1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 Boulevard, Uniondale, New York 11553
(Address of principal executive offices) (Zip Code)
516-222-0023
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No___
APPLICABLE ONLY TO CORPORATE ISSUERS:
At January 31, 1998 the registrant had outstanding 21,369,283 shares of common
stock $.01 par value.
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONTENTS
Page No.
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PART I - FINANCIAL INFORMATION........................................... 3
Item 1. Financial Statements
Consolidated Balance Sheets
- December 31, 1997 and September 30, 1997...................... 3
Consolidated Statements of Operations
- Three months ended December 31, 1997 and 1996................. 5
Consolidated Statements of Cash Flows
- Three months ended December 31, 1997 and 1996................. 6
Notes to Consolidated Financial Statements...................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 12
PART II - OTHER INFORMATION.............................................. 13
Item 1. Legal Proceedings............................................... 13
Item 2. Changes in Securities........................................... 13
Item 3. Defaults Upon Senior Securities................................. 13
Item 4. Submission of Matters to a Vote of Security Holders............. 13
Item 5. Other Information............................................... 13
Item 6. Exhibits and Reports on Form 8-K................................ 13
SIGNATURES............................................................... 15
EXHIBIT INDEX............................................................ 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
Assets 1997 1997
----------- -----------
(unaudited)
Current assets:
Cash and cash equivalents $ 7,988,035 $ 8,636,634
Short-term investments 20,974,690 23,198,035
Receivables, including
trade receivables of $257,626 and
$350,100 at December 31, 1997 and
September 30, 1997, respectively 1,857,264 1,215,672
Interest receivable 351,852 475,800
Grants receivable 260,994 179,740
Prepaid expenses and other 798,894 820,151
----------- -----------
Total current assets 32,231,729 34,526,032
----------- -----------
Property, equipment and leasehold
improvements - net 7,762,339 7,752,286
Compound library assets - net 6,496,902 6,800,406
Loans to officers and employees 34,317 34,317
Other assets 1,434,352 1,287,782
Intangible assets - net 8,819,556 9,184,742
----------- -----------
$56,779,195 $59,585,565
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 3,256,159 $ 4,180,039
Current portion of unearned revenue 1,207,884 733,377
----------- -----------
Total current liabilities 4,464,043 4,913,416
----------- -----------
Other liabilities:
Loan payable 134,263 151,985
Deferred acquisition costs 640,826 630,796
Accrued postretirement benefits cost 994,796 944,500
----------- -----------
Total liabilities 6,233,928 6,640,697
----------- -----------
(continued)
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, September 30,
Liabilities and Stockholders' Equity (cont'd) 1997 1997
------------- -------------
(unaudited)
Stockholders' equity:
Common stock, $.01 par value;
50,000,000 shares authorized,
22,267,121 and 22,262,220
issued and outstanding at
December 31, 1997 and
September 30, 1997, respectively 222,671 222,622
Additional paid-in capital 104,885,283 104,864,056
Treasury stock, at cost 897,838 shares at
December 31, 1997 and
September 30, 1997 (6,284,866) (6,284,866)
Accumulated deficit (48,126,443) (45,657,713)
Cumulative translation adjustments (67,478) (101,531)
Unrealized holding loss on
short-term investments (83,900) (97,700)
------------- -------------
Total stockholders' equity 50,545,267 52,944,868
------------- -------------
Commitments and contingencies
$ 56,779,195 $ 59,585,565
============= =============
See accompanying notes to consolidated financial statements.
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
December 31,
------------------------------
1997 1996
------------ ------------
Revenues:
Collaborative program revenues,
principally from related parties $ 3,507,426 $ 1,833,182
Sales 198,766 276,710
Other research revenue 480,431 204,897
------------ ------------
4,186,623 2,314,789
------------ ------------
Expenses:
Research and development 4,881,891 3,474,333
Selling, general and administrative 1,784,263 1,768,856
Amortization of intangibles 365,186 365,185
------------ ------------
7,031,340 5,608,374
------------ ------------
Loss from operations (2,844,717) (3,293,585)
Other income (expense):
Net investment income 401,237 603,458
Other (25,250) (6,327)
------------ ------------
Net loss $ (2,468,730) $ (2,696,454)
============ ============
Weighted average number of shares
of common stock outstanding 21,366,603 22,176,112
============ ============
Basic net loss per share $ (.12) $ (.12)
============ ============
See accompanying notes to consolidated financial statements.
