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FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended September 30, 1997 or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
Commission file number 0-15190
OSI Pharmaceuticals, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 13-3159796
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
106 Charles Lindbergh Blvd., Uniondale, N.Y. 11553
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 222-0023
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which registered
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of November 28, 1997, the aggregate market value of the Registrant's voting
stock held by non-affiliates was $133,215,769. For purposes of this
calculation, shares of Common Stock held by directors, officers and stockholders
whose ownership exceeds five percent of the Common Stock outstanding at November
28, 1997 were excluded. Exclusion of shares held by any person should not be
construed to indicate that such person possesses the power, direct or indirect,
to direct or cause the direction of the management or policies of the
Registrant, or that such person is controlled by or under common control with
the Registrant.
As of November 28, 1997, there were 22,263,969 shares of the Registrant's $.01
par value common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for its 1998
annual meeting of stockholders are incorporated by reference into Part III.
This Form 10-K/A is being filed to amend certain numerical information
under the caption "Intellectual Property" in Item 1 of, and to make certain
other non-substantive typographical or technical changes in, the annual report
on Form 10-K of OSI Pharmaceuticals, Inc. for the fiscal year ended September
30, 1997, which was filed with the Securities and Exchange Commission on
December 29, 1997.
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PART I
ITEM 1. BUSINESS
OSI Pharmaceuticals, Inc. ("OSI" or the "Company"), formerly known as
Oncogene Science, Inc., is a leading drug discovery company that has assembled
a platform of drug discovery technologies enabling it to build and sustain a
pipeline of pharmaceutical product opportunities. The Company pioneered the
development of (i) genetically engineered live cell assays targeting gene
transcription and (ii) robotic high throughput screening in order to generate
lead compounds more efficiently. Over the last few years, the Company has,
through acquisition and internal technology development, added extensively to
these core capabilities. The addition of large diverse libraries of small
molecules and a broadened expertise in assay biology, medicinal, combinatorial
and pharmaceutical chemistry capabilities has created a comprehensive drug
discovery platform enabling the Company to progress leads discovered against
novel targets all the way through the discovery and pre-clinical development
stages.
Through corporate collaborations and co-ventures, OSI is partnering its
drug discovery capabilities with the resources of other companies. In this
manner, the Company receives current revenues from research funding and expects
to realize future revenues from research and milestone payments, success fees
and royalties from product sales. Independently and in collaboration with Pfizer
Inc. ("Pfizer"), Hoechst Marion Roussel, Inc. ("HMRI"), BioChem Pharma
(International) Inc. ("BioChem Pharma"), Sepracor, Inc. ("Sepracor"), Novartis
Pharma AG ("Novartis") and Sankyo Company, Ltd. ("Sankyo"), the Company is
engaged in the discovery and development of drugs for 45 target proteins in a
wide range of disease areas, including cancer, systemic and topical viral,
bacterial and fungal diseases, diabetes, atherosclerosis, arthritis,
neurological disorders and chronic anemias. Its research and development
capabilities together with its ongoing discovery and development programs have
positioned the Company as a leader in the field of drug discovery. The Company
was incorporated in 1983. To reflect the Company's evolution, effective October
1, 1997, the Company changed its name from Oncogene Science, Inc. to OSI
Pharmaceuticals, Inc. and its NASDAQ stock symbol to OSIP.
BACKGROUND
Over the last decade, major advances in molecular biology, automation,
computing and the understanding of the human genome have led to a revolution in
drug discovery technology. This has occurred at a time when the rising costs of
health care and changes in health care management policies are applying
increasing competitive pressure on the pharmaceutical industry. This has
resulted in a series of major mergers within the pharmaceutical industry as
organizations strive to maintain market share and build strong pipelines of new
products to maintain competitive positions. This has led to an emphasis on the
cost-effectiveness and quality of drug candidates and the speed with which novel
classes of pharmaceuticals can be brought to the marketplace. In this
environment, new discovery technologies that improve the number and quality of
lead compounds have become critical in order to identify novel drug candidates
and to conduct cost-effective clinical development.
OSI'S TECHNOLOGY PLATFORM
The Company's technologies are designed to accelerate the process of
identifying and optimizing high quality, small molecule drug candidates for
clinical development. The Company's technology platform is widely applicable to
the identification and optimization of small molecule drug candidates to treat
many different diseases, including diseases due to mutations or abnormalities in
multiple genes. Utilizing its technology platform, the Company has been able to
identify and optimize lead compounds that are potent and selective, possess
minimal or no cellular toxicity and have activity in live cells and animal
models, and that have progressed to clinical trials in humans. OSI's platform,
which constitutes an integrated set of drug discovery technologies covering
every aspect of pre-clinical drug development, includes proprietary live-cell
assays, high throughput robotic screening, diverse compound libraries and
combinatorial, medicinal and natural products chemistry capabilities, together
with significant pre-clinical expertise in pharmaceutics, pharmacokinetics and
molecular biology.
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Assay Biology
The Company has specialized in the development of drug screens that
utilize genetically engineered human cells to identify compounds that affect
transcription of target genes. These assay systems, which employ reporter gene
technology, can be utilized to discover drugs that affect the expression of
proteins encoded by the target genes. There are multiple sites within a cell
where a drug can act to exert a specific effect. This broadly enabling
technology allows the Company to discover compounds that exert their effects on
receptors, signal transduction proteins, transcription factors and other sites.
The Company's seminal contribution to the development of this technology was
recognized by the issuance of U.S. Patent No. 5,665,543 in September 1997, which
claims a method of identifying compounds that specifically modulate expression
of target genes using cells engineered to include reporter genes. This
technology is used in the biotechnology and pharmaceutical industry and the
Company believes that the claims covered by this patent, together with claims
covered by pending patent applications, can be licensed for certain monetary and
technology considerations. During the last two years the Company has broadened
its assay expertise extensively. Currently, the Company is able to conduct
screens on a wide variety of different assay platforms, including enzyme assays,
immunoassays, scintillation proximity assays, protein-protein interaction assays
and receptor-ligand screens. The Company believes this breadth of expertise
enables it to select the most appropriate assay with which to pursue drug
discovery against a novel biological target.
High Throughput Robotic Screening Technology
OSI has been a pioneer and remains a leader in the development of high
throughput screening. The Company has developed software and automation that
enable it to manage large compound libraries and prepare test substances for
screening. The Company has developed proprietary hardware and software systems
to automate the entire drug screening process, from the addition of the test
substances to the cells to the analysis of the data generated from the tests. In
its proprietary robotic screening facility, the Company can analyze up to
300,000 different test samples each week, depending on the complexity of the
assays. The Company's robotic systems are not limited to any particular assay
format and can be rapidly reconfigured to run a wide variety of assays.
Diverse Compound Libraries
Access to large libraries of diverse compounds is a key asset in the
Company's drug discovery efforts. Leads discovered from these libraries become
the proprietary starting materials from which drugs are optimized. The Company
has access to over 1.5 million compounds from its own and several of its
partners' compound libraries for high throughput screening. The Company's
proprietary libraries include its unique natural products library of fungal
organisms, its focused libraries of small molecule compounds derived from its
high-speed combinatorial analoging, and The Dow Chemical Company's ("Dow")
library of approximately 140,000 small molecule compounds. In March 1997, the
Company acquired from Dow an exclusive worldwide license to this library for
the purposes of discovery and development of small molecular weight
pharmaceuticals and cosmeceuticals. The duration of this license is coextensive
with the life of the last to expire of the patents related to the licensed
compounds (or 20 years if no patents are filed). In exchange for these rights,
the Company issued to Dow 352,162 shares of common stock. The Company will also
pay royalties to Dow from sales of products derived from a small subset of
Dow's compound library that is covered by existing Dow patents or proprietary
technology. In addition, certain collaborative partners have made their
compound libraries available for additional research by the Company outside
their existing collaborative programs. For any compound from the Company's
collaborative partners' libraries that emerges as a lead in a proprietary
program, the partner typically will have the right of first refusal to develop
the compound or terminate its further development or to allow the Company to
commercialize the compound independently or with a third party in exchange for
royalty payments from the Company on product sales.
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Natural Products Discovery
The Company has an extensive program to discover novel and active
natural product compounds found in fungal fermentation extracts. Fungi are a
known source of pharmaceuticals, including penicillin, cephalosporin,
lovastatin, prevastatin and cyclosporin A. Through its MYCOsearch, Inc.
subsidiary ("MYCOsearch"), the Company owns a unique and diverse collection of
approximately 70,000 fungal organisms. In the MYCOsearch Natural Products
Discovery Center in North Carolina, the Company has implemented automated
microfermentation technology through which it has generated approximately
110,000 extracts for high throughput screening. This operation is expected to
add between 50,000 and 100,000 new extracts to the Company's natural products
library annually. The Company has invested substantial resources in implementing
a fully integrated fermentation biology and natural products chemistry
capability to provide the infrastructure and expertise necessary to isolate and
identify active natural product compounds that may be present in fungal
abstracts.
Chemistry and Lead Optimization
The pharmaceutical properties of a lead compound must be optimized
before clinical development of that compound begins. In 1996 the Company
acquired Aston Molecules Ltd. ("Aston"), a private company with expertise in
medicinal and combinatorial chemistry, which are critical elements in the lead
optimization process. The Company's Aston subsidiary also has expertise in
pharmacokinetics and pharmaceutical chemistry, which are disciplines applied
during the pre-clinical stages to accentuate the drug-like qualities of a lead
candidate. In November 1997, the Company officially dedicated Aston's newly
expanded medicinal, combinatorial and pharmaceutical chemistry facilities. The
Company continues to invest in technology designed to improve drug discovery in
this area. The Company also has a strategic alliance with Xenometrix, Inc. which
is aimed at the development of automated live-cell assays that will allow the
Company to profile genes that might be early indicators of the toxicological
liability of a lead compound. This molecular biology approach is being
implemented together with similar approaches that are being designed to allow
the Company to generate information on the metabolic liability of lead compounds
together with their physical and chemical properties. The Company is in the
process of establishing this integrated platform of automated and semi-automated
technologies in an effort to support decision making regarding the quality of
lead candidates earlier in the drug discovery process.
STRATEGY
Historically, drug discovery has been an expensive process of
attrition. In the pharmaceutical industry, only about 1 in 16 research and
development programs involving compounds screened against specific targets
actually result in a successful drug. It costs on average (including failures)
approximately $300 million in research and development to bring a drug from
initial lead to market. OSI's business strategy is to manage this risk by
applying its integrated discovery platform to improve the speed and
effectiveness of the drug discovery process, and to leverage this platform
through corporate collaborations to grow and sustain a pipeline of novel
pharmaceutical product opportunities.
To retain more of the downstream returns, the Company has also embarked
on a strategy of forming co-ventures with other pharmaceutical and biotechnology
companies. These co-ventures are in the form of (i) discovery and development
collaborations in which the Company has committed greater resources toward
product development in exchange for greater product commercialization rights and
(ii) new entities formed jointly by the Company and other organizations to which
the Company has contributed technology, expertise and other resources in
exchange for equity interests and royalty rights.
In addition to its collaborative programs and co-ventures, the Company
has undertaken independent efforts to discover and develop gene
transcription-based therapeutics in various proprietary areas. Generally, the
Company's objective with respect to its proprietary programs is to identify lead
compounds, progress them through pre-clinical development and manage clinical
development through early-stage clinical trials. If its drug discovery efforts
are successful, the Company's practice is to partner with large pharmaceutical
firms for clinical and commercial development of potential proprietary products.
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PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS
The following table summarizes OSI's current product development and
research programs as of September 30, 1997. The table is qualified in its
entirety by reference to the more detailed descriptions elsewhere in this
report.
- ------------------------- ----------------------- ------------ ------------ ------------- ------------ -------------
NO. OF
DRUG DISCOVERY DRUG PRE-CLINICAL
PROGRAM DISEASE FIELD TARGETS DISCOVERY(a) EVALUATION(b) PHASE I(c) PHASE II(d)
- ------------------------- ----------------------- ------------ ------------ ------------- ------------ -------------
COLLABORATIONS
Novartis Wound Healing 1 1
(TGF-Beta3)
Oral Mucositis 1 1
(TGF-Beta3)
Pfizer Cancer 14 10 3 1
HMRI Cardiovascular 4 3 1
Inflammatory 4 3 1
EPO Inducers 1 1
Wyeth Diabetes 1 1
Sankyo Influenza 4 4
CO-VENTURES
BioChem Pharma HIV 2 2
HCV 2 1 1
HBV 1 1
Sepracor Anti-Bacterials, 3 3
Anti-Fungals
Anaderm Skin Pigmentation 2 1 1
Skin Wrinkles 1 1
Hair Growth 1 1
Helicon Long-Term Memory 1 1
OTHER
AFM Muscular Dystrophy 1 1
OSI Sickle Cell Disease, 1 1
B-Thalassemia
- ------------------------- ----------------------- ------------ ------------ ------------- ------------ -------------
TOTAL 45 33 9 1 2
- ------------------------- ----------------------- ------------ ------------ ------------- ------------ -------------
(a) For most of the Company's programs in the "Discovery" phase,
the target proteins are either undergoing high throughput
screening or lead compounds identified in these screens are
being evaluated. Multiple lead compounds may exist for any
target protein. These lead compounds may be at different
stages of development, as indicated in the table above.
(b) In the "Pre-clinical Evaluation" phase, the Company or its
collaborative partners optimize lead compounds and conduct
laboratory pharmacology and toxicology testing.
(c) "Phase I" clinical trials consist of small scale safety trials
typically in healthy human volunteers.
(d) "Phase II" clinical trials entail testing of compounds in
humans for safety and efficacy in a limited patient
population.
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Small Molecule Collaborative Programs and Co-Ventures
OSI pursues collaborations with pharmaceutical companies to combine the
Company's drug discovery capabilities with the collaborators' development and
financial resources. The Company's collaborations provide for its partners to
fund the Company's collaborative research programs and to pay royalties on sales
of any resulting products. Certain collaborative programs involve milestone
payments by the Company's partners. The collaborative partners generally retain
manufacturing and marketing rights worldwide. Generally, each collaborative
research agreement prohibits the Company from pursuing with any third party drug
discovery research relating to the target proteins being covered by research
under the collaboration.
The Company's existing collaborations are as follows:
Pfizer Inc.
In April 1986, Pfizer and the Company entered into a collaborative
research agreement and several other related agreements. During the first five
years of the collaboration, the Company and Pfizer focused principally on
understanding the molecular biology of oncogenes. In 1991, Pfizer and the
Company renewed the collaboration for a second five-year term and expanded the
resources and scope of the collaboration to focus on the discovery and
development of cancer therapeutic products based on mechanisms-of-action that
target oncogenes and anti-oncogenes. Oncogenes play a key role in the conversion
of normal cells to a cancerous state and can cause cancer when they mutate or
over express. Anti-oncogenes, or tumor suppressor genes, encode proteins that
generally function to block the proliferative growth of particular cell types. A
loss of function of certain tumor suppressor genes can result in uncontrolled
cell growth. Effective April 1, 1996, the Company and Pfizer renewed their
collaboration for a new five-year term by entering into new collaborative
research and license agreements.
Currently, the Company's collaboration with Pfizer focuses on
discovering compounds that act upon various target proteins involved in cancer.
The Company's screening program has resulted in the identification of a
proprietary lead compound, CP-358,774, that inhibits the activity of the
Epidermal Growth Factor Receptor, a protein associated with a number of major
cancers. Pfizer is conducting Phase I safety and toxicity studies in the United
States on this compound. The continued development of this compound depends on
several factors outside the control of the Company, including the amount and
timing of resources devoted by Pfizer, successful completion of safety and
toxicity studies and successful optimization of the compound. There can be no
assurance that a drug will result from this program.
All patent rights and patentable inventions derived from the research
under this collaboration are owned jointly by the Company and Pfizer. The
Company has granted Pfizer an exclusive, worldwide license to make, use, and
sell the therapeutic products resulting from this collaboration in exchange for
royalty payments. This license terminates on the date of the last to expire of
the Company's relevant patent rights.
Pfizer will be responsible for the clinical development, regulatory
approval, manufacturing and marketing of any products derived from the
collaborative research program. However, the collaborative research agreement
does not obligate Pfizer to pursue these activities. Generally, the Company and
Pfizer are prohibited during the term of the contract from independently
pursuing or sponsoring research aimed at the compounds or products in the target
area, except that the Company may conduct research with respect to human
diagnostic products within the area of its collaborative research with Pfizer.
The collaborative research agreement will expire on April 1, 2001. However, it
may be terminated earlier by either party upon the occurrence of certain
defaults by the other party. Any termination of the collaboration resulting from
a Pfizer default will cause a termination of Pfizer's license rights. Pfizer
will retain its license rights if it terminates the agreement in response to a
default by the Company. In addition, between July 1 and September 30, 1998,
Pfizer may terminate the collaborative research agreement, with or without
cause, effective March 31, 1999. Furthermore, between July 1 and September 30,
1999, Pfizer may terminate the collaborative research agreement, with or without
cause, effective March 31, 2000. In the event of such early termination, Pfizer
will retain its license rights.
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From 1986 to March 1997, Pfizer paid an aggregate amount of $36.4
million to the Company in research funding. In 1986, Pfizer purchased 587,500
shares of the Company's common stock, which constitutes approximately 2.6% of
the Company's outstanding common stock, for an aggregate purchase price of
$3,525,000. Under the current collaborative research agreement, Pfizer has
committed to provide research funding to the Company in an aggregate amount of
approximately $18.8 million. Pursuant to a schedule set forth in the
collaborative research agreement, Pfizer will make annual research funding
payments to the Company, which will gradually increase from a maximum of
approximately $3.5 million in the first year of the five-year term to
approximately $4 million in the fifth year.
Hoechst Marion Roussel, Inc.
