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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(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, 1999
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
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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 30, 1999, the aggregate market value of the registrant's
voting stock held by non-affiliates was $88,829,908. 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
30, 1999 were excluded. Exclusion of shares held by any person should not be
construed to indicate that the person possesses the power, direct or indirect,
to direct or cause the direction of the management or policies of the
registrant, or that the person is controlled by or under common control with the
registrant.
As of November 30, 1999, there were 21,557,110 shares of the registrant's
common stock, par value $.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 2000 annual
meeting of stockholders are incorporated by reference into Part III of this Form
10-K.
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PART I
ITEM 1. BUSINESS
OSI Pharmaceuticals, Inc. (OSI or the Company) is a Pharmaceutical Research
and Development Organization (PRDO) that utilizes a comprehensive drug discovery
and development capability to rapidly and cost effectively discover and develop
novel, small-molecule drug candidates for commercialization by major
pharmaceutical companies.
OSI conducts its drug discovery and product development programs
independently and in collaboration with major pharmaceutical companies. The
Company derives revenues from funded collaborative alliances, milestone and
success payments and, upon the successful development and marketing of
out-licensed drug candidates, royalties on sales of these products. Using this
business model, OSI is able to leverage the research, development and financial
resources of its corporate partners to help build and sustain a large pipeline
of product opportunities. OSI's major corporate partners include Pfizer Inc.,
Tanabe Seiyaku Co. Ltd., Sankyo Company, Ltd., Solvay Pharmaceuticals, B.V.,
Novartis Pharma AG, and Hoechst Marion Roussel, Inc. Independently and in
collaboration with its various partners, OSI is involved in the discovery and
development of drugs for 45 targets. The Company has drug candidates in clinical
trials and pre-clinical development. These drug discovery efforts are primarily
focused in the areas of cancer, diabetes, cosmeceuticals, and G-protein coupled
receptor, or GPCR, directed drug discovery. OSI believes its research and
development capabilities together with its ongoing drug discovery and
development programs have positioned it as a leader in the field of drug
discovery and development. OSI was incorporated in 1983. Its NASDAQ stock symbol
is OSIP.
BACKGROUND
Drug discovery is an expensive and high risk process involving significant
attrition. Only about 1-in-16 research and development, or R&D, programs
actually results in a successful drug, and the process from concept to market
typically takes over a decade. On average, it costs more than $400 million in
research and development (including failures) to bring a drug from initial lead
identification to market.
During the 1990s, the rising cost of health care and changes in health care
management policies have fundamentally altered the pharmaceutical landscape,
putting increasing competitive pressure on the pharmaceutical industry. As
organizations strive to enhance market share and improve profit margins, major
pharmaceutical company mergers have occurred. These mergers are expected to
continue. These organizations face the challenge of consolidating and
efficiently managing large research and development organizations while striving
to meet aggressive new product requirements. In addition, many of the major
pharmaceutical companies are also facing the expiration of patent protection on
significant drug products in the next few years.
These new pressures have led to a growing emphasis on product pipeline
enhancement through the cost-effective discovery and development of novel
classes of pharmaceuticals that will meet large, unmet medical needs, can more
rapidly be brought to the marketplace, and have the potential to command premium
prices. This, in turn, has created an increased need for pharmaceutical
companies to look outside their organizations for new product candidates.
Advances in molecular biology, automation, and computing and the understanding
of the human genome have revolutionized the ways in which drug discovery is
conducted, creating the potential for accelerated discovery and development of
new generations of drugs. OSI believes that the deployment and integration of
these technologies in smaller and more nimble pharmaceutical research and
development organizations offers a rapid and cost effective vehicle for the
discovery and early development of high quality drug candidates to meet the
growing needs of the pharmaceutical industry.
Pharmaceutical companies have typically formed collaborations with
biotechnology companies in order to access new types of technologies in the
pursuit of novel drug development. OSI believes that the competitive pressures
described above have caused pharmaceutical companies to greatly reduce the
royalty rates they are willing to pay to biotechnology companies for
technological contributions to their own product development efforts. On the
other hand, OSI believes that these pressures are making pharmaceutical
companies more
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willing to pay premiums for high quality drug candidate products that have
already undergone optimization and have proven activity in development. OSI
believes that, as a prototypical PRDO, it is well-positioned to compete for this
emerging opportunity.
STRATEGY
OSI's mission is the discovery and early development of novel
pharmaceutical products that improve the human condition. Its strategy is to
build and sustain a pipeline of pharmaceutical product opportunities for
commercialization by the pharmaceutical industry thereby diversifying risk while
maintaining significant potential upside and fully capitalizing on the Company's
strengths in drug discovery. OSI's plan for accomplishing this goal consists of
the following elements:
Exploitation of the Full Range of Discovery and Early Development
Capabilities in Selected Disease Areas. OSI has built a fully integrated drug
discovery platform. This platform includes every major aspect of drug discovery
and development, from the identification of a validated drug discovery target to
the emergence of a clinically proven drug candidate. The integrated management
of these technologies is designed to accelerate the process of identifying and
optimizing high quality, small molecule drug candidates for clinical development
and then to progress these candidates through Phase II clinical trials.
In order to more independently progress product candidates to advanced
pre-clinical and clinical development, OSI intends to focus its own R&D
investments on a smaller number of targets in fewer disease areas to provide the
critical mass and expertise to effectively move these programs forward. OSI is
focused primarily on the areas of cancer, diabetes, cosmeceuticals and
GPCR-directed drug discovery. It believes that these areas represent large
market opportunities with significant, unmet medical needs and fully leverage
OSI's strengths and R&D assets. To further focus on its core drug discovery and
development programs, OSI recently completed the sale of its diagnostics
business in November 1999, including the assets of its wholly-owned subsidiary,
Oncogene Science Diagnostics, Inc., or OSDI, to Bayer Corporation. OSI's
decision to sell its diagnostics business was based on its belief that the
development of diagnostic products would require significant continued
investment that could otherwise be directed to the development of therapeutic
products.