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
December 31,
---------------------------
1997 1996
----------- -----------
Cash flows from operating activities:
Net loss $(2,468,730) $(2,696,454)
Adjustments to reconcile net loss
to net cash used by operating activities:
Gain (loss) on sale of investments (4,764) (6,411)
Depreciation and amortization 450,243 404,804
Amortization of library assets 450,739 275,376
Amortization of intangibles 365,186 365,185
Amortization of warrants 10,030 --
Foreign exchange (gain) loss 34,053 14,309
Changes in assets and liabilities:
Receivables (641,592) (601,991)
Interest receivable 123,948 (5,870)
Grants receivable (81,254) (204,897)
Prepaid expenses and other 21,257 (37,307)
Other assets (146,570) (225,060)
Accounts payable
and accrued expenses (923,880) (664,679)
Unearned revenue 474,507 (49,227)
Accrued postretirement
benefits cost 50,296 10,896
----------- -----------
Net cash used by
operating activities $(2,286,531) $(3,421,326)
----------- -----------
Cash flows from investing activities:
Additions to short-term
investments $(2,907,127) $(2,269,650)
Maturities and sales of short-term
investments 5,149,036 5,851,675
Additions to library assets (147,235) --
Additions to property,
equipment and leasehold
improvements (460,296) (476,411)
----------- -----------
Net cash provided by investing
activities $ 1,634,378 $ 3,105,614
----------- -----------
(continued)
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
Three Months Ended
December 31,
-------------------------------
1997 1996
------------ ------------
Cash flows from financing activities:
Proceeds from exercise
of stock options and
employee stock purchase plan $ 21,276 $ 50,210
Net change in loans payable (17,722) 148,899
------------ ------------
Net cash provided by financing
activities $ 3,554 $ 199,109
------------ ------------
Net decrease in cash and cash
equivalents (648,599) (116,603)
Cash and cash equivalents at
beginning of period $ 8,636,634 $ 13,409,866
------------ ------------
Cash and cash equivalents
at end of period $ 7,988,035 $ 13,293,263
============ ============
See accompanying notes to consolidated financial statements.
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of OSI
Pharmaceuticals, Inc. and its subsidiaries (the "Company") as of December 31,
1997 and September 30, 1997, and its results of operations and cash flows for
the three months ended December 31, 1997 and 1996. Certain reclassifications
have been made to the prior period financial statements to conform them to the
current presentation.
It is recommended that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto in the
Company's 1997 Annual Report on Form 10-K.
Results for interim periods are not necessarily indicative of results for the
entire year.
(2) Net Loss Per Share
Effective December 31, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," which replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Basic loss per share is computed by dividing the
net loss by the weighted-average number of common shares outstanding during the
period. Diluted loss per share is not presented as the inclusion of potential
common shares (stock options and warrants) would be antidilutive.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
REVENUES
Revenues for the three months ended December 31, 1997 were approximately $4.2
million, an increase of $1.9 million or 81%, compared to revenues of $2.3
million for the three months ended December 31, 1996. Collaborative program
revenues increased approximately $1.7 million or 91%. This was largely 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")
to discover and develop novel pharmaceutical products to treat influenza; (3)
Bayer Corporation ("Bayer") for the continuing development of serum-based cancer
diagnostics; and (4) Anaderm Research Corp. ("Anaderm") for the commencement on
October 1, 1997, of the funded phase of the research agreement among the
Company, Anaderm and Pfizer Inc. ("Pfizer"). 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 relating to the discovery and development of
drugs for the treatment of diabetes and osteoporosis. Sales revenue,
representing primarily service revenue from the pharmaceutical division of the
Company's Aston Molecules Ltd. ("Aston") subsidiary, which the Company acquired
in September 1996, decreased approximately $78,000 or 28%. The decrease was
primarily due to the Company's decision to devote certain of Aston's resources
to internal programs as opposed to sales outside the Company. Other research
revenues, representing primarily government and other research grants, increased
approximately $276,000 or 134%. The increase was primarily related to new
government grants and to the inclusion of a Muscular Dystrophy grant from the
Association Francaise Contre Les Myopathies.
EXPENSES
The Company's operating expenses increased by approximately $1.4 million or 25%
for the three months ended December 31, 1997, compared to the three months ended
December 31, 1996. Research and development expenses increased approximately
$1.4 million or 41%. The increase was due to the expansion of the Company's
joint venture with Anaderm for the discovery and development of novel compounds
to treat baldness, wrinkles and pigmentation disorders; the new joint venture
with Sepracor, Inc. ("Sepracor") for the discovery of certain anti-infective and
anti-inflammatory agents, and the new collaborative agreement with Sankyo for
the discovery and development of novel pharmaceutical products to treat
influenza. Although the Company incurred expenses in connection with its chronic
anemia program with HMRI, these expenses generally were offset (relative to the
comparable periods in the prior fiscal year) by the elimination of expenditures
with respect to the Company's former proprietary program in this area. Also
contributing to the increase in expenses were costs associated with the
expansion of the Company's natural products discovery and medicinal
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chemistry operations at its MYCOsearch, Inc. ("MYCOsearch") and Aston
subsidiaries as well as amortization of MYCOsearch's library of fungal cultures.
