FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
---------------------- -----------------------
Commission file number 0-15190
OSI Pharmaceuticals, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3159796
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
58 South Service Road, Suite 110, Melville, New York 11747
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
631-962-2000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
At April 30, 2004 the registrant had outstanding 40,745,943 shares of common
stock, $.01 par value.
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION............................................. 1
Item 1. Financial Statements.............................................. 1
Consolidated Balance Sheets
- March 31, 2004 (Unaudited) and September 30, 2003........ 1
Consolidated Statements of Operations
-Three Months Ended March 31, 2004 and 2003 (Unaudited).... 2
Consolidated Statements of Operations
- Six Months Ended March 31, 2004 and 2003 (Unaudited)..... 3
Consolidated Statements of Cash Flows
- Six Months Ended March 31, 2004 and 2003 (Unaudited)..... 4
Notes to Consolidated Financial Statements................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................... 26
Item 4. Controls and Procedures........................................... 28
PART II. OTHER INFORMATION................................................. 30
Item 1. Legal Proceedings................................................. 30
Item 2. Changes in Securities and Use of Proceeds......................... 30
Item 3. Defaults Upon Senior Securities................................... 30
Item 4. Submission of Matters to a Vote of Security Holders............... 30
Item 5. Other Information................................................. 30
Item 6. Exhibits and Reports on Form 8-K.................................. 31
SIGNATURES................................................................. 32
INDEX TO EXHIBITS.......................................................... 33
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE DATA)
MARCH 31, SEPTEMBER 30,
2004 2003
----------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 103,192 $ 202,519
Investment securities .......................................................... 209,886 174,057
Restricted investment securities - short-term .................................. 15,163 12,758
Receivables, including amounts due from related parties of $131 and $74 at
March 31, 2004 and September 30, 2003, respectively .......................... 5,805 10,121
Inventory - net ................................................................ 1,463 3,616
Interest receivable ............................................................ 1,817 1,533
Prepaid expenses and other current assets ...................................... 5,879 9,847
--------- ---------
Total current assets .................................................. 343,205 414,451
--------- ---------
Restricted investment securities - long-term ........................................ 7,058 14,813
Property, equipment and leasehold improvements - net ................................ 42,116 44,977
Debt issuance costs - net ........................................................... 9,070 9,488
Goodwill ............................................................................ 39,064 38,810
Other intangible assets - net ....................................................... 56,751 66,145
Other assets ........................................................................ 2,915 2,818
--------- ---------
$ 500,179 $ 591,502
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses, including amounts due to related
parties of $2,620 and $6,875 at March 31, 2004 and September 30, 2003,
respectively ............................................................... $ 25,553 $ 29,013
Unearned revenue - current, including amounts received in advance from
related parties of $3,750 and $5,000 at March 31, 2004 and September
30, 2003, respectively ..................................................... 4,719 5,779
Loans and capital leases payable - current ..................................... 24 61
--------- ---------
Total current liabilities ............................................. 30,296 34,853
--------- ---------
Other liabilities:
Deferred rent expense - long-term .............................................. 1,964 2,179
Unearned revenue - long-term, including amounts received in advance from
related parties of $1,250 at September 30, 2003 ............................ -- 1,250
Convertible senior subordinated notes and capital leases payable - long-term.... 310,000 310,008
Contingent value rights ........................................................ 22,047 22,047
Accrued postretirement benefit cost ............................................ 3,489 3,108
--------- ---------
Total liabilities ..................................................... 367,796 373,445
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares authorized; no shares issued
at March 31, 2004 and September 30, 2003 ............................... -- --
Common stock, $.01 par value; 200,000 shares authorized; 40,489 and 40,298
shares issued at March 31, 2004 and September 30, 2003, respectively ....... 405 403
Additional paid-in capital ..................................................... 750,090 747,737
Deferred compensation .......................................................... (393) (216)
Accumulated deficit ............................................................ (595,417) (505,580)
Accumulated other comprehensive income ......................................... 3,149 1,164
--------- ---------
157,834 243,508
Less: treasury stock, at cost; 1,443 shares at March 31, 2004 and
September 30, 2003 ......................................................... (25,451) (25,451)
--------- ---------
Total stockholders' equity ............................................ 132,383 218,057
--------- ---------
$ 500,179 $ 591,502
========= =========
See accompanying notes to consolidated financial statements.
1
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2003
-------- --------
Revenues:
Sales commissions and product sales .................. $ 5,941 $ 887
License and other revenues, including $1,250 from
related parties in 2004 and 2003 .................. 1,275 1,469
Collaborative program revenues, including $4,177
from related parties in 2003 ...................... -- 5,236
-------- --------
7,216 7,592
-------- --------
Expenses:
Cost of product sales ................................ 2,044 --
Research and development ............................. 26,721 23,773
Selling, general and administrative .................. 21,804 10,660
Amortization of intangibles .......................... 4,574 690
-------- --------
55,143 35,123
-------- --------
Loss from operations ........................... (47,927) (27,531)
Other income (expense):
Investment income - net .............................. 1,427 2,233
Interest expense ..................................... (2,820) (1,605)
Other expense - net .................................. (384) (266)
-------- --------
Net loss ................................................ $(49,704) $(27,169)
======== ========
Weighted average shares of common stock outstanding ..... 38,985 36,448
======== ========
Basic and diluted net loss per common share ............. $ (1.27) $ (0.75)
======== ========
See accompanying notes to consolidated financial statements.
2
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
SIX MONTHS ENDED
MARCH 31,
---------------------------
2004 2003
--------- ---------
Revenues:
Sales commissions and product sales .................. $ 16,082 $ 887
License and other revenues, including $2,500 from
related parties in 2004 and 2003 .................. 2,525 2,959
Collaborative program revenues, including $6,187
from related parties in 2003 ..................... -- 8,218
--------- ---------
18,607 12,064
--------- ---------
Expenses:
Cost of product sales ................................ 2,154 --
Research and development ............................. 50,826 51,996
Selling, general and administrative .................. 42,624 18,160
Amortization of intangibles .......................... 9,412 744
--------- ---------
105,016 70,900
--------- ---------
Loss from operations ........................... (86,409) (58,836)
Other income (expense):
Investment income - net .............................. 2,914 4,902
Interest expense ..................................... (5,640) (3,212)
Other expense - net ................................. (702) (123)
--------- ---------
Net loss ................................................ $ (89,837) $ (57,269)
========= =========
Weighted average shares of common stock outstanding ..... 38,935 36,431
========= =========
Basic and diluted net loss per common share ............. $ (2.31) $ (1.57)
========= =========
See accompanying notes to consolidated financial statements.
3
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
MARCH 31,
---------------------------
2004 2003
--------- ---------
Cash flow from operating activities:
Net loss ................................................................. $ (89,837) $ (57,269)
Adjustments to reconcile net loss to net cash used in operating
activities:
Gain on sale of investments ........................................... (35) (338)
Loss on sale and disposals of equipment ............................... 96 26
Depreciation and amortization ......................................... 16,057 6,647
Provision for inventory obsolescense .................................. 1,954 --
Non-cash compensation charges ......................................... 486 115
Changes in assets and liabilities:
Receivables ........................................................ 4,032 (2,410)
Inventory .......................................................... 199 --
Prepaid expenses and other current assets .......................... 4,145 (12,312)
Other assets ....................................................... 9 29
Accounts payable and accrued expenses .............................. (3,944) 5,019
Unearned revenue ................................................... (2,310) (5,652)
Accrued postretirement benefit cost ................................ 381 348
--------- ---------
Net cash used in operating activities ....................................... (68,767) (65,797)
--------- ---------
Cash flows from investing activities:
Payments for acquisition of marketing rights ............................. -- (46,009)
Purchases of investments (restricted and unrestricted) ................... (216,941) (223,616)
Maturities and sales of investments (restricted and unrestricted) ........ 186,574 240,229
Net additions to property, equipment and leasehold improvements .......... (1,515) (1,487)
Additions to compound library assets ..................................... (126) (135)
Investments in privately-owned companies ................................. (150) (50)
--------- ---------
Net cash used in investing activities ....................................... (32,158) (31,068)
--------- ---------
Cash flows from financing activities:
Proceeds from the exercise of stock options, stock warrants, and other.... 1,692 416
Debt issuance costs ...................................................... (119) --
Payments on loans and capital leases payable ............................. (45) (398)
--------- ---------
Net cash provided by financing activities ................................... 1,528 18
--------- ---------
Net decrease in cash and cash equivalents ................................... (99,397) (96,847)
Effect of exchange rate changes on cash and cash equivalents ................ 70 (73)
Cash and cash equivalents at beginning of year .............................. 202,519 152,578
--------- ---------
Cash and cash equivalents at end of period .................................. $ 103,192 $ 55,658
========= =========
Non-cash activities:
Issuance of common stock to employees .................................... $ 65 $ 91
========= =========
Issuance of common stock to directors .................................... $ 425 $ 433
========= =========
Acceleration of director's options ....................................... $ 177 $ --
========= =========
Cash paid for interest ...................................................... $ 5,639 $ 3,211
========= =========
See accompanying notes to consolidated financial statements.