Commercialization Strategy. In order for OSI to sustain its critical mass
and manage its cash resources through to the time when significant royalty and
milestone revenues are able to drive the growth and profitability of the
business, OSI has developed a three-pronged strategy. This strategy will provide
for a sustained revenue stream and allow OSI to retain sufficient ownership of
selected drug discovery and development assets to ultimately effect a
substantial return.
- Pharmaceutical partner-funded discovery programs. These fully-funded,
royalty bearing discovery alliances with major pharmaceutical partners
significantly support OSI's strategy. These collaborations provide risk
diversification and revenue streams that allow OSI to both sustain
critical mass and also anchor its discovery and development efforts in
the focused disease areas. In addition to funded research at OSI, the
collaborators provide significant R&D resources to support the
development of products in these programs and will, generally, fund and
manage clinical development, manufacturing and launch of successfully
developed drug candidates.
- Out-Licensing of Early Development Candidates. OSI intends to create a
business of selling drug candidate compounds as opposed to selling its
R&D capability. Over the next several years, however, OSI believes that
it is likely to create more opportunities at the IND-track stage than it
can progress into the clinical stage. OSI may license early drug
candidates that it chooses not to develop independently to third parties
(out-licensing), by exploring cash/milestone rich deal structures with
the intent of providing near-term revenue growth.
- Further Clinical Development of Selected Candidates. OSI intends to
develop selected candidates through clinical development. By focusing on
selected candidates, OSI expects to maximize the commercial value of the
resulting products. If successful, OSI intends to partner these products
with pharmaceutical companies prior to marketing in order to maximize
their full commercial potential.
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OSI is, and will remain, dependent on its collaborative partners and third
parties for the manufacture, marketing and sales of all pharmaceutical products.
RESEARCH AND DEVELOPMENT PROGRAMS
OSI utilizes its broad-based drug discovery capability in multiple drug
discovery programs encompassing a variety of major human diseases. OSI's major
programs in R&D are as follows:
Cancer
During the 1980s, cancer researchers developed a sophisticated
understanding of the role played by certain genes in the transformation of
normal cells into a cancerous state, and thus were able to identify novel
targets for drug intervention. As the decade of the 1990s comes to a close, this
new knowledge of the molecular basis of cancer has started to move from the
laboratory into the clinical arena, promising new hope for patients with many
types of cancers, including breast, colon, head and neck, and ovarian. In the
next decade, novel anticancer therapies are expected to be commercialized,
creating a new paradigm for cancer treatment, with the potential that cancer can
either be cured or managed safely over the long term. OSI believes that it is
positioned at the forefront of this unfolding revolution in the treatment of
cancer.
With Pfizer, OSI has focused since 1986 on the discovery and development of
novel classes of orally active, molecularly targeted, small molecule anticancer
drugs based on oncogenes and tumor suppressor genes and the fundamental
mechanisms underlying tumor growth. The first of these programs has yielded a
clinical candidate CP-358,774 which is a potent, selective and orally active
inhibitor of the epidermal growth factor receptor, or EGFR, a key oncogene in a
variety of cancers including ovarian, pancreatic, non-small cell lung, breast
and head and neck. Following a successful Phase I program which demonstrated
that the drug could be safely administered to patients over extended (6 month)
periods at doses that achieved the blood concentration of drug required for
anti-tumor activity in animal models, the Company entered large-scale,
multi-center Phase II clinical trials in the United States in the spring of
1999. The program includes trials in ovarian, head and neck and non-small cell
lung cancer. There are over a million new cases of solid tumors in the U.S.
every year, approximately 30% of which have a aberrant EGFR gene. The program is
designed to assess CP-358,774 both as a single agent and in combination with
existing chemotherapy regimens. CP-358,774 is representative of an emerging new
class of anti-cancer drugs that target the underlying molecular changes
involving oncogenes and tumor suppressor genes that play critical roles in the
conversion of normal cells into a cancerous state.
The OSI/Pfizer alliance has identified two other compounds, CP-609,754 and
CP-663,427, as orally active inhibitors of an enzyme termed farnesyl
transferase. CP-609,754 has advanced to Phase I clinical trials in the United
States and CP-663-427 is in advanced pre-clinical development. These compounds
may target the ras oncogene, an important target in many tumors including colon
and bladder. In addition, another compound, CP-547,632, is in advanced
pre-clinical development and is being developed as an orally available, potent
and selective inhibitor of a key protein tyrosine kinase receptor involved in
angiogenesis. Angiogenesis is the process of blood vessel growth and is induced
by solid tumors which require nutrients that will enable growth. OSI believes
that the ability to safely and effectively inhibit this process represents one
of the most exciting areas of cancer drug development. An additional 12 targets
are in active research and development in the OSI/Pfizer collaboration. The
types of novel anticancer drugs being developed in the OSI/Pfizer collaboration
are expected to be safer and more effective than standard chemotherapeutic
agents. OSI has also begun lead seeking activities in an OSI-funded cancer
research program.
Diabetes
Diabetes mellitus is a chronic, progressively debilitating disease
affecting more than 143 million people worldwide. Approximately 90-95% of the
people affected have Type II diabetes which usually develops in adults over age
40 and is most common among adults over age 55. The prevalence of diabetes is
likely to continue to grow as this age group continues to increase in size.
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Effective October 1, 1999, OSI entered into a fully-funded collaboration,
including milestone and success payment and royalties, with Tanabe to discover
and develop small molecule drugs for the treatment of Type II diabetes. OSI also
received an upfront fee upon initiation of this program. The Company is also
independently researching selected targets in this area. This collaboration is
built upon the comprehensive drug discovery alliance between OSI and Vanderbilt
University Diabetes Center, with which OSI has been collaborating since April,
1998. The targets of this collaboration will focus on the normalization of the
elevated plasma glucose levels seen in Type II diabetes.
Cosmeceuticals
Every year, consumers in the United States, Europe and Asia spend billions
of dollars on cosmetic products and services that promise to provide a youthful,
healthy or culturally desirable appearance. Some of these products are marketed
on the basis of ostensible pharmaceutical effects, such as the reduction of skin
wrinkles and pigmentation or the promotion of hair growth. OSI believes that
most of these products are not optimally effective and may have undesirable side
effects.