The Company is pursuing various areas jointly with HMRI in two
collaborative efforts. Effective as of January 1, 1997, the Company entered into
a Collaborative Research and License Agreement with HMRI to develop orally
active, small molecule inducers of erythropoietin gene expression for the
treatment of anemia due to chronic renal failure and anemia associated with
chemotherapy for AIDS and cancer. This collaboration is focused on the
pre-clinical and clinical development of lead compounds previously discovered by
the Company from its natural products and combinatorial chemistry libraries and
from HMRI's compound library. In addition, effective as of April 1, 1997, the
Company and HMRI entered into an Amended Collaborative Research and License
Agreement that consolidated and extended formerly separate collaborative
programs between the Company and each of Marion Merrell Dow Inc. ("MMDI"),
Hoechst Roussel Pharmaceuticals, Inc. ("Hoechst Roussel") and Hoechst AG
("Hoechst"). This resulted from the corporate reorganization of HMRI in July
1995 in which the pharmaceutical operations of MMDI, Hoechst Roussel and Hoechst
were combined into HMRI. This Amended Collaborative Research and License
Agreement provides for HMRI and the Company to collaborate in the discovery and
development of drugs for the treatment of atherosclerosis, inflammation,
arthritis and metabolic diseases. HMRI holds 1,590,909 shares of common stock of
the Company, which includes a warrant to purchase 500,000 shares of the
Company's common stock for $5.50 per share.
Anemia. The anemia collaboration is focused on developing orally
active, small molecules that induce gene expression of the protein
erythropoietin. Under the terms of the agreement, a research committee, with
equal representation from the Company and HMRI, prepares and approves research
plans and reviews and evaluates progress under the plans. Both the Company and
HMRI are contributing medicinal chemistry and pre-clinical optimization teams
under the agreement. HMRI has the exclusive right to conduct pre-clinical and
clinical development of drug candidates emerging from the program. The Company
may receive from HMRI up to $30 million in research funding, milestone payments
and success fees depending on HMRI's clinical success.
The Company has granted to HMRI exclusive, worldwide licenses to, among
other things, use, manufacture and sell products resulting from the
collaboration. In exchange for these licenses, HMRI will pay the Company
royalties on the sales by HMRI of any products resulting from the collaboration.
The duration of the licenses is coextensive with the lives of the patents
related to the licensed compounds. The Company and HMRI each have certain
rights and obligations to prosecute and maintain patent rights related to
specified areas of the research under the agreement.
Generally, the Company and HMRI are prohibited during the term of the
collaboration from pursuing or sponsoring research and development of compounds
and products in the target area other than pursuant to the agreement without the
approval of the research committee. The term of the agreement is segmented into
three periods: (1) an option period, which terminates on March 31, 1998; (2) a
contract period, which continues until March 31, 2000; and (3) a development
phase which commences March 31, 1998 and continues for as long as HMRI continues
development activities. During the option period, the agreement may be
terminated by mutual written agreement of the parties. If HMRI elects not to
participate in the contract period term or discontinues participation during the
contract period term or development phase, it will offer the Company and the
Company may accept the license rights to develop and commercialize the compounds
and products of the collaboration, subject to payment of royalties by the
Company to HMRI. The agreement is also subject to early termination in the event
of certain defaults by the parties.
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Atherosclerosis, Inflammation, Arthritis and Metabolic Diseases.
Pursuant to the Amended Collaborative Research and License Agreement effective
April 1, 1997, the Company and HMRI are conducting joint research and
development activities in the areas of atherosclerosis, inflammation, arthritis
and metabolic diseases. In the atherosclerosis program, the Company has
completed screening HMRI's compound libraries. This has resulted in the
identification of several lead compounds, which HMRI is optimizing for further
development. In the inflammation, arthritis and metabolic diseases program, the
Company has completed the screening of HMRI's compound libraries against
specified targets. The lead compounds identified in these screens are undergoing
further analysis, including evaluation in animal models, by HMRI.
Under this collaboration, a research committee, with equal
representation from OSI and HMRI, meets at least three times a year to evaluate
the progress of the research program, make priority and program decisions, and
prepare research plans identifying the drug targets to be pursued. New targets
are added to the program on an ongoing basis by mutual agreement. The Company is
responsible for achieving objectives outlined in the annual research plans. HMRI
is responsible for assisting the Company in the pursuit of such objectives,
including advancing the pharmacological assessment of compounds identified by
the Company, determining the chemical structure of the selected compounds,
identifying and selecting development candidates, pursuing clinical development
and regulatory approval, and developing manufacturing methods and pharmaceutical
formulations for the selected candidates. HMRI is responsible for funding the
costs of the Company's discovery efforts. As of September 30, 1997, the
Company had received or accrued an aggregate of $16.1 million in research
funding from HMRI and its predecessors.
The Company has granted to HMRI (i) an exclusive, worldwide license
with respect to, among other things, the use, manufacture and sale of products
resulting from their atherosclerosis research collaboration and (ii) the right
to obtain an exclusive, worldwide license with respect to any therapeutic
product derived from the inflammation, arthritis and metabolic disease program.
In exchange for these licenses, HMRI will pay royalties to the Company on sales
of such products. The Company and HMRI have mutually exclusive rights and
obligations to prosecute and maintain certain patent rights related to various
specified areas of the research.
Generally, the Company is prohibited during the term of the
collaboration from pursuing or sponsoring research independent of HMRI if it
relates to the identified targets in the areas of collaboration with HMRI
without the approval of the research committee. HMRI is generally prohibited
from using the gene transcription method independent of OSI to discover novel
human therapeutic products without the approval of the research committee. The
agreement expires on the later of March 31, 2002 or the last to expire of
any obligations of HMRI to pay royalties. The collaborative research agreement
may be terminated early by either party upon the occurrence of certain defaults
by the other party. Any termination by the Company resulting from an HMRI
default will cause a termination of certain of HMRI's license rights. HMRI will
retain its license rights if it terminates the agreement in response to a
default by the Company.
Sankyo Company, Ltd.
Effective as of February 12, 1997, the Company entered into a
Collaborative Research and License Agreement with Sankyo to be conducted in
partnership with MRC Collaborative Center ("MRC CC"), London, U.K. The
collaboration is focused on discovering and developing novel pharmaceutical
products to treat influenza.
Under the terms of the agreement, a research committee was formed
consisting of three representatives from Sankyo, two representatives from the
Company and one representative from MRC CC. The committee monitors the
progress of the research program and directs the objectives, tasks and required
activities of the collaboration. The Company is responsible for conducting
research as directed by the research committee, including, without limitation,
compound screening in exchange for research funding from Sankyo. Sankyo has the
responsibility and the exclusive right to conduct pre-clinical and clinical
development of all candidate compounds in exchange for milestone payments to the
Company.
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The Company and MRC CC have granted to Sankyo exclusive, worldwide
licenses to, among other things, use, manufacture and sell all products
resulting from the collaboration. In exchange for these licenses, Sankyo will
pay to the Company and MRC CC license fees and royalties on product sales. The
duration of the licenses is coextensive with the lives of the patents related to
the licensed compound. If Sankyo discontinues development of all candidate
compounds, the Company will have the sole and exclusive right to develop, use,
manufacture and sell all products resulting from the collaboration, and it will
pay royalties to Sankyo. Each of the parties has rights and obligations to
prosecute and maintain patent rights related to specified areas of the research
under the agreement.
Generally, the Company, Sankyo and MRC CC are prohibited during the
term of the contract from pursuing or sponsoring research and development of
compounds and products in the anti-influenza area other than pursuant to the
agreement. The agreement is for a term of three years, with the option to extend
for an additional one or two year period upon conditions and terms acceptable to
the Company, Sankyo and MRC CC. The agreement is subject to early termination in
the event of certain defaults by the parties.
Wyeth-Ayerst Laboratories
In December 1991, the Company entered into a two-year collaborative
research agreement with Wyeth, which was extended for an additional three-year
term in December 1993. The purpose of the agreement was to discover and develop
transcription-based drugs for the treatment of diabetes, immune system
modulation, asthma and osteoporosis. This collaboration was successful in
identifying active compounds on all four protein targets. Wyeth has continued
pre-clinical evaluation of compounds active against diabetes targets and is
continuing research in the diabetes program. Wyeth is responsible for assessing
the safety of the development candidates in animals and human patients under
conditions designed to meet FDA requirements, and developing manufacturing
methods and pharmaceutical formulations for those selected candidates. The
funded portion of this collaboration was concluded on December 31, 1996 in
accordance with the terms of the collaborative research agreement.
The Company has granted to Wyeth an option which is valid until
December 31, 1997, to obtain exclusive, worldwide licenses with respect to
products resulting from this collaboration in exchange for royalties to the
Company on sales of such products. Under the agreement, all technology and
patent rights will remain owned by the respective parties and each party has the
right to prosecute and maintain its own patents. Wyeth has funded the Company's
drug discovery efforts under this collaboration. As of September 30, 1997, Wyeth
had provided the Company with an aggregate of $6.1 million in research funding.
The Company has established the following discovery and development
co-ventures:
BioChem Pharma (International) Inc.
Effective as of May 1, 1996, the Company entered into a Collaborative
Research, Development and Commercialization Agreement with BioChem Pharma. Under
this agreement, the parties will seek to discover and develop antiviral drugs
for the treatment of Hepatitis B virus, Hepatitis C virus and HIV, although the
focus of the collaborative efforts may change at the discretion of a joint
steering committee. This agreement provides that the Company and BioChem Pharma
will jointly commit resources to the collaborative program. The Company and
BioChem Pharma will share equally the commercialization rights in the U.S. and
Europe for any products resulting from the collaboration. BioChem Pharma will
exclusively own commercialization rights in Canada. The agreement is for a term
of five years, with automatic, successive one-year renewal periods thereafter.
After May 1, 1999, however, either party may terminate the agreement by giving
the other party six-months prior written notice. The agreement is also subject
to early termination in the event of certain defaults by either party. BioChem
Pharma presently holds 500,000 shares of common stock of the Company.
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Sepracor, Inc.
On March 7, 1997, the Company entered into a Collaborative Research
Development and Commercialization Agreement with Sepracor. Under this agreement,
the parties will seek to discover and develop certain anti-infective agents and
anti-inflammatory agents. A joint steering committee consisting of equal
representation from each of the parties will manage all aspects of the research
program. The Company and Sepracor will commit equal resources to the program,
including, among other things, access to all their respective compound libraries
and dedicated teams of research scientists. Generally, the parties will share
equally the commercialization rights throughout the world for products derived
from the program and will share equally the profits from sales of such products,
except that in the case of drugs that are derived from two specified lead series
that were contributed to the collaboration by Sepracor (and for which Sepracor
had previously established activity against specified targets), Sepracor will
receive 75% of such profits (and bear 75% of the commercialization
responsibilities). The agreement is for a term of three years, with automatic
successive one-year renewal terms thereafter (subject to the right of either
party to terminate the agreement at the end of each term). The agreement is
subject to early termination in the event of specified defaults by either party.
The Company and Sepracor are prohibited from conducting independently any
research within the scope of the co-venture without the consent of the joint
steering committee.
Xenometrix, Inc.
On June 27, 1997, the Company and Xenometrix, Inc. entered into an
agreement pursuant to which they will jointly seek a corporate partner to fund a
technology collaboration for the development of automated systems to generate
and analyze certain data relating to toxicological, metabolic and undesirable
systemic effects of drug candidates. The parties have cross licensed certain of
their respective assay technologies on a worldwide, royalty-free, non-exclusive
basis. The agreement is for a period of nine months, with automatic successive
three month renewal periods. Each party is prohibited from negotiating
independently with any potential corporate partner with respect to the subject
matter of this agreement without the consent of the other party. No assurance
can be given that the parties will identify or contract with an appropriate
corporate partner.
The Company has established the following equity co-ventures:
Anaderm Research Corp.
On April 23, 1996, in connection with the formation of Anaderm Research
Corp., a Delaware corporation ("Anaderm"), the Company entered into a
Stockholders' Agreement (the "Stockholders' Agreement") among the Company,
Pfizer, Anaderm, New York University ("NYU") and certain NYU faculty members
(the "Faculty Members"), and a Collaborative Research Agreement (the "Research
Agreement") among the Company, Pfizer and Anaderm for the discovery and
development of novel compounds to treat conditions such as baldness, wrinkles
and pigmentation disorders. Anaderm has issued common stock to Pfizer and the
Company and options to purchase common stock to NYU and the Faculty Members. NYU
and the Faculty Members have exercised their options fully, and Pfizer holds
82%, the Company holds 14%, and NYU and the Faculty Members collectively hold
4%, of Anaderm's common stock. In exchange for its 14% of the outstanding shares
of Anaderm common stock, the Company provided formatting for high throughput
screens and conducted compound screening for 18 months at its own expense under
the Research Agreement.
The term of the initial Research Agreement was three years. During the
initial phase of the agreement (the first 18 months) the Company was required to
provide at its own cost formatting for high throughput screens and perform
screening of its own compounds and those compounds provided by Pfizer. Upon the
termination of the initial phase, the Board of Directors of Anaderm made a
determination that the initial phase was successfully completed. Pursuant to
Pfizer's approval, the funded phase commenced as of October 1, 1997 and will
continue for the term of the Research Agreement. During this phase, Anaderm will
make payments to the Company equal to its research costs, including overhead,
plus 10%. Anaderm or Pfizer will pay royalties to the Company on the sales of
products resulting from this collaboration.
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Helicon Therapeutics, Inc.
In July 1997, the Company, Cold Spring Harbor Laboratory and Hoffman-La
Roche Inc.("Roche") formed Helicon Therapeutics, Inc., a new Delaware
corporation ("Helicon"). In exchange for approximately 28% of Helicon's
outstanding capital stock, the Company will contribute to Helicon molecular
screening services and a nonexclusive license with respect to certain screening
technology. Such services are to be performed within one year. Cold Spring
Harbor Laboratory contributed a royalty-free license to commercialize certain
technology relating to genes associated with long-term memory in exchange for a
portion of Helicon's outstanding capital stock. Roche contributed cash for a
portion of Helicon's outstanding capital stock. Certain individuals associated
with Cold Spring Harbor Laboratory hold the remaining outstanding capital stock
of Helicon.
The parties have entered into various collaborative research and
license agreements pursuant to which they will jointly pursue the discovery,
development and commercialization of novel drugs for the treatment of long-term
memory disorders and other central nervous system dysfunctions. The initial term
of the collaborative program is three years, commencing as of July 1, 1997,
subject to extension for successive one-year periods upon agreement of the
parties. Roche, however, will have the right to terminate the program at the end
of the second year, or otherwise if certain milestones identified by the
research committee are not achieved. The Company and Cold Spring Harbor
Laboratory are to conduct research under the program, which will be funded by
Helicon (except for the molecular screening services the Company is contributing
to Helicon). Helicon is to receive funding from Roche for the first two years of
the program. If the program is not previously terminated, Roche is to continue
to provide funding for the third year of the program, with the actual amount to
be determined by a research committee established to oversee the collaborative
program. Roche is obligated to use reasonably diligent efforts to commercialize
products derived from the program.
Helicon has granted to Roche a worldwide license to commercialize
pharmaceutical products resulting from the collaborative program in exchange for
certain milestone payments and royalties on Roche's sales of such products. Each
of Helicon, the Company, Cold Spring Harbor Laboratory and Roche have various
rights and obligations to prosecute and maintain patent rights related to
specified developments and areas of the research under the collaborative
program. Helicon is prohibited from independently conducting or sponsoring
research related to the objectives of this collaborative program.
Recombinant TGF-Beta3 Collaboration
Novartis Pharma AG
In addition to its small molecule discovery programs, the Company has
developed the recombinant protein TGF-Beta3 for various indications. The
Company believes it was the first to isolate TGF-Beta3, a naturally occurring
human growth factor that exerts either stimulatory or inhibitory effects
depending upon the particular cell type to which it is applied. Topical or local
application of TGF-Beta3 in animal studies has been shown to enhance and
accelerate wound healing. Similarly, animal studies have shown that TGF-Beta3
can minimize the severity of ulcerative mucositis when administered prior to
chemotherapy.
The Company entered into an agreement with Novartis in April 1995
expanding the scope of the two companies' prior collaborative efforts with
respect to TGF-Beta3. This agreement grants to Novartis an exclusive,
worldwide license to use and sell TGF-Beta3 products for wound healing and
oral mucositis, as well as certain other indications, including psoriasis, and
an option to obtain rights to all other indications of TGF-Beta3 currently
held by the Company. In addition, Novartis has the worldwide license to
manufacture TGF-Beta3 for all indications.
Wound Healing. The Company is collaborating with Novartis in the
development of TGF-Beta3 in an application to promote soft tissue wound
healing, including venous leg ulcers, decubitus ulcers (pressure sores),
diabetic foot ulcers and burns. This is the primary indication for TGF-Beta3
on which Novartis and the Company are focusing. Such chronic cutaneous ulcers
afflict an estimated three million people in the U.S. TGF-Beta3 is
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believed to promote wound healing by recruiting inflammatory cells, such as
neutrophils and macrophages, and fibroblasts, and stimulating fibroblast
proliferation and extracellular matrix production. TGF-Beta3 is also believed
to stimulate angiogenesis (new blood vessel growth) at the wound site.
To date, Novartis has completed four Phase I safety studies, one in
Europe using a single dose of TGF-Beta3 applied to intact skin, one in the
U.S. using a multiple dose of TGF-Beta3 applied to intact skin, and two in
Japan. In all studies, the drug was found to be well tolerated with no adverse
effects. Novartis recently completed two Phase IIa safety/dose-finding studies,
one in Europe, involving a single dose administration to venous leg ulcer
patients, the other in the U.S., involving a single dose administration to
decubitis ulcer patients. The drug was found to be well tolerated in these
patients and shown initial efficacy data. Novartis initiated a comprehensive
Phase II clinical trial of venous leg ulcer patients in Europe, a clinical trial
in pressure sore patients in the U.S. and Canada and a venous ulcer, decubitis
ulcer and burn study in Japan during 1996. In addition, Novartis is conducting
additional Phase II venous leg ulcer, decubitus ulcer and burn wound clinical
trials in Japan. There can be no assurance that additional trials will
demonstrate safety and efficacy or will begin when planned, or at all in part
for the reasons discussed below.