The Company acquired MYCOsearch in April 1996.
OTHER INCOME AND EXPENSE
Investment income decreased approximately $202,000 or 34% for the three months
ended December 31, 1997 compared to the three months ended December 31, 1996.
The decrease relates to the decrease in the principal balance invested.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, working capital (representing primarily cash, cash
equivalents and short-term investments) aggregated approximately $27.8 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.
In connection with the formation of Helicon Therapeutics, Inc. ("Helicon") in
July 1997, the Company agreed to perform $1 million of molecular screening
services for Helicon through approximately July 1998 (and grant to Helicon a
non-exclusive license with respect to certain screening technology) in exchange
for its shares of Helicon's capital stock. Helicon is to provide research
funding to the Company for the second and third years of the initial three-year
term of this program. In addition, pursuant to its agreement with Pfizer and
Anaderm, the Company will contribute approximately $800,000 in drug discovery
resources (including assay biology, high throughput screening, lead optimization
and chemistry) to Anaderm in fiscal 1998 and, assuming Anaderm achieves certain
milestones, approximately an additional $1 million in such resources through
fiscal 1999.
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
three to 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 collaborations. In
pursuing this objective, the Company 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
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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 in July 1997 with Cold Spring Harbor Laboratory and
Hoffman-La Roche Inc., the formation of Anaderm in April 1996 with Pfizer and
New York University, and the Company's co-ventures with BioChem Pharma
(International) Inc., which commenced in May 1996, and with Sepracor, 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.
YEAR 2000 COMPLIANCE
The Company is currently working to resolve the potential impact of the Year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. The Year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define an
applicable year. Substantially all of the Company's biology and chemistry
databases are stored on Oracle tables and ISIS chemical structure databases,
which are Year 2000 compliant, as are its Novell network servers. The Company
currently plans to convert its financial records to an Oracle based system and
is in the process of implementing a new planning and budgeting package both of
which are Year 2000 compliant. Based on current information, costs of addressing
remaining potential problems are not expected to have a material adverse impact
on the Company's financial position, results of operations, or cash flows in
future periods.
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NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," and SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components. SFAS No. 131
establishes standards for reporting information about operating segments and
related disclosures about products and services, geographic areas and major
customers. SFAS No. 132 revises current disclosure requirements for employers'
pensions and other retiree benefits. These standards are effective for years
beginning after December 15, 1997. These standards expand or modify current
disclosures and, accordingly, will have no impact on the Company's reported
financial position, results of operations and cash flows.
FORWARD LOOKING STATEMENTS
A number of the matters and subject areas discussed in this report that are not
historical or factual 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. Various factors
that may cause the Company's actual future experience to differ materially from
the descriptions contained in future looking statements herein are discussed in
Exhibit 99 to the Company's annual report on Form 10-K for the fiscal year ended
September 30, 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 Certificate of Incorporation, as amended
3.2 By-Laws, as amended (1)
27 Financial Data Schedule
-------------------------------
(1) Included as an exhibit to the Company's registration
statement on Form S-3 (File No. 333-937) initially filed
on February 14, 1996, and incorporated herein by
reference.
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(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on October 6,
1997. The earliest event covered by such report occurred on
October 1, 1997. The item included on this report consisted
of:
Item 5. Other Events
Effective October 1, 1997, the Company changed its
name and Nasdaq National Market Symbol to OSI
Pharmaceuticals, Inc. and "OSIP," respectively.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OSI PHARMACEUTICALS, INC.
Date: February 13, 1998 /s/ Gary E. Frashier
--------------------------------
Gary E. Frashier
Chairman and Chief Executive Officer
Date: February 13, 1998 /s/ Robert L. Van Nostrand
--------------------------------
Robert L. Van Nostrand
Vice President and Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation, as amended
3.2 By-Laws, as amended (1)
27 Financial Data Schedule
- ----------
(1) Included as an exhibit to the Company's registration statement on
Form S-3 (File No. 333-937) initially filed on February 14, 1996,
and incorporated herein by reference.
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