In 1996, OSI entered into a joint venture with Pfizer (the majority owner)
and New York University to form Anaderm Research Corporation, a company
dedicated to the application of modern tools for the discovery and development
of safe, effective, pharmacologically active agents for certain cosmetic and
quality-of-life indications, such as skin pigmentation, hair loss and skin
wrinkling. Pfizer recently financed an extensive renewal and expansion of the
Anaderm venture effective April, 1999. Under this new agreement, Anaderm will
provide up to $50 million in R&D funding to OSI over the next four to six years.
OSI will remain the sole drug discovery arm of Anaderm during this period
providing discovery biology, medicinal chemistry and pharmaceutical development
resources.
GPCR -- Directed Drug Discovery
In August, 1999, OSI purchased certain assets of Cadus Pharmaceuticals
Corporation. In this acquisition, OSI acquired Cadus' drug discovery programs
focused on G-protein coupled receptors or GPCRs. These receptors are one of the
most important families of targets for drug discovery in the pharmaceutical
industry. Approximately, forty percent of the currently marketed pharmaceutical
products target GPCRs. The acquired programs include Cadus' discovery program in
adenosine receptors, an important family of GPCR's. These programs will form the
core of OSI-owned and funded candidate development programs in the coming year.
The improved understanding of the physiology, pharmacology and molecular
biology of adenosine and adenosine receptors in recent years has provided a
solid foundation for active research and development in this field. Currently,
four adenosine receptor subtypes, A(1), A(2A), A(2B) and A(3), have been
characterized and R&D efforts have led to high quality proprietary lead
compounds for each.
Several adenosine receptor compounds are under development by OSI.
Promising adenosine A(1) and adenosine A(2B) receptor targeted compounds will
undergo evaluation as candidates for asthma, with the dual goals of identifying
an IND-track candidate against both targets and simultaneously assessing and
executing the best commercialization strategy. The A(1) compound is targeted for
the treatment of the bronchoconstriction associated with the acute phase of an
asthma attack while the A(2B) compound is directed toward blocking the
inflammatory components produced by mast cells and associated with the longer
term damage caused by the disease. OSI also has potent and selective A(2A)
targeted compounds that have potential for development as both anti-angiogenesis
agents and for the treatment of Parkinson's disease. Additionally, OSI has a
selective adenosine A(3) targeted compound that is undergoing extensive
evaluation in animal models for glaucoma. The targets of Parkinson's disease and
glaucoma are examples of programs outside OSI's disease area focus and may be
out-licensed or earlier partnered in the development process.
In addition, an A(1) targeted compound, CDS-096370, has potential for use
in the treatment of congestive heart failure and renal failure. This candidate
has been licensed to Solvay for advanced pre-clinical and clinical development.
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Cholesterol Lowering
As part of OSI's long-term alliance with Hoechst Marion Roussel, or HMRI,
in gene transcription drug discovery, the parties have focused on cholesterol
lowering. The cholesterol lowering market is dominated by a class of drugs
including Lipitor and Zocor which target a key enzyme involved in the body's
metabolism of fats and cholesterol (HMG-CoA reductose inhibitors), which sell,
in total, over $12 billion a year worldwide. Three to five percent of patients
on these drugs have an elevation of certain liver enzymes which indicates some
low level of liver damage as a side effect. The OSI/HMRI program was designed to
target a new class of compounds that would avoid these complications. A compound
is in advanced pre-clinical development that operates through a novel mechanism.
This compound enhances the expression of the Low Density Lipoprotein Receptor
(LDLR), the principal mechanism by which liver cells bind LDL-cholesterol
(so-called bad cholesterol) for clearance by the body. In pre-clinical models,
this candidate is very efficacious in lowering LDL-cholesterol and are
apparently well tolerated in pre-clinical safety studies.
Psoriasis
During the last year, OSI executed an in-license agreement with Pfizer that
enabled OSI to take advantage of the extensive joint technology for
protein-tyrosine kinases that exist in the OSI/Pfizer cancer alliance and to
apply this to the treatment of mild-to-moderate psoriasis. Mild-to-moderate
psoriasis is an autoimmune disease affecting 3-6 million Americans. The disease
manifests itself in the form of scaly, thickened and reddened skin lesions.
These lesions arise as a result of hyper-proliferation of the skin and local
angiogenesis. OSI licensed a family of compounds from Pfizer that are
co-inhibitors of both EGFR, which is a key regulator of skin cell growth, and
vascular endothelial growth factor receptor, or VEGFR, which is the key mediator
of angiogenesis. OSI is currently attempting to identify a candidate for
development of a topically applied formulation for this indication. As part of
the license agreement, Pfizer has an option to recover full development and
marketing rights for this program past Phase II trials. If Pfizer executes its
option, it will reimburse OSI's clinical development costs, and pay milestone
and royalty payments on successful product development and marketing.
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The progress of these and other drug candidates as of December 1, 1999 is
summarized in the following table:
TABLE I. CURRENT PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS
This table is qualified in its entirety by reference to the more detailed
descriptions elsewhere in this report.