4
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In this Quarterly Report on Form 10-Q, "OSI," "our company," "we,"
"us," and "our" refer to OSI Pharmaceuticals, Inc. and subsidiaries.
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles, or GAAP, for interim financial information and
with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
three and six months ended March 31, 2004 and cash flows for the six months
ended March 31, 2004 are not necessarily indicative of the results that may be
expected for the fiscal year ending September 30, 2004. For further information,
refer to the consolidated financial statements and footnotes thereto included in
our Annual Report on Form 10-K for the fiscal year ended September 30, 2003.
(2) Revenue Recognition
Sales commissions represent commissions earned on the sales of the
drug, Novantrone(R) (mitoxantrone for injection concentrate), in the United
States for oncology indications (see note 4). Sales commissions are recognized
on net oncology sales in the period the sales occur based on the estimated split
between oncology sales and multiple sclerosis sales, as determined on a
quarterly basis by a contracted external third party. The split between oncology
and multiple sclerosis sales is subject to further adjustment based on the
parties final review, in the subsequent quarter. Based on past experience, we do
not believe these adjustments, if any, are significant to the consolidated
financial statements.
Product sales represent sales of Gelclair(R) Bioadherent Oral Gel, or
Gelclair(R), in accordance with an exclusive distribution agreement with Helsinn
Healthcare S.A., or Helsinn, which allows us to market and distribute
Gelclair(R) in North America. Gelclair(R) was acquired as part of the Cell
Pathways acquisition (see note 5) and launched by us to the oncology market in
the fourth quarter of calendar 2003. In accordance with SFAS No. 48, "Revenue
Recognition When Right of Return Exists," given the limited sales history of
Gelclair(R), we at this time defer the recognition of revenue on product
shipments of Gelclair(R) to wholesale customers until such time as the product
is sold from the wholesale customer to the retail and non-retail outlets. For
each reporting period, we monitor estimated shipments from wholesale customers
to pharmacies and hospitals, and wholesale customer reorder history based on
data from an external third party. The related cost of the product shipped to
wholesale customers that has not been recognized as revenue has been reflected
as inventory subject to return (see note 7). The unearned revenue related to
shipments of Gelclair(R) to wholesale customers was $969,000 and $779,000 as of
March 31, 2004 and September 30, 2003, respectively, and is included in unearned
revenue-current on the accompanying consolidated balance sheets.
5
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
We account for upfront nonrefundable technology access and other
upfront fees over the term of the related research and development collaboration
period in accordance with the guidance provided in the Securities and Exchange
Commission's Staff Accounting Bulletin No. 104, "Revenue Recognition." We
received a total of $25.0 million in upfront fees from Genentech, Inc. and Roche
in January 2001 which is being recognized on a straight-line basis over the
expected term of our required research and development efforts under the terms
of a Tripartite Agreement with Genentech and Roche.
(3) Stock Options
We follow the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." The provisions of SFAS No. 123 allow us 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, or APB, 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. We have
elected to continue to apply APB No. 25 in accounting for stock options issued
to employees.
Stock option grants are generally set at the closing price of our
common stock on the date of grant and the number of shares to be granted under
the option are fixed at that point in time. Therefore, under the principles of
APB No. 25, we do not recognize compensation expense associated with the grant
of stock options. Pro forma information regarding net loss and net loss per
share shown below was determined as if we had accounted for our employee stock
options and shares sold under our stock purchase plan under the fair value
method of SFAS No. 123.
The weighted average fair value per stock option granted was $18.42 and
$8.52 for the three months ended March 31, 2004 and 2003, respectively, and
$18.14 and $8.53 for the six months ended March 31, 2004 and 2003, respectively.
The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- -------
Risk-free interest rate ................................... 2.03% 2.00% 2.06% 2.00%
Dividend yield ............................................ 0% 0% 0% 0%
Volatility factors of expected market price of our common
stock ................................................... 74.73% 81.35% 74.89% 81.81%
Weighted-average expected life of option (years) .......... 3 3 3 3
Weighted-average exercise price of stock option grants..... $ 37.26 $ 16.10 $ 36.62 $16.07
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. Our pro forma
information for the three and six months ended March 31, 2004 and 2003 is as
follows (in thousands, except per share information):
6
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ---------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net loss.............................................. $ (49,704) $ (27,169) $ (89,837) $ (57,269)
Add: stock based compensation included in net loss.... 301 14 486 115
Compensation cost determined under fair value method.. (5,975) (4,622) (11,800) (9,401)
--------- --------- --------- ---------
Pro forma net loss.................................... $ (55,378) $ (31,777) $(101,151) $ (66,555)
========= ========= ========= =========
Basic and diluted net loss per common share:
Net loss - as reported ........................... $ (1.27) $ (0.75) $ (2.31) $ (1.57)
========= ========= ========= =========
Net loss - pro forma ............................. $ (1.42) $ (0.87) $ (2.60) $ (1.83)
========= ========= ========= =========
(4) Co-Promotion Agreement
On March 11, 2003, we entered into a Co-Promotion Agreement with an
affiliate of Serono S.A., or Serono, to market and promote Novantrone(R) for
approved oncology indications in the United States through December 2017. The
purchase price and related professional fees, net of related amortization, are
included in other intangible assets in the accompanying consolidated balance
sheets as of March 31, 2004 and September 30, 2003 and are being amortized on a
straight-line basis through expiration of the Novantrone(R) patent in April
2006. Under the terms of the agreement, we will also pay quarterly maintenance
fees until the later of the expiration of the last valid patent claim or the
first generic date, as defined in the agreement. Such maintenance fees will be
expensed as incurred and included in selling, general and administrative
expenses on the accompanying consolidated statements of operations. We receive
commissions on net sales of the product in the United States for oncology
indications. Sales commissions totaled $5.7 million and $15.5 million for the
three and six months ended March 31, 2004, respectively.
(5) Acquisition
On June 12, 2003, we completed our acquisition of Cell Pathways, Inc.,
or Cell Pathways, pursuant to the terms of an Agreement and Plan of Merger dated
February 7, 2003. The acquisition was accounted for under the purchase method of
accounting.
The assets purchased and liabilities assumed by us included: (a) two
drug candidates in clinical development, Aptosyn(R) (exisulind) and OSI-461, and
the related technology platform and patent estate; (b) exclusive distribution
rights to the marketed product, Gelclair(R), in North America; (c) rights to
Cell Pathways' leased facility in Horsham, Pennsylvania, as well as leasehold
improvements and certain equipment; (d) inventory; and (e) certain other assets
and liabilities. Gelclair(R) is a bioadherent oral gel that provides relief for
the treatment of pain associated with oral mucositis, a debilitating side effect
often seen in patients undergoing chemotherapy or radiation treatment. We have
an exclusive distribution agreement with Helsinn which allows us to market and
distribute Gelclair(R) in North America (United States, Canada and Mexico)
through January 2012. We previously had a marketing agreement with John O.
Butler Company, or Butler, under which Butler marketed Gelclair(R) to the dental
7
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
market. In April 2004, we agreed with Butler to terminate this agreement and are
currently seeking a new partner.
(6) Restricted Assets
In September 2003, in connection with the issuance of convertible
senior subordinated notes, we pledged $14.2 million of U.S. government
securities, or Restricted Investment Securities, with maturities at various
dates through August 2006. In February 2002, in connection with the issuance of
convertible senior subordinated notes, we pledged $22.9 million of 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 respective
convertible senior subordinated notes when due. We consider our Restricted
Investment Securities to be held-to-maturity securities, 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 balance of Restricted Investment
Securities decreases as scheduled interest payments are made. The aggregate fair
value and amortized cost of the Restricted Investment Securities at March 31,
2004 were $22.3 million and $22.2 million, respectively, of which $15.2 million
was classified as short-term and the balance of $7.1 million was classified as
long-term.