Oral Mucositis. Oral mucositis is a painful, often debilitating
condition characterized by mouth and throat lesions that frequently occur as a
side effect of chemotherapy. In the U.S., over one million new cases of cancer
occur each year, over half of which receive multiple treatments of chemotherapy.
Approximately 40% of chemotherapy patients exhibit some degree of oral
mucositis. As a secondary indication, the Company and Novartis have developed
topical formulations of TGF-Beta3 in an attempt to temporarily inhibit the
high proliferative growth rate of certain normal cells in the mouth. The
Company's objective is to develop TGF-Beta3 to reduce the toxicity associated
with chemotherapeutic agents.
Under an agreement with the Company, Novartis is funding clinical
trials of TGF-Beta3 for oral mucositis in the United States and in Europe.
Having completed two Phase I clinical trials, Novartis has initiated
multi-center Phase II clinical studies in Europe and the U.S. Novartis will fund
all further Phase III clinical trials. No assurance can be given that any of
these clinical trials will demonstrate efficacy.
General. In exchange for its exclusive license with respect to the
wound healing, oral mucositis and certain other indications for TGF-Beta3,
Novartis will make royalty payments to the Company on the sale of TGF-Beta3
products. Also, Novartis purchased 909,091 shares of the Company's Common Stock
at $5.50 per share for an aggregate purchase price of $5 million in April 1995.
If, and at the time, Novartis decides to initiate Phase III clinical trials (or
the equivalent in Europe) for oral mucositis, Novartis will be required to make
a $10 million payment to the Company. In exchange for such payment, Novartis's
license will be expanded to cover all other indications for TGF-Beta3.
Novartis has the option to make such payment by purchasing $10 million of the
Company's Common Stock at the higher of $5.50 per share or the then current
market price. In the absence of a decision by Novartis to pursue such clinical
trials, Novartis may nonetheless exercise an option within four years from
inception of the agreement, or by April 1999, to expand its license under the
agreement to cover all indications for TGF-Beta3 by making the $10 million
payment.
Novartis has the right to discontinue clinical development at any time,
in which case all of its license rights from the Company with respect to
TGF-Beta3 will be terminated and it will make available to the Company the
results of all clinical work up to the date such activity was discontinued.
Under the agreement, Novartis has the right to manufacture TGF-Beta3, and will
supply the Company and any licensee of the Company with all developmental and
commercial quantities of TGF-Beta3 required. With respect to the Company's
commercial requirements in the future, if any, Novartis and the Company have
agreed to negotiate terms pursuant to which Novartis will supply TGF-Beta3,
subject to a specified pricing formula should the parties fail to reach
agreement. If Novartis is unable or unwilling to scale up its capacity to
supply TGF-Beta3 to the Company or its licensees in sufficient quantities,
Novartis will license to the Company its technology relating to the production
of TGF-Beta3 on terms to be negotiated within specified parameters.
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The Company's agreement with Novartis ends upon the expiration of the
last Company's patents relating to TGF-Beta3.
Proprietary Drug Discovery And Development
Chronic Anemias
Currently, the Company's proprietary discovery and development efforts
are focused principally on sickle cell anemia and B-thalassemia that are caused
by genetic mutations which result in the mutation, absence or decrease in the
adult chain of hemoglobin (the protein in red blood cells that binds oxygen).
Currently available treatments for both of these diseases are inadequate and
expensive. The cost of treating each sickle cell patient in the U.S. has been
estimated to be in excess of $60,000 annually. Regular blood transfusions are
the mainstay of current therapy for thalassemia. The Company's approach to
address sickle cell anemia and thalassemia is to discover a small molecule
compound that increases expression of the fetal hemoglobin ("HbF") gene to
compensate for defects in the adult chain of hemoglobin. The Company has
identified lead compounds that induce the production of HbF and has initiated
pre-clinical developments.
Muscle Wasting Disorders
Muscular Dystrophy. Duchenne's and Becker's muscular dystrophy are due
to defects of the dystrophin gene. The Company is developing multiple approaches
in its discovery efforts with respect to a drug for the treatment of muscular
dystrophy. A portion of the funding for this project has been provided by the
Association Francaise Contre Les Myopathies ("AFM").
CANCER DIAGNOSTICS
The Company is engaged in the development of a series of cancer
diagnostic tests based on oncogenes, tumor suppressor genes and other gene
targets whose proteins are directly involved in tumor growth or metastasis. One
line of these tests utilizes immunoassays and monoclonal antibodies to detect
these cancer markers in urine and serum. The other line of diagnostic tests
utilizes a series of monoclonal antibodies capable of measuring the cancer
markers in tissue sections using immunohistochemistry techniques such as manual
pathology diagnostic tests and image analysis. Both of these lines of tests are
designed to aid oncologists in the confirmation, monitoring, staging, screening
or prognosis of human cancer. These tests may enable reference labs and
physicians to select more effective types of treatment, more easily monitor
patients during therapy, or diagnose cancer at an earlier stage. The current
focus of the Company's diagnostic development program is on breast and colon
cancer, but the Company believes that many of the cancer markers in its program
may have clinical utility for other human tumors, such as lung, prostate,
ovarian and stomach cancer. None of these diagnostic tests have completed
clinical development or received FDA clearance to be marketed in the United
States.
The Company pursued serum and tissue based cancer diagnostic products
in collaboration with Becton, Dickinson and Company ("Becton") under a
collaborative program started in October 1991 (after an earlier technology
collaboration from 1984 to 1989). During 1995, the Company and Becton agreed
that Becton would narrow its focus in the program exclusively to tissue-based
diagnostic tests including immunohistochemistry and that the Company would
continue its development program in serum-based cancer diagnostics. Pursuant to
an agreement entered into as of September 27, 1996, the Company has granted to
Becton world-wide licenses to make, use and sell tissue-based diagnostic
products that incorporate specified antibodies with respect to which the Company
owns patent or other proprietary rights. The Company has generally retained the
rights with respect to nontissue-based (i.e., serum-based) diagnostic products.
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The Company entered into a Collaborative Research and License Agreement
with the Bayer Corporation ("Bayer"), effective January 1, 1997, for the
development of serum-based cancer diagnostic products. Under this agreement, the
Company has granted to Bayer licenses to manufacture, use and sell clinical
diagnostic products based on the Company's cancer diagnostics technology in
exchange for royalties on net sales. Bayer will own all technology, and has the
exclusive right to commercialize clinical diagnostic products, derived from the
collaboration. Bayer's license is perpetual with respect to nonpatented
technology and will terminate with respect to patented technology upon the
expiration of the last to expire of the Company's patents. Bayer will provide
funding for the Company's research under the collaboration in the amount of $1.5
million for each of the first two years, and $1 million for each subsequent
year. The Company will be required to provide up to $500,000 in annual funding
for the collaboration to the extent the Company derives net revenues from
out-licensing any cancer diagnostics technology or the sale of any clinical
diagnostic or clinical research products. The agreement will terminate on
December 31, 2002. Bayer has the right to terminate the agreement at any time
after December 31, 1997 upon 12 months notice.
INTELLECTUAL PROPERTY
The Company believes that patents and other proprietary rights are
vital to its business. The Company's policy is to protect its intellectual
property rights in technology developed by its scientific staff by a variety of
means, including applying for patents in the United States and other major
industrialized countries. The Company also relies upon trade secrets and
improvements, unpatented proprietary know-how and continuing technological
innovations to develop and maintain its competitive position. In this regard,
the Company seeks restrictions in its agreements with third parties, including
research institutions, with respect to the use and disclosure of the Company's
proprietary technology. The Company also has confidentiality agreements with its
employees, consultants and scientific advisors.
The Company currently owns 20 U.S. patents and 70 foreign patents. In
addition, the Company currently has pending 27 applications for U.S. patents, 9
of which have been allowed, and 32 applications for foreign patents, 4 of which
have been allowed. In addition, other institutions have granted exclusive rights
under their United States and foreign patents and patent applications to the
Company.
In September 1997, the Company was issued U.S. Patent No. 5,665,543,
which claims a method of identifying compounds that specifically modulate
expression of target genes using cells engineered to include reporter genes. The
Company has additional patent applications pending, some of which have been
allowed, which should enhance the Company's patent position in the area of gene
transcription, including an allowed U.S. patent application claiming a method
of specifically modulating gene transcription in a multicellular organism using
a low molecular weight compound.
There can be no assurance that patents will issue based upon the
Company's pending patent applications or any applications which it may file in
the future, that any patent issued will adequately protect a commercially
marketable product or process or that any patent issued will not be circumvented
or infringed by others or declared invalid or unenforceable. Moreover, there can
be no assurance that others may not independently develop the same or similar
technology or obtain access to the Company's proprietary technology. The Company
is aware of patents issued to other entities with respect to technology
potentially useful to the Company and, in some cases, related to products and
processes being used or developed by the Company. The Company currently cannot
assess the effect, if any, that these patents may have on its operations in the
future. The extent to which efforts by other researchers resulted or will result
in patents and the extent to which the issuance of patents to other entities
would have a material adverse effect on the Company or would force the Company
to seek licenses from such other entities currently is unknown as is the
availability to the Company of licenses from such other entities, and whether,
if available, such licenses can be obtained on terms acceptable to the Company.
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In the cancer diagnostics area, the Company has an issued U.S. patent
and a granted European patent relating to an assay the Company, in collaboration
with Bayer, is seeking to develop for the detection of a protein encoded by the
neu oncogene ("neu") in serum. The U.S. Patent Office has declared an
interference between the Company's issued U.S. Patent and a pending patent
application owned by Chiron Diagnostics Inc. ("Chiron"). In addition, Chiron has
filed an opposition against the corresponding granted European patent. These
legal proceedings, if not settled, could result in substantial legal expenses
being incurred by the Company. Also, the Company cannot predict whether it would
prevail in these proceedings. If the Company does not prevail, it may not be
able to commercialize its assay for neu in serum without a license from Chiron,
which may not be available on acceptable terms or at all.
The Company is aware of several U.S. and foreign patents owned by
others who may allege infringement by products, including TGF-Beta3, which the
Company is seeking to develop in collaboration with a partner. Genentech has
U.S. patents relating to certain recombinant materials and procedures for
producing members of the TGF-Beta family, including TGF-Beta3. In addition, the
Company believes that Genentech has license rights under a United States
Government patent relating to work done at the National Institute of Health of
the U.S. Department of Health and Human Services involving the identification
and isolation of TGF-Beta1. Furthermore, Celtrix Pharmaceuticals, Inc.
("Celtrix") has been granted a European patent relating to TGF-Beta2.
The Company believes that the currently planned development by the
Company and Novartis, its collaborative partner for TGF-Beta3, involving
manufacture in Europe by Novartis of TGF-Beta3 in nonmammalian cells for
subsequent distribution in Europe and the United States does not infringe any
valid claim of any patent owned by Genentech, by the U.S. Government or by
Celtrix. The Company and Novartis have taken and continue to take such actions,
including the pursuit of opposition proceedings against foreign patents, as they
deem prudent to minimize the possibility of any charge of patent infringement
being validly raised against Novartis or the Company based on such patents.
The Company has received communications from Sibia Neuroscience, Inc.
("Sibia") in which Sibia has stated the Company's live-cell assay technology may
infringe a patent issued to Sibia covering cell-based assays. The Company does
not believe that it is infringing any valid claim of Sibia's patent or of any
patents owned by any other third parties. However, there can be no assurance
that a contrary position will not be asserted, or that, if asserted, such a
position would not prevail. If a patent infringement lawsuit were brought
against the Company or its licensees, the Company could incur substantial costs
in defense of such a suit, which could have a material adverse effect on the
Company's business, financial condition and results of operation, regardless of
whether the Company were successful in the defense. Furthermore, if Sibia (or
any other third party) were to establish that the Company's assays infringe
Sibia's patent (or any patent of any other third party), then the Company would
be required to design non-infringing assays or take a license under Sibia's
patent. There can be no assurance the Company would successfully design such
assays or that such a license would be available on acceptable terms or at all.
Moreover, the Company's royalties may be reduced by up to 50% if its licensees
or collaborative partners are required to obtain licenses from third parties
whose patent rights are infringed by the Company's products, technology or
operations.
COMPETITION
The pharmaceutical, biotechnology and diagnostics industries are
intensely competitive. The Company faces, and will continue to face, intense
competition from organizations such as large pharmaceutical companies,
biotechnology companies, diagnostic companies, academic and research
institutions and government agencies. The Company is subject to significant
competition from industry participants who are pursuing the same or similar
technologies as those which constitute the Company's technology platform and
from organizations that are pursuing pharmaceutical products or therapies or
diagnostic products that are competitive with the Company's potential products.
Most of the organizations competing with the Company have greater capital
resources, research and development staffs and facilities, and greater
experience in drug discovery and development, obtaining regulatory approval and
pharmaceutical product manufacturing and marketing. The Company's major
competitors include fully integrated pharmaceutical companies, such as Merck &
Co., Inc., Glaxo Wellcome Inc.
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and Smith Kline Beecham, that conduct extensive drug discovery efforts and
are developing novel small molecule pharmaceuticals, as well as numerous smaller
companies.
The Company's technology platform consists principally of utilizing
genetically engineered live cells, gene transcription technologies, high
throughput drug screening, and medicinal, combinatorial and natural product
chemistry. Pharmaceutical and biotechnology companies and others are active in
all of these areas. Ligand Pharmaceuticals Inc. and Aurora Biosciences, Inc.,
publicly owned companies, employ live-cell assays, gene transcription, and high
throughput robotics in their drug discovery operations. Numerous other companies
use one or more of these technologies. Several private companies, including
Tularik Inc., Signal Pharmaceuticals Inc. and Scriptgen Pharmaceuticals, Inc.,
pursue drug discovery using gene transcription methods. Other organizations may
acquire or develop technology superior to that of the Company.
Companies pursuing different but related fields also present
significant competition for the Company. For example, research efforts with
respect to gene sequencing and mapping are identifying new and possibly superior
target genes. In addition, alternative drug discovery strategies, such as
rational drug design, may prove more effective than those pursued by the
Company. Furthermore, competing entities may have access to more diverse
compounds for testing by virtue of larger compound libraries or through
combinatorial chemistry skills or other means. These include Pharmacopeia, Inc.,
CombiChem, Inc. and ArQule, Inc., all of which have major collaborations with
leading pharmaceutical companies. There can be no assurance that the Company's
competitors will not succeed in developing technologies or products that are
more effective than those of the Company or that would render the Company's
products or technologies obsolete or noncompetitive.
With respect to the Company's small molecule drug discovery programs,
other companies have potential drugs in clinical trials to treat disease areas
for which the Company is seeking to discover and develop drug candidates. These
competing drug candidates may be further advanced in clinical development than
are any of the Company's potential products in its small molecule programs and
may result in effective, commercially successful products. Even if the Company
and its collaborative partners are successful in developing effective drugs,
there can be no assurance that the Company's products will compete effectively
with such products. No assurance can be given that the Company's competitors
will not succeed in developing and marketing products that either are more
effective than those that may be developed by the Company and its collaborative
partners or are marketed prior to any products developed by the Company or its
collaborative partners.
With respect to its efforts to develop TGF-Beta3 for various
indications, the Company is aware of competing growth factor proteins in
clinical trials, and competing treatment regimens, for wound healing
indications. Platelet derived growth factor ("PDGF") for diabetic skin ulcers,
under development by Chiron Corporation and Johnson & Johnson, has completed
Phase III clinical trials in the U.S. Chiron Corporation and Johnson & Johnson
had filed a Product Licensing Application ("PLA") for PDGF with the FDA and in
July 1997, an FDA advisory panel recommended approval. Fibroblast growth factor
("FGF") for chronic dermal ulcers, under development by Scios Nova Inc. and
Kaken Pharmaceutical Co., Ltd., is in Phase III clinical trials in Japan.
TGF-Beta2 for leg ulcers, under development by Genzyme Corp. and Celtrix
Pharmaceuticals, Inc., is in Phase II clinical trials in the U.S. No assurance
can be given that the Company and Novartis will successfully develop TGF-Beta3
for any indication, including wound healing. Furthermore, if any of the
competing growth factor product candidates listed above or other growth factors
proves to be effective for wound healing indications, there can be no assurance
that any product developed by the Company will be able to compete effectively
with such product or products.
Other competing approaches to the treatment of chronic wounds include
comprehensive service-based patient centers, which are dedicated to intensive
wound management. These centers may include the use of autologous growth factor
therapy, in which extracts prepared from the patient's own platelets are used to
treat the wounds. Surgical intervention is also frequently employed, which may
involve partial amputation and/or surgical revascularization. The use of skin
grafts to treat wounds, either autografts (skin from elsewhere on the same
patient) or cultured allografts, are also being investigated by several
companies, including Advanced Tissues Sciences, Inc. and Organogenesis, Inc.
Organogenesis, Inc. presently has an application for Apligraft(TM), a
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treatment for wounds after autografting, pending premarket approval. No
assurance can be given that TGF-Beta3 will prove to be effective or will compete
successfully against current and emerging therapies for any particular clinical
indication.
The Company believes that its ability to compete successfully will be
based on, among other things, its ability to create and maintain scientifically
advanced technology, attract and retain scientific personnel with a broad range
of expertise, obtain patent protection or otherwise develop proprietary products
or processes, enter into collaborative arrangements, and, independently or with
its collaborative partners, conduct clinical trials, obtain required government
approvals on a timely basis, and commercialize its products.
MANUFACTURING
Novartis has the exclusive right to, and the Company will rely on
Novartis for, the manufacture of TGF-Beta3 for all of the Company's requirements
for clinical trials and commercial purposes. The Company believes that, if
Novartis should fail to meet its requirements, there are other companies that
could manufacture and supply TGF-Beta3, although there can be no assurance that
this could be accomplished on a timely basis, or at all.
The Company is, and will remain, dependent on its collaborative
partners and third parties for the manufacture of all products. There can be no
assurance that the Company will be able to manufacture products that will meet
the Company's demands for quality, quantity, cost and timeliness or otherwise
contract for manufacturing capabilities on acceptable terms. The failure of the
Company to successfully contract for the manufacture of products that satisfy
its requirements for quality, quantity, cost and timeliness would prevent the
Company from conducting pre-clinical testing and clinical trials and
commercializing its products.