DISEASE FIELD DESCRIPTION
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CANCER OSI/PFIZER FUNDED COLLABORATION WITH ROYALTIES: CLINICAL
CANDIDATES/TARGETS:
- CP 358,774 -- EGFR -- Phase II
- CP 609,754 -- Farnesylation -- Phase I
ADVANCED PRE-CLINICAL CANDIDATES/TARGETS:
- CP 663,427 -- Farnesylation -- IND Track
- CP 547,632 -- Angiogenesis -- IND Track
PRE-CLINICAL:
- 4 targets in Lead Optimization
- 8 targets in Lead Seeking
OSI OWNED:
- 1 target in Lead Seeking
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DIABETES & OBESITY OSI/TANABE FUNDED COLLABORATION WITH MILESTONES & ROYALTIES:
- 4 targets in Lead Seeking
OSI OWNED:
- 1 target in Lead Seeking
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COSMECEUTICALS OSI/PFIZER/ANADERM FUNDED COLLABORATION WITH ROYALTIES:
- 1 target in IND track
- 2 targets in Lead Optimization
- 3 targets in Lead Seeking
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GPCR DIRECTED OSI OWNED:
(ADENOSINE RECEPTORS): - 1 target in IND track
- Heart Disease - 3 targets in Lead Optimization
- Asthma/Inflammation
- Glaucoma OSI/SOLVAY FUNDED COLLABORATION WITH MILESTONES & ROYALTIES:
- Parkinson's Disease - 1 target in IND track (licensed to Solvay with milestones
& royalties)
- multiple targets in Lead Seeking
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HYPERCHOLESTEROLEMIA/ OSI/HMRI FUNDED COLLABORATION WITH ROYALTIES:
TRANSCRIPTION - 1 candidate on IND track
- 2 targets in Lead Optimization
- 4 targets in Lead Seeking
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PSORIASIS OSI OWNED WITH PFIZER OPTION:
- 1 target in Lead Optimization
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WOUND HEALING (TGF SS-3): OSI OWNED:
- Anti-Scarring CLINICAL:
- Bone & Cartilage Repair - 1 target at the end of Phase I
OSI/NOVARTIS FUNDED COLLABORATION WITH MILESTONES &
ROYALTIES:
- 1 candidate on IND track
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INFLUENZA OSI/SANKYO FUNDED COLLABORATION WITH MILESTONES & ROYALTIES:
- 2 targets in Lead Optimization
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OSI'S DRUG DISCOVERY PLATFORM
OSI's drug discovery platform constitutes an integrated set of technologies
and capabilities covering every aspect of pre-clinical drug development. The
drug discovery approach pursued by OSI is focused on the discovery and
development of small molecule pharmaceutical products which, typically, would be
taken orally by a patient as a pill, capsule or suspension. The process begins
with a lead seeking phase. In this phase, which can take up to two years, a
combination of modern molecular biology, robotics and computational science is
used to build "assay" or test systems in which large libraries of diverse small
molecules and natural products are tested to see if any possess activity against
a drug target. Drug targets are usually genes or gene products that are shown to
be relevant to various disease states. After this initial testing, active
compounds are tested in a variety of secondary assays designed to determine
their potency and selectivity and to obtain early information on their toxicity
and mechanism of action. Active compounds surviving this selection process are
considered leads and progressed into lead optimization. During lead
optimization, which can also take up to two years, medicinal chemists synthesize
new molecules and combinatorial libraries which are structurally related to the
lead compound. These are tested extensively in order to produce a drug candidate
which has greatly improved drug like qualities, is active and well tolerated in
animal models and can be patented as a novel pharmaceutical. Having identified a
suitable drug candidate the molecule is advanced toward clinical trials, the
so-called "IND-track" phase, in which toxicological, scale-up synthesis and
clinical trial design issues are addressed. This phase usually takes one to one
and one-half years. Upon entering clinical trials (usually with an
Investigational New Drug (IND) approval from the Food and Drug Administration,
or FDA) a drug is first assessed for its safety, usually in healthy volunteers
(except for life-threatening diseases such as cancer where patient volunteers
are used). After these Phase I trials, drugs are tested in efficacy studies
(Phase II) to demonstrate activity in humans prior to extensive Phase III trials
designed to collect the data necessary to support a New Drug Application (NDA)
filing with the FDA. The entire process typically takes over a decade and is
subject to significant risk and attrition. Only approximately 1 in 16 drug
discovery projects results in a successful product and approximately seven
million compounds are tested for every successful product. The Company, has,
therefore, adopted a research strategy that manages a portfolio of product
opportunities and has integrated a platform of technologies designed to rapidly
and cost-effectively enhance the overall process.
OSI's platform includes a variety of cell-free and live-cell assays,
molecular biology capabilities, high throughput robotic screening, diverse
compound libraries and combinatorial, medicinal and natural products chemistry
capabilities, together with significant pre-clinical expertise in pharmaceutics,
and pharmacokinetics. OSI's technologies are designed to accelerate the process
of identifying and optimizing high quality, small molecule drug candidates for
clinical development. OSI pioneered the development of (i) genetically
engineered live-cell assays targeting gene transcription and (ii) robotic high
throughput screening. OSI has, through acquisition and internal technology
development, added extensively to these core capabilities including, via its
Cadus asset acquisition, significant expertise in GPCR discovery and information
technology tools to support research and development. The addition of large
diverse libraries of small molecules and a broadened expertise in assay biology
and medicinal, combinatorial and pharmaceutical chemistry capabilities have
created a comprehensive drug discovery platform enabling OSI to progress leads
all the way through the discovery and pre-clinical development stages. OSI's
drug discovery platform is widely applicable to the identification and
optimization of small molecule drug candidates to treat many different diseases.
Utilizing this platform, OSI has been able to identify and optimize lead
compounds that are potent and selective, possess minimal or no cellular
toxicity, have activity in live-cells and animal models, and have progressed to
clinical trials in humans.
Assay Biology
OSI specializes in the development of a variety of drug screens that
capitalize on recent advances in understanding the human genome and its
correlation to disease. Various assay biology techniques are used to target
selected and validated gene products for drug discovery. The Company pioneered
the use of 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
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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 OSI
to discover compounds that exert their effects on signal transduction proteins,
transcription factors and other sites. This technology has resulted in the
issuance of five patents in its gene transcription patent estate. These patents
cover methods of modulating transcription in-vivo, the use of reporter genes in
many cell-based transcription assays used for drug discovery and the modulation
of genes associated with cardiovascular disease. OSI anticipates that future
issuances will further broaden its patent estate in this area. This technology
has been widely adopted in the biotechnology and pharmaceutical industry, and
OSI believes that the claims covered by this patent estate can be licensed for
certain monetary and technology considerations. Over the last several years OSI
broadened its assay expertise extensively. Currently, OSI 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. OSI believes that this breadth of expertise enables
it to select the most appropriate assay with which to pursue drug discovery
against a novel biological target. OSI has 74 scientists involved in assay
biology as support for both drug discovery and development programs.
High Throughput Robotic Screening
OSI has been a pioneer and remains a leader in high throughput screening.
