultants, including the 2001 Incentive and
Non-Qualified Stock Option Plan and two stock option plans adopted upon the
acquisitions of Gilead's oncology assets in December 2001 (see note 3(a)) and
certain assets from Cadus in July 1999. The plans are administered by the
Compensation Committee of the Board of Directors, which may grant either
non-qualified or incentive stock options. The Committee determines the exercise
price and vesting schedule at the time the option is granted. Options vest over
various periods and expire no later than 10 years from date of grant. The total
authorized shares under these plans is 12,565,249.
The Board of Directors adopted the 2001 Incentive and Non-Qualified Stock
Option Plan, effective June 13, 2001, which was approved by the stockholders at
the annual meeting of stockholders on March 13, 2002. Under the plan the Company
may grant incentive stock options and non-qualified stock options to purchase up
to 4,000,000 shares. Participation in the plan is limited to directors,
officers, employees and consultants of the Company or a parent or subsidiary of
the Company. The plan also continues the automatic, formula-based grants of
non-qualified stock options to directors who are not employees of the Company.
Persons elected to the board after June 13, 2001 are entitled to an initial
grant of a non-qualified option to purchase 30,000 shares of common stock upon
their initial election with annual grants of options to purchase
35
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
7,500 shares thereafter upon re-election to the board. Persons elected to the
board prior to June 13, 2001 will continue to be eligible for annual grants of
options to purchase shares of common stock in an amount which depends upon the
number of years of service as a director (20,000 shares reducing to 7,500
shares).
The following table summarizes changes in the number of common shares
subject to options in the eight stock option plans, options established for
certain outside consultants related to clinical trial operations, options
granted to employees of OSI-UK, and options granted to outside directors:
<Table>
<Caption>
EXERCISE PRICE
--------------------------
SHARES WEIGHTED
(IN THOUSANDS) LOW HIGH AVERAGE
-------------- ------ ------ --------
Balance at September 30, 1999 -- Unexercised........ 4,575 $ 1.75 $ 9.32 $ 5.70
Granted........................................... 1,243 5.38 41.25 23.70
Exercised......................................... (2,371) 1.75 9.32 5.49
Forfeited......................................... (139) 4.25 23.25 5.90
------ ------ ------ ------
Balance at September 30, 2000 -- Unexercised........ 3,308 $ 3.25 $41.25 $12.68
Granted........................................... 1,043 33.68 60.06 48.59
Exercised......................................... (538) 3.25 23.25 7.05
Forfeited......................................... (55) 4.25 51.80 29.03
------ ------ ------ ------
Balance at September 30, 2001 -- Unexercised........ 3,758 $ 3.25 $60.06 $23.20
Granted........................................... 1,817 13.09 47.68 33.02
Exercised......................................... (432) 3.25 23.25 13.16
Forfeited......................................... (533) 3.50 60.06 41.73
------ ------ ------ ------
Balance at September 30, 2002 -- Unexercised........ 4,610 $ 3.25 $60.06 $26.00
====== ====== ====== ======
</Table>
At September 30, 2002, the Company has reserved 8,160,807 shares of its
authorized common stock for all shares issuable under options. At September 30,
2002, 2001 and 2000 the number of options exercisable were 2,291,689, 2,147,374,
and 1,752,084, respectively.
Information regarding stock options outstanding as of September 30, 2002,
is as follows:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------- -------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
SHARES EXERCISE CONTRACTUAL SHARES EXERCISE
PRICE RANGE (IN THOUSANDS) PRICE LIFE (IN THOUSANDS) PRICE
- ----------- -------------- -------- ----------- -------------- --------
$0.00 - $10.00 1,368 $ 6.14 4.5 1,367 $ 6.14
$10.01 - $20.00 110 15.24 7.9 83 15.70
$20.01 - $30.00 1,486 22.26 8.0 470 22.87
$30.01 - $40.00 191 35.10 6.9 76 35.36
$40.01 - $50.00 901 44.74 9.0 26 46.26
$50.01 - $60.00 436 51.80 7.0 201 51.80
$60.01 - $70.00 118 60.06 8.2 69 60.06
</Table>
Stock option grants are generally set at the closing price of the Company's
common stock on the date of grant and the related number of shares granted are
fixed at that point in time, except for one grant as noted below. Therefore
under the principles of APB Opinion No. 25, the Company does not recognize
compensation
36
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
expense associated with the grant of stock options. SFAS No. 123, "Accounting
for Stock-Based Compensation," requires the use of option valuation models to
determine the fair value of options granted after 1995. Pro forma information
regarding net loss and loss per share shown below was determined as if the
Company had accounted for its employee stock options and shares sold under its
stock purchase plan under the fair value method of SFAS No. 123.
The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for fiscal 2002, 2001 and 2000, respectively: risk-free interest
rates of 3.86 %, 3.28% and 5.95%, dividend yields of 0%; volatility factors of
the expected market price of the Company's common stock of 77.19%, 81.9% and
84.0%; expected life of the employees' options of 3.0 years, 3.0 years, and 4.2
years; and expected life of the consultants' options equal to the remaining
contractual life of the options. These assumptions resulted in weighted-average
fair values of $17.19, $25.29 and $23.08 per share for stock options granted in
fiscal 2002, 2001 and 2000, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The pro forma effect on
net loss for the periods presented is not representative of the pro forma effect
on net income or loss in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
fiscal 1996. The Company's pro forma information is as follows (in thousands,
except per share information):
<Table>
<Caption>
SEPTEMBER 30,
-------------------------------
2002 2001 2000
--------- -------- --------
Pro forma net loss.................................. $(235,584) $(34,223) $(21,542)
Pro forma basic and diluted net loss per share...... $ (6.55) $ (1.01) $ (0.88)
</Table>
On August 17, 2000, the Board of Directors granted non-qualified options to
purchase up to 250,000 shares of common stock to the Company's then new
President and Head of Research and Development. The terms of this grant provided
for an option to purchase 100,000 shares of common stock with an exercise price
equal to 50% of the fair market value on the grant date, vesting immediately
upon his employment on September 28, 2000 and an option to purchase 150,000
shares of common stock with an exercise price equal to the fair market value on
the grant date, vesting one-third in a year from the effective date of his
employment and monthly thereafter for twenty-four months. Compensation expense
resulting from these awards was measured as of September 28, 2000, the effective
date of employment. The granting of the options at 50% of fair market value
resulted in a compensation charge of $5.0 million, which is included in R&D
expense in the accompanying consolidated statement of operations for fiscal
2000. The granting of the other options resulted in deferred compensation of
$4.4 million which was to be recognized as compensation expense on a
straight-line basis over the vesting period. In fiscal 2002 and 2001, $485,000
and $1.5 million was recognized as compensation expense. As a result of his
resignation as an employee effective February 1, 2002, no additional
compensation expense has been recorded subsequent to February 1, 2002 and the
remaining deferred compensation of $2.4 million was reversed.