With respect to our facility leases in Horsham, Pennsylvania and
Oxford, England, we have outstanding letters of credit issued by a commercial
bank. The irrevocable letter of credit for our Horsham, Pennsylvania facility
expires annually on September 22nd with a final expiration date of September 22,
2008. This letter of credit is for $400,000 of which the full amount was
available at March 31, 2004. The irrevocable letter of credit for our Oxford,
England facility expires annually on September 27th with a final expiration date
of September 27, 2007. This letter of credit is for $2.6 million, of which the
full amount was available on March 31, 2004. The collateral for these letters of
credit are maintained in a restricted investment account. Included in cash and
cash equivalents and investments securities as of March 31, 2004 is $84,000 and
$3.4 million, respectively, relating to restricted cash and investments to
secure these letters of credit. Included in cash and cash equivalents and
investment securities as of September 30, 2003 is $35,000 and $3.4 million,
respectively, relating to restricted cash and investments to secure these
letters of credit.
(7) Inventory
Inventory is comprised solely of Gelclair(R) and is stated at the lower
of cost or market, as determined using the first-in, first-out method. During
the three months ended March 31, 2004, we recorded a provision for inventory
obsolescence of $2.0 million for inventory we consider to be in excess of
forecasted future demand based on expiration dates. This provision is included
in inventory-net in the accompanying consolidated balance sheet as of March 31,
2004, as well as in cost of product sales in the accompanying consolidated
statements of operations for the three and six months ended March 31, 2004.
8
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Inventory-net at March 31, 2004 and September 30, 2003, consisted of
the following (in thousands):
MARCH 31 SEPTEMBER 30,
2004 2003
-------- -------------
Finished goods on hand, net............... $1,160 $3,358
Inventory subject to return .............. 303 258
------ ------
$1,463 $3,616
====== ======
Inventory subject to return represents the amount of Gelclair(R)
shipped to wholesale customers which has not been recognized as revenue based on
estimated wholesaler activity, as further discussed in note 2.
(8) Comprehensive Income (Loss)
Comprehensive loss for the three and six months ended March 31, 2004
and 2003 was as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- -------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net loss ................................................... $(49,704) $(27,169) $(89,837) $(57,269)
Other comprehensive income (loss):
Foreign currency translation adjustments ................ 462 (364) 1,798 296
Unrealized gains on derivative instruments arising
during period ......................................... 102 - 102 -
Unrealized holding gains (losses) arising during period.. 131 (262) 107 (328)
Less: Reclassification adjustment for losses (gains)
realized in net loss .................................. (13) 7 (22) (341)
-------- -------- -------- --------
682 (619) 1,985 (373)
-------- -------- -------- --------
Total comprehensive loss ................................... $(49,022) $(27,788) $(87,852) $(57,642)
======== ======== ======== ========
The components of accumulated other comprehensive income were as
follows (in thousands):
MARCH 31, SEPTEMBER 30,
2004 2003
-------- -------------
Cumulative foreign currency translation adjustment .......... $ 2,628 $ 830
Unrealized gains on derivative instruments .................. 102 -
Unrealized gains on available-for-sale securities ........... 419 334
-------- --------
Accumulated other comprehensive income ...................... $ 3,149 $ 1,164
======== ========
9
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(9) Net Loss per Common 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. Common share equivalents (convertible senior subordinated notes, stock
options and warrants) are not included since their effect would be
anti-dilutive. The contingent shares pursuant to the contingent value rights are
not included since the contingency condition has not been satisfied.
Such common share equivalents (convertible senior subordinated notes,
stock options and warrants) and contingent shares for the three and six months
ended March 31, 2004 and 2003 amounted to (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ------------------
2004 2003 2004 2003
----- ----- ----- -----
Common share equivalents... 7,641 3,997 7,484 4,050
===== ===== ===== =====
Contingent shares ......... 1,585 -- 1,585 --
===== ===== ===== =====
If the six months ended March 31, 2004 and 2003 had resulted in net
income and had the common share equivalents for the 4% convertible senior
subordinated notes (3,200,000 shares) issued in February 2002 and the 3.25%
convertible senior subordinated notes (2,998,800 shares) issued in September
2003 been dilutive, interest expense related to the notes would have been added
back to net income to calculate diluted earnings per share. The related interest
expense of these notes for the three and six months ended March 31, 2004 totaled
$2.8 million and $5.6 million, respectively, and $1.6 million and $3.2 million
for the three and six months ended March 31, 2003, respectively.
(10) Goodwill and Other Intangible Assets
The carrying amount of goodwill as of March 31, 2004 of $39.1 million
includes a $254,000 effect from foreign currency exchange rate fluctuations
during the six-month period ended March 31, 2004. We completed our annual
impairment review of goodwill during the first quarter of fiscal 2004 and
determined that no impairment charge was required.
The components of other intangible assets are as follows (in
thousands):
MARCH 31, 2004 SEPTEMBER 30, 2003
-------------- ------------------
NET NET
CARRYING ACCUMULATED BOOK CARRYING ACCUMULATED BOOK
AMOUNT AMORTIZATION VALUE AMOUNT AMORTIZATION VALUE
-------- ------------ -------- -------- ------------ --------
Novantrone(R) ................. $ 46,009 $(15,544) $ 30,465 $ 46,009 $ (8,084) $ 37,925
Gelclair(R) ................... 28,957 (2,671) 26,286 28,957 (984) 27,973
License to compound libraries.. - - - 740 (493) 247
-------- -------- -------- -------- -------- --------
Total ......................... $ 74,966 $(18,215) $ 56,751 $ 75,706 $ (9,561) $ 66,145
======== ======== ======== ======== ======== ========
Amortization expense for these intangible assets for the three and six
months ended March 31, 2004 was $4.6 million and $9.4 million, respectively, and
$690,000 and $744,000 for
10
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
the three and six months ended March 31, 2003, respectively. Amortization
expense is estimated to be $9.1 million for the remainder of fiscal 2004, $18.3
million in fiscal 2005, $11.5 million in fiscal 2006, $3.4 million in fiscal
2007 and $3.4 million in fiscal 2008.
(11) Horsham Facility Costs
During the three months ended March 31, 2004, we committed to and
approved an exit plan for our Horsham, Pennsylvania facility which we acquired
in connection with the acquisition of Cell Pathways in June 2003. In accordance
with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," we have recognized the rent obligations for the remainder of the
lease (through June 2008), offset by the estimated sublease rental income. This
resulted in a charge of $1.8 million which has been included in the accompanying
balance sheet in accrued expenses as of March 31, 2004 and in selling, general
and administrative expenses in the accompanying consolidated statements of
operations for the three and six months ended March 31, 2004.
(12) Derivative Financial Instruments
In March 2004, we entered into forward exchange contracts to reduce
foreign currency fluctuation risks relating to intercompany transactions for the
funding of research activities in the United Kingdom. We account for these
derivative financial instruments in accordance with SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which was amended by SFAS
No. 137 and SFAS No. 138. SFAS No. 133, as amended, establishes accounting and
reporting standards for derivative instruments and hedging activities. They
require that an entity recognize all derivatives as either assets or liabilities
in the balance sheet and measure those instruments at fair value. Changes in the
fair value of those instruments will be reported in earnings or other
comprehensive income depending on the use of the derivative and whether it
qualifies for hedge accounting. The accounting for gains and losses associated
with changes in the fair value of the derivative and the effect on the
consolidated financial statements will depend on its hedge designation and
whether the hedge is highly effective in achieving offsetting changes in the
fair value of cash flows of the asset or liability hedged. When entered into, we
designate and document these derivative instruments as a cash flow hedge of a
specific underlying exposure, as well as the risk management objectives and
strategies for undertaking the hedge transactions. Changes in the fair value of
a derivative that is designated and documented as a cash flow hedge and is
highly effective, are recorded in other comprehensive income until the
underlying transaction effects earnings, and then are later reclassified to
earnings in the same account as the hedged transaction. We formally assess, both
at the inception and at each financial quarter thereafter, the effectiveness of
the derivative instrument hedging the underlying forecasted cash flow
transaction which is being hedged. Any ineffectiveness related to the derivative
financial instruments' changes in fair value will be recognized in the period in
which the ineffectiveness was calculated. As of March 31, 2004, the notional and
fair value of the foreign exchange contracts for British pounds was $6.5 million
and $6.6 million, respectively. The contracts will mature over the next seven
months. At March 31, 2004, net gains on derivative instruments expected to be
reclassified from accumulated other
11
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
comprehensive income to earnings during the next seven months due to the
settlement of the forward contracts and execution of the intercompany
transactions were $102,000.