The Company has developed software and automation that enables it to manage
large compound libraries and prepare test substances for screening. OSI has
developed proprietary hardware and software systems to automate the entire drug
screening process, from the addition of the test substances to assay systems to
the analysis of the data generated from the tests. The technology has been
developed to accommodate a high degree of flexibility allowing the Company to
conduct a wide variety of assay formats in screening. In its proprietary robotic
screening facility, OSI can analyze up to 300,000 different test samples each
week, depending on the complexity of the assays. OSI'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, small molecule compounds is a key
asset in OSI's drug discovery efforts. Leads discovered from these libraries
become the proprietary starting materials from which drugs are optimized. OSI
manages over 1.5 million compounds in its compound libraries facility from its
own and several of its partners' compound libraries for high throughput
screening. OSI's proprietary libraries include its focused libraries of small
molecule compounds derived from its high-speed combinatorial analoging,
libraries of diverse, high quality small-molecule compounds that it has acquired
and its natural products library derived from its unique collection of over
70,000 fungal organisms. As part of the acquisition of assets from Cadus in
July, 1999, OSI obtained a library of 150,000 diverse, high quality small
molecule compounds directed toward GPCR discovery. In March, 1997, OSI acquired
from the Dow Chemical an exclusive worldwide license to a library of 140,000
compounds for the purposes of discovery and development of small molecular
weight pharmaceuticals and cosmeceuticals. In addition, certain collaborative
partners have made their compound libraries available for additional research
and development by OSI outside of their existing collaborative programs. For any
compound from OSI'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
OSI to commercialize the compound independently or with a third party in
exchange for royalty payments from OSI on product sales. OSI also continues to
expand its libraries through OSI high speed combinatorial analoging activities.
OSI employs approximately 20 scientists and research associates in its combined
screening and library management operations.
Chemistry and Lead Optimization
The pharmaceutical properties of a lead compound must be optimized before
clinical development of that compound begins. In 1996 OSI acquired Aston
Molecules Ltd., a private British company with expertise in medicinal and
combinatorial chemistry and pharmaceutical development, which are critical
elements in the lead optimization and development process. With subsequent
investments in combinatorial chemistry, an
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expansion of the Aston facility and the addition of the Cadus chemistry team in
Tarrytown, New York, this group has grown to a high quality medicinal chemistry
team of over 35 medicinal, combinatorial, computational and natural product
chemists. The group has integrated various computational techniques for
molecular modeling and diversity analysis into its lead optimization and
development activities to further enhance the speed and quality of drug
discovery at OSI.
Pre-Clinical Development
The Aston group has expertise in pharmacokinetics and pharmaceutical
chemistry and the management and generation of good laboratory practices, or
GLP, accredited data required for regulatory dossier submissions to agencies
such as the FDA. Thus, OSI is able to support the development of a drug
candidate for clinical testing. OSI has invested significant resources in
expanding this capability and in technological enhancements in this area. In
addition, OSI is implementing approaches that allow it to generate information
on the metabolic liability of lead compounds together with their physical and
chemical properties. OSI 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.
Through the Cadus asset acquisition and quality hires, OSI has added to its
depth in expanding its pre-clinical development capabilities. These include the
characterization of lead compounds with respect to pharmacokinetics, potency,
efficiency and selectivity. This combined group manages the necessary studies,
including toxicology, that ultimately lead to IND applications and clinical
trials.
OSI believes that its drug discovery and lead optimization capabilities
will continue to generate high quality pre-clinical candidates. Additionally,
OSI will seek quality pre-clinical candidates to license-in for further
development. OSI has over 24 pharmaceutical chemists and pharmacologists
employed in this area.
MAJOR COLLABORATIVE PROGRAMS
OSI pursues collaborations with pharmaceutical companies to combine its
drug discovery and development capabilities with the collaborators' development
and financial resources. The collaborations provide for OSI's partners to fund
its collaborative research and development programs which are jointly managed
and pay for clinical development, manufacturing, marketing and launch costs for
any product developed. OSI receives royalties, generally in the five to eight
percent range, on sales of any resulting products. Certain collaborative
programs involve milestone payments by the partners. The collaborative partners
generally retain manufacturing and marketing rights worldwide. Generally, each
collaborative research agreement prohibits OSI from pursuing with any third
party drug discovery research relating to the drug targets being covered by
research under the collaboration, but do not block research activity in the
fields.
Pfizer Inc.
In April, 1986, Pfizer and OSI entered into a collaborative research
agreement and several other related agreements. During the first five years of
the collaboration, OSI and Pfizer focused principally on understanding the
molecular biology of oncogenes. In 1991, Pfizer and OSI 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 and fundamental mechanisms underlying tumor growth. 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. Tumor induced
angiogenesis is a process whereby solid tumors develop the blood supply
necessary to sustain tumor growth. Effective April 1, 1996, OSI and Pfizer
renewed their collaboration for a new five-year term by entering into new
collaborative research and license agreements. All patent rights and patentable
inventions derived from the research under this collaboration are owned jointly
by OSI and Pfizer. OSI has granted Pfizer an exclusive, worldwide license to
make, use, and sell the therapeutic products resulting from
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this collaboration in exchange for royalty payments. This license terminates on
the date of the last to expire of OSI's relevant patent rights.
Pfizer is responsible for the clinical development, regulatory approval,
manufacturing and marketing of any products derived from the collaborative
research program. Generally, OSI and Pfizer are prohibited during the term of
the contract from independently pursuing or sponsoring research aimed at the
compounds or products against specific targets in the program. The collaborative
research agreement will expire on April 1, 2001. It may be terminated earlier by
either party only 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 OSI. Under this
collaborative research agreement, Pfizer has committed to provide research
funding to OSI 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 OSI, 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.
Effective as of April 1, 1999, OSI entered into a Development Agreement
with Pfizer for the development of certain compounds derived from the
collaborative research agreement described above for the treatment of psoriasis.