On August 17, 2000, one member of the Company's Board of Directors retired
as a director but continues to provide consulting services to the Company under
an existing consulting arrangement. In connection with his retirement, the Board
of Directors declared the then outstanding unvested options held by this
director as immediately vested. Absent this acceleration in vesting, the
unvested options would have continued to vest pursuant to the original terms of
the option award. The modification to the vesting schedule caused a new
measurement date for the unvested options which resulted in an incremental
intrinsic value of $1.6 million. The incremental intrinsic value was not
reflected as compensation in the accompanying consolidated statements of
operations as the individual continued to provide services to the Company
through the original vesting period of such options. In fiscal 2002, 2001 and
2000, the Company granted options to certain non-
37
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
employees to purchase 8,500, 127,000 and 80,000 shares of common stock,
respectively. Such options vest over a three year period, based upon future
service requirements. The Company recorded net deferred compensation of $49,000
and $1.0 million based on the fair value of such options as of September 30,
2002 and 2001, respectively, as determined using a Black-Scholes option pricing
model (see above for weighted average assumptions used). Such compensation cost
is amortized to expense using the methodology prescribed in FASB Interpretation
No. 28 over the respective vesting periods. In accordance with EITF Issue 96-18,
"Accounting For Equity Instruments that Are Issued to Other Than Employees for
Acquiring, or In Conjunction with Selling, Goods or Services," the amount of
compensation expense to be recorded in future periods related to the
non-employee grants is subject to change each reporting period based upon the
then fair value of these options, using a Black-Scholes option pricing model,
until expiration of the grant vesting period. The Company recorded compensation
expense in fiscal 2002 of $612,000 for shares granted in fiscal 2002, 2001 and
2000. The Company recorded compensation expense in fiscal 2001 of $1.8 million
for shares granted in fiscal 2001, 2000 and 1999. The Company recorded
compensation expense in fiscal 2000 of $1.8 million for shares granted in fiscal
2000, 1999 and 1998.
In April 1999, new tax regulations became effective in the UK requiring
employers to remit a national insurance contribution (NIC) tax on gains on the
exercise of stock options by employees. This NIC tax applies to the Company's
grants of options to its UK employees in 1999, 2000 and 2001. On June 12, 2001,
the Company obtained Inland Revenue approval to statutorily transfer the
employer NIC liability to the employee.
(b) Shareholder Rights Plan
On September 27, 2000, the Board of Directors adopted a shareholder rights
plan, declared a dividend distribution of one Series SRPA Junior Participating
Preferred Stock Purchase Right on each outstanding share of its common stock,
and authorized the redemption of the rights issued pursuant to the Company's
then current shareholder rights plan. The Company distributed rights to all
shareholders of record at the close of business on September 27, 2000, the
record date. These rights entitle the holder to buy one one-thousandth of a
share of Series SRPA Junior Participating Preferred Stock upon a triggering
event as discussed below.
Upon the actual acquisition of 17.5% or more of the outstanding common
stock of the Company by a person or group, the rights held by all holders other
than the acquiring person or group will be modified automatically to be rights
to purchase shares of common stock (instead of rights to purchase preferred
stock) at 50% of the then market value of such common stock. Furthermore, such
rightholders will have the further right to purchase shares of common stock at
the same discount if the Company merges with, or sells 50% or more of its assets
or earning power to, the acquiring person or group or any person acting for or
with the acquiring person or group. If the transaction takes the form of a
merger of the Company into another corporation, these rightholders will have the
right to acquire at the same percentage discount shares of common stock of the
acquiring person or other ultimate parent of such merger party.
The Company can redeem the rights at any time before (but not after) a
person has acquired 17.5% or more of the Company's common stock, with certain
exceptions. The rights will expire on August 31, 2010 if not redeemed prior to
such date.
(c) Authorized Common and Preferred Stock
The Company has 200,000,000 shares of authorized common stock, with a par
value of $.01 and 5,000,000 shares of preferred stock with a par value of $.01
per share with such designations, preferences, privileges, and restrictions as
may be determined from time to time by the Company's Board of Directors.
38
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
(d) Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan under which eligible
employees may contribute up to 10% of their base earnings toward the quarterly
purchase of the Company's common stock. The employee's purchase price is derived
from a formula based on the fair market value of the common stock. No
compensation expense is recorded in connection with the plan. During fiscal
2002, 2001 and 2000, 19,046, 3,350 and 6,811 shares were issued with 163, 57 and
48 employees participating in the plan, respectively. At September 30, 2002, the
Company has reserved 608,704 shares of its authorized common stock in connection
with this plan.
The Company sponsors a stock purchase plan for employees of OSI-UK, its
wholly-owned subsidiary. Under the terms of the plan, eligible employees may
contribute between L5 and L250 of their base earnings, in 36 monthly
installments towards the purchase of the Company's common stock. The employee's
purchase price is determined at the beginning of the 36-month period and
compensation expense is recorded over the 36-month period. A maximum of 100,000
shares may be issued under the plan. As of September 30, 2002, there were 94
employees, eight employees and 17 employees participating in the 2002, 2001 and
2000 stock purchase plans, respectively. At September 30, 2002, the Company has
reserved 66,920 shares of its common stock in connection with this plan.
(e) Private Placement
On February 28, 2000, the Company sold 3.325 million newly-issued shares of
its common stock to a select group of institutional investors for net proceeds
of approximately $53 million.
(f) 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 $351.4 million after
all underwriting and other related fees were 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 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 $52.8 million.