MARKETING AND SALES
The Company does not expect to develop significant marketing and sales
capabilities. Potential therapeutic products subject to the Company's
collaborative agreements with Pfizer, HMRI, Wyeth, Sankyo, BioChem Pharma, and
Novartis, and potential diagnostic products under the Company's collaboration
with Bayer, will be marketed by those companies worldwide. The Company will
receive royalties of up to 8% on net sales of products, depending upon the
nature of the product and the ownership of the underlying technology. The
Company expects that products resulting from future collaborations in drug
discovery and development and diagnostic product development will be marketed
under arrangements which are similar to these agreements, although any
collaborations established for products resulting from proprietary programs may
vary significantly.
GOVERNMENT REGULATION
The Company and its collaborative partners are, and any potential
products discovered and developed thereto, will be subject to comprehensive
regulation by the FDA in the United States and by comparable authorities in
other countries. These national agencies and other federal, state, and local
entities regulate, among other things, the pre-clinical and clinical testing,
safety, effectiveness, approval, manufacture, labeling, marketing, export,
storage, record keeping, advertising, and promotion of pharmaceutical and
diagnostic products.
The process required by the FDA before pharmaceutical products may be
approved for marketing in the United States generally involves: (i) pre-clinical
laboratory and animal tests, (ii) submission to FDA of an investigational new
drug application ("NDA"), which must become effective before clinical trials may
begin, (iii) adequate and well controlled human clinical trials to establish the
safety and efficacy of the drug for its intended indication, (iv) submission to
the FDA of an NDA or, in the case of biological products, such as TGF-Beta3, a
PLA, and (v) FDA review of the NDA or PLA in order to determine, among other
things, whether the drug is safe and effective for its intended uses. There is
no assurance that FDA review process will result in product approval on a timely
basis, if at all.
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Pre-clinical tests include laboratory evaluation of product chemistry
and formulation, as well as animal studies, to assess the potential safety and
efficacy of the product. Certain pre-clinical tests are subject to FDA
regulations regarding current Good Laboratory Practices. The results of the
pre-clinical tests are submitted to the FDA as part of an IND and are reviewed
by the FDA prior to the commencement of clinical trials.
Clinical trials are conducted under protocols that detail such matters
as the objectives of the study, the parameters to be used to monitor safety and
the efficacy criteria to be evaluated. Each protocol must be submitted to the
FDA as part of the IND.
Clinical trials are typically conducted in three sequential phases,
which may overlap. During Phase I, when the drug is initially given to human
subjects, the product is tested for safety, dosage tolerance, absorption,
metabolism, distribution and excretion. Phase II involves studies in a limited
patient population to: (i) evaluate preliminarily the efficacy of the product
for specific, targeted indications, (ii) determine dosage tolerance and optimal
dosage, and (iii) identify possible adverse effects and safety risks. Pivotal or
Phase III trials are undertaken in order to further evaluate clinical efficacy
and to further test for safety within an expanded patient population. The FDA
may suspend or terminate clinical trials at any point in this process if it
concludes that clinical subjects are being exposed to an unacceptable health
risk.
FDA approval of the Company's and its collaborators' products,
including a review of the manufacturing processes and facilities used to produce
such products, will be required before such products may be marketed in the
United States. The process of obtaining approvals from the FDA can be costly,
time consuming and subject to unanticipated delays. There can be no assurance
that approvals of the Company's proposed products, processes or facilities will
be granted on a timely basis, if at all. Any failure to obtain or delay in
obtaining such approvals would have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, even if
regulatory approval is granted, such approval may include significant
limitations on indicated uses for which a product could be marketed.
Among the conditions for NDA approval is the requirement that the
prospective manufacturer's manufacturing procedures conform to Good
Manufacturing Practices ("GMP") requirements, which must be followed at all
times. In complying with those requirements, manufacturers (including a drug
sponsor's third-party contract manufacturers) must continue to expend time,
money and effort in the area of production and quality control to ensure
compliance. Domestic manufacturing establishments are subject to periodic
inspections by the FDA in order to assess, among other things, GMP compliance.
To supply products for use in the United States, foreign manufacturing
establishments must comply with GMP and are subject to periodic inspection by
the FDA or by regulatory authorities in certain countries under reciprocal
agreements with the FDA.
Both before and after approval is obtained, a product, its manufacturer
and the holder of the NDA for the product are subject to comprehensive
regulatory oversight. Violations of regulatory requirements at any stage,
including the pre-clinical and clinical testing process, the approval process,
or thereafter (including after approval) may result in various adverse
consequences, including the FDA's delay in approving or refusal to approve a
product, withdrawal of an approved product from the market, and the imposition
of criminal penalties against the manufacturer and NDA holder. In addition,
later discovery of previously unknown problems may result in restrictions on
such product, manufacturer or NDA holder, including withdrawal of the product
from the market. Also, new government requirements may be established that could
delay or prevent regulatory approval of the Company's products under
development.
For marketing outside the United States, the Company and its
collaborators and the drugs developed thereby, if any, will be subject to
foreign regulatory requirements governing human clinical trials and marketing
approval for drugs and diagnostic products. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursement vary
widely from country to country. In addition, before a new drug may be exported
from the United States, it must be the subject of an approved NDA or comply with
FDA regulations pertaining to INDs.
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19
In addition to regulations enforced by the FDA, the Company also is
subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other present and future federal, state or
local regulations. The Company's research and development involves the
controlled use of hazardous materials, chemicals and various radioactive
compounds. Although the Company believes that its safety procedures for handling
and disposing of such materials comply with the standards prescribed by state
and federal regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result and any
such liability could exceed the resources of the Company.
Diagnostic tests undergo different FDA review processes depending
whether they are classified as "biologicals" or "medical devices." For medical
devices, a 510(k) application (for a product substantially equivalent to a
product already on the market) or a premarket approval application (generally, a
new product or method that is not substantially equivalent to an existing
product) must be filed with, and approved by, the FDA prior to
commercialization. Obtaining premarket approval is a costly and time-consuming
process, comparable to that for new drugs. There can be no assurance that the
Company's cancer diagnostic product candidates will be submitted for regulatory
approval, or if submitted, that the Company would not be required to seek
premarket approval as opposed to filing a 510(k) application.
EMPLOYEES
The Company believes that its success is largely dependent upon its
ability to attract and retain qualified personnel in scientific and technical
fields. As of September 30, 1997, the Company employed 156 persons worldwide
(128 in the United States), of whom 130 were primarily involved in research and
development activities, with the remainder engaged in executive and
administrative capacities. Although the Company believes that it has been
successful to date in attracting skilled and experienced scientific personnel,
competition for such personnel is intense and there can be no assurance that the
Company will continue to be able to attract and retain personnel of high
scientific caliber. The Company considers its employee relations to be good.
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ITEM 2. PROPERTIES
The Company leases a 30,000 square foot facility located at 106 Charles
Lindbergh Boulevard, Uniondale, New York. This facility houses the Company's
principal executive offices and drug discovery laboratory. The Company also
leases an 11,000 square foot facility located at 80 Rogers Street/129 Binney
Street, Cambridge, Massachusetts. This facility contains the offices and
laboratories of the Company's diagnostic product operations. The Company also
has two wholly-owned subsidiaries, Aston Molecules Ltd. and MYCOsearch, Inc.,
each of which lease facilities which house their offices and drug discovery
laboratories. Aston Molecules Ltd. leases a 9,689 square foot facility located
at 10 Holt Court, Aston Science Park, Birmingham, England. MYCOsearch, Inc.
leases two facilities, one located at Five Oaks Office Park, 4905 Pine Cone
Drive, Durham, North Carolina consisting of 4,280 square feet and the other
located at 4727 University Drive, Durham, North Carolina consisting of 8,000
square feet. The Company believes that its facilities will be adequate to meet
current requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of fiscal 1997.
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21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market and
is included for quotation on the NASDAQ National Market under the symbol OSIP.
The following is the range of high and low sales prices by quarter for the
Company's common stock from the first quarter of fiscal 1996 through September
30, 1997 as reported on the NASDAQ National Market:
1997 FISCAL YEAR HIGH LOW
---------------- ---- ---
First Quarter........................................................... $9 $6-1/4
Second Quarter.......................................................... 7-7/8 5-5/8
Third Quarter........................................................... 6-15/16 4-3/4
Fourth Quarter.......................................................... 11-3/4 5-5/8
1996 FISCAL YEAR HIGH LOW
---------------- ---- ---
First Quarter .......................................................... $10-3/4 $5
Second Quarter.......................................................... 11-1/8 8
Third Quarter........................................................... 12-1/2 8-7/8
Fourth Quarter.......................................................... 10-1/2 7-1/8
As of November 30, 1997, there were approximately 659 holders of record
of the Company's common stock. The Company has not paid any dividends since its
inception and does not intend to pay any dividends in the foreseeable future.
Declaration of dividends will depend, among other things, upon future earnings,
the operating and financial condition of the Company, its capital requirements
and general business conditions.
RECENT SALE OF UNREGISTERED SECURITIES
Pursuant to Section 4(2) of the Securities Act of 1933, as amended, on
March 18, 1997, the Company issued 352,162 shares of its common stock to The Dow
Chemical Company. For a description of the transaction, see "Business-OSI's
Technology Platform-Diverse Compound Libraries."
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22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data
with respect to the Company for each of the years in the five-year period ended
September 30, 1997. The information set forth below should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere herein.
YEARS ENDED SEPTEMBER 30
----------------------------------------------------------------------------------------
1997(a) 1996(b) 1995(c) 1994(d) 1993(e)
------- ------- ------- ------- -------
Statement of Operations Data:
Revenues $14,777,323 $9,718,437 $15,864,999 $16,299,489 $16,088,021
Expenses:
Research and development 16,896,617 13,918,968 13,523,043 12,125,210 10,659,806
Production 635,768 134,529 1,252,990 1,427,981 1,443,649
Selling, general and
administrative 7,424,265 6,314,697 7,140,208 7,487,090 6,429,701
Amortization of
intangibles 1,460,748 1,452,755 1,696,561 1,745,163 1,745,713
Loss from operations (11,640,075) (12,102,512) (7,747,803) (6,485,955) (4,190,848)
Other income, net 2,053,838 2,160,377 768,744 762,031 884,806
Gain on sale of Research
Products Business -- - 2,720,389 -- --
Net loss (9,586,237) (9,942,135) (4,258,670) (5,723,924) (3,306,042)
Net loss per share (0.44) (0.50) (0.25) (0.35) (0.21)
Weighted average number of
shares of common stock
outstanding 21,604,344 19,712,274 16,757,370 16,335,000 16,080,000
SEPTEMBER 30
----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Balance Sheet Data:
Cash and short-term
investments $31,834,669 $47,542,745 $26,786,566 $18,157,891 $22,390,454
Accounts receivable 1,215,672 2,031,950 1,320,015 3,032,839 3,146,990
Working capital 29,612,616 47,181,407 26,127,781 21,208,145 25,914,827
Total assets 59,585,565 73,537,054 44,057,421 42,040,900 47,614,538
Stockholders' equity 52,944,868 68,286,959 40,549,636 38,656,314 45,044,603
- ----------
(a) During fiscal 1997, the Company entered into collaborative agreements
with Sankyo and Bayer, expanded its collaboration with HMRI, entered
into co-venture agreements with Sepracor and Helicon, entered into a
license agreement with Dow, and repurchased its common stock held by
Becton (See Notes 2(d), 5 and 9(a) to the Consolidated Financial
Statements).
(b) During fiscal 1996, the Company acquired MYCOsearch and Aston and
completed an offering of its common stock (See Notes 2 and 9(b) to the
Consolidated Financial Statements).
(c) During fiscal 1995, the Company sold its Research Products Business and
also sold shares of its common stock to Novartis (See Notes 4 and 9(e)
to the Consolidated Financial Statements).
22
23
(d) During fiscal 1994, the Company changed its method of accounting for
marketable securities to adopt the provisions of the Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities".
(e) During fiscal 1993, the Company entered into collaborative agreements
with MMDI and Hoechst and also sold shares of its common stock to
MMDI (See Note 5(b) to the Consolidated Financial Statements).
23
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
REVENUES
Total revenues of $14.8 million in fiscal 1997 increased approximately
$5.1 million or 52% compared to fiscal 1996 and total revenues of $9.7 million
in fiscal 1996 decreased approximately $6.1 million or 39% compared to fiscal
1995. Collaborative program revenues increased approximately $3.9 million or
46%, in fiscal year 1997 due to new collaborative research and license
agreements with each of: (1) Hoechst Marion Roussel, Inc. ("HMRI"), to develop
orally active, small molecule drugs for the treatment of chronic anemia; (2)
Sankyo Company, Ltd. ("Sankyo") of Japan to discover and develop novel
pharmaceutical products to treat influenza; and (3) Bayer Corporation ("Bayer")
for the continuing development of serum-based cancer diagnostics. Included in
the revenue was a $1.0 million initiation fee from HMRI in connection with the
chronic anemia program, which was recorded in the quarter ended March 31, 1997.
The increase in revenues was partially offset by a decrease in revenues related
to the completion on December 31, 1996 of the funded discovery phase of the
Company's collaborative program with Wyeth-Ayerst Laboratories ("Wyeth")
relating to the discovery and development of drugs for the treatment of diabetes
and osteoporosis and the completion on September 30, 1996 of the funded
collaboration with Becton, Dickinson and Company ("Becton") relating to the
development of serum-based cancer diagnostics. Sales revenues, representing
primarily service revenue from the pharmaceutical division of the Company's
Aston Molecules Ltd. ("Aston") subsidiary and sales of research products
increased approximately $1.1 million or 1008%. The increase was primarily due to
the inclusion of the service revenues of Aston, which the Company acquired in
September 1996. Aston's service business is supplemental to the Company's
internal medicinal chemistry operations. Other research revenues, representing
primarily government and other research grants, increased approximately $143,000
or 11%. The increase was primarily due to the inclusion of a muscular dystrophy
grant from the French Muscular Dystrophy Association.
The decrease in total revenues of approximately $6.1 million in fiscal
1996 compared to fiscal 1995 was attributable to the sale of the Company's
Research Products Business in August 1995. Accordingly, there were no
significant sales of research products recorded after this date. Approximately
$4.2 million of the decrease in total revenues in fiscal 1996 was attributable
to the sale of the Research Products Business in fiscal 1995. Collaborative
program revenues decreased by approximately $1.3 million or 14% in fiscal 1996
largely due to a reduction in revenue under the collaboration agreement with
HMRI, as compared to the total revenue in the prior year's periods from Marion
Merrell Dow Inc. ("MMDI"), Hoechst Roussel Pharmaceuticals, Inc. ("Hoechst
Roussel") and Hoechst AG ("Hoechst") as well as a reduction in the funding under
the Becton collaboration due to a narrowing of scope in that program. The
balance of the decrease represents changes in the timing and amount of grant
awards.
EXPENSES
Research and development expenses increased by approximately $3.0
million or 21% in fiscal 1997 compared to fiscal 1996 and increased by
approximately $396,000 or 3% in fiscal 1996 compared to fiscal 1995. The
increase in fiscal 1997 was due to the expansion of the Company's joint ventures
with BioChem Pharma (International) Inc. ("BioChem Pharma") and Anaderm Research
Corp. ("Anaderm"), and the new collaborative agreements with Sankyo and HMRI.
Although the Company incurred expense in connection with its serum-based cancer
diagnostics collaboration with Bayer, these expenses generally were offset
(relative to the comparable periods in the prior fiscal year) by the elimination
of expenditures with respect to (i) the Company's former tissue-based cancer
diagnostics collaboration with Becton, which expired on September 30, 1996 and
(ii) the discovery and development of drugs for the treatment of diabetes and
osteoporosis by Wyeth which was competed December 31, 1996. Also contributing to
the increase in expenses were costs associated with the expansion of the
Company's natural products discovery and medicinal chemistry operations at its
MYCOsearch, Inc. ("MYCOsearch") and Aston subsidiaries. The Company acquired
MYCOsearch in April 1996. In addition, research and development expenses
included the amortization of the Company's compound library assets which
increased by approximately $1.1 million in fiscal 1997 reflecting a full year of
amortization of the fungi cultures acquired in April 1996 upon the acquisition
of MYCOsearch.
24
25
The increase in fiscal 1996 was due to an increase in expenditures in
the Company's joint venture with Biochem Pharma, and its technology development
programs as well as additional amortization expense on the newly acquired
MYCOsearch assets. These increases were partially offset by reductions in
expenditures in the collaborative programs, primarily with HMRI.
Production and service costs increased approximately $501,000 in fiscal
1997, and decreased approximately $1,118,000 in fiscal 1996. The increase in
fiscal 1997 was due to the acquisition of Aston's pharmaceutical development
business. The decrease in fiscal 1996 was due to the Company's sale of the
Research Products Business.
Selling, general and administrative expenses increased approximately
$1.1 million or 18% in fiscal 1997 compared to fiscal 1996. These increases were
primarily related to the expenses associated with the Company's corporate
development activities and the general and administrative costs associated with
the expansion of the Company's recently acquired subsidiaries. Selling, general
and administrative expenses decreased approximately $826,000 or 12% in fiscal
1996 compared to fiscal 1995. This decrease reflected the reduction in sales and
marketing expenses due to the sale of the Company's Research Products Business,
partially offset by increases in expenses related to corporate development
activities.
Amortization of intangibles in fiscal 1997, 1996, and 1995 represents
amortization of patents and goodwill that resulted from the acquisition of the
cancer diagnostics business of Applied bioTechnology in fiscal 1991 and Aston in
fiscal 1996. The decrease in amortization expense in fiscal 1996 is due to the
portion of goodwill which was expensed in connection with the sale of the
Company's Research Products Business. The goodwill related to Applied
bioTechnology approximated $686,000 per annum and was fully amortized as of
September 1996. Amortization expense in fiscal 1997 includes the first year of
amortization of the goodwill from the acquisition of Aston totaling $694,000.