Under the development agreement, OSI will conduct a development program which
includes pre-clinical and clinical research and development through and
including Phase II clinical trials for compounds to assess their safety and
efficacy to be developed as therapeutic agents for the treatment of psoriasis
and other related dermal pathologies. Pursuant to the terms of the development
agreement, Pfizer has granted to OSI an exclusive, with the exception of Pfizer,
license to make and use the compounds for all research and development purposes
in the development program other than the sale or manufacture for sale of
products or processes. At the end of the development program, Pfizer must notify
OSI of its intention to continue development and commercialization of a compound
within three months following receipt of the data package from the clinical
studies. If Pfizer notifies OSI of such intention, it will have an exclusive,
world-wide license, with the right to grant sublicenses, to make, use, sell,
offer for sale and import products developed in the course of the development
program subject to the reimbursement of clinical development costs. If Pfizer
fails to notify OSI of such intention, OSI will receive an exclusive,
world-wide, royalty-bearing license, including the right to grant sublicenses,
to manufacture, use, sell, offer for sale and import products developed in the
course of the development program. OSI, however, has the right to refuse to
accept this license. The party receiving the license must pay milestone and
royalty payments as consideration therefor. The duration of the licenses is
coextensive with the lives of patents related to the licensed compounds. Each of
the parties has rights and obligations to prosecute and maintain patent rights
related to specified areas of the research under the development agreement. The
development agreement is subject to early termination in the event of certain
defaults by the parties.
From 1986 to September 30, 1999, Pfizer paid an aggregate amount of $44.1
million to OSI in research funding. In 1986, Pfizer purchased 587,500 shares of
OSI's common stock, which constitutes approximately 2.7% of OSI's outstanding
common stock, for an aggregate purchase price of $3,525,000.
Anaderm Research Corporation
On April 23, 1996, in connection with the formation of Anaderm, OSI entered
into a Stockholders' Agreement with Pfizer, Anaderm, NYU and certain NYU faculty
members, and a Collaborative Research Agreement with Pfizer and Anaderm for the
discovery and development of novel compounds to treat conditions such as
baldness, wrinkles and pigmentation disorders. Anaderm issued common stock to
Pfizer and OSI and options to purchase common stock to NYU and the faculty
members. NYU and the faculty members exercised their options fully. In exchange
for its 14% of the outstanding shares of Anaderm's common stock, OSI 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 research agreement was three years. During the initial
phase of the agreement (the first 18 months), OSI was required to provide at its
own cost formatting for high throughput screens and perform
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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 as of October 1, 1997. During this phase,
Anaderm made payments to OSI equal to its research costs, including overhead,
plus 10%. Anaderm or Pfizer will pay royalties to OSI on the sales of products
resulting from this collaboration.
In December, 1997, OSI and Pfizer entered into an agreement for a second
round of equity financing for Anaderm. The agreement called for an equity
contribution of $14 million by OSI and Pfizer, of which OSI was to contribute $2
million in drug discovery resources, including assay biology, high throughput
screening, lead optimization and chemistry, through 1999. The amount to be
contributed by Pfizer included amounts which were to be used to support OSI in
its ongoing drug discovery activities under this program.
In April, 1999, OSI, Pfizer and Anaderm amended the research agreement to
expand the collaborative program. The new research agreement is for a term of
three years. Pfizer may terminate the new research agreement, however, after the
first or second year of the term in its sole discretion after consultation with
Anaderm and OSI to determine whether satisfactory progress has been made in the
research program during the previous year. The new research agreement provides
for funding by Pfizer of up to $35 million in total payments to Anaderm to fund
OSI's research and development activities during the three-year term and up to
$15 million in phase-down funding following expiration of the three-year term or
earlier termination by Pfizer. In the expanded program, OSI will continue to
provide a full range of capabilities including assay biology, high throughput
screening, compound libraries, combinatorial, medicinal, and natural product
chemistry, as well as pharmaceutics, pharmacokinetics and molecular biology. OSI
anticipates a significant increase in its staffing of the program to conduct its
drug discovery efforts during the term of the new research agreement. Anaderm or
Pfizer will pay royalties to OSI on the sales of products resulting from the
collaboration.
In April, 1999, the parties also amended the stockholders' agreement. The
amendment provided for the addition of a right on the part of each of OSI, NYU
and each of the faculty members, exercisable at any time prior to December 31,
1999, to require Anaderm or Pfizer to purchase all, but not less than all, of
the shares of common stock of Anaderm held by each such stockholder for a fixed
price. The stockholders continue to have the right, exercisable at any time
subsequent to April 23, 2000, to require Anaderm or Pfizer to purchase all, but
not less than all, of the shares of common stock of Anaderm held by each such
stockholder at a defined value. In addition, Anaderm or Pfizer had the right,
exercisable at any time subsequent to April 23, 2002, to require OSI, NYU or any
faculty member to sell to Anaderm all, but not less than all, of the shares of
common stock of Anaderm held by such stockholder at a defined value of such
shares. In the prior stockholders' agreement, this call right was exercisable by
Anaderm only with respect to the shares owned by NYU and the faculty members. On
September 23, 1999, by letter to Pfizer, OSI exercised its right to require
Anaderm or Pfizer to purchase all of the shares of common stock of Anaderm held
by it. On November 10, 1999, Pfizer purchased such shares from OSI for an agreed
upon purchase price and OSI's obligations under the stockholder agreement
terminated.
Tanabe Seiyaku Co., Ltd.
Effective as of October 1, 1999, OSI entered into a Collaborative Research
and License Agreement with Tanabe. The collaboration is focused on discovering
and developing novel pharmaceutical products to treat diabetes.
Under the agreement, OSI is responsible for identification of targets
(subject to Tanabe's approval), assay development, screening of compounds from
OSI's library and Tanabe's library against identified targets, identification of
seed compounds meeting certain criteria specified in the agreement, optimization
of such seed compounds, and identification of lead compounds meeting certain
criteria specified in the agreement. Tanabe maintains responsibility for further
development and marketing of a lead compound in exchange for milestone and
royalty payments to OSI.
If Tanabe determines to initiate further development of lead compounds
identified by OSI, OSI will grant to Tanabe exclusive, worldwide licenses to,
among other things, use, manufacture and sell all products containing such lead
compounds directed to the identified targets. In exchange for these licenses,
Tanabe will
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pay OSI 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 or ten years from the first commercial sale, whichever is longer. If
Tanabe determines not to initiate further development of a lead compound or if
Tanabe discontinues development of candidate compounds, OSI will have the sole
and exclusive right to develop, use, manufacture and sell all products resulting
from the collaboration, and it will pay royalties to Tanabe. Each of the parties
has rights and obligations to prosecute and maintain patent rights related to
specified areas of the research and development under the agreement.