(g) Stock Purchase Agreements
Concurrently with the execution of the collaboration agreements described
in note 5(a), the Company entered into separate Stock Purchase Agreements on
January 8, 2001 with each of Genentech and Roche Holdings 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 transactions contemplated under the collaboration agreements and
Stock Purchase Agreements closed on January 30, 2001.
(h) Issuance of Common Stock to Gilead
On December 21, 2001, in connection with the acquisition of certain
oncology assets from Gilead, the Company issued 924,984 shares of common stock
valued at $40.0 million (see note 3(a)).
(i) Convertible Notes
On February 1, 2002, the Company issued $200.0 million aggregate principal
amount of the notes in a private placement. In August and September 2002, the
Company retired a total of $40.0 million in principal amount of the Notes for an
aggregate purchase price of approximately $26.2 million. The Notes are
39
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
convertible into shares of the 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 (see note 9).
(11) INCOME TAXES
There is no provision (benefit) for federal or state income taxes, since
the Company has incurred operating losses since inception and has established a
valuation allowance equal to the net deferred tax assets.
The tax effect of temporary differences, net operating loss carry forwards
and research and development tax credit carry forwards as of September 30 are as
follows (in thousands):
<Table>
<Caption>
SEPTEMBER 30,
--------------------
2002 2001
--------- --------
Deferred tax assets:
Net operating loss carry forwards........................... $ 95,713 $ 48,174
Research and development credits............................ 6,203 1,295
Intangible assets........................................... -- 686
Unearned revenue............................................ 5,460 9,485
Purchased research and experimental expenditures............ 51,642 --
Other....................................................... 9,112 7,536
--------- --------
168,130 67,176
Valuation allowance......................................... (167,970) (67,176)
--------- --------
160 --
Deferred tax liability:
Intangible assets........................................... (160) --
--------- --------
(160) --
--------- --------
$ -- $ --
========= ========
</Table>
As of September 30, 2002, the Company has available federal net operating
loss carry forwards of approximately $241 million which will expire in various
years from 2003 to 2022, and may be subject to certain annual limitations. The
Company's research and development tax credit carry forwards expire in various
years from 2005 to 2022.
Of the $168 million valuation allowance at September 30, 2002, $88 million
relates to deductions for employee stock options for which the tax benefit will
be credited to additional paid in capital if realized.
(12) COMMITMENTS AND CONTINGENCIES
(a) Lease Commitments
The Company leases office, operating and laboratory space under various
lease agreements.
Rent expense was approximately $6.2, $2.1 and $2.0 million for fiscal 2002,
2001 and 2000, respectively. The rent expense for fiscal 2002 includes the
Oxford, England facility leases (acquired in September 2001), the Boulder,
Colorado facility leases (acquired in December 2001), the Farmingdale, New York
lease (commenced in June 2002) and the expansion of the Melville, New York
facility (commenced June 2002). This was offset by the termination of the
Tarrytown, New York lease (August 2002). Beginning in April 2002, rental
payments for the Birmingham, England facility were charged against the closing
cost accrual (see note 16(b)).
40
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
The following is a schedule of future minimum rental payments for the next
five fiscal years and thereafter required as of September 30, 2002, assuming
expiration of the leases for the Birmingham, England facility by January 4,
2006, the Uniondale facility on June 30, 2006, the Melville, New York facility
on December 31, 2009, the two Oxford, England facilities on August 24, 2009 and
March 31, 2021, respectively, the Farmingdale facility on May 31, 2022, and the
Boulder facilities by October 16, 2006. Also included in the amounts below are
commitments for equipment under various operating leases (in thousands).
<Table>
2003........................................................ $ 6,952
2004........................................................ 7,047
2005........................................................ 6,982
2006........................................................ 5,567
2007........................................................ 4,232
2008 and thereafter......................................... 55,443
-------
$86,223
=======
</Table>
As of September 30, 2002, the Company has entered into capital commitments
of approximately $510,000 relating to the refurbishment and upgrading of the two
Oxford facilities and one of the Boulder facilities.
(b) Contingencies
From time to time, the Company has received several letters from other
companies and universities advising the Company that various products under
research and development by the Company may be infringing on existing patents of
such entities. These matters are reviewed by management and outside counsel for
the Company. Where valid patents of other parties are found by the Company to be
in place, management will consider entering into licensing arrangements with the
universities and/or other companies or modify the conduct of its research. The
Company's future royalties, if any, may be reduced by up to 50% if its licensees
or collaborative partners are required to obtain licenses from third parties
whose patent rights are infringed by the Company's products, technology or
operations. In addition, should any infringement claims result in a patent
infringement lawsuit, the Company could incur substantial costs in defense of
such a suit, which could have a material adverse effect on the Company's
business, financial condition and results of operations, regardless of whether
the Company were successful in the defense.
(c) Borrowings
As of September 30, 2002, the Company had a line of credit with a
commercial bank in the amount of $10.0 million. This line expires annually on
March 31st, and its current rate of interest is prime plus 3/4. There were no
amounts outstanding under the line of credit as of September 30, 2002. In
addition, in 1999, the Company obtained a secured loan of $500,000 from the same
bank. The loan was payable over a three-year period, with monthly principal
payments of $13,888, plus interest at 8.12%. The loan balance as of September
30, 2001 was $111,000 and was fully repaid as of September 30, 2002.
In connection with the acquisition of certain assets from Gilead in
December 2001 (see note 3(a)), the Company assumed certain liabilities from
Gilead including loans utilized to finance equipment. The loans have fixed
interest rates ranging from 11.50% to 11.90% and are due in full by June 2003.
The loan balance as of September 30, 2002 was $275,000. The Company's
wholly-owned subsidiary, OSI-UK, also maintains certain loans to finance
equipment. The loans have interest rates ranging from 10.98% to 16.30% and are
due in full by October 2003. The loan balance as of September 30, 2002 was
$265,000.
41
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
(d) Derivative Financial Instruments
The Company, at times, minimizes risk by hedging the foreign currency
exposure of the Company's net investment in foreign operations through the
purchase of forward foreign exchange contracts. At September 30, 2000, the
Company had $1.0 million in such contracts, with remaining terms not exceeding
six months. The difference between the foreign currency rate in the contract and
such rate as of September 30, 2000 was immaterial to the results of operations
for fiscal 2000.
During fiscal 2002 and 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 purpose other than cash flow
hedging; the Company does not speculate using derivatives.