OTHER INCOME AND EXPENSE
Net investment income decreased approximately $70,000 or 3% for fiscal
1997 compared to fiscal 1996, This decrease was a result of the decline in
principal balance invested.
Net investment income increased approximately $1.3 million or 159% for
fiscal 1996 compared to fiscal 1995. This increase was largely due to investment
of the proceeds from the Company's public offering of common stock in April
1996. Net proceeds from the offering (along with the concurrent sale of 500,000
shares directly to BioChem Pharma) were approximately $30.3 million.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, working capital (representing primarily cash,
cash equivalents and short-term investments) aggregated approximately $29.6
million. The Company is dependent upon collaborative research revenues,
government research grants, interest income and cash balances, and will remain
so until products developed from its technology are successfully commercialized.
The Company believes that with the funding from its collaborative
research programs, government research grants, interest income, and cash
balances, its financial resources are adequate for its operations for
approximately the next four years based on its current business plan even if no
milestone payments or royalties are received during this period. However, the
Company's capital requirements may vary as a result of a number of factors,
including, but not limited to, competitive and technological developments, funds
required for further expansion or enhancement of the Company's technology
platform, (including possible additional joint ventures, collaborations and
acquisitions), potential milestone payments, and the time and expense required
to obtain governmental approval of products, some of which factors are beyond
the Company's control.
One of the Company's strategic objectives is to manage its financial
resources and the growth of its drug discovery and development programs so as to
balance its proprietary efforts and co-ventures with its funded
25
26
collaborations. In pursuing this objective, the Company in fiscal 1997 has
expanded the scope of its discovery and development activities without
significantly increasing its rate of cash consumption. An example of this was
the conversion of the Company's chronic anemia program from an exclusively
proprietary effort to a funded collaboration with HMRI in the second quarter of
fiscal 1997. This made additional resources formerly allocated to the
proprietary chronic anemia program available for other proprietary programs and
co-ventures without requiring an increase in the rate of cash consumption. The
Company expects to continue its current level of expenditures and capital
investment over the next several years to enhance its drug discovery
technologies, pursue internal proprietary drug discovery programs, and to commit
resources to co-ventures with pharmaceutical companies.
Examples of the Company's co-ventures with pharmaceutical companies
include the formation of Helicon Therapeutics, Inc. in July 1997 with Cold
Spring Harbor Laboratory and Roche, the formation of Anaderm in April 1996 with
Pfizer and New York University, the Company's co-ventures with BioChem Pharma,
which commenced in May 1996, and with Sepracor, Inc., which commenced in March
1997. Generally the Company expects to commit greater resources to such programs
in exchange for greater commercialization rights, as compared to its traditional
collaborative research programs in which the Company receives research funding
and royalties on sales of commercialized products. If the developmental
activities on which one or more of these ventures are focused are successful,
then the Company will be required to make substantial additional capital
investment in such venture(s) in order to maintain its percentage participation.
There can be no assurance that scheduled payments will be made by third
parties, that current agreements will not be canceled, that government research
grants will continue to be received at current levels, that milestone payments
will be made, or that unanticipated events requiring the expenditure of funds
will not occur. Further, there can be no assurance that the Company will be able
to obtain any additional required funds on acceptable terms, if at all. Failure
to obtain additional funds when required would have a material adverse effect on
the Company's business, financial condition and results of operations.
FORWARD LOOKING STATEMENTS
A number of the matters and subject areas discussed in this Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," in Item 1 "Business" and elsewhere in this report that are not
historical or current facts deal with potential future circumstances and
developments. The discussion of such matters and subject areas is qualified by
the inherent risks and uncertainties surrounding future expectations generally,
and such discussion may materially differ from the Company's actual future
experience involving any one or more of such matters and subject areas. These
forward looking statements are also subject generally to the other risks and
uncertainties that are described in Exhibit 99 to this report.
26
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements:
PAGE
NUMBER
------
Independent Auditors' Report............................................................... 28
Consolidated Balance Sheets -- September 30, 1997 and 1996................................. 29
Consolidated Statements of Operations -- Years ended September 30,
1997, 1996 and 1995..................................................................... 30
Consolidated Statements of Stockholders' Equity -- Years ended
September 30, 1997, 1996 and 1995....................................................... 31
Consolidated Statements of Cash Flows -- Years ended September 30,
1997, 1996 and 1995..................................................................... 32
Notes to Consolidated Financial Statements................................................. 33
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28
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
OSI Pharmaceuticals, Inc. (formerly known as Oncogene Science, Inc.):
We have audited the accompanying consolidated balance sheets of OSI
Pharmaceuticals, Inc. (formerly known as Oncogene Science, Inc.) and
subsidiaries (the "Company") as of September 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended September 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of OSI
Pharmaceuticals, Inc. (formerly known as Oncogene Science, Inc.) and
subsidiaries at September 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended
September 30, 1997 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Jericho, New York
December 5, 1997
28
29
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 8,636,634 $ 13,409,866
Short-term investments ............................................................ 23,198,035 34,132,879
Receivables, including trade receivables of $350,100 and $215,201
at September 30, 1997 and 1996, respectively ................................... 1,215,672 2,031,950
Interest receivable ............................................................... 475,800 480,050
Grants receivable ................................................................. 179,740 331,014
Prepaid expenses and other ........................................................ 820,151 623,827
------------- -------------
Total current assets ...................................................... 34,526,032 51,009,586
------------- -------------
Property, equipment and leasehold improvements -- net .............................. 7,752,286 6,495,112
Compound library assets - net ...................................................... 6,800,406 5,048,584
Loans to officers and employees .................................................... 34,317 37,342
Other assets ....................................................................... 1,287,782 300,949
Intangible assets -- net ........................................................... 9,184,742 10,645,481
------------- -------------
$ 59,585,565 $ 73,537,054
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............................................. $ 4,180,039 $ 3,686,638
Current portion of unearned revenue ............................................... 733,377 141,541
------------- -------------
Total current liabilities ................................................. 4,913,416 3,828,179
------------- -------------
Other liabilities:
Long-term portion of unearned revenue ............................................. -- 104,497
Loan payable ...................................................................... 151,985 83,244
Deferred acquisition costs ........................................................ 630,796 590,675
Accrued postretirement benefit cost ............................................... 944,500 643,500
------------- -------------
Total liabilities ......................................................... 6,640,697 5,250,095
------------- -------------
Stockholders' equity:
Common stock, $.01 par value; 50,000,000 shares authorized, 22,262,220 shares
issued at September 30, 1997 and 22,175,214 shares issued at September 30, 1996 222,622 221,752
Additional paid-in capital ........................................................ 104,864,056 104,347,231
Accumulated deficit ............................................................... (45,657,713) (36,071,476)
Cumulative translation adjustments ................................................ (101,531) (5,355)
Unrealized holding loss on short-term investments .................................. (97,700) (205,193)
------------- -------------
59,229,734 68,286,959
Less: treasury stock, at cost; 897,838 shares at September 30, 1997 ................ (6,284,866) --
------------- -------------
Total stockholders' equity ................................................ 52,944,868 68,286,959
------------- -------------
Commitments and contingencies ...................................................... $ 59,585,565 $ 73,537,054
============= =============
See accompanying notes to consolidated financial statements.
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30
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30,
---------------------------------------------
1997 1996 1995
---- ---- ----
Revenues:
Collaborative program revenues, principally from
related parties .......................................... $ 12,200,801 $ 8,347,560 $ 9,685,856
Sales ...................................................... 1,167,604 105,356 4,286,540
Other research revenue ..................................... 1,408,918 1,265,521 1,892,603
------------ ------------ ------------
14,777,323 9,718,437 15,864,999
------------ ------------ ------------
Expenses:
Research and development ................................... 16,896,617 13,918,968 13,523,043
Production and service costs ............................... 635,768 134,529 1,252,990
Selling, general and administrative ........................ 7,424,265 6,314,697 7,140,208
Amortization of intangibles ................................ 1,460,748 1,452,755 1,696,561
------------ ------------ ------------
26,417,398 21,820,949 23,612,802
------------ ------------ ------------
Loss from operations ................................ (11,640,075) (12,102,512) (7,747,803)
------------ ------------ ------------
Other income (expense):
Net investment income ....................................... 2,092,331 2,162,294 834,830
Other expense-net ........................................... (38,493) (1,917) (66,086)
Gain on sale of Research Products Business .................. -- -- 2,720,389
------------ ------------ ------------
Net loss ..................................................... $ (9,586,237) $ (9,942,135) $ (4,258,670)
------------ ------------ ------------
Weighted average number of shares of common stock
outstanding ................................................ 21,604,344 19,712,274 16,757,370
============ ============ ============
Net loss per weighted average share of common stock
outstanding ................................................ $ (.44) $ (.50) $ (.25)
============ ============ ============
See accompanying notes to consolidated financial statements.
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31
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
COMMON STOCK
------------
ADDITIONAL CUMULATIVE
PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT
------ ------ ------- ------- ----------
Balance at September 30, 1994.. 16,564,715 $ 165,647 $61,199,670 $(21,870,671) $ (41,773)
Options exercised.............. 206,025 2,060 571,408 -- --
Issuance of common stock for
employee purchase plan........ 3,216 32 10,523 -- --
Unrealized holding gain on
short-term investments........ -- -- -- -- --
Sale of common stock
to Novartis................... 909,091 9,091 4,953,774 -- --
Translation adjustment......... -- -- -- -- (13,896)
Net loss....................... -- -- -- (4,258,670) --
---------- -------- ------------ ------------ ---------
Balance at September 30, 1995.. 17,683,047 176,830 66,735,375 (26,129,341) (55,669)
Options exercised.............. 491,544 4,915 1,640,653 -- --
Issuance of common stock for
employee purchase plan........ 3,860 39 10,214 -- --
Unrealized holding loss on
short-term investments........ -- -- -- -- --
Sale of common stock........... 3,618,750 36,188 30,293,757 -- --
Issuance of common stock and treasury
stock for acquisitions......... 378,013 3,780 5,667,232 -- --
Translation adjustment......... -- -- -- -- 50,314
Net loss....................... -- -- -- (9,942,135) --
---------- -------- ------------ ------------ ---------
Balance at September 30, 1996.. 22,175,214 221,752 104,347,231 (36,071,476) (5,355)
Options exercised.............. 74,618 746 407,503 -- --
Issuance of common stock for
employee purchase plan........ 12,388 124 74,456 -- --
Unrealized holding gain on
short-term investments........ -- -- -- -- --
Purchase of treasury stock..... -- -- -- -- --
Issuance of treasury stock for Dow
Compound Library License...... -- -- 34,866 -- --
Translation adjustment......... -- -- -- -- (96,176)
Net loss....................... -- -- -- (9,586,237) --
---------- -------- ------------ ------------ ---------
Balance at September 30, 1997 22,262,220 $222,622 $104,864,056 $(45,657,713) $(101,531)
========== ======== ============ ============ =========
UNREALIZED
HOLDING
LOSS ON TOTAL
SHORT-TERM TREASURY STOCKHOLDERS'
INVESTMENTS STOCK EQUITY
----------- ----- ------
Balance at September 30, 1994.. $ (654,000) $ (142,559) $38,656,314
Options exercised.............. -- -- 573,468
Issuance of common stock for
employee purchase plan........ -- -- 10,555
Unrealized holding gain on
short-term investments........ 619,000 -- 619,000
Sale of common stock
to Novartis................... -- -- 4,962,865
Translation adjustment......... -- -- (13,896)
Net loss....................... -- -- (4,258,670)
----------- ----------- ----------
Balance at September 30, 1995.. (35,000) (142,559) 40,549,636
Options exercised.............. -- -- 1,645,568
Issuance of common stock for
employee purchase plan........ -- -- 10,253
Unrealized holding loss on
short-term investments........ (170,193) -- (170,193)
Sale of common stock........... -- -- 30,329,945
Issuance of common stock and treasury
stock for acquisitions......... -- 142,559 5,813,571
Translation adjustment......... -- -- 50,314
Net loss....................... -- -- (9,942,135)
----------- ----------- ----------
Balance at September 30, 1996.. (205,193) -- 68,286,959
Options exercised.............. -- -- 408,249
Issuance of common stock for
employee purchase plan........ -- -- 74,580
Unrealized holding gain on
short-term investments........ 107,493 -- 107,493
Purchase of treasury stock..... -- (8,750,000) (8,750,000)
Issuance of treasury stock for
Dow Compound Library License.. -- 2,465,134 2,500,000
Translation adjustment......... -- -- (96,176)
Net loss....................... -- -- (9,586,237)
----------- ----------- -----------
Balance at September 30, 1997 $(97,700) $(6,284,866) $52,944,868
=========== =========== ===========
See accompanying notes to consolidated financial statements.
31
32
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30,
---------------------------------------
1997 1996 1995
---- ---- ----
Cash flow from operating activities:
Net loss ............................................................... $ (9,586,237) $ (9,942,135) $ (4,258,670)
Adjustments to reconcile net loss to net cash used in operating
activities:
Gain on sale of Research Products Business ............................ -- -- (2,720,389)
(Gain) loss on sale of investments .................................... 36,523 (33,305) 118,141
Depreciation and amortization .......................................... 1,518,751 1,837,873 1,037,044
Amortization of library assets ......................................... 1,101,509 458,962 --
Amortization of intangibles ............................................ 1,460,739 1,452,755 1,696,561
Amortization of warrants ............................................... 40,121 -- --
Cashless exercise of stock options ..................................... 126,600 -- --
Foreign exchange (gain) loss ........................................... (96,176) 50,314 (13,896)
Changes in assets and liabilities, net of the effects of the sale of the
Research Products Business and acquisitions of MYCOsearch and Aston
Molecules:
Receivables ......................................................... 816,278 (412,935) 1,605,217
Inventory ........................................................... -- -- 216,405
Interest receivable ................................................. 4,250 (434,787) 101,959
Grants receivable ................................................... 151,274 102,516 226,091
Prepaid expenses and other .......................................... (196,324) (105,677) (196,491)
Other receivable .................................................... -- 262,703 162,817
Other assets ........................................................ (72,514) (108,949) (15,622)
Accounts payable and accrued expenses ............................... 493,401 391,857 (586,276)
Unearned revenue .................................................... 487,339 (69,842) (358,092)
Accrued postretirement benefit cost ................................. 301,000 277,297 177,760
------------ ------------ ------------
Net cash used by operating activities .................................. (3,413,466) (6,273,353) (2,776,197)
------------ ------------ ------------
Cash flows from investing activities:
Additions to short-term investments ................................. (4,019,935) (37,216,936) (3,723,180)
Maturities and sales of short-term investments ...................... 15,025,749 11,814,126 13,192,665
Change in other assets .............................................. (914,319) 150,000 (250,000)
Additions to property, equipment and leasehold improvements ......... (2,775,925) (2,421,040) (403,275)
Additions to compound library assets ................................ (353,332) -- --
Payments for acquisition of MYCOsearch .............................. -- (1,889,960) --
Payments for acquisition of Aston Molecules ......................... (635,441)
Net change in loans to officers and employees ....................... 3,025 (11,826) 10,400
Proceeds from sale of Research Products Business .................... -- -- 6,000,000
------------ ------------ ------------
Net cash provided by (used in) investing activities ................. 6,965,263 (30,211,077) 14,826,610
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net ......................... -- 30,329,945 4,962,865
Purchase of treasury stock .......................................... (8,750,000) -- --
Proceeds from exercise of stock options and employee stock
stock purchase plan ................................................ 356,230 1,655,821 584,023
Net change in loan payable .......................................... 68,741 (11,079) --
------------ ------------ ------------
Net cash provided by (used in) financing activities .................... (8,325.029) 31,974,687 5,546,888
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ................... (4,773,232) (4,509,743) 17,597,301
Cash and cash equivalents at beginning of year ......................... 13,409,866 17,919,609 322,308
------------ ------------ ------------
Cash and cash equivalents at end of year ............................... $ 8,636,634 $ 13,409,866 $ 17,919,609
============ ============ ============
Non-cash activities:
Issuance of common stock, treasury stock and warrants for acquisition
of MYCOsearch and Aston Molecules ...................................... -- $ 5,816,736 --
============ ============ ============
Liabilities assumed from acquisition of MYCOsearch and Aston Molecules -- $ 563,402 --
============ ============ ============
Deferred purchase obligation incurred for acquisition of Aston Molecules -- $ 590,675 --
============ ============ ============
Issuance of treasury stock for acquisition of
Dow Compound Library License ........................................... $ 2,500,000 -- --
============ ============ ============
See accompanying notes to consolidated financial statements.
32
33
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements of the Company include the
accounts of OSI Pharmaceuticals, Inc., known as Oncogene Science, Inc. prior to
October 1, 1997, and its wholly-owned subsidiaries Applied bioTechnology, Inc.,
MYCOsearch, Inc. ("MYCOsearch") and Aston Molecules Ltd. ("Aston"). All
intercompany balances and transactions have been eliminated. The Company
utilizes a platform of proprietary technologies in order to discover and develop
novel, small molecule compounds for the treatment of major human diseases. It
conducts the full range of drug discovery activities, from target identification
to drug candidate.
(b) Revenue Recognition
Collaborative research revenues represent funding arrangements for the
conduct of research and development ("R&D") in the field of biotechnology and
are recognized when earned in accordance with the terms of the contracts and the
related development activities undertaken. Other research revenues are
recognized pursuant to the terms of grants which provide reimbursement of
certain expenses related to the Company's other R&D activities. Collaborative
and other research revenues are accrued for expenses incurred in advance of the
reimbursement and deferred for cash payments received in advance of
expenditures. Such deferred revenues are recorded as revenue when earned. (See
Note 5)
Revenue from the sale of diagnostic and research reagent products is
recognized at time of shipment. Revenues from the performance of chemistry
services provided by Aston are recognized when performed.