(13) Employee Postretirement Plan
On November 10, 1992, we 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-payments and other
limitations.
We follow 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 costs for the three and six months ended
March 31, 2004 and 2003 includes the following components (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------- ---------
2004 2003 2004 2003
---- ---- ---- ----
Service costs for benefits earned during the period ................. $143 $108 $286 $215
Interest costs on accumulated postretirement benefits obligation .... 66 59 131 118
Amortization of initial benefits attributed to past services ........ 1 1 3 2
Amortization of loss ................................................ 10 7 20 15
---- ---- ---- ----
Net postretirement benefit cost ..................................... $220 $175 $440 $350
==== ==== ==== ====
(14) Amended and Restated Stock Incentive Plan
On March 17, 2004, at the 2004 Annual Meeting of Stockholders, our
stockholders approved the Amended and Restated Stock Incentive Plan, or the
Plan, which was adopted by the Board of Directors on January 23, 2004. The Plan
amends and restates our 2001 Incentive and Non-Qualified Stock Option Plan to
permit, in addition to the grant of options, the grant of restricted stock
awards, stock appreciation rights and stock bonus awards upon such terms and
conditions as the compensation committee appointed by the Board of Directors
under the Plan shall determine.
(15) License Agreement
Effective as of October 1, 1999, we entered into a Collaborative
Research and License Agreement with Tanabe Seiyaku Co. Ltd. focused on
discovering and developing novel pharmaceutical products to treat diabetes. The
contract period under this agreement expired on October 1, 2003 and was not
renewed. Tanabe had the responsibility for further development and marketing of
any lead compound in exchange for milestone and royalty payments to us. In April
2003, we assigned our rights and obligations under the collaborative agreement,
to our majority-owned, UK-based subsidiary, Prosidion Ltd. In March 2004,
Prosidion entered into a termination
12
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
agreement with Tanabe, whereby Prosidion obtained the rights to certain patents
developed under the collaboration, subject to Tanabe's rights to develop certain
compounds in certain Asian territories. In consideration of the termination
Prosidion will pay Tanabe $1.0 million in cash and $1.0 million in Prosidion
shares. These expenses have been accrued and are included in research and
development expenses on the accompanying statements of operations for the three
and six months ended March 31, 2004. Prosidion is also required to make certain
payments to Tanabe upon the achievement of certain milestones.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE AND SIX MONTHS ENDED MARCH 31, 2004 AND 2003
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 around our
flagship product, Tarceva(TM) (erlotinib HCl), that includes both novel
mechanism based, targeted therapies in the areas of signal transduction and
apoptosis and next-generation cytotoxic chemotherapy agents. We also market and
promote Novantrone(R) (mitoxantrone concentrate for injection) for approved
oncology indications in the United States and market and distribute Gelclair(R)
Bioadherent Oral Gel in North America.
Tarceva(TM) is an oral once-a-day small molecule drug designed to
specifically block the activity of the epidermal growth factor receptor, or
HER1/EGFR, protein. 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 relatively well tolerated anti-cancer agents that may have utility in
treating a wide range of cancer patients. We are developing Tarceva(TM) in a
global alliance with Genentech, Inc. and Roche. On April 26, 2004, we announced
that Tarceva(TM) met its primary endpoint of improving survival in a
731-patient, double blind, randomized Phase III trial, or the BR.21 trial, which
tested the drug as a single agent against placebo in relapsed non-small cell
lung cancer, or NSCLC, patients. Tarceva(TM) also met its key secondary
endpoints including time to symptom deterioration, progression-free survival and
response rate. The results of this trial represent the first time that an
HER1/EGFR targeted agent has demonstrated a survival benefit in a controlled
study in any disease setting. Additionally, the BR.21 trial represents the first
time that an agent which is not a chemotherapy drug has demonstrated a survival
benefit in a randomized study in relapsed NSCLC patients.
In January 2004, we initiated the "rolling" submission of our New Drug
Application, or NDA, with the Food and Drug Administration, or FDA, for the use
of Tarceva(TM). The "rolling" submission is an FDA provision, available to drug
candidates which have received Fast Track designation, that allows for completed
sections of an NDA to be submitted on an ongoing basis before knowing the
results of the pivotal clinical trial. Fast Track status for Tarceva(TM) in the
2nd/3rd line NSCLC indication was granted by the FDA in September 2002. Although
the FDA has no obligation to begin reviewing sections of the NDA until the final
sections of the complete NDA are submitted, the FDA may begin the review of the
submitted sections, if resources permit. Such a review can be advantageous to
the overall product assessment timelines. The Fast Track designation is limited
to a new drug that is intended for the treatment of a serious and
life-threatening condition for which there is an unmet medical need. We are
continuing to work with the FDA to complete our NDA filing which we anticipate
will occur over the summer. We estimate that we will launch Tarceva(TM) in the
United States, together with our marketing partner Genentech, early in the first
quarter of calendar 2005, assuming a successful six-month priority
14
review of our NDA by the FDA. We anticipate that Roche will launch Tarceva(TM)
in Europe, assuming an approval by the European Agency for the Evaluation of
Medicinal Products, or EMEA, at the end of calendar 2005. Beyond the launch of
Tarceva(TM), our other high priority goals for Tarceva(TM) include moving the
drug as a monotherapy into earlier stage and adjuvant settings in NSCLC,
expanding it to other disease indications, combining it with other targeted
therapies like Avastin and exploring it with other all-oral regimens.
In addition to meeting its endpoints in the Phase III single agent
NSCLC trial, Tarceva(TM) has also demonstrated encouraging indications of
anti-cancer activity in single-agent, open label Phase I and Phase II trials in
bronchioloalveolar cell carcinoma, or BAC (a form of lung cancer), glioblastoma
multiforme, head and neck cancer, hepatocellular carcinoma and ovarian cancer.
Tarceva(TM) is also in a Phase III trial for pancreatic cancer where it is being
tested in combination with gemcitabine versus gemcitabine plus placebo. We
expect top line data for this Phase III trial in the second half of 2004. We
continue to view a positive outcome from the pancreatic study to be considered
high risk.
We believe that the successful results from the BR.21 trial have
significant financial and strategic implications for our company. While there
continues to be some degree of regulatory risk associated with Tarceva(TM), we
have effectively removed the technical risk associated with this flagship
product and with it the principal near-term risk of a downside to our financial
and business prospects. We believe we are, therefore, in a strong position
strategically to deliver growth over the next several years. In the near term,
we recognize that the principal driver of value creation for our stockholders
continues to be Tarceva(TM) and our highest priority will be on maximizing,
together with our partners, the value of our flagship product.
Beyond Tarceva(TM), it is clear that in order to drive growth and value
creation in the near future, we must continue to build a successful oncology
franchise and pipeline. We have historically built a strong and well-balanced
organization by maintaining a solid balance sheet and supplementing our internal
research and development efforts with mergers and acquisitions and partnering
activities. We believe this basic formula will continue to apply as we seek to
strengthen our oncology business around Tarceva(TM).
Our clinical pipeline consists of other drug candidates in various
stages of clinical development and are summarized in depth in the Business
Section of our Annual Report on Form 10-K for the fiscal year ended September
30, 2003. In order to effectively manage the risks inherent in biotechnology
research and development and to complement our internal research efforts, we
believe it is essential that we continue to aggressively manage our pipeline and
continue to explore licensing and acquisition initiatives designed to add
oncology products and clinical candidates to our pipeline. Two significant
pipeline events occurred over the last quarter. OSI-7904L is a liposomal
formulation of a potent thymidylate synthase, or TS, inhibitor, which is
currently in a two stage Phase II trial as a single agent in gastric or gastric
esophageal junction cancer. During this past quarter, we advanced OSI-7904L to
the second stage of the study based upon it exceeding the initial requirements
of achieving at least three partial responses in the first 18 evaluable
patients. We also continued to advance OSI-930 through pre-clinical development
(Investigational New Drug, or IND, track). OSI-930 is an oral, small molecule
kinase inhibitor that primarily targets two receptor tyrosine kinases, namely
c-KIT and VEGFR. As a dual c-KIT/VEGFR inhibitor, OSI-930 has the potential to
inhibit tumor
15
proliferation and angiogenesis, two important processes in the progression of
cancer. It is the first candidate advanced to the IND track stage since our
decision to focus our research efforts on oncology in early fiscal 2003.