(13) RELATED PARTY TRANSACTIONS
One director is a partner in a law firm which represents the Company on its
patent and license matters. Fees paid to this firm in fiscal 2002, 2001 and 2000
were approximately $504,000, $546,000 and $482,000, respectively. One director
is a controlling member of Mehta Partners LLC with which the Company has a
strategic and financial services arrangement. In fiscal 2002, 2001 and 2000, the
Company paid Mehta approximately $175,000, $175,000 and $490,000 for consulting
services received. In addition, the Company has compensated other directors for
services performed pursuant to consultant arrangements. In fiscal 2002, 2001 and
2000, consulting fees in the amounts of approximately $153,000, $151,000 and
$292,000, respectively, were paid by the Company pursuant to these arrangements.
A director is an officer of Cold Spring Harbor Laboratory which was a founder of
Helicon and Amplicon (which was acquired by Tularik). The Company's former
chairman was a member of the board of directors of Anaderm through September
1999 and is on the board of directors of Helicon. An executive officer of the
Company was vice president of Helicon through November 2002 and vice president
of Anaderm through November 2001. A director was the chief executive officer of
Helicon through December 1999. The Company has a fully reserved investment in
Helicon and sold its investment in Tularik in December 1999 (note 4). A director
is on the faculty of Vanderbilt with which the Company has a collaborative
research agreement, and also has a consulting agreement with the Company. A
director is a non-executive director of Genentech and is an advisor to Roche,
both entities with which the Company has collaboration agreements.
An officer and a vice president of the Company have outstanding loans with
the Company aggregating $200,000 with a carrying amount of $184,000 as of
September 30, 2002. The Company assumed these loans in connection with the
acquisition of certain assets from Gilead on December 21, 2001 (see note 3(a)).
(14) EMPLOYEE SAVINGS AND INVESTMENT PLAN
The Company sponsors an Employee Savings and Investment Plan under Section
401(k) of the Internal Revenue Code. The plan allows employees to defer from 2%
to 20% of their income on a pre-tax basis through contributions into designated
investment funds. For each dollar the employee invests, up to 6% of his or her
earnings, the Company will contribute an additional 50 cents into the funds. For
fiscal 2002, 2001 and 2000, the Company's expenses related to the plan were
approximately $502,000, $350,000 and $277,000, respectively.
The Company also sponsors four pension plans covering the employees of
OSI-UK, its wholly-owned subsidiary. The Group Personal Pension Plan allows
employees to contribute up to 31% (depending on their age) of their income on a
post-tax basis into designated investment funds. The tax paid on the
contribution is then recovered from the Inland Revenue. The Company will
contribute from 4% to 9% depending on the employees' contributions. The British
Biotech Pension Scheme covers employees retained from the acquisition of certain
assets from British Biotech (see note 3(b)), as well as certain former employees
of British
42
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
Biotech hired by the Company subsequent to the acquisition. The plan allows the
employees to defer up to 15% of their income on a pre-tax basis through
contributions into designated pension funds. For each pound the employee
invests, the Company will contribute up to 9% into the funds. The Company also
sponsors a personal pension plan for one employee and a Flexible Executive
Pension Plan covering two senior employees. The Flexible Executive Pension Plan
allows the employees to defer up to 15% of their income on a pre-tax basis
through contributions into designated pension funds. For each pound the employee
invests, the Company will contribute up to 9% into the funds. For fiscal 2002,
2001, and 2000, the Company's expenses related to the plans were approximately
$602,000, $186,000 and $190,000, respectively.
(15) EMPLOYEE RETIREMENT PLAN
On November 10, 1992, the Company adopted a plan which provides
postretirement medical and life insurance benefits to eligible employees, board
members and qualified dependents. Eligibility is determined based on age and
service requirements. These benefits are subject to deductibles, co-payment
provisions and other limitations.
The Company follows SFAS No. 106, "Employer's Accounting for Postretirement
Benefits Other Than Pensions" to account for the benefits to be provided by the
plan. Under SFAS No. 106 the cost of postretirement medical and life insurance
benefits is accrued over the active service periods of employees to the date
they attain full eligibility for such benefits.
Net postretirement benefit cost for fiscal 2002, 2001 and 2000 includes the
following components (in thousands):
<Table>
<Caption>
2002 2001 2000
---- ---- ----
Service cost for benefits earned during the period.......... $255 $159 $152
Interest cost on accumulated postretirement benefit
obligation................................................ 189 156 156
Amortization of initial benefits attributed to past
service................................................... 6 6 6
---- ---- ----
Net postretirement benefit cost............................. $450 $321 $314
==== ==== ====
</Table>
The accrued postretirement benefit cost at September 30, 2002 and 2001 was
as follows (in thousands):
<Table>
<Caption>
2002 2001
------ ------
Accumulated postretirement benefit obligation............... $3,508 $2,246
Unrecognized cumulative net loss............................ (930) (53)
Unrecognized transition obligation.......................... (108) (113)
------ ------
Accrued postretirement benefit cost......................... $2,470 $2,080
====== ======
</Table>
The changes in the accumulated postretirement benefit obligation during
fiscals 2002 and 2001 were as follows (in thousands):
<Table>
<Caption>
2002 2001
------- -------
Balance at beginning of year................................ $(2,246) $(2,142)
Benefit payments.......................................... 60 127
Gain/(loss) experience.................................... (878) 84
Service cost.............................................. (255) (159)
Interest cost............................................. (189) (156)
------- -------
Balance at end of year...................................... $(3,508) $(2,246)
======= =======
</Table>
43
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
The accumulated postretirement benefit obligation was determined using a
discount rate of 6.75% and 7.5% in 2002 and 2001, respectively. In fiscal 2002,
the health care cost trend was increased to an initial level of 8%, decreasing
to an ultimate rate of 5% by 2016. The health care cost trend rate used in 2001
was a fixed 5%. Increasing the assumed health care cost trend rates by one
percentage point in each year and holding all other assumptions constant would
increase the accumulated postretirement benefit obligation as of September 30,
2002 by approximately $736,000 and the fiscal 2003 net postretirement service
and interest cost by approximately $191,000. Benefits paid during fiscal 2002,
2001 and 2000 were $60,000, $127,000 and $119,000, respectively.