(c) Patents and Goodwill
As a result of the Company's research and development programs,
including programs funded pursuant to the research and development funding
agreements (See Note 5), the Company has applied for a number of patents in the
United States and abroad. Such patent rights are of significant importance to
the Company to protect products and processes developed. Costs incurred in
connection with patent applications for the Company's research and development
programs have been expensed as incurred.
Patents and goodwill acquired in connection with the acquisition of
Applied bioTechnology's cancer business in October 1991 have been capitalized
and are being amortized on a straight-line basis over the remaining lives of the
respective patents, and over five years for goodwill. The goodwill acquired in
connection with the acquisition of Aston in September 1996 is being amortized on
a straight-line basis over five years (See Note 2). The Company continually
evaluates the recoverability of its intangible assets by assessing whether the
unamortized value can be recovered through expected future results.
(d) Research and Development Costs
Research and development costs are charged to operations as incurred
and include direct costs of research scientists and equipment and an allocation
of laboratory facility and central service. In fiscal years 1997, 1996, and
1995, R&D activities include approximately $5,052,000, $6,365,000 and $5,696,000
of independent R&D, respectively. Independent R&D represents those research and
development activities, including research and development activities funded by
government research grants, substantially all the rights to which the Company
will retain. The balance of research and development represents expenses under
the collaborative agreements and co-ventures with Pfizer Inc. ("Pfizer"), Becton
Dickinson and Co. ("Becton"), Wyeth-Ayerst, a division of American Home Products
("Wyeth"), Marion Merrell Dow Inc. ("Marion"), Hoechst AG, Hoechst-Roussel
Pharmaceuticals, Inc. ("Hoechst Roussel"), BioChem Pharma International, Inc.
("BioChem Pharma"), and Novartis-Pharma AG, Ltd. ("Novartis"), Sankyo Company,
LTD. ("Sankyo"), Bayer AG ("Bayer"), Sepracor, Inc. ("Sepracor"), Helicon
Therapeutics, Inc. ("Helicon"), and Anaderm Research Corp. ("Anaderm"). On July
18, 1995, Marion, Hoechst AG and Hoechst-Roussel merged forming a new company
named Hoechst Marion Roussel Inc. ("HMRI").
33
34
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(e) Depreciation and Amortization
Depreciation of equipment is provided over the estimated useful lives
of the respective asset groups on a straight-line basis. Leasehold improvements
are amortized on a straight-line basis over the lesser of the estimated useful
lives or the remaining term of their lease.
Amortization of the fungi cultures acquired in connection with the
acquisition of MYCOsearch (See Note 2(a)), and amortization of the Dow Compound
Library License (See Note 2(d)) are on a straight line basis over five years,
which represents the estimated period over which the fungi cultures and
compounds will be used in the Company's R&D efforts.
(f) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(g) Investments
Investment securities at September 30, 1997 and 1996 consist of U.S.
Treasury obligations and corporate debt securities. The Company classifies its
investments as available for sale. These securities are recorded at their fair
value. Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported as a
separate component of stockholders' equity until realized. Realized gains and
losses from the sale of available-for-sale securities are determined on a
specific identification basis.
A decline in the market value of any available-for-sale security below
cost that is deemed to be other than temporary results in a reduction in
carrying amount to fair value. The impairment is charged to earnings and a new
cost basis for the security is established. Premiums and discounts are amortized
or accreted over the life of the related held-to-maturity security as an
adjustment to yield using the effective interest method. Dividend and interest
income are recognized when earned.
(h) Loss Per Share
Loss per common share is computed by dividing the net loss by the
weighted average number of common shares outstanding. Common share equivalents
(stock options) are not included in the computation since their inclusion would
be anti-dilutive.
(i) Cash and Cash Equivalents
The Company includes as cash equivalents reverse repurchase agreements,
treasury bills, and other time deposits with original maturities of three months
or less.
(j) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relative to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
34
35
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(2) ACQUISITIONS
(a) MYCOsearch, Inc.
On April 11, 1996, the Company acquired all the outstanding shares of
MYCOsearch, a privately owned company, that specializes in the collection of
fungi cultures and the development of extracts derived therefrom. On the date of
the acquisition, MYCOsearch became a wholly-owned subsidiary of the Company.
Prior to the acquisition, the Company had purchased extracts and certain
services from MYCOsearch. Such expenses totaled $301,000, and $571,000 in fiscal
1996 (through April 11, 1996) and fiscal 1995, respectively, which are included
in research and development expenses in the accompanying consolidated statements
of operations.
The purchase price paid by the Company to the shareholders of
MYCOsearch consisted of $1.75 million in cash, $2.95 million in common stock of
the Company (316,553 shares at $9.319 per share, of which 222,521 shares
represented the reissuance of shares held in treasury), and warrants to purchase
100,000 shares of the Company's stock at $9.319 per share, valued at $483,000.
The warrants are exercisable for a three-year period starting on April 11, 1998.
The Company also incurred other direct costs totaling approximately $137,000 in
connection with the acquisition resulting in a total purchase price of $5.3
million.
The acquisition has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based on the fair values at the
date of acquisition. The purchase price was allocated as follows (in thousands):
Fungi cultures $5,508
Fixed assets 21
Other assets 16
Other liabilities (225)
-----
Purchase price $5,320
======
The fungi cultures contain natural chemical structures that will be tested
against target proteins using the Company's drug screens. The Company is
amortizing the fungi cultures on a straight-line basis over a five-year period
and will continually evaluate the recoverability of this asset based on the
results of its testing. Amortization of the fungi cultures totaling $1,102,000
and $459,000 for the fiscal years ended September 30, 1997 and 1996,
respectively, is reflected as research and development expense in the
accompanying consolidated statement of operations.
(b) Aston Molecules Ltd.
On September 19, 1996, the Company completed the acquisition of all the
outstanding capital stock of Aston Molecules Ltd. ("Aston"), a privately held
United Kingdom company. On the date of the acquisition, Aston became a
wholly-owned subsidiary of the Company. Its operations and personnel will be
maintained at its present site in Birmingham, UK.
The consideration paid for Aston included 283,981 shares of the
Company's common stock having a fair market value of approximately $2.4 million.
In addition, the Company also issued rights exercisable at the end of three and
five years following the closing date (for an aggregate exercise price of
$7,500) to obtain a number of shares of the Company's common stock having an
aggregate value of $750,000 (based on the then current market value). The
present value of this additional consideration of $630,796 and $590,675 is
reflected as deferred acquisition costs in the accompanying consolidated balance
sheet as of September 30, 1997 and 1996, respectively. Other direct costs of the
acquisition approximated $635,000 resulting in a total acquisition cost of $3.6
million.
35
36
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
The acquisition has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based on the fair values at the
date of acquisition. The purchase price was allocated as follows (in thousands):
Goodwill $3,468
Fixed assets 181
Other assets 299
Other liabilities (338)
-----
Purchase price $3,610
======
The goodwill resulting from the acquisition is being amortized on a
straight-line basis over a five year period. Prior to the acquisition, the
Company purchased certain chemistry services from Aston. Such expenses totaled
$879,000, and $302,000 in fiscal 1996 (through September 19, 1996) and fiscal
1995, respectively, which are included in research and development expenses in
the accompanying consolidated statements of operations.
Concurrent with the acquisition, the Company entered into employment
agreements with certain of Aston's executives and scientific personnel and
granted stock options covering an aggregate of 125,000 shares of its common
stock to such persons. The exercise price of $8.51 per share was based on the
fair market value of the Company's stock on the date of the grant.
(c) Pro Forma Information (Unaudited)
The operating results of MYCOsearch and Aston have been included in the
consolidated statements of operations from the respective dates of the
acquisitions. The following unaudited pro forma information presents a summary
of consolidated results of operations for the years ended September 30, 1996 and
1995 assuming the acquisitions had taken place as of October 1, 1995 and 1994,
respectively.
1996 1995
---- ----
Revenues......................................... $10,566,000 $17,130,000
Net loss......................................... (12,108,000) (6,213,000)
Net loss per share............................... (.61) (.36)
The pro forma results give effect to the amortization of the fungi
cultures and goodwill; elimination of intercompany sales; reduction of
investment income; and an increase in the number of common shares outstanding.
The pro forma financial information is not necessarily indicative of the results
of operations as they would have been had the acquisitions been affected on the
assumed dates.
(d) Compound Library License
On March 18, 1997, the Company entered into a license agreement with
The Dow Chemical Company ("Dow") giving the Company exclusive worldwide rights
to use more than 140,000 compounds for screening and potential development of
small molecule drugs and cosmeceuticals. The initial payment for the license was
352,162 shares of the Company's common stock with a fair market value of
approximately $2,500,000. Dow is also entitled to royalty payments from any new
drug products that may result from the screening of the compound library. The
common stock issued to Dow was from the shares held in treasury. The Company
will amortize the license agreement cost on a straight-line basis over a
five-year period, which represents the estimated period over which the compounds
will be used in the Company's research and development efforts. Since the
Company has not conducted significant research utilizing these compounds during
fiscal 1997, the Company will begin amortizing the license agreement cost in
October 1997.
36
37
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(3) INVESTMENTS
The Company invests its excess cash in U.S. Government securities and
debt instruments of financial institutions and corporations with strong credit
ratings. The Company has established guidelines relative to diversification of
its investments and their maturities that should maintain safety and liquidity.
These guidelines are periodically reviewed and modified to take advantage of
trends in yields and interest rates. The Company uses the specific
identification method to determine the cost of securities sold.
The following is a summary of available-for-sale securities as of September 30,
1997 and 1996:
GROSS
UNREALIZED
1997 COST (LOSSES) GAINS FAIR VALUE
---- ---- -------------- ----------
US Treasury Securities and obligations of
US Government agencies ................................ $14,869,695 $(126,253) $14,743,442
Corporate debt securities ............................... 8,426,040 28,553 8,454,593
----------- --------- -----------
Total ......................................... $23,295,735 $ (97,700) $23,198,035
=========== ========= ===========
GROSS
UNREALIZED
1996 COST (LOSSES) GAINS FAIR VALUE
---- ---- -------------- ----------
US Treasury Securities and obligations of
US Government agencies......................... $22,212,207 $(218,842) $21,993,365
Corporate debt securities........................ 12,125,865 13,649 12,139,514
----------- --------- -----------
Total.................................. $34,338,072 $(205,193) $34,132,879
=========== ========= ===========
Net realized losses on sales of investments during fiscal 1997 were
approximately $37,000. Net realized gains on sales of investments during fiscal
1996 were approximately $33,000. Net realized losses on sales of investments
during fiscal 1995 were approximately $118,000.
The Company also has investments in certain biotechnology companies
that are not publicly traded and are included in other noncurrent assets in the
accompanying balance sheets. The investments are summarized as follows:
SEPTEMBER 30,
----------------------
1997 1996
---------- --------
Anaderm Research Corp. ...... $677,471 $136,952
Helicon Therapeutics, Inc. .. 123,800 --
Amplicon Corp. .............. 250,000 100,000
NuGene Technologies, Inc. ... 100,000 --
---------- --------
$1,151,271 $236,952
========== ========
37
38
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
As further discussed in Note 5, the Company has collaborative research
agreements with Anaderm and Helicon and the investments are carried based on the
equity method of accounting. The investments in Amplicon Corp. ("Amplicon") and
NuGene Technologies, Inc. ("NuGene") are carried at cost and approximate fair
market value. In November 1997, Amplicon was acquired by Tularik Inc.
("Tularik"). The Company's Amplicon securities were exchanged for common shares
of Tularik.
(4) SALE OF RESEARCH PRODUCTS BUSINESS
In August 1995, the Company sold certain assets and the business of the
Research Products Business (Business) to Calbiochem-Novabiochem International,
Inc. (Calbiochem) for $6.0 million in cash. The assets sold included the
Business' line of research products sold or intended for sale to the academic,
industrial and clinical research markets, existing inventory, property and
equipment and certain other assets. The Company retained the trade accounts
receivable and accounts payable outstanding on the date of sale. In connection
with the sale, the Company wrote off the unamortized goodwill related to the
Business of approximately $343,000. The sale resulted in a net gain of
approximately $2.7 million. In the sale agreement, the Company agreed to
indemnify the purchaser for a period of two years for certain breaches of the
agreement.
The Company also signed a sublease agreement with Calbiochem relating
to the Cambridge facility for a term of three years, at an annual payment equal
to 50% of the Company's fixed lease payment and related facility costs, plus
certain operating costs. Payments from Calbiochem totaling $355,000, $417,000
and $0 for the years ended September 30, 1997, 1996 and 1995, respectively, have
been reflected as an offset to selling, general and administrative expenses in
the accompanying consolidated statements of operations.
(5) PRODUCT DEVELOPMENT CONTRACTS
(a) Pfizer
Effective April 1, 1996, the Company and Pfizer renewed their
ten-year-old collaboration for a new five-year term by entering into new
Collaborative Research and License Agreements. Under these agreements, all
patent rights and patentable inventions derived from the research under this
collaboration are owned jointly by the Company and Pfizer. Under the
collaborative research agreement, Pfizer has committed to provide research
funding to the Company in an aggregate amount of approximately $18.8 million.
Pursuant to a schedule set forth in the collaborative research agreement, Pfizer
will make maximum annual research funding payments to the Company, which will
gradually increase from approximately $3.5 million in the first year of the
five-year term to approximately $4 million in the fifth year. The collaborative
research agreement will expire on April 1, 2001. However, it may be terminated
earlier by either party upon the occurrence of certain defaults by the other
party. Any termination of the collaboration resulting from a Pfizer default will
cause a termination of Pfizer's license rights. Pfizer will retain its license
rights if it terminates the agreement in response to a default by the Company.
In addition, between July 1 and September 30, 1998, Pfizer may terminate the
collaborative research agreement, with or without cause, effective March 31,
1999. Furthermore, between July 1 and September 30, 1999, Pfizer may terminate
the collaborative research agreement, with or without cause, effective March 31,
2000. Upon such early termination by Pfizer, Pfizer will retain its license
rights. The Company also granted Pfizer an exclusive, worldwide license to make,
use, and sell the therapeutic products resulting from this collaboration in
exchange for royalty payments. This license terminates on the date of the last
to expire of the Company's relevant patent rights.
38
39
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(b) Hoechst Marion Roussel
Effective as of January 1, 1997, the Company entered into a
Collaborative Research and License Agreement with HMRI to develop orally active,
small molecule inducers of erythropoietin gene expression for the treatment of
anemia due to chronic renal failure and anemia associated with chemotherapy for
AIDS and cancer. The collaboration is focused on the pre-clinical and clinical
development of lead compounds previously discovered by the Company from its
natural products and combinatorial chemistry libraries and from HMRI's compound
library. Under the terms of the agreement, both the Company and HMRI are
contributing medicinal chemistry and pre-clinical optimization teams under the
agreement. HMRI has the exclusive right to conduct pre-clinical and clinical
development of drug candidates emerging from the program. The Company may
receive from HMRI up to $30 million in research funding, milestone payments and
success fees depending on HMRI's clinical success. During fiscal 1997, the
Company received and recorded as income a $1,000,000 initiation fee from HMRI in
connection with this program, 50% of which will be credited against future
royalties, if any.
The Company has granted to HMRI exclusive, worldwide licenses to, among
other things, use, manufacture and sell products resulting from the
collaboration. In exchange for these licenses, HMRI will pay the Company
royalties on the sales by HMRI of any products resulting from the collaboration.
The duration of the licenses is coextensive with the lives of the patents
related to the licensed compounds. Generally, the Company and HMRI are
prohibited during the term of the collaboration from pursuing or sponsoring
research and development of compounds and products in the target area other than
pursuant to the agreement without the approval of the research committee. The
term of the agreement is segmented into three periods: (1) an option period
which terminates on March 31, 1998; (2) a contract period term which continues
until March 31, 2000; and (3) a development phase which commences March 31, 1998
for as long as HMRI continues development activities. During the option period,
the agreement may be terminated by mutual written agreement of the parties. If
HMRI elects not to participate in the contract period term or discontinues
participation during the contract period term or development phase, it will
offer the Company and the Company may accept the license rights to develop and
commercialize the compounds and products of the collaboration, subject to
payment of royalties by the Company to HMRI.
Effective as of April 1, 1997, the Company and HMRI entered into an
Amended Collaborative Research and License Agreement that consolidated and
extended formerly separate collaborative programs between the Company and each
of Marion Merrell Dow Inc. ("MMDI"), Hoechst Roussel Pharmaceuticals, Inc.
("Hoechst Roussel") and Hoeschst AG ("Hoechst"). This resulted from the
corporate reorganization of HMRI in July 1995 in which the pharmaceutical
operations MMDI, Hoechst Roussel and Hoechst were combined into HMRI. This
Amended Collaborative Research and License Agreement provides for HMRI and the
Company to collaborate in the discovery and development of drugs for the
treatment of atherosclerosis, inflammation, arthritis and metabolic diseases.
Under this collaboration, a research committee, with equal
representation from the Company and HMRI, meets at least three times a year to
evaluate the progress of the research program, make priority and program
decisions, and prepare research plans identifying the drug targets to be
pursued. New targets are added to the program on an ongoing basis by mutual
agreement. The Company is responsible for achieving objectives outlined in the
annual research plans. HMRI is responsible for assisting the Company in the
pursuit of such objectives and for the clinical development and
commercialization of drugs resulting from the program. HMRI is responsible for
funding the costs of the Company so that's discovery efforts, and as of
September 30, 1997, the Company had received or accrued an aggregate of $16.1
million in research funding from HMRI and its predecessors.
39
40
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
The Company has granted to HMRI (i) an exclusive, worldwide license
with respect to, amount other things, the use, manufacture and sale of products
resulting from their atherosclerosis research collaboration and (ii) the right
to obtain an exclusive, worldwide license with respect to any therapeutic
product derived from the inflammation, arthritis and metabolic disease program.
In exchange for these licenses, HMRI will pay royalties to the Company on sales
of such products. The Company and HMRI have mutually exclusive rights and
obligations to prosecute and maintain certain patent rights related to various
specified areas of the research.