As we look to longer-term value creation for our company, we consider
it prudent to explore the expansion into another disease area in order to
enhance growth. In this respect, we have chosen to expand our investment in our
majority-owned diabetes and obesity subsidiary, Prosidion Ltd. Prosidion was
created in January 2003 when we transferred our diabetes assets into this
U.K.-based majority-owned subsidiary as part of our effort to focus our core
business on oncology. Since its inception, Prosidion has made significant
progress and throughout this period we have continued to invest in the
subsidiary. Two small molecule drug candidates, one targeting the activation of
the enzyme glucokinase and the other targeting the inhibitor of the enzyme
glycogen phosphorylase, have progressed to the IND track stage of development
and these drug candidates are scheduled to enter clinical trials in early 2005.
Based on this progress, we believe that Prosidion represents a potentially
valuable asset for long-term growth and a means to eventually broaden our
interest to a second disease area beyond our core oncology business. As a
result, we have chosen to continue funding Prosidion in the near term rather
than seek overly dilutive third-party financing or premature partnering and have
committed an additional investment of up to $40.0 million based on progress of
the subsidiary, with an initial commitment of $10.0 million.
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 revenues
and expenses during the periods presented. Actual results could differ
significantly from our estimates and the estimated amounts could differ
significantly 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 consolidated financial
statements included in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2003, includes a summary of the significant accounting policies
used in the preparation of the consolidated financial statements.
Revenue Recognition
Sales commissions from Novantrone(R) on net oncology sales are
recognized in the period the sales occur based on the estimated split between
oncology sales and multiple sclerosis sales, as determined on a quarterly basis
by an external third party. The split between oncology and multiple sclerosis
sales is subject to further adjustment based on the parties final review in the
subsequent quarter. Based on past experience, we do not believe these
adjustments, if any, will be significant to the consolidated financial
statements.
16
Given the limited sales history of Gelclair(R), we at this time defer
the recognition of revenue on product shipments of Gelclair(R) to wholesale
customers until such time as the product is sold from the wholesale customer to
the retail and non-retail outlets. For each reporting period, we monitor
shipments from wholesale customers to pharmacies and hospitals and wholesale
customer reorder history based on data from an external third party.
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. 104, "Revenue
Recognition." 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. Subsequent changes to the expected term could
increase or decrease the period over which the unearned revenue is recognized.
Inventory
Our inventory is stated at the lower of cost or market value, and our
inventory costs are determined by the first-in, first-out method. We analyze our
inventory levels quarterly and write down inventory that has become obsolete,
inventory that has a cost basis in excess of its expected net realizable value,
and inventory in excess of expected requirements. Expired inventory is disposed
of and the related costs are written off. Provisions for excess or expired
inventory are primarily based on our estimates of forecasted sales levels. If
actual market conditions are less favorable than those projected by us,
additional inventory write-downs may be required.
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.
Goodwill and Other Long-Lived Assets
SFAS No. 142, "Goodwill and Other Intangible Assets," requires that
goodwill and certain other intangibles with indefinite useful lives are not
amortized into results of operations but instead are reviewed for impairment at
least annually and written down, and charged to results of operations in periods
in which the recorded value of goodwill and certain other intangibles is more
than their implied fair value. We completed our annual impairment review of
goodwill during the first quarter of fiscal 2004 and determined that no
impairment charge was required.
Our identifiable intangible assets are subject to amortization. SFAS
No. 142 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. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 requires, among other things,
17
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. We review our intangibles with determinable lives and
other long-lived assets 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. Our two most significant intangible assets are our
rights to Novantrone(R) and Gelclair(R); and therefore, we continually monitor
sales activity and market and regulatory conditions for these products for the
existence of any impairment indicators. In the future, events could cause us to
conclude that impairment indicators exist and that certain intangibles with
determinable lives and other long-lived assets are impaired which may result in
an adverse impact on our financial condition and results of operations.
REVENUES
Total revenues for the three and six months ended March 31, 2004 were
$7.2 million and $18.6 million, respectively, compared to revenues of $7.6
million and $12.1 million for the three and six months ended March 31, 2003,
respectively. The prior year revenues were primarily comprised of collaborative
revenue, where as the current year's revenue consist mainly of sales commissions
and product sales. This shift reflects the continuation of our transition from a
business centered on funded collaborative programs to one of generating its own
product revenues ahead of a projected launch of Tarceva(TM).
Sales Commissions and Product Sales
Sales commissions and product sales were $5.9 million and $16.1 million
for the three and six months ended March 31, 2004, respectively, compared to
$887,000 for each of the comparable prior year periods. We began recording
Novantrone(R) sales commissions upon the execution of our Co-Promotion Agreement
with Serono on March 11, 2003. Therefore, the prior year periods only included a
partial quarter of sales commissions. Sales commissions for the three months
ended March 31, 2004 were $5.7 million compared to $9.8 million for the three
months ended December 31, 2003. The decrease in sales commissions during the
second fiscal quarter of 2004 compared to the first fiscal quarter of 2004 was
primarily due to a decrease in net oncology sales, which likely reflects some
inventory workdown at the wholesalers. Also contributing to the decrease was a
lower base commission rate effective with the new calendar year. Oncology sales
during calendar 2003 exceeded a contractual threshold resulting in a higher
sales commission rate for the quarter ended December 31, 2003. We will continue
at the lower commission rate until we achieve certain calendar year oncology
sales goals for Novantrone(R). We began recognizing Gelclair(R) product sales
during the third quarter of fiscal 2003, upon the closing of our acquisition of
Cell Pathways, Inc., in June 2003. Product sales for the three and six months
ended March 31, 2004 were $267,000 and $576,000, respectively. Although
Gelclair(R) product sales have been less than originally forecasted, we believe
that our product sales of Gelclair(R) will increase in the oncology market as we
continue our sales and marketing efforts which were initially launched in the
fourth quarter of calendar 2003. We currently estimate that our total fiscal
2004 sales commissions and product sales will be between $30 million and $34
million.
18
License and Other Revenues
License and other revenues were $1.3 million and $2.5 million for the
three and six months ended March 31, 2004, respectively, compared to $1.5
million and $3.0 million for the three and six months ended March 31, 2003,
respectively. Such revenues consist principally of the recognition of upfront
fees from Genentech and Roche over the expected term of the collaboration. There
were no collaborative program revenues in fiscal 2004, compared to collaborative
revenues of $5.2 million and $8.2 million for the three and six months ended
March 31, 2003. This decrease was due to the completion of our remaining
collaborations with Anaderm Research Corporation in March 2003 and Tanabe
Seiyaku Co., Ltd. in October 2003.
EXPENSES
Total operating expenses for the three and six months ended March 31,
2004 were $55.1 million and $105.0 million, respectively, compared to operating
expenses of $35.1 million and $70.9 million for the three and six months ended
March 31, 2003, respectively. These increases are primarily due to an increase
in selling, general and administrative expenses as well as amortization expense.
Operating expenses included (i) research and development expenses, which include
expenses related to the development of our lead clinical candidate, Tarceva(TM),
and expenses related to our proprietary and collaborative-based research; (ii)
selling, general and administrative expenses; (iii) amortization of intangibles;
and (iv) cost of product sales.
Cost of Product Sold
Cost of product sales, which relate to sales of Gelclair(R), were $2.0
million and $2.2 million for the three months and six months ended March 31,
2004, respectively. Included in cost of product sales for both periods is a
provision of $2.0 million for obsolete inventory that we consider to be in
excess of forecasted future demand based on the expiration date of the product
on hand. The excess inventory relates to the substantial inventory obtained from
Cell Pathways and the current low demand for the product as a result of a
previously unsuccessful and under-funded product launch in 2002, prior to our
acquisition. We are currently evaluating different packaging of Gelclair(TM) and
believe that a significant component of our forecasted sales will be derived
from this new packaging. Excluding this provision for obsolete inventory, cost
of product sales during the three and six months ended March 31, 2004 was
approximately 35% of product sales. There were no cost of product sales in the
comparable periods of fiscal 2003 since we acquired the rights to Gelclair(R) on
June 12, 2003.