(16) CONSOLIDATION OF FACILITIES
(a) Tarrytown
During the fourth quarter of fiscal 2001, the Company announced its
strategic decision to close down its Tarrytown, New York facility and
consolidate its operations into its Farmingdale, New York facility. The
operations at the facility ceased on June 30, 2002 and the Company closed the
facility in August 2002. The fungal extract libraries and certain furniture and
equipment from the Tarrytown, New York facility were relocated to the other
company facilities. Twenty-eight research and administrative employees relocated
to the Farmingdale and Uniondale facilities. Under the plan for consolidating
this facility, we had anticipated that 28 research and administrative employees
would not relocate and would receive a severance package, which included two
weeks salary for each year of service. As of the closing of the facility, 35
employees did not relocate and received a severance package and two employees
relocated to our Oxford, England facility. In August 2002, the Company entered
into a Termination and Surrender Agreement with the landlord of the Tarrytown
facility whereby it was released from its obligations under the lease.
The estimated cost of closing this facility as of September 30, 2001 was
$775,000, and has been included in the accompanying consolidated balance sheet
in accrued expenses as of September 30, 2001, and in R&D expense ($673,000) and
in selling, general and administrative expenses ($102,000) in the accompanying
consolidated statement of operations for fiscal 2001. The charge consists of
write down of equipment and leaseholds, which were not relocated, of $384,000,
and severance costs of $391,000.
During fiscal 2002, the Company paid $418,000 in severance costs, of which
$391,000 was charged against the closing costs accrual, and $19,000 has been
included in R&D and $8,000 has been included in selling, general and
administrative costs in the accompanying consolidated statement of operations
for fiscal 2002. The Company also wrote-off $511,000 of leasehold improvements
and furniture and equipment which were not relocated to the other facilities,
net of cash proceeds received from the sale of furniture and equipment. The
Company charged $384,000 of this write-off against the closing costs accrual and
$126,000 is included in the accompanying consolidated statement of operations
for fiscal 2002. As of September 30, 2002, there are no accrued closing costs in
the accompanying consolidated balance sheet relating to the Tarrytown facility.
The consolidation activity for the fiscal year ended September 30, 2002 was as
follows (in thousands):
<Table>
<Caption>
WRITEDOWN OF
SEVERANCE EQUIPMENT AND
COSTS LEASEHOLDS TOTAL
--------- ------------- -----
Balance at September 30, 2001......................... $ 391 $ 384 $ 775
Cash Paid/writedowns.................................. (391) (384) (775)
----- ----- -----
Balance at September 30, 2002......................... $ -- $ -- $ --
===== ===== =====
</Table>
44
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
(b) Birmingham
During the fourth quarter of fiscal 2001, the Company announced the
decision to consolidate its Birmingham, England facility with the newly acquired
Oxford, England facility as a result of the acquisition of the British Biotech
assets (see note 3(b)). The operations at the facility ceased on March 31, 2002;
however, the Company is still in the process of closing down the facility. Fifty
research and administrative employees relocated to the Oxford facilities. Under
the plan for consolidating this facility, we had anticipated that 28 research
and administrative employees would not relocate but would receive a severance
package based on the number of years of service. As of the cessation of
operations, 32 employees did not relocate and received the severance package.
The estimated cost of closing this facility as of September 30, 2001 was
$4.3 million and has been included in the accompanying consolidated balance
sheet in accrued expenses as of September 30, 2001, in R&D expense ($3.8
million) and selling, general and administrative expenses ($511,000) in the
accompanying consolidated statement of operations for fiscal 2001. The charge
consists of non-cancelable lease exit costs for the period April 2002 through
February 2004 of $2.0 million, write down of equipment and leaseholds which are
not being relocated of $2.1 million, and severance costs of $190,000.
During fiscal 2002, the Company paid $244,000 in severance costs, of which
$185,000 was charged against the closing costs accrual, $28,000 and $31,000 have
been included in R&D expense and selling, general and administrative costs,
respectively, in the accompanying consolidated statement of operations for
fiscal 2002. During fiscal 2002, the Company has also paid rental expense and
costs to restore the facility to its original condition in the amount of
$932,000, which have been charged against the closing costs accrual. The Company
adjusted the accrual for lease exit costs based on a revised estimate of costs
to restore the facility to its original condition. As a result, a credit of
$69,000 is included in selling, general and administrative costs in the
accompanying consolidated statement of operations for fiscal 2002. An adjustment
of $537,000 was also made to the accrual to reflect a longer-than expected lease
term relating to one of the leases at the Aston facility. As a result, a charge
of $486,000 and $51,000 is included in R&D expense and selling, general and
administrative costs, respectively, in the accompanying consolidated statement
of operations for fiscal 2002. The Company also wrote-off approximately $2.3
million of leasehold improvements and furniture and equipment which were not
relocated to the Oxford facility. The Company charged $2.2 million of this
write-off against the closing costs accrual and $97,000 is included in the
accompanying consolidated statement of operations for fiscal 2002. As of
September 30, 2002, the remaining restructuring reserve relating to the
consolidation of this facility was $1.6 million relating to non-cancelable lease
exit costs. The consolidation activity for the fiscal year ended September 30,
2002 was as follows (in thousands):
<Table>
<Caption>
WRITEDOWN OF
SEVERANCE LEASE EXIT EQUIPMENT AND
COSTS COSTS LEASEHOLDS TOTAL
--------- ---------- ------------- -------
Balance at September 30, 2001..................... $ 190 $1,978 $ 2,116 $ 4,284
Cash Paid/writedowns.............................. (185) (932) (2,199) (3,316)
Adjustments....................................... -- 473 -- 473
Foreign currency translation adjustments.......... (5) 111 83 189
----- ------ ------- -------
Balance at September 30, 2002..................... $ -- $1,630 $ -- $ 1,630
===== ====== ======= =======
</Table>
(c) North Carolina
During fiscal 1999, the Company made the strategic decision to close down
its facilities in North Carolina and consolidate its natural products operations
into its Tarrytown, New York facility. This close-down occurred on March 31,
2000. The fungal extract libraries and certain equipment were relocated to the
45
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
Tarrytown facility. None of the employees at the North Carolina facility were
relocated. Under the plan for relocating this facility, 16 research and
administrative employees received a severance package, which included continued
payments of four months salary, plus four months of continuous health insurance.