Generally, OSI is prohibited during the term of the contract from pursuing
independently or having sponsored or sponsoring research and development of
compounds and products in the diabetes area relating to the identified targets
in the agreement. Tanabe is prohibited from sponsoring research relating to the
identified targets and from being sponsored by another pharmaceutical company
with respect to research relating to the identified targets. The agreement is
for a term of four years, with the option to extend for an additional two year
period. Tanabe, however, has the right to terminate the agreement after two
years under certain circumstances. On the effective date of the agreement,
Tanabe was required to pay OSI a technology access fee of $3.5 million. Such
payment was advanced on September 28, 1999. Tanabe has committed to provide
research funding to OSI in an aggregate amount up to approximately $16 million.
Vanderbilt University
Effective as of April 28, 1998, OSI entered into a Collaborative Research,
Option and Alliance Agreement with Vanderbilt University to conduct a
collaborative research program and seek a corporate partner to fund a technology
collaboration for the discovery and development of drugs to treat diabetes. The
collaborative research was funded by OSI in exchange for which OSI received an
option to negotiate a commercially reasonable, worldwide, exclusive license from
Vanderbilt to develop, make, use, and sell products derived from the research
program. OSI and Vanderbilt committed equal resources to the program, including,
among other things, access to all their respective laboratory facilities and
dedicated teams of research scientists. OSI had certain rights and obligations
to prosecute and maintain patent rights related to specified areas of the
research under the agreement. The agreement was for a term of one year, and was
extended until the execution of a third-party research collaboration agreement
by OSI -- i.e., the agreement with Tanabe.
Concurrently with the execution of the Tanabe Agreement, OSI and Tanabe
entered into an Amended and Restated Collaborative Research, License and
Alliance Agreement with Vanderbilt with an effective date of August 31, 1999.
This agreement amends and restates the agreement from April, 1998 to add Tanabe
as a party to the agreement with respect to certain sections and to amend
certain other provisions to clarify Vanderbilt's role in the OSI/Tanabe research
program. The term of the research program conducted by OSI and Vanderbilt
commenced on April 28, 1998 and will end upon termination of the contract period
under the Tanabe Agreement unless mutually extended by OSI and Vanderbilt.
The OSI/Vanderbilt research program is comprised of two parts: research
directed toward the targets identified in the Tanabe Agreement and research
directed toward additional targets which are not targets under the Tanabe
Agreement. OSI may offer to Tanabe any of the additional targets for inclusion
in the OSI/ Tanabe research program. As part of the OSI/Vanderbilt research
program, Vanderbilt will assist OSI in fulfilling its obligations under the
Tanabe/OSI research program by providing access to Vanderbilt's drug discovery
resources, including laboratories and assays.
OSI will provide funding to Vanderbilt to conduct the OSI/Vanderbilt
research program. A portion of such funding will come from Tanabe's funding of
the OSI/Tanabe research program. OSI will also pay to Vanderbilt a percentage of
the revenues (milestone and royalty payments) it receives from Tanabe and any
other third party which is commercializing products resulting from the
OSI/Vanderbilt research program. The percentage received by Vanderbilt will vary
in accordance with the extent to which Vanderbilt technology and patents
contributed to the product giving rise to such revenue. OSI also paid Vanderbilt
a one-time success fee of $500,000 in October, 1999 in respect of OSI entering
into the Tanabe Agreement.
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Sankyo Company, Ltd.
Effective as of February 12, 1997, OSI entered into a Collaborative
Research and License Agreement with Sankyo to be conducted in partnership with
MRC Collaborative Center, London, U.K. The collaboration is focused on
discovering and developing novel pharmaceutical products to treat influenza.
OSI 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 OSI.
OSI 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 OSI 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, OSI 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, OSI, Sankyo and MRC CC are prohibited during the term of the
agreement 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 OSI,
Sankyo and MRC CC. The agreement is subject to early termination in the event of
certain defaults by the parties. In November, 1999, OSI and Sankyo renewed the
collaboration for an additional two years.
Hoechst Marion Roussel, Inc. (HMRI)
Pursuant to the Amended Collaborative Research and License Agreement
effective April 1, 1997, OSI and HMRI are conducting joint research and
development activities, which focus specifically on OSI's expertise in live-cell
assay technology. OSI conducts the lead seeking (screening) phase of the drug
discovery process against a variety of targets in various disease areas. HMRI is
responsible for all lead optimization and development activities. OSI has
identified several compounds, which HMRI is optimizing for further development.
The most advanced of these compounds are in lead optimization for individual
targets in atherosclerosis and arthritis.
Under this collaboration, OSI is responsible for achieving objectives
outlined in the annual research plans. HMRI is responsible for assisting OSI in
the pursuit of such objectives, including advancing the pharmacological
assessment of compounds identified by OSI, 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 OSI's discovery
efforts. As of September 30, 1999, OSI had recognized an aggregate of $22.8
million in research funding from HMRI and its predecessors.
OSI has granted to HMRI an exclusive, worldwide license (and rights to
acquire additional licenses) with respect to, among other things, the use,
manufacture and sale of products resulting from OSI's lead seeking efforts
against these individual drug targets. In exchange for these licenses, HMRI will
pay royalties to OSI on sales of such products. OSI and HMRI have mutually
exclusive rights and obligations to prosecute and maintain certain patent rights
related to various specified areas of the research.
Generally, OSI 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 agreement may be terminated early by either party upon the
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occurrence of certain defaults by the other party. Any termination by OSI
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 OSI. As of September 30, 1999 HMRI held
1,590,909 shares of common stock of OSI. This included a warrant to purchase
500,000 shares of OSI's common stock for $5.50 per share which expired on
December 10, 1999.
Effective as of January 1, 1997, OSI 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 identified active lead compounds that were advanced
to a pre-clinical development stage. This research effort, however, did not
achieve sufficient data to warrant further development. Consequently, in October
1998, this program was terminated.