(c) Novartis
In April 1995, the Company entered into an agreement with Novartis to
expand the scope of the companies' collaborative efforts with respect to the
development of TGF-Beta3 for wound healing and the treatment of oral mucositis
and other indications. Under the agreement, the Company will fund development
through Phase I clinical trials and Novartis will fund Phase II and III clinical
trials. Novartis will pay the Company $10 million if, and at the time, it
decides to initiate Phase IIB or III clinical trials or, at the option of
Novartis, within four years of the agreement date. The payment will be
characterized, at Novartis's option, as a milestone payment or a purchase of the
Company's common stock at the higher of $5.50 per share or the then current
market price. In exchange for such payment, Novartis' license will be expanded
to include all other indications for TGF-Beta3.
(d) Becton Dickinson
On October 4, 1991, the Company and Becton established a collaborative
research program to develop cancer diagnostic products. The Company and Becton
shared equally the cost of discovery phase and pre-clinical research and
development. This collaborative research program expired on September 30, 1996
and was not renewed. To the extent Becton commercializes any products derived
from this program, it will pay certain royalties to the Company on sales of such
products, if any.
(e) Bayer
Effective January 1, 1997, the Company and Bayer entered into an
agreement to develop serum-based cancer diagnostic products. Under the
agreement, the Company granted to Bayer licenses to manufacture, use and sell
clinical diagnostic products based on the Company's cancer diagnostics
technology in exchange for royalties on net sales. Bayer will own all
technology, and has the exclusive right to commercialize clinical diagnostic
products derived from the collaboration. Bayer's license is perpetual with
respect to nonpatented technology and will terminate with respect to patented
technology upon the expiration of the last to expire of the Company's patents.
Bayer will provide funding for the Company's research under the collaboration in
the amount of $1.5 million for each of the first two contract years, and $1
million for each subsequent year. After the first two contract years, the
Company will be required to provide up to $500,000 in annual funding for the
collaboration to the extent the Company derives net revenues from out-licensing
any cancer diagnostics technology or the sale of any clinical diagnostic or
clinical research products. The agreement will terminate on December 31, 2002.
Bayer has the right to terminate the agreement at any time after December 31,
1997 upon 12 months' notice.
40
41
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(f) Wyeth-Ayerst
Effective December 31, 1991, the Company entered into a collaborative
research agreement with Wyeth. This agreement was extended and expanded in
January 1994 for an additional 3 years through December 31, 1996 to provide for
additional funding of approximately $4.3 million. The Company had received
approximately $1.6 million annually in research and development funding from
Wyeth pursuant to this collaborative agreement. The funded portions of the
research collaboration expired on December 31, 1996. To the extent Wyeth
commercializes any products derived from this collaboration, it will pay certain
royalties to the Company on sales of such products, if any.
(g) Anaderm
In April 1996, in connection with the formation of Anaderm Research
Corp. ("Anaderm"), the Company entered into a Stockholders' Agreement
("Stockholders' Agreement") among the Company, Pfizer, Anaderm, New York
University ("NYU") and certain NYU faculty members ("Faculty Members"), and a
Collaborative Research Agreement ("Research Agreement") among the Company,
Pfizer and Anaderm. Anaderm issued common stock to Pfizer and the Company and
options to purchase common stock to NYU and the Faculty Members. NYU and the
Faculty Members have exercised their options fully, and Pfizer holds 82%, the
Company holds 14%, and NYU and the Faculty Members collectively hold 4% of
Anaderm's common stock. In exchange for its 14% of the outstanding shares of
Anaderm common stock, the Company will provide formatting for high-throughput
screens and will conduct compound screening for 18 months at its own expense
under the Research Agreement. The term of the Research Agreement is three years.
During the initial phase of the agreement (the first 18 months) the Company was
required to provide at its own cost formatting for high throughput screens and
perform screening of its own compounds and those compounds provided by Pfizer.
Upon the termination of the initial phase, the Board of Directors of Anaderm
made a determination that the initial phase was successfully completed. With
Pfizer's approval, the funded phase commenced on October 1, 1997 and will
continue for the term of the Research Agreement. During this phase, Anaderm will
make payments to the Company equal to its research costs, including overhead,
plus 10%. Anaderm or Pfizer will pay royalties to the Company on the sales of
products resulting from this collaboration.
As of September 30, 1997, the Company has expended approximately $1.8
million which has been capitalized as the cost of the Company's 14% interest in
Anaderm. This capitalized cost has been offset by approximately $1.2 million
which includes the Company's estimated interest in the loss of Anaderm as of
September 30, 1997 and additional discounted reserve. The Company's net
investment in Anaderm at September 30, 1997 of $677,000 is included in other
assets in the accompanying consolidated balance sheet. During fiscal 1997, the
Company received $388,000 from Anaderm for additional research during the
initial phase outside the scope of the original agreement.
(h) BioChem Pharma
Effective May 1, 1996, the Company entered into a Collaborative
Research, Development and Commercialization Agreement with BioChem Pharma. Under
this agreement, the parties will seek to discover and develop antiviral drugs
for the treatment of Hepatitis B virus, Hepatitis C virus and HIV, although the
focus of the collaborative efforts may change at the discretion of a joint
steering committee. This agreement provides that the Company and BioChem Pharma
will jointly commit resources to the collaborative program. The Company and
BioChem Pharma will share equally the commercialization rights in the U.S. and
Europe for any product resulting from the collaboration. BioChem Pharma will
exclusively own commercialization rights in Canada. The agreement is for a term
of five years, with automatic, successive one-year renewal periods thereafter.
After May 1, 1999, however, either party may terminate the agreement by giving
the other party six-months prior written notice. The agreement is also subject
to early termination in the event of certain defaults by either party. As of
September 30, 1997, the Company has recognized $518,000 which represents (i) a
$100,000 annual technology fee for the right to receive all available upgrades
and annual improvements to the equipment,
41
42
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
software and license technology and (ii) reimbursement for all out of pocket
costs to build, deliver and install robotic equipment at the agreed BioChem
Pharma location.
(i) Sankyo
Effective as of February 12, 1997, the Company entered into a
Collaborative Research and License Agreement with Sankyo to be conducted in
partnership with MRC Collaborative Center ("MRC CC"), London, U.K. The
collaboration is focused on discovering and developing novel pharmaceutical
products to treat influenza. The Company is responsible for conducting research
as directed by a research committee, including, without limitation, compound
screening in exchange for research funding from Sankyo. Sankyo has the
responsibility and the exclusive right to conduct pre-clinical and clinical
development of all candidate compounds in exchange for milestone payments to the
Company. The Company received and recorded $267,000 for a non-refundable
technology disclosure fee upon signing the agreement.
The Company and MRC CC have granted to Sankyo exclusive, worldwide
licenses to, among other things, use, manufacture and sell all products
resulting from the collaboration. In exchange for these licenses, Sankyo will
pay to the Company and MRC CC license fees and royalties on product sales. The
duration of the licenses is coextensive with the lives of the patents related to
the licensed compound. If Sankyo discontinues development of all candidate
compounds, the Company will have the sole and exclusive right to develop, use,
manufacture and sell all products resulting from the collaboration, and it will
pay royalties to Sankyo.
(j) Sepracor
On March 7, 1997, the Company entered into a Collaborative Research
Development and Commercialization Agreement with Sepracor. Under this agreement,
the parties will seek to discover and develop certain anti-infective agents and
anti-inflammatory agents. The Company and Sepracor will commit equal resources
to the program, including, among other things, access to all their respective
compound libraries and dedicated teams of research scientists. Generally, the
parties will share equally the commercialization rights throughout the world of
products derived from the program and will share equally the profits from sale
of such products, except that in the case of drugs that target two specified
microbes, Sepracor will receive 75% of such profits.
(k) Xenometrix
On June 27, 1997, the Company and Xenometrix, Inc. ("Xenometrix")
entered into an agreement pursuant to which they will jointly seek a corporate
partner to fund a technology collaboration for the development of automated
systems to generate and analyze certain data relating to toxicological,
metabolic and undesirable systemic effects of drug candidates. The parties have
cross-licensed certain of their respective assay technologies on a worldwide,
royalty-free nonexclusive basis. The agreement is for a period of nine months,
with automatic successive three-month renewal periods.
(l) Helicon
In July 1997, the Company, Cold Spring Harbor Laboratory and Hoffman-La
Roche Inc.("Roche") formed Helicon Therapeutics, Inc., a new Delaware
corporation. In exchange for approximately 28% of Helicon's outstanding capital
stock, the Company will contribute to Helicon molecular screening services and a
nonexclusive license with respect to certain screening technology. Such services
are to be performed within one year. Cold Spring Harbor Laboratory contributed a
royalty-free license to commercialize certain technology relating to genes
associated with long-term memory in exchange for a portion of Helicon's
outstanding capital stock. Roche contributed cash for a portion of Helicon's
outstanding capital stock. Certain individuals associated with Cold Spring
Harbor Laboratory hold the remaining outstanding capital stock of Helicon.
42
43
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
The parties have entered into various collaborative research and
license agreements pursuant to which they will jointly pursue the discovery,
development and commercialization of novel drugs for the treatment of long-term
memory disorders and other central nervous system dysfunctions. The Company and
Cold Spring Harbor Laboratory are to conduct research under the program, which
will be funded by Helicon (except for the molecular screening services that the
Company is contributing to Helicon). Helicon is to receive this funding from
Roche for the first two years of the program. If the program is not previously
terminated, Roche is to continue to provide funding for the third year of the
program, with the actual amount to be determined by a research committee
established to oversee the collaborative program. Helicon has granted to Roche a
worldwide license to commercialize pharmaceutical products resulting from the
collaborative program in exchange for certain milestone payments and royalties
on Roche's sales of such products.
As of September 30, 1997, the Company has expended approximately
$180,000 which has been capitalized as the cost of the Company's 28% interest in
Helicon. This capitalized cost has been offset by approximately $56,000 which
represents the Company's estimated interest in the loss of Helicon as of
September 30, 1997. The Company's net investment in Helicon at September 30,
1997 of $124,000 is included in other assets in the accompanying consolidated
balance sheet.
(m) Other
Under the terms of aforementioned collaborative research agreements,
the collaborative partners will pay the Company royalties ranging from 2% to 8%
of net sales of products resulting from these research programs. To date, the
Company has not received any royalties pursuant to these agreements. The Company
or its collaborative partners may terminate each of the collaborative research
programs upon the occurrence of certain events.
The Company does not intend to conduct late-stage clinical trials,
manufacturing or marketing activities with respect to any of its product
candidates in the foreseeable future. The Company is dependent on the companies
with which it collaborates for the pre-clinical testing, clinical development,
regulatory approval, manufacturing and marketing of potential products developed
under its collaborative research programs. The Company's collaborative
agreements allow its collaborative partners significant discretion in electing
to pursue or not to pursue any of these activities. The Company cannot control
the amount and timing of resources its collaborative partners devote to the
Company's programs or potential products. If any of the Company's collaborative
partners were to breach or terminate its agreements with the Company or
otherwise fail to conduct its collaborative activities successfully in a timely
manner, the pre-clinical or clinical development or commercialization of product
candidates or research programs could be delayed or terminated. Any such delay
or termination could have a material adverse effect on the Company's business,
financial condition and results of operations.
43
44
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
Total program research revenues under the aforementioned agreements are
as follows:
YEARS ENDED SEPTEMBER 30,
---------------------------------------
1997 1996 1995
----------- ---------- ----------
Related Parties:
Pfizer .................................................................. $3,622,363 $3,208,077 $3,505,427
HMRI .................................................................... 5,136,257 2,439,358 3,405,335
Becton .................................................................. -- 1,150,125 1,400,094
Anaderm ................................................................. 388,254 --
BioChem Pharma .......................................................... 517,888 -- --
----------- ---------- ----------
Total Related Parties ................................................... 9,664,762 6,797,560 8,310,856
Bayer ................................................................... 1,125,000 -- --
Sankyo .................................................................. 1,011,039 -- --
Wyeth ................................................................... 400,000 1,550,000 1,375,000
----------- ---------- ----------
Total ................................................................... $12,200,801 $8,347,560 $9,685,856
=========== ========== ==========
(6) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are recorded at cost and
consist of the following:
SEPTEMBER 30,
ESTIMATED --------------------------------
LIFE (YEARS) 1997 1996
------------ ---------- ----------
Laboratory equipment................... 5-15 $9,073,179 $8,079,536
Office furniture and equipment......... 5-10 3,587,698 2,357,247
Automobile equipment................... 3 152,474 35,954
Leasehold improvements................. Life of lease 5,315,125 4,879,814
--------- ---------
18,128,476 15,352,551
Less: accumulated depreciation and
amortization......................... 10,376,190 8,857,439
---------- ---------
Net property, equipment and leasehold
improvements......................... $7,752,286 $6,495,112
========== ==========
(7) INTANGIBLE ASSETS
The components of intangible assets are as follows:
SEPTEMBER 30,
--------------------------
1997 1996
----------- ----------
Patents ...................................................... $6,410,614 $7,177,825
Goodwill ..................................................... 2,774,128 3,467,656
----------- -----------
$9,184,742 $10,645,481
========== ===========
The above amounts reflect accumulated amortization of $8,721,613 and
$7,260,874 at September 30, 1997 and 1996, respectively. During fiscal 1996,
goodwill increased $3,467,656 in connection with the acquisition of Aston
Molecules Ltd. (See Note 2). As of September 30, 1996, the goodwill related to
the acquisition of Applied bioTechnology has been fully amortized.
44
45
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at September 30, 1997 and 1996
are comprised of:
SEPTEMBER 30,
---------------------------------------
1997 1996
---------- ----------
Accounts payable....................................... $2,411,133 $2,081,031
Accrued future lease escalations....................... 448,137 417,614
Accrued payroll and employee benefits.................. 367,242 462,958
Accrued incentive compensation......................... 615,000 285,370
Accrued expenses....................................... 338,527 439,665
---------- ----------
$4,180,039 $3,686,638
========== ==========
(9) STOCKHOLDERS' EQUITY
(a) Stock Redemption
On February 18, 1997, the Company repurchased all 1.25 million shares
of the Company's common stock held by Becton, Dickinson and Company ("Becton")
for an aggregate price of $8.75 million. The Company's collaborative research
agreement with Becton had ended on its scheduled expiration date of September
30, 1996. See Note 5(d).
(b) Stock Offering
In April 1996, the Company completed a public offering for 3,118,750
shares of common stock. The sale price was $9.125 per share. Concurrent with the
public offering, the Company sold 500,000 shares at $9.125 per share directly to
BioChem Pharma. The proceeds to the Company from these sales, net of
underwriting commissions and other costs, were approximately $30.3 million. The
net proceeds were added to the Company's general funds and are to be used for
research and development expenses, including funds for enhancing the Company's
drug discovery technologies, and for general corporate purposes.
(c) Stock Option Plans
The Company has established four stock option plans for its employees,
officers, directors and consultants. The Plans are administered by the
Compensation Committee of the Board of Directors, which may grant either
non-qualified or incentive stock options. The Committee determines the exercise
price and vesting schedule at the time the option is granted. Options vest over
various periods and may expire no later than 10 years from date of grant. The
total authorized shares under these plans is 5,400,000.
45
46
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
The following table summarizes changes in the number of common shares
subject to options in the stock option plans:
EXERCISE PRICE
---------------------------------------------------
WEIGHTED
SHARES LOW HIGH AVERAGE
--------------------------------------------------
Balance September 30, 1994
Unexercised................................................................ 2,048,325 $1.75 $7.63 $4.05
Granted................................................................. 803,000 3.50 4.13 3.78
Exercised............................................................... (206,025) 1.75 5.63 2.68
Forfeited............................................................... (624,021) 4.00 7.63 4.98
-------------------------------------------------
Balance September 30, 1995
Unexercised................................................................ 2,021,279 $1.75 $5.63 $3.75
Granted................................................................. 776,000 7.88 9.32 8.98
Exercised............................................................... (491,544) 1.75 4.88 3.35
Forfeited............................................................... (87,678) 3.50 5.63 3.98
-------------------------------------------------
Balance September 30, 1996
Unexercised................................................................ 2,218,057 $1.75 $9.32 $5.67
Granted................................................................. 907,500 6.50 7.09 6.82
Exercised............................................................... (84,618) 2.50 9.25 4.32
Forfeited............................................................... (127,499) 3.50 9.00 5.19
-------------------------------------------------
Balance September 30, 1997
Unexercised................................................................ 2,913,440 $1.75 $9.32 $6.07
---------- ----- ----- -----
At September 30, 1997, the Company has reserved 4,341,292 shares of its
authorized common stock for all shares issuable under option. At September 30,
1997, 1996, and 1995 options exercisable were 1,290,829, 872,513 and 952,883
respectively.
On March 22, 1995, the Company granted the right to current option
holders to surrender their current options in exchange for replacement options
on the basis of three replacement options for four options surrendered. The
exercise price of the replacement options was $3.50 per share, which was greater
than the market price on the date of exchange. The replacement options vested
25% upon grant with the remaining 75% vesting pro rata on a monthly basis over
the following three years. Option holders surrendered 606,000 options in
exchange for 454,500 replacement options.
Stock option grants are set at the closing price of the Company's
common stock on the date of grant and the related number of shares granted are
fixed at that point in time. Therefore under the principles of APB Opinion No.
25, the Company does not recognize compensation expense associated with the
grant of stock options. SFAS No. 123, "Accounting for Stock-Based Compensation,"
requires the use of option valuation models to provide supplemental information
regarding options granted after 1995. Pro forma information regarding net income
and earnings per share shown below was determined as if the Company had
accounted for its employee stock options and shares sold under its stock
purchase plan under the fair value method of that statement.
The fair value of the options was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1996, respectively: risk-free interest rates of 5.84%
and 6.26%; dividend yields of 0% and 0%; volatility factors of the expected
market price of the Company's common stock of 65.8% and 64.8% and expected life
of the options of 3.7 years and 3.7 years. These assumptions resulted in
weighted-average fair values of $3.61 and $4.75 per share for stock options
granted in 1997 and 1996, respectively.