The leases in North Carolina were scheduled to expire in 2004. The Company
accrued an estimate of a reserve for an expected delay in finalizing a new
tenant and its assumption of the Company's existing lease.
The estimated cost of closing this facility was $535,000, and was included
in the consolidated balance sheet in accrued expenses as of September 30, 1999,
in R&D expense ($395,000) and in selling, general and administrative expenses
($140,000) in the consolidated statement of operations for fiscal 1999. During
fiscal 2000, the Company incurred approximately $432,000 principally in
severance and subleasing-related costs, including a $61,000 loss resulting from
the assumption of a lease and related leasehold improvements by a third party.
At September 30, 2001, the plan was completed and no liability remains.
(17) SALE OF DIAGNOSTICS BUSINESS
On November 30, 1999, the Company sold assets of its diagnostics business
to Bayer including the assets of the Company's wholly-owned diagnostics
subsidiary, OSDI, based in Cambridge, Massachusetts. The assets sold 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 the OSDI
facility located in Cambridge. Under the terms of the agreement, the Company
received $9.2 million up-front from Bayer with additional contingent payments of
$1.0 million made to the Company in December 2001.
The Company recorded a gain on the sale of approximately $3.7 million
during fiscal 2000. The net gain was calculated as follows (in thousands):
<Table>
Cash received from Bayer.................................... $ 9,151
Accrued expenses assumed by Bayer........................... 599
Net book value of fixed assets sold......................... (611)
Net book value of patent costs (intangibles)................ (4,748)
Professional and legal fees incurred........................ (172)
Commission costs paid....................................... (315)
Other related costs......................................... (158)
-------
Gain on sale of diagnostics business........................ $ 3,746
=======
</Table>
The Company also recorded a gain on the sale of $1.0 million during fiscal
2002 upon receipt of the additional contingent payment.
46
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
(18) QUARTERLY FINANCIAL DATA (UNAUDITED)
The tables below summarize the Company's unaudited quarterly operating
results for fiscal 2002 and 2001.
<Table>
<Caption>
THREE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
2001 2002 2002 2002
------------ --------- -------- -------------
Revenues............................... $ 5,892 $ 6,770 $ 4,510 $ 4,644
Net loss............................... $(142,382) $(24,515) $(29,440) $(22,142)
Basic and diluted net loss per weighted
average share of common stock
outstanding.......................... $ (4.05) $ (0.68) $ (0.81) $ (0.61)
</Table>
<Table>
<Caption>
THREE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
2000 2001 2001 2001
------------ --------- -------- -------------
Revenues................................ $ 5,695 $7,531 $ 6,339 $ 6,457
Net (loss) income before cumulative
effect of accounting change........... $(3,022) $1,351 $(4,760) $(14,699)
Net (loss) income....................... $(5,647) $1,351 $(4,760) $(14,699)
Basic and diluted net (loss) income per
weighted average share of common stock
outstanding:
Before cumulative effect of accounting
change................................ $ (0.10) $ 0.04 $ (0.14) $ (0.42)
After cumulative effect of accounting
change................................ $ (0.18) $ 0.04 $ (0.14) $ (0.42)
</Table>
The basic and diluted net (loss) income per common share calculation for
each of the quarters are based on the weighted average number of shares
outstanding in each period. Therefore, the sum of the quarters in a fiscal year
does not necessarily equal the basic and diluted net (loss) income per common
share for the fiscal year.
(19) NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS 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. Amortization expense relating to goodwill was $0,
$694,000 and $694,000 for the years ended September 30, 2002, 2001 and 2000,
respectively. 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. The
Company adopted the applicable provisions of these statements for the accounting
of the acquisition of certain oncology assets from Gilead and the British
Biotech asset acquisition,
47
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
which occurred after July 1, 2001 (see notes 3(a) and 3(b) to the consolidated
financial statements, respectively).
Upon full adoption of these standards in fiscal 2003, the Company will
evaluate its 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. The Company 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, the Company 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 of
September 30, 2002, the Company had goodwill in the amount of $36.5 million and
identifiable intangible assets in the amount of $2.6 million. The Company is
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. The Company is currently assessing the impact of adoption of
SFAS No. 144.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, among other things, rescinds SFAS No. 4, which
required all gains and losses from the extinguishment of debt to be classified
as an extraordinary item and amends SFAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. The Company
adopted SFAS No. 145 effective April 1, 2002, which was the beginning of the
fiscal quarter in which this statement was issued. As a result, the Company did
not classify the net gain of $12.6 million realized in the fourth quarter of
fiscal year 2002 from the early retirement of a portion of the Company's notes
as an extraordinary item in the accompanying consolidated statements of
operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", effective for exit or disposal
activities initiated after December 31, 2002. Under SFAS No. 146, a liability
for a cost associated with an exit or disposal activity must only be recognized
when the liability is incurred. Under the previous guidance of EITF 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity including Certain Costs Incurred in a Restructuring", the
Company recognized a liability for an exit or disposal activity cost at the date
of its commitment. If the Company were to commit to further exit or disposal
activities subsequent to the effective date, it would be subject to the new
rules regarding expense recognition.
(20) SUBSEQUENT EVENT
On October 24, 2002, the Company announced certain staffing adjustments,
management alignments and business initiatives designed to continue the
Company's efforts to refocus its entire business and research development
activities into the oncology area. The Company reduced its overall headcount by
approximately 40 employees, primarily in the research discovery area, and
announced its intention to divest its non-oncology research assets.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
OSI PHARMACEUTICALS, INC.
By: /s/ ROBERT L. VAN NOSTRAND
------------------------------------
Robert L. Van Nostrand
Vice President and Chief Financial
Officer
Date: April 29, 2003
49
CERTIFICATION
I, Colin Goddard, certify that:
1. I have reviewed this annual report on Form 10-K of OSI Pharmaceuticals,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 29, 2003
/s/ COLIN GODDARD
--------------------------------------
Colin Goddard
Chief Executive Officer
50
CERTIFICATION
I, Robert L. Van Nostrand, certify that:
1. I have reviewed this annual report on Form 10-K of OSI Pharmaceuticals,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"), and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 29, 2003
/s/ ROBERT L. VAN NOSTRAND
--------------------------------------
Robert L. Van Nostrand
Vice President and Chief Financial
Officer
51
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
- -------
2.1+ Asset Purchase Agreement, dated July 30, 1999, by and
between Cadus Pharmaceutical Corporation and OSI
Pharmaceuticals, Inc., filed by the Company as an exhibit to
the Form 10-Q for the fiscal quarter ended June 30, 1999
(file no. 000-15190), and incorporated herein by reference.