Research and Development
The largest component of our total expenses continues to be our ongoing
investments in research and development, and particularly, the development of
our clinical product pipeline. We currently have multiple drug candidates in
clinical development including our most prominent candidate, Tarceva(TM), which
has just successfully completed Phase III trials for NSCLC and continues in a
Phase III study for pancreatic cancer, additional NSCLC studies and a Phase II
trial for glioblastoma. Tarceva(TM) is also the subject of an extensive
collaborative clinical program encompassing over 100 additional clinical trials.
We consider the active
19
management and development of our clinical pipeline crucial to the long-term
approval process. We manage our overall research, development and in-licensing
efforts in a manner designed to generate a constant flow of clinical candidates
into development to offset both the advancement of products to the market and
the anticipated attrition rate of drug candidates that fail in clinical trials
or are terminated for business reasons.
Because we manage our pipeline in a dynamic manner, it is difficult to
give accurate guidance on the anticipated proportion of our research and
development investments assigned to any one program prior to the Phase III stage
of development, or to the future cash inflows from these programs. For the three
months and six months ended March 31, 2004, we invested a total of approximately
$13.5 million and $24.3 million, respectively, in research and approximately
$13.2 million and $26.5 million, respectively, in pre-clinical and clinical
development. We estimate our fiscal 2004 research and development costs will be
between $105 million and $115 million. We consider this level of investment
suitable to sustain one major Phase III program and two to four earlier clinical
stage programs at any time and we manage our overall research and development
investments toward this level of activity.
Research and development expenses increased $2.9 million or 12% for the
three months ended March 31, 2004 and decreased $1.2 million or 2% for the six
months ended March 31, 2004 compared to the three and six months ended March 31,
2003. The increase for the three months was primarily due to costs associated
with the clinical development of our other pipeline molecules, including
Aptosyn(R) and OSI-461, which were acquired in connection with our acquisition
of Cell Pathways in June 2003, OSI-7904L and OSI-930, as well as additional
investments in our other cancer programs. Research and development expenses also
include the research and development costs of our diabetes subsidiary,
Prosidion, which totaled $4.1 million for the quarter ended March 31, 2004. In
April 2003, we assigned our rights and obligations under the Tanabe
collaborative agreement, to Prosidion. In March 2004, Prosidion entered into a
termination agreement with Tanabe, whereby Prosidion obtained the rights to
certain patents developed under the collaboration. Tanabe retained the rights to
develop such compounds in certain Asian territories. In consideration of the
termination, Prosidion shall pay Tanabe $1.0 million in cash and $1.0 million in
Prosidion shares. These required upfront payments to Tanabe under the agreement
of $2.0 million have been accrued at March 31, 2004 and are included in research
and development expenses on the accompanying statements of operations for the
three and six months ended March 31, 2004. Prosidion is also required to make
certain payments to Tanabe upon the achievement of certain milestones. These
increases in research and development expenses for the three months were offset
by a reduction in clinical development costs for Tarceva(TM). Although there are
multiple on-going clinical trials for Tarceva(TM), the large scale Phase III
trials have been completed or are near completion, while all four Phase III
trials were fully active in the prior year period. This reduction in Tarceva(TM)
development costs was the primary driver in the decrease in research and
development expenses for the six months ended March 31, 2004.
The significant perceived market potential for Tarceva(TM) resulted in
the alliance partnership with Genentech and Roche committing to a large and
comprehensive global development plan for the candidate. The global development
plan consists of major Phase III clinical trials in lung and pancreatic cancers
and a large number of earlier stage trials in a variety of disease settings,
including glioblastoma. The alliance partners have committed to invest a
20
combined $300 million in the global development plan to be shared equally by the
three parties. We have made additional research and development investments
outside of the global development plan with the consent of the other parties. As
of March 31, 2004, we have invested in excess of $88 million since the return of
the full rights to Tarceva(TM) from Pfizer, Inc. in June 2000, representing our
share of the costs incurred to date in the tripartite global development plan
and additional investments outside the plan. Our research and development
expenses for Tarceva(TM) incurred for the three and six months ended March 31,
2004 were $6.3 million and $13.2 million, respectively, as compared to $9.0
million and $20.6 million for the three and six months ended March 31, 2003,
respectively. We anticipate investing a majority of the remaining commitment
under the global development plan over the next year. Should Tarceva(TM) be
successfully registered and launched, we would anticipate continued research and
development investment in the product to support its commercial growth. As of
March 31, 2004, we anticipate that the cost to complete the Phase III clinical
trials for Aptosyn(R) to be between $2.0 million and $3.0 million.
Selling, General and Administrative
Selling, general and administrative expenses increased $11.1 million or
105% and $24.5 million or 135% for the three and six months ended March 31,
2004, respectively, compared to the three and six months ended March 31, 2003.
The increases were primarily due to:
- - additional management and personnel relating to the establishment of
commercial operations to support Gelclair(R) and Novantrone(R);
- - subcontracting expenses related to our short-term transitional arrangement
with a contract sales organization consisting of a core of sales
representatives as we build our commercial operations;
- - increased commercialization and marketing costs relating to Tarceva(TM)
which are shared with Genentech in accordance with the terms of our
collaboration with Genentech;
- - expenses for maintenance fees relating to Novantrone(R) sales in oncology
indications;
- - transition support services provided by Celgene Corporation during the
first quarter of fiscal 2004 as a result of our full recovery of rights to
market and distribute Gelclair(R) from Celgene; and
- - disposal costs relating to the consolidation of our Horsham, Pennsylvania
facility acquired in the Cell Pathways acquisition.
The sales and marketing infrastructure is currently comprised of
approximately 60 sales, marketing, medical affairs, commercial planning and
support personnel, including an approximately 30-person sales force. We expect
selling, general and administrative costs to increase as we expand our
commercial operations and are currently estimating that our fiscal 2004 selling,
general and administrative costs will be between $85 million and $95 million.
Amortization of Intangibles
Amortization of intangibles increased $3.9 million and $8.7 million for
the three and six months ended March
21
31, 2004, respectively, compared to the three and six months ended March 31,
2003. The increase primarily related to amortization expense related to our
rights to Novantrone(R) acquired in March 2003 and to Gelclair(R) acquired in
June 2003.
OTHER INCOME AND EXPENSE
Net investment income decreased $806,000 or 36% and $2.0 million or 41%
for the three and six months ended March 31, 2004, respectively, compared to the
three and six months ended March 31, 2003. The decrease was primarily
attributable to a decrease in the average rate of return on our investments and
to less funds available for investment during the respective periods. Interest
expense increased $1.2 million or 76% and $2.4 million or 76% for the three and
six months ended March 31, 2004, respectively, compared to the three and six
months ended March 31, 2003. The increase was primarily due to the interest
expense incurred on the 3.25% convertible senior subordinated notes issued in
September 2003. For the six months ended March 31, 2004, other expense-net was
$702,000 compared to other expense-net of $123,000 for the six months ended
March 31, 2003. The increase in the other expense-net for the six months is due
to realized gains on the sale of investments recorded in 2003, as well as the
amortization of debt issuance costs related to the convertible senior
subordinated notes issued in September 2003 recorded in 2004.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, working capital, representing primarily cash, cash
equivalents, and restricted and unrestricted short-term investments, aggregated
$312.9 million compared to $379.6 million at September 30, 2003. This decrease
of $66.7 million is primarily due to net operating cash burn for the six month
period.
We expect to incur continued losses over the next couple years as we
continue our investment in Tarceva(TM) and other product candidates in our
pipeline as well as our research programs and our commercial operations. We
estimate that our fiscal 2004 cash burn will be between $120 million and $125
million depending upon the timing of certain milestone payments that we will
receive upon the successful filing and approval of the NDA submission for
Tarceva(TM) in the United States and in Europe. We have established a goal of
achieving profitability and positive cash flow within 24 months of a successful
market launch of Tarceva(TM). We estimate the approval of Tarceva(TM) by the FDA
in early first quarter of calendar 2005, assuming a six month review period for
the NDA. As we continue to pursue strategic in-licensing and acquisition
opportunities that would bring additional products and clinical development
candidates to our cancer pipeline, we will be required to use our available cash
and/or equity securities. 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 current cash resources
provide a solid financial base from which to fund our existing operations
although we continuously evaluate our capital requirements to support the next
phase of our growth.