46
47
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The pro forma effect on
net income for 1997 and 1996 is not representative of the pro forma effect on
net income in future years because it does not take into consideration pro forma
compensation expense related to grants made prior to 1996. Pro forma information
in future years will reflect the amortization of a larger number of stock
options granted in several succeeding years. The Company's pro forma information
is as follows (in thousands, except per share information):
SEPTEMBER 30,
----------------------
1997 1996
--------- ---------
Pro forma net loss ...... $(11,205) $(10,327)
Pro forma loss per share:
Primary ................. $ (0.51) $ (0.52)
Information regarding stock options outstanding as of September 30,
1997, is as follow (options in thousands):
----------------------
---------------------------------- Options
Options Outstanding Exercisable
----------------------------------------------------------
Weighted-
Weighted- Average Weighted-
Average Remaining Average
Shares Exercise Contractual Shares Exercise
Price Range (in thous) Price Life (in thous) Price
- -------------------------------------------------------------------------
Under $5.00 1,284 $3.87 6.32 years 938 $3.84
$5.00 - $7.00 879 $6.80 9.42 years 31 $6.33
Over $7.00 750 $8.89 8.24 years 321 $9.00
(d) Sale of Common Stock and Warrant to Marion Merrell Dow
In December 1992, the Company entered into the common stock purchase
and common stock warrant purchase agreements with Marion. The Company issued
1,090,909 shares of common stock at $5.50 per share and a warrant to purchase up
to 500,000 additional shares at $5.50 per share which is exercisable during the
period December 1994 to December 1999. The proceeds to the Company were $6
million.
(e) Sale of Common Stock to Novartis
On April 19, 1995, Novartis purchased 909,091 shares of the Company's
common stock at $5.50 per share for an aggregate purchase price of $5 million.
(f) Employee Stock Purchase Plan
On May 1, 1993, the Company adopted an Employee Stock Purchase Plan
under which eligible employees may contribute up to 10% of their base earnings
toward the quarterly purchase of the Company's common stock. The employees
purchase price is derived from a formula based on the fair market value of the
common stock. No compensation expense is recorded in connection with the plan.
During fiscal 1997, 1996 and 1995, 12,388, 3,860 and 3,216 shares were issued
with 48, 34 and 18 employees participating in the plan, respectively.
47
48
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(10) INCOME TAXES
There is no provision (benefit) for federal or state income taxes,
since the Company has incurred operating losses since inception and has
established a valuation allowance equal to the total deferred tax asset.
The tax effect of temporary differences, net operating loss carry
forwards and research and development tax credit carry forwards as of September
30, 1997 and 1996 are as follows:
SEPTEMBER 30,
-----------------------------
1997 1996
------------ ------------
Deferred tax assets:
Net operating loss carry forwards .............................. $14,170,792 $12,252,652
Research and development credits ............................... 824,246 792,980
Intangible assets .............................................. 946,094 1,028,148
Other .......................................................... 1,750,156 678,849
------------ ------------
17,691,288 14,752,629
Valuation allowance ............................................ (17,691,288) (14,752,629)
------------ ------------
$ -- $ --
============ ============
As of September 30, 1997, the Company has available federal net
operating loss carry forwards of approximately $42 million which will expire in
various years from 2000 to 2012, and may be subject to certain annual
limitations. The Company's research and development tax credit carry forwards
noted above expire in various years through from 2000 to 2012.
48
49
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(11) COMMITMENTS AND CONTINGENCIES
(a) Lease Commitments
The Company leases office, operating and laboratory space under various
lease agreements.
Rent expense was approximately $1,081,000, $727,000 and $750,000, for
the fiscal years ended September 30, 1997, 1996, and 1995, respectively.
The following is a schedule by fiscal years of future minimum rental
payments required as of September 30, 1997, assuming expiration of the lease for
the Uniondale facility on June 30, 2006, the Cambridge facility on December 31,
2003, the Durham facility on October 31, 2004, and the Birmingham facility on
May 31, 2002.
1998.......................................................................... $972,579
1999.......................................................................... 976,126
2000.......................................................................... 1,048,297
2001.......................................................................... 1,055,689
2002.......................................................................... 1,075,139
2003 and thereafter........................................................... 2,443,268
----------
$7,571,098
==========
(b) Contingencies
The Company has received several letters from other companies and
universities advising the Company that various products being marketed and
research being conducted by the Company may be infringing on existing patents of
such entities. These matters are presently under review by management and
outside counsel for the Company. Where valid patents of other parties are found
by the Company to be in place, management will consider entering into licensing
arrangements with the universities and/or other companies or modify the conduct
of its research. The Company's royalties may be reduced by up to 50% if its
licensees or collaborative partners are required to obtain licenses from third
parties whose patent rights are infringed by the Company's products, technology
or operations. Management believes that the ultimate outcome of these matters
will not have a material adverse effect on the financial position of the
Company.
(12) RELATED PARTY TRANSACTIONS
Effective January 1, 1993, the Company compensates its independent
outside directors on a $1,000 retainer per month. This amount increased to
$1,500 effective January 1, 1995. For the years ended September 30, 1997, 1996
and 1995, such fees amounted to $126,000, $108,000 and $99,000, respectively.
The Company also has compensated four directors for consulting services
performed. Three directors have consulting agreements, the other two were paid
on a per diem basis. For the years ended September 30, 1997, 1996 and 1995,
consulting services in the amounts of $144,000, $100,000 and $90,000
respectively, were paid by the Company pursuant to these arrangements.
49
50
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
One director is a partner in a law firm which represents the Company on
its patent and license matters. Fees paid to this firm for the years ended
September 30, 1997, 1996 and 1995 were approximately $404,000, $413,000 and
$260,000, respectively.
During fiscal 1997, the Board of Directors of the Company approved the
cashless excercise of certain stock options held by a director. The Company
recorded a charge of $126,750, which represents the fair market value of the
common stock issued.
A board member is an officer of Cold Spring Harbor Laboratory which was
a founder of Amplicon (which was recently acquired by Tularik) and Helicon. A
board member is the chief executive officer and director of Helicon and member
of the board of directors of Xenometrix. A board member is the chief executive
officer of NuGene. The Company's chief executive officer is a member of the
boards of directors of NuGene, Anaderm and Helicon, and may become the chairman
or co-chairman of Helicon and vice president of Anaderm. An executive officer of
the Company is vice president of Helicon. The Company has investments in
Tularik, Helicon, and NuGene and collaborative research agreements with Helicon
and Xenometrix.
(13) EMPLOYEE SAVINGS AND INVESTMENT PLAN
The Company sponsors an Employee Savings and Investment Plan under
Section 401(k) of the Internal Revenue Code. The plan allows employees to defer
from 2% to 10% of their income on a pre-tax basis through contributions into
designated investment funds. For each dollar the employee invests up to 6% of
his or her earnings, the Company will contribute an additional 50 cents into the
funds. For the years ended September 30, 1997, 1996, and 1995, the Company's
expenses related to the plan were approximately $233,000, $164,000 and $180,000,
respectively.
(14) EMPLOYEE RETIREMENT PLAN
On November 10, 1992, the Company adopted a plan which provides
postretirement medical and life insurance benefits to eligible employees, board
members and qualified dependents. Eligibility is determined based on age and
service requirements. These benefits are subject to deductibles, co-payment
provisions and other limitations.
The Company utilizes 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 post retirement medical and
life insurance benefits is accrued over the active service periods of employees
to the date they attain full eligibility for such benefits. As permitted by SFAS
No. 106, the Company elected to amortize over a 20 year period the accumulated
postretirement benefit obligation related to prior service costs.
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51
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
Net postretirement benefit cost for the years ended September 30, 1997,
1996 and 1995 includes the following components:
1997 1996 1995
-------- -------- --------
Service cost for benefits earned during the
period ........................................................ $194,900 $161,800 $107,175
Interest cost on accumulated postretirement
benefit obligation ............................................ 99,600 89,300 47,181
Amortization of unrecognized net loss .......................... 9,600 18,700 5,855
Amortization of initial benefits attributable to
past service .................................................. 17,500 17,500 17,549
-------- -------- --------
Net postretirement benefit cost ................................ $321,600 $287,300 $177,760
======== ======== ========
The accrued postretirement benefit cost at September 30, 1997 and 1996
were as follows:
1997 1996
---------- ----------
Accumulated postretirement benefit obligation-fully eligible
active plan participants.......................................... $1,672,500 $1,306,300
Unrecognized cumulative net loss................................... (460,400) (377,600)
Unrecognized transition obligation................................. (267,600) (285,200)
---------- ----------
Accrued postretirement benefit cost................................ $944,500 $643,500
========== ==========
The accumulated postretirement benefit obligation was determined using
a discount rate of 7.5 percent in 1997 and 8 percent in 1996 and a health care
cost trend rate of approximately 8 percent in 1997, decreasing down to 5 percent
in year 2000. Increasing the assumed health care cost trend rates by one
percentage point in each year and holding all other assumptions constant would
increase the accumulated postretirement benefit obligation as of September 30,
1997 by approximately $322,100 and the net postretirement benefit cost by
approximately $61,200.
(15) NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share." This Statement establishes standards
for computing and presenting earnings per share ("EPS") and applies to entities
with publicly held common stock or potential common stock. This Statement
simplifies the standards for computing earnings per share previously found in
APB Opinion No. 15, "Earnings Per Share," and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. This Statement is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods;
earlier application is not permitted. This Statement requires restatement of all
prior period EPS data presented. The adoption of this Statement will not have
any impact on the Company's EPS disclosure, as the Company's stock options and
warrants are anti-dilutive and will be excluded from the denominator of earnings
per share; thus, earnings (loss) per common share is equal to basic earnings
(loss) per share as computed under SFAS No. 128.
51
52
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" ("SFAS 130") and "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"), respectively (collectively, the
"Statements"). The Statements are effective for fiscal years beginning after
December 15, 1997. SFAS 130 establishes standards for reporting of comprehensive
income and its components in annual financial statements. SFAS 131 establishes
standards for reporting financial and descriptive information about an
enterprise's operating segments in its annual financial statements and selected
segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS 130 and SFAS 131,
respectively. Application of the Statements' disclosure requirements will have
no impact on the Company's consolidated financial position, results of
operations or earnings per share data as currently reported.
52
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
53
54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by this item is incorporated by reference to
the similarly named section of the Registrant's Proxy Statement for its 1998
Annual Meeting to be filed with the Securities and Exchange Commission not later
than 120 days after September 30, 1997 (the "1998 Proxy").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the similarly named section of the Registrant's 1998 Proxy.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the similarly named section of the Registrant's 1998 Proxy.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the similarly named section of the Registrant's 1998 Proxy.
54
55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements are
included in Part II, Item 8 of this report:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) All schedules are omitted as the required information
is inapplicable or the information is presented in
the financial statements or related notes.
(3) The exhibits listed in the Index to Exhibits on pages
58-60 hereof are attached hereto or incorporated
herein by reference and filed as a part of
this report.
(b) Reports on Form 8-K
None.
55
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
OSI PHARMACEUTICALS, INC.
By: /s/ ROBERT L. VAN NOSTRAND
--------------------------
Robert L. Van Nostrand
Chief Financial Officer
Date: January 14, 1998
56
57
INDEX TO EXHIBITS
(All exhibits have been previously filed with the original Form 10-K)
Exhibits
3.1 Certificate of Incorporation, as amended (1)
3.2 Bylaws, as amended (1)
10.1 1985 Stock Option Plan (filed as an exhibit to the Company's
registration statement on Form S-1 (file no. 33-3148) and incorporated
herein by reference)
10.2 1989 Incentive and Non-Qualified Stock Option Plan (filed as an exhibit
to the Company's registration statement on Form S-8 (file no. 33-38443)
and incorporated herein by reference)
10.3 1993 Incentive and Non-Qualified Stock Option Plan, as amended (filed
as an exhibit to the Company's registration statement on Form S-8 (file
no. 33-64713) and incorporated herein by reference)
10.4 Stock Purchase Plan for Non-Employee Directors (filed as an exhibit to
the Company's registration statement on Form S-8 (file no. 333-06861)
and incorporated herein by reference)
10.5 1995 Employee Stock Purchase Plan (filed as an exhibit to the Company's
registration statement on Form S-8 (file no. 333-06861) and
incorporated herein by reference)
10.6 1997 Incentive and Non-Qualified Stock Option Plan (filed as an exhibit
to the Company's registration statement on Form S-8 (file no.
333-39509) and incorporated herein by reference)
10.7+ Collaborative Research Agreement dated April 1, 1996 between the
Company and Pfizer Inc. (2)
10.8+ License Agreement dated April 1, 1996 between the Company and Pfizer
Inc. (2)
10.9+ Stockholders' Agreement dated April 23, 1996 among Anaderm Research
Corp., the Company, Pfizer Inc., New York University and certain
individuals (2)
10.10+ Collaborative Research Agreement dated April 23,1996 amount the
Company, Pfizer Inc. and Anaderm Research Corp. (2)
10.11 Registration Rights Agreement dated April 11, 1996 among the Company
and the former stockholders of MYCOsearch, Inc. and their designees (2)
10.12 Form of Warrants issued by the Company to the former stockholders of
MYCOsearch, Inc. and their designees covering an aggregate of 100,000
shares of common stock (2)
10.13 Employment Agreement dated April 11, 1996 between the Company and Dr.
Barry Katz (2)
10.14+ Collaborative Research Agreement dated as of December 31, 1991 between
the Company and American Home Products Corporation (3)
10.15+ Amendatory Agreement dated as of December 31, 1993 between the Company
and American Home Products Corporation (3)
10.16* Common Stock Purchase Warrant granted to Marion Merrell Dow, Inc. dated
December 11, 1992
57
58
10.17 Collaborative Agreement dated as of April 19, 1995 between the Company
and Novartis Pharma AG (4)
10.18 Letter Agreement dated as of April 19, 1995 between the Company and
Novartis Pharma AG (4)
10.19 Registration Rights Agreement dated as of April 19, 1995 between the
Company and Novartis Pharma AG (4)
10.20 Asset Purchase Agreement dated June 26, 1995 among the Company,
Calbiochem-Novabiochem International, Inc. and Calbiochem-Novabiochem
Corporation (5)
10.21 New Product License Right of First Refusal Agreement dated August 2,
1995 between the Company and Calbiochem-Novabiochem Corporation (5)
10.22 Employment Agreement dated as of February 9, 1990 between the Company
and Gary E. Frashier (6)
10.23 Form of Employment Agreement dated as of August 27, 1991, which is
substantially identical in all material respects to the Employment
Agreement dated as of April 28, 1993 between the Company and Colin
Goddard, Ph.D. (6)
10.24+ Agreement dated September 27, 1996 between the Company and Becton,
Dickinson and Company (6)
10.25+ Collaborative Research and License Agreement dated as of January 1,
1997 between the Company and Bayer Corporation (7)
10.26+ Collaborative Research, Development and Commercialization Agreement
dated as of May 1, 1996 between the Company and BioChem Pharma
(International) Inc. (7)
10.27+ EPO Collaborative Research and License Agreement dated as of January 1,
1997 between the Company and Hoechst Marion Roussel, Inc. (8)
10.28+ Collaborative Research, Development and License Agreement dated as of
February 12, 1997 by and among the Company, Sankyo Company, Ltd., and
MRC Collaborative Center (8)
10.29+ Collaborative Research, Development and Commercialization Agreement
dated as of March 7, 1997 between the Company and Sepracor, Inc. (8)
10.30+ License Agreement dated as of March 18, 1997 between the Company and
The Dow Chemical Company (8)
10.31 Amended and Restated Collaborative Research and License Agreement
effective as of April 1, 1997 by and among the Company, Hoechst Marion
Roussel, Inc. and Hoechst Aktiengesellschaft (9)
10.32*+ Stock Subscription Agreement dated as of July 17, 1997 by and between
the Company and Helicon Therapeutics, Inc.
10.33*+ License and Services Agreement dated as of July 17, 1997 by and between
the Company and Helicon Therapeutics, Inc.
10.34*+ Stockholders' Agreement dated as of July 17, 1997 by and among Helicon
Therapeutics, Inc. and certain stockholders of Helicon Therapeutics,
Inc.
10.35*+ Convertible Preferred Stock Purchase Agreement dated as of July 17,
1997 by and among Helicon Therapeutics, Inc., the Company, Hoffman-La
Roche, Inc. and Cold Spring Harbor Laboratory.
58
59
10.36*+ Collaborative Research and License Agreement effective as of July 1,
1997 by and between Hoffman-La Roche, Inc. and Helicon Therapeutics,
Inc.
21* Subsidiaries of the Company
23* Consent of KPMG Peat Marwick, LLP, independent public accountants
27* Financial Data Schedule
99* Additional Exhibits: Risk Factors
- ------------------------------------
* Filed herewith.
+ Portions of this exhibit have been redacted and are subject to a
confidential treatment request filed with the Secretary of the
Securities and Exchange Commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934, as amended.
(1) Filed as an exhibit to the Company's registration statement on Form S-3
(file no. 333-937) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's quarterly report on Form 10-Q for
the fiscal quarter ended March 31, 1996, as amended, and incorporated
herein by reference.
(3) Filed as an exhibit to the Company's quarterly report on Form 10-Q for
the fiscal quarter ended December 31, 1995, as amended, and
incorporated herein by reference.
(4) Filed as an exhibit to the Company's annual report on Form 10-K for the
fiscal year ended September 30, 1995, as amended, and incorporated
herein by reference.
(5) Filed as an exhibit to the Company's current report on Form 8-K dated
August 2, 1995 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's annual report on Form 10-K for the
fiscal year ended September 30, 1996 and incorporated herein by
reference.
(7) Filed as an exhibit to the Company's quarterly report on Form 10-Q for
the fiscal quarter ended December 31, 1996 and incorporated herein by
reference.
(8) Filed as an exhibit to the Company's quarterly report on Form 10-Q for
the fiscal quarter ended March 31, 1997 and incorporated herein by
reference.
(9) Filed as an exhibit to the Company's quarterly report on Form 10-Q for
the fiscal quarter ended June 30, 1997 and incorporated herein by
reference.
59