2.2 OSI Pharmaceuticals, Inc. Non-Qualified Stock Option Plan
for Former Employees of Cadus Pharmaceutical Corporation,
filed by the Company as an exhibit to the Form 10-Q for the
fiscal quarter ended June 30, 1999 (file no. 000-15190), and
incorporated herein by reference.
2.3+ Asset Purchase Agreement, dated November 17, 1999, by and
among OSI Pharmaceuticals, Inc., Oncogene Science
Diagnostics, Inc., and Bayer Corporation, filed by the
Company as an exhibit to the Form 8-K filed on December 15,
1999 (file no. 000-15190), and incorporated herein by
reference.
2.4 Amendment No. 1 to Asset Purchase Agreement, dated November
30, 1999, by and among OSI Pharmaceuticals, Inc., Oncogene
Science Diagnostics, Inc., and Bayer Corporation, filed by
the Company as an exhibit to the Form 8-K filed on December
15, 1999 (file no. 000-15190), and incorporated herein by
reference.
2.5 Asset Purchase Agreement, dated November 26, 2001, by and
between OSI Pharmaceuticals, Inc. and Gilead Sciences, Inc.
filed by the Company as an exhibit to the Form 8-K filed on
December 11, 2001 (file no. 000-15190), and incorporated
herein by reference.
2.6 OSI Pharmaceuticals, Inc. Non-Qualified Stock Option Plan
for Former Employees of Gilead Sciences, Inc. filed by the
Company as an exhibit to the Form 8-K filed on January 7,
2002 (file no. 000-15190), and incorporated herein by
reference.
3.1 Certificate of Incorporation, as amended, filed by the
Company 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 the Company 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.
4.1 Stock Purchase Agreements, dated February 24, 2000, by and
between OSI Pharmaceuticals, Inc. and each of Biotechnology
Value Fund L.P., American Variable Insurance Series Global
Small Capitalization Fund, Asset Management Holding Co.,
Biotechnology Value Fund, II L.P., Chelsey Capital,
Forstmann International Fund, LTD, Forstmann Partners, L.P.,
Galleon Healthcare Overseas, Ltd., Galleon Healthcare
Partners, LP, International Biotechnology Trust PLC,
Investment 10, L.L.C., Janus Investment Fund, Lone Balsam,
L.P., Lone Cypress, LTD, Lone Sequoia, L.P., Lone Spruce,
L.P., Merlin BioMed LP, Merlin BioMed Intl LTD, Moore Global
Investments, Ltd., Remington Investment Strategies, L.P.,
Sands Point Partners, SMALLCAP World Fund, Inc., United
Capital Management, Inc., and Ziff Asset Management, L.P.,
filed by the Company as exhibits to the Form 8-K filed on
March 1, 2000 (file no. 000-15190), and incorporated herein
by reference.
4.2 Rights Agreement, dated September 27, 2000, between OSI
Pharmaceuticals, Inc. and The Bank of New York as Rights
Agent, including Terms of Series SRP Junior Participating
Preferred Stock, Summary of Rights to Purchase Preferred
Stock and Form of Right Certificate, filed by the Company as
an exhibit to the Form 8-A filed on September 27, 2000 (file
no. 000-15190), and incorporated herein by reference.
4.3 Stock Purchase Agreement, dated January 8, 2001, by and
between OSI Pharmaceuticals, Inc. and Genentech, Inc., filed
by the Company as an exhibit to the Form 8-K filed on
February 14, 2001 (file no. 000-15190), and incorporated
herein by reference.
4.4 Stock Purchase Agreement, dated January 8, 2001, by and
between OSI Pharmaceuticals, Inc. and Roche Holdings, Inc.,
filed by the Company as an exhibit to the Form 8-K filed on
February 14, 2001 (file no. 000-15190), and incorporated
herein by reference.
</Table>
<Table>
<Caption>
EXHIBIT
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4.5 Investor Rights Agreement, dated December 21, 2001, by and
between OSI Pharmaceuticals, Inc. and Gilead Sciences, Inc.,
filed by the Company as an exhibit to the Form 8-K filed on
January 7, 2002 (file no. 000-15190) and incorporated herein
by reference.
4.6 Indenture, dated February 1, 2002, by and between OSI
Pharmaceuticals, Inc. and The Bank of New York, filed as an
exhibit to OSI Pharmaceuticals, Inc.'s registration
statement on Form S-3 filed April 19, 2002 (file no.
333-86624), and incorporated herein by reference.
4.7 Form of 4% Convertible Senior Subordinated Note Due 2009
(included in Exhibit 4.6).
4.8 Registration Rights Agreements, dated February 1, 2002, by
and among OSI Pharmaceuticals, Inc., Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith, Incorporated,
Robertson Stephens, Inc., Adams, Harkness & Hill, Inc. and
Lazard Freres & Co. LLC, filed as an exhibit to OSI
Pharmaceuticals, Inc.'s registration statement on Form S-3
filed April 19, 2002 (file no. 333-86624), and incorporated
herein by reference.
10.1 1985 Stock Option Plan, filed as an exhibit to OSI
Pharmaceuticals, Inc.'s registration statement on Form S-8
(file no. 33-8980), and incorporated herein by reference.
10.2 1989 Incentive and Non-Qualified Stock Option Plan, filed as
an exhibit to OSI Pharmaceuticals, Inc.'s registration
statement on Form S-8 (file no. 33-38443), and incorporated
herein by reference.
10.3 1993 Employee Stock Purchase Plan, as amended, filed as an
exhibit to OSI Pharmaceuticals, Inc.'s registration
statement on Form S-8 (file no. 33-60182), and incorporated
herein by reference.
10.4 1993 Incentive and Non-Qualified Stock Option Plan, as
amended, filed as an exhibit to OSI Pharmaceuticals, Inc.'s
registration statement on Form S-8 (file no. 33-64713) and
incorporated herein by reference.