In the past, we have funded our research, development, commercial and
administrative support efforts through public and private sales of our
securities, including debt and equity
22
securities. Most recently, in September 2003, we issued a total of $150.0
million aggregate principal amount of convertible senior subordinated notes in a
private placement for net proceeds of $144.8 million. The notes bear interest at
3.25% per annum, payable semi-annually, and mature on September 8, 2023. The
notes are convertible into shares of our common stock at a conversion price of
$50.02 per share, subject to normal and customary adjustments such as stock
dividends or other dilutive transactions. In connection with the issuance of the
notes, we used $19.0 million of the net proceeds for the purchase of 503,800
shares of our common stock. With respect to the notes, we pledged $14.2 million
of U.S. government securities with maturities at various dates through August
2006. Upon maturity, the proceeds of these restricted investment securities will
be sufficient to pay the first six scheduled interest payments on the notes when
due. The aggregate fair value and amortized cost of the restricted investment
securities at March 31, 2004 was $11.9 million.
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 $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 our common stock at a conversion price of $50 per
share, subject to normal and customary adjustment, such as stock dividends. In
August and September 2002, we purchased in the open market a total of $40.0
million in principal amount of the notes. With respect to the notes, we pledged
$22.9 million of U.S. government securities with maturities at various dates
through November 2004. Upon maturity, the proceeds of these restricted
investment securities will be sufficient to pay the first six scheduled interest
payments on the notes when due. The aggregate fair value and amortized cost of
the restricted investment securities at March 31, 2004 were $10.4 million and
$10.3 million, respectively.
If all or any portion of the notes issued in September 2003 and
February 2002 have not been converted into common stock prior to their maturity
dates, we will be required to pay, in cash, the outstanding principal amounts of
the notes plus any accrued and unpaid interest. This could have a significant
impact on our liquidity depending on our cash position at 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 out debt
obligations.
23
COMMITMENTS AND CONTINGENCIES
Our major outstanding contractual obligations relate to our senior
subordinated convertible notes and our facility leases. The following table
summarizes our significant contractual obligations at March 31, 2004 and the
effect such obligations are expected to have on our liquidity and cash flow in
future periods (in thousands):
2009 &
2004 2005 2006 2007 2008 THEREAFTER TOTAL
-------- -------- -------- -------- -------- ---------- --------
Contractual Obligations:
Senior convertible debt (a) $ 5,638 $ 11,275 $ 11,275 $ 11,275 $ 11,275 $386,325 $437,063
Operating leases 4,193 8,387 6,960 5,657 6,624 55,148 86,969
Capital commitments 299 -- -- -- -- -- 299
-------- -------- -------- -------- -------- -------- --------
Total contractual obligations $ 10,130 $ 19,662 $ 18,235 $ 16,932 $ 17,899 $441,473 $524,331
======== ======== ======== ======== ======== ======== ========
- ----------------------
(a) Includes interest payments at a rate of 4% per annum and 3.25% per annum
relating to convertible senior subordinated notes issued in February 2002
and September 2003, respectively.
Other significant commitments and contingencies include the following:
- We are committed to share equally with Genentech and Roche a
combined $300 million in certain global development costs for
Tarceva(TM). As of March 31, 2004, we have spent approximately
85% of our commitment under the agreement.
- In connection with our agreement to market and promote
Novantrone(R) in approved oncology indications, we are required
to pay quarterly maintenance fees until the later of the
expiration of the last valid patent claim or the first generic
date, as defined in the agreement, or unless the agreement is
earlier terminated.
- In connection with the exclusive distribution agreement to
market and distribute Gelclair(R) in North America, we are
committed to additional inventory purchases of $3.0 million and
$5.0 million in calendar 2003 and 2004, respectively. Our
commitment for calendar 2003 will be recorded during 2004 upon
shipment of the inventory. We are also committed to annual
marketing expenditures of $750,000, $500,000 and $250,000 for
2004 through 2006, 2007 through 2008 and 2009 through 2011,
respectively. In addition, we are obligated to spend $1.3
million annually for direct sales force efforts. We could be
responsible for milestone payments totaling $3.0 million
related to achievement of certain sales, patent and clinical
trial milestones.
- Under agreements with external CROs we will continue to incur
expenses relating to the progress of Tarceva(TM) and other
candidate 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.
24
- In connection with our termination agreement with Celgene, we
are required to make a payment to Celgene on the first
anniversary of the effective date provided that the transition
services, as defined in the agreement, have been provided to
us. The agreement also provides for a milestone payment to
Celgene upon the achievement of a specified amount of net sales
of Gelclair(R).
- We have outstanding letters of credit issued by a commercial
bank totaling $3.0 million of which the full amounts were
available on March 31, 2004. One is an irrevocable letter of
credit related to our Oxford, England facility and expires
annually with a final expiration date of September 27, 2007.
Another is an irrevocable letter of credit related to our
Horsham, Pennsylvania facility, whose lease we assumed through
the acquisition of Cell Pathways. The letter expires annually
with a final expiration date of September 22, 2008.
- 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 $3.5 million at March 31, 2004.
- In connection with the acquisition of Cell Pathways, we
provided additional consideration in the form of five-year
contingent value rights through which each share of Cell
Pathways' common stock will be eligible for an additional 0.04
share of OSI common stock in the event of a filing of a new
drug application by June 12, 2008 for either of the two
clinical candidates acquired from Cell Pathways, OSI-461 or
Aptosyn(R).
- Under certain license and 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, President Bush signed into law the Medicare
Prescription Drug, Improvement and Modernization Act of 2003. The Act introduced
both a Medicare prescription drug benefit and a federal subsidy to sponsors of
retiree health care plans that provide a benefit at least "actuarially
equivalent" to the Medicare benefit. These provisions of the new law will affect
accounting measurements. It is currently unclear whether the subsidy (1) should
be accounted for as a reduction of the accumulated postretirement benefit
obligation and net periodic postretirement benefit costs or (2) should be
accounted for as a payment to a plan sponsor as determined by reference to the
plan's benefit payments. It is also unclear under the current accounting
guidance whether the subsidy should be recorded immediately or deferred until
future periods. The Financial Accounting Standards Board, or FASB, plans to
issue authoritative guidance on the accounting for
25
subsidies later in 2004. We have elected to defer accounting for the effect of
the new Act as it relates to our postretirement plan, until FASB issues further
guidance.
RECENTLY ISSUED EXPOSURE DRAFT
On March 31, 2004, the FASB issued a proposed Statement, "Share-Based
Payment," that addresses the accounting for share-based awards to employees,
including employee-stock-purchase-plans, or ESPPs. The FASB formally proposed to
require companies to recognize the fair value of stock options and other
stock-based compensation to employees. The proposed statement would eliminate
the ability to account for share-based compensation transactions using APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and generally would
require instead, that such transactions be accounted for using a
fair-value-based method. The proposed requirements in the exposure draft would
be effective for public companies as of the beginning of the first fiscal year
beginning after December 15, 2004.We currently account for our stock-based
compensation plans in accordance with APB Opinion No. 25. Therefore, the
eventual adoption of this proposed statement, if issued in final form by the
FASB, will have a material effect on our consolidated financial statements.
FORWARD LOOKING STATEMENTS
A number of the matters and subject areas discussed in this Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere in this report that are not historical or current
facts deal with potential future circumstances and developments. The discussion
of these matters and subject areas is qualified by the inherent risks and
uncertainties surrounding future expectations generally, and these discussions
may materially differ from our actual future experience involving any one or
more of these matters and subject areas. These forward looking statements are
also subject generally to the other risks and uncertainties that are described
in our Annual Report on Form 10-K for the fiscal year ended September 30, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash flow and earnings are subject to fluctuations due to changes
in interest rates in our investment portfolio of debt securities, to the fair
value of equity instruments held and to foreign currency exchange rates. We
maintain an investment portfolio of various issuers, types and maturities. These
securities are generally classified as available-for-sale as defined by SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities," and,
consequently, are recorded on the balance sheet at fair value with unrealized
gains or losses reported as a component of accumulated other comprehensive
income (loss) included in stockholders' equity. With respect to the convertible
senior subordinated notes issued in September 2003 and February 2002, we pledged
U.S. government securities, or restricted investment securities, with maturities
at various dates through August 2006 and November 2004, respectively. 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. We consider our restricted investment
securities to be held-to-maturity as defined by SFAS No. 115. 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
26
the securities. We have not used or held derivative financial instruments in our
investment portfolio.