10.5 Stock Purchase Plan for Non-Employee Directors, filed as an
exhibit to OSI Pharmaceuticals, Inc.'s registration
statement on Form S-8 (file no. 333-06861), and incorporated
herein by reference.
10.6 1995 Employee Stock Purchase Plan, filed as an exhibit to
OSI Pharmaceuticals, Inc.'s registration statement on Form
S-8 (file no. 333-06861), and incorporated herein by
reference.
10.7 1997 Incentive and Non-Qualified Stock Option Plan, filed as
an exhibit to OSI Pharmaceuticals, Inc.'s registration
statement on Form S-8 (file no. 333-39509), and incorporated
herein by reference.
10.8 1999 Incentive and Non-Qualified Stock Option Plan, filed as
an exhibit to OSI Pharmaceuticals, Inc.'s registration
statement on Form S-8 (file no. 333-42274), and incorporated
herein by reference.
10.9 2001 Incentive and Non-Qualified Stock Option Plan, filed as
an exhibit to OSI Pharmaceuticals, Inc.'s registration
statement on Form S-8 (file no. 333-91118), and incorporated
herein by reference.
10.10+ Collaborative Research Agreement, dated April 1, 1996,
between OSI Pharmaceuticals, Inc. and Pfizer Inc., filed by
the Company as an exhibit to the Form 10-Q for the fiscal
quarter ended March 31, 1996, as amended (file no.
000-15190), and incorporated herein by reference.
10.11+ License Agreement, dated April 1, 1996, between OSI
Pharmaceuticals, Inc. and Pfizer Inc., filed by the Company
as an exhibit to the Form 10-Q for the fiscal quarter ended
March 31, 1996, as amended (file no. 000-15190), and
incorporated herein by reference.
10.12 Employment Agreement, dated April 30, 1998, between OSI
Pharmaceuticals, Inc. and Colin Goddard, Ph.D., filed by the
Company as an exhibit to the Form 10-Q for the fiscal
quarter ended June 30, 1998 (file no. 000-15190), and
incorporated herein by reference.
10.13 Consulting Agreement, dated October 1, 1998, between OSI
Pharmaceuticals, Inc. and Gary E. Frashier, filed by the
Company as an exhibit to the Form 10-Q for the fiscal
quarter ended December 31, 1998 (file no. 000-15190), and
incorporated herein by reference.
10.14+ Amended and Restated Collaborative Research Agreement, dated
April 23, 1999, by and among Pfizer, Inc., OSI
Pharmaceuticals, Inc. and Anaderm Research Corp., filed by
the Company as an exhibit to the Form 10-Q for the fiscal
quarter ended June 30, 1999 (file no. 000-15190), and
incorporated herein by reference.
</Table>
<Table>
<Caption>
EXHIBIT
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10.15+ Collaborative Research, License and Alliance Agreement,
dated August 31, 1999, by and between OSI Pharmaceuticals,
Inc. and Vanderbilt University, filed by the Company as an
exhibit to the Form 10-K for the fiscal year ended September
30, 1999 (file no. 000-15190), and incorporated herein by
reference.
10.16+ Collaborative Research and License Agreement, dated October
1, 1999, by and between OSI Pharmaceuticals, Inc. and Tanabe
Seiyaku Co. Ltd., filed by the Company as an exhibit to the
Form 10-K for the fiscal year ended September 30, 1999 (file
no. 000-15190), and incorporated herein by reference.
10.17 Yeast Technology Agreement, dated February 15, 2000, by and
between OSI Pharmaceuticals, Inc. and Cadus Pharmaceutical
Corporation, filed by the Company as an exhibit to the Form
10-Q for the fiscal quarter ended March 31, 2000 (file no.
000-15190), and incorporated herein by reference.
10.18 Agreement, dated May 23, 2000, by and between OSI
Pharmaceuticals, Inc. and Pfizer Inc., filed by the Company
as an exhibit to the Form 8-K filed on June 20, 2000 (file
no. 000-15190), and incorporated herein by reference.
10.19 Employment Agreement, dated September 28, 2000, between OSI
Pharmaceuticals, Inc. and Nicholas G. Bacopoulous, Ph.D.,
filed by the Company as an exhibit to the Form 10-K for the
fiscal year ended September 30, 2000 (file no. 000-15190),
and incorporated herein by reference.
10.20+ Development and Marketing Collaboration Agreement, dated
January 8, 2001, between OSI Pharmaceuticals, Inc. and
Genentech, Inc., filed by the Company as an exhibit to the
Form 8-K filed on February 14, 2001 (file no. 000-15190),
and incorporated herein by reference.
10.21+ Development Collaboration and Licensing Agreement, dated
January 8, 2001, between OSI Pharmaceuticals, Inc. and F.
Hoffman -- La Roche Ltd., filed by the Company as an exhibit
to the Form 8-K filed on February 14, 2001 (file no.
000-15190), and incorporated herein by reference.
10.22+ Tripartite Agreement, dated January 8, 2001, by and among
OSI Pharmaceuticals, Inc., Genentech, Inc., and F.
Hoffman -- La Roche Ltd., filed by the Company as an exhibit
to the Form 8-K filed on February 14, 2001 (file no.
000-15190), and incorporated herein by reference.
10.23+ Manufacturing Agreement, dated December 21, 2001, by and
between OSI Pharmaceuticals, Inc. and Gilead Sciences, Inc.
filed by the Company as an exhibit to the Form 8-K filed on
January 7, 2002 (file no. 000-15190), and incorporated
herein by reference.
21 Subsidiary of OSI Pharmaceuticals, Inc. (filed by the
Company as an exhibit to the Form 10-K filed on December 12,
2002 (file no. 000-15190), and incorporated herein by
reference).
23* Consent of KPMG LLP, independent public accountants (filed
by the Company as an exhibit to the Form 10-K filed on
December 12, 2002 (file no. 000-15190), and incorporated
herein by reference).
99.1* Certification of Chief Executive Officer pursuant to 18
U.S.C. sec. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2* Certification of Chief Financial Officer pursuant to 18
U.S.C. sec. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
</Table>
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* Filed herewith.
+ Portions of this exhibit have been redacted and are subject to a confidential
treatment request filed with the Secretary of the Securities and Exchange
Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,
as amended.