At March 31, 2004, we maintained a portion of our cash and cash
equivalents in financial instruments with original maturities of three months or
less. We also maintained an investment portfolio principally comprised of
government and government agency obligations and corporate obligations that are
subject to interest rate risk and will decline in value if interest rates
increase. A hypothetical 10% change in interest rates during the periods would
have resulted in a $143,000 and $291,000 change in our net losses for the three
and six month periods ended March 31, 2004, respectively.
In March 2004, we entered into forward exchange contracts to reduce
foreign currency fluctuation risks relating to intercompany transactions
relating to the funding of research activities in the United Kingdom. We account
for these derivative financial instruments in accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133, as amended, establishes
accounting and reporting standards for derivative instruments and hedging
activities. They require that an entity recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure those
instruments at fair value. Changes in the fair value of those instruments will
be reported in earnings or other comprehensive income depending on the use of
the derivative and whether it qualifies for hedge accounting. The accounting for
gains and losses associated with changes in the fair value of the derivative and
the effect on the consolidated financial statements will depend on its hedge
designation and whether the hedge is highly effective in achieving offsetting
changes in the fair value of cash flows of the asset or liability hedged. When
entered into, we designate and document these derivative instruments as a cash
flow hedge of a specific underlying exposure, as well as the risk management
objectives and strategies for undertaking the hedge transactions. Changes in the
fair value of a derivative that is designated and documented as a cash flow
hedge and is highly effective, are recorded in other comprehensive income until
the underlying transaction effects earnings, and then are later reclassified to
earnings in the same account as the hedged transaction. We formally assess, both
at the inception and at each financial quarter thereafter, the effectiveness of
the derivative instrument hedging the underlying forecasted cash flow
transaction which is being hedged. Any ineffectiveness related to the derivative
financial instruments' change in fair value will be recognized in the period in
which the ineffectiveness was calculated. As of March 31, 2004, the notional and
fair value of the foreign exchange contracts for British pounds was $6.5 million
and $6.6 million, respectively. The contracts will mature over the next seven
months. At March 31, 2004, net gains on derivative instruments expected to be
reclassified from accumulated other comprehensive income to earnings during the
next seven months due to the settlement of the forward contracts and execution
of the intercompany transactions was $102,000.
Our limited investments in certain biotechnology companies are carried
on the equity method or cost method of accounting using the guidance of
applicable accounting literature. Other-than-temporary losses are recorded
against earnings in the same period the loss was deemed to have occurred.
Our long-term debt totaled $310.0 million at March 31, 2004 and was
comprised of the convertible senior subordinated notes we issued in September
2003 and February 2002 which bear interest at a fixed rate of 3.25% and 4%,
respectively.
27
Underlying market risk exists related to an increase in our stock price
or an increase in interest rates which may make the conversion of the
convertible senior subordinated notes to common stock beneficial to the
convertible senior subordinated notes holders. Conversion of the convertible
senior subordinated notes would have a dilutive effect on any future earnings
and book value per common share.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of our Disclosure Controls and Procedures. The Securities
and Exchange Commission requires that as of the end of the period covered by
this Quarterly Report on Form 10-Q, the CEO and the CFO evaluate the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13(a)-15(e)) under the Securities Exchange Act of
1934, or the Exchange Act, and report on the effectiveness of the design and
operation of our disclosure controls and procedures. Accordingly, under the
supervision and with the participation of our management, including our CEO and
CFO, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
Quarterly Report on Form 10-Q.
CEO/CFO Conclusions about the Effectiveness of the Disclosure Controls
and Procedures. Based upon their evaluation of the disclosure controls and
procedures, our CEO and CFO have concluded that, subject to the limitations
noted below, our disclosure controls and procedures are effective to provide
reasonable assurance that material information relating to OSI and our
consolidated subsidiaries is made known to management, including the CEO and
CFO, on a timely basis and particularly during the period in which this
Quarterly Report on Form 10-Q was being prepared.
Limitations on the Effectiveness of Controls. Our management, including
the CEO and CFO, does not expect that our disclosure controls and procedures or
our internal control over financial reporting will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected. While we believe that our disclosure controls and procedures
have been effective, in light of the foregoing we intend to continue to examine
and refine our disclosure controls and procedures and to monitor ongoing
developments in this area.
28
Changes in Internal Control Over Financial Reporting. There were no
changes in our internal control over financial reporting (as defined in Rule
13(a)-15(f)) under the Exchange Act identified in connection with the evaluation
of such internal control over financial reporting that occurred during the
period covered by this Quarterly Report on Form 10-Q, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of stockholders was held on March 17, 2004. The
following ten directors were elected:
Votes For Votes Withheld
---------- --------------
1. Robert A. Ingram 26,743,333 4,590,837
2. Colin Goddard, Ph.D. 27,655,483 3,678,687
3. Edwin A. Gee, Ph.D. 20,642,198 10,691,972
4. Michael Atieh 27,710,928 3,623,242
5. G. Morgan Browne 25,722,487 5,611,683
6. Daryl K. Granner, M.D. 25,760,026 5,574,144
7. Walter M. Lovenberg, Ph.D. 25,167,844 6,166,326
8. Viren Mehta 25,424,080 5,910,090
9. Sir Mark Richmond 27,333,445 4,000,725
10. John P. White 21,581,893 9,752,277
In addition, the following matters were voted upon: (i) a proposal to
adopt the Amended and Restated Stock Incentive Plan was approved (15,286,841
shares voted in favor, 7,137,624 shares voted against, 82,426 shares abstained
and there were 8,827,279 broker non-votes); and (ii) the appointment of KPMG LLP
as auditors for fiscal year ending September 30, 2004 was ratified (30,490,533
shares voted in favor, 813,082 shares voted against, 30,555 shares abstained and
there were no broker non-votes).
ITEM 5. OTHER INFORMATION
Not applicable.
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 Certificate of Incorporation, as amended, filed by OSI
Pharmaceuticals, Inc. as an exhibit to the Form 10-K for
the fiscal year ended September 30, 2001 (file no.
000-15190), and incorporated herein by reference.
3.2 Amended and Restated Bylaws, filed by OSI Pharmaceuticals,
Inc. as an exhibit to the Form 10-K for the fiscal year
ended September 30, 2001 (file no. 000-15190), and
incorporated herein by reference.
31.1* Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or 15d-14(a).
31.2* Certification of Chief Financial Officer pursuant to Rule
13a-14(a) or 15d-14(a).
32.1* Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350.
32.2* Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350.
- -------------------
* Filed herewith.
(b) REPORTS ON FORM 8-K
We filed a current report on January 30, 2004 with the Securities and
Exchange Commission via EDGAR, furnishing our financial results for the quarter
ended December 31, 2003. The earliest event covered by this report occurred on
January 28, 2004.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
OSI PHARMACEUTICALS, INC.
------------------------------------------
(Registrant)
Date: May 14, 2004 /s/ Colin Goddard, Ph.D.
------------------------------------------
Colin Goddard, Ph.D.
Chief Executive Officer
Date: May 14, 2004 /s/ Robert L. Van Nostrand
------------------------------------------
Robert L. Van Nostrand
Vice President and Chief Financial Officer
(Principal Financial Officer)
32
INDEX TO EXHIBITS
Exhibit
3.1 Certificate of Incorporation, as amended, filed by OSI Pharmaceuticals,
Inc. as an exhibit to the Form 10-K for the fiscal year ended September
30, 2002 (file no. 000-15190), and incorporated herein by reference.
3.2 Amended and Restated Bylaws, filed by OSI Pharmaceuticals, Inc. as an
exhibit to the Form 10-K for the fiscal year ended September 30, 2002
(file no. 000-15190), and incorporated herein by reference.
31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-14(a).
31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or
15d-14(a).
32.1* Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350.
32.2* Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350.
- ------------------
* Filed herewith.
33