Solvay Pharmaceuticals, B.V.
With the acquisition of the assets of Cadus, OSI purchased a Collaborative
Research and License Agreement effective as of November 1, 1995 which Cadus had
with Solvay. The collaboration is directed toward GPCR drug discovery in
differing fields of use. OSI's fields of use include cancer, asthma and
inflammatory diseases. Solvay's fields of use include cardiovascular, central
nervous system disorders and gastrointestinal diseases.
Under the agreement, the parties are to develop and manufacture screens
that incorporate targets which are the subject of the agreement. The screens are
to enable Solvay and OSI to test compounds for biological activity as part of
their respective drug discovery efforts in their respective fields. The parties
are responsible for the identification of targets and OSI undertakes assay
development using funds from Solvay. In exchange for milestone and royalty
payments, Solvay maintains sole responsibility for pre-clinical and clinical
development as well as marketing and commercialization of any lead compound it
discovers from its use of the screens developed as part of the collaboration.
Under the agreement, Cadus granted to Solvay a worldwide license in
Solvay's fields of use to, among other things, use and practice the screens to
identify and confirm potential human therapeutics. The license is exclusive for
the term of the research program, or longer if Solvay has identified or
confirmed a potential product during the exclusive period, and non-exclusive for
five years following the research program. In exchange for these licenses,
Solvay will pay OSI, as Cadus' successor, license fees and royalties on product
sales. If Solvay discontinues the development of candidate compounds, OSI, as
Cadus' successor, will have the sole and exclusive right to develop, use,
manufacture and sell all products resulting from the collaboration, and OSI will
pay milestones and royalties to Solvay. Each of the parties has rights and
obligations to prosecute and maintain patent rights related to specified areas
of the research under the agreement. The term of the research program is until
December 31, 2000.
Novartis Pharma AG
OSI entered into an agreement with Novartis in April 1995 for the
development of TGF-Beta 3 for various indications. TGF-Beta 3 is a naturally
occurring human growth factor, first isolated by OSI, that exerts either
stimulatory or inhibitory effects depending upon the particular cell type to
which it is applied. This agreement granted to Novartis an exclusive, worldwide
license to use and sell TGF-Beta 3 products for wound healing and oral
mucositis, as well as certain other indications, in exchange for royalty
payments to OSI on the sale of TGF-Beta 3 products. During 1998, Phase II
clinical trials being conducted by Novartis for both wound healing and oral
mucositis failed to achieve their primary clinical end points. Consequently, no
further clinical development of TGF-Beta 3 by Novartis for either wound healing
or oral mucositis has been anticipated.
On May 31, 1999, the parties amended their agreement. The parties changed
certain terms of the agreement including the definition of licensed indications,
the supply of TGF-Betas, the amount of royalty payments, and the schedules of
OSI's patents and applications and Novartis' patents. Specifically, oral
mucositis and the healing of soft wound tissue were removed from the licensed
indications. Novartis
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acknowledged in the amendment that it has discontinued development of products
for the indications of oral mucositis and healing of soft wound tissue. The
parties agreed that all licenses which were granted to Novartis with respect to
the discontinued indications are terminated and that OSI is free to continue
development work and to grant licenses to third parties with respect to the
discontinued indications. OSI is also free to use the results of any development
work with respect to the discontinued indications carried out by Novartis prior
to the date of the amendment provided that OSI pays to Novartis royalties and/or
certain other agreed-upon amounts with respect to sales of products resulting
from any continued development work by OSI or its licensee. Under the amendment,
the new licensed indications are bone, cartilage and tendon repair. Novartis'
option was changed in the amendment from an option to include in the definition
of licensed indications all indications not already included to (a) an exclusive
option to include in licensed indications the treatment of transplant patients
(e.g., graft protection), the treatment of ischemia (e.g., angina pectoris and
peripheral vascular disease), the treatment of stroke patients, and the
treatment of inflammatory bowel disease, and (b) a non-exclusive option to
include any other additional indications relating to TGF-Betas (other than the
discontinued indications). The payment terms for the option were also amended
and the time period to exercise the option was extended until May 31, 2003.
Helicon Therapeutics, Inc.
In July 1997, OSI, Cold Spring Harbor Laboratory and Hoffman-La Roche Inc.
formed Helicon, a new Delaware corporation. In exchange for approximately 30% of
Helicon's outstanding capital stock, OSI contributed to Helicon molecular
screening services and a nonexclusive license with respect to certain screening
technology. 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.
Hoffman-La Roche contributed cash for a portion of Helicon's outstanding capital
stock.
The parties entered into various collaborative research and license
agreements pursuant to which they were to 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 was three years, commencing as of July 1, 1997. As
of July 1, 1999, Hoffman-La Roche terminated its participation in the program,
the terms of which termination are currently being negotiated. Helicon received
funding from Hoffman-La Roche for the first two years of the program. OSI may
provide to Helicon OSI personnel to conduct screening and services and a license
to use OSI's compound library for research purposes. OSI is currently
contributing funds to Helicon on an as-needed basis in amounts tied to the costs
of conducting research activities.
BioChem Pharma, Inc.
Pursuant to an agreement, dated March 19, 1999, OSI and BioChem (formerly
BioChem Pharma (International) Inc.) amended their Collaborative Research,
Development and Commercialization Agreement, effective as of May 1, 1996,
terminating certain provisions contained therein, including, without limitation,
provisions establishing the research program. Under the agreement, OSI granted
BioChem a worldwide, irrevocable, exclusive license, and right to grant
sublicenses, in a certain anti-viral target for a license fee of $2 million
which is included in license fee income in the accompanying consolidated
statement of operations for the year ended September 30, 1999. In addition, each
party will be free to independently pursue the discovery of new compounds in the
Hepatitis B and HIV areas without incurring any responsibility to the other
party. To the extent BioChem completes any clinical trials or pursues any
regulatory approvals for any products covered by the license it will pay
milestones to OSI. In addition, to the extent BioChem commercializes certain
compounds arising out of the joint venture, it will pay royalties to OSI.
INTELLECTUAL PROPERTY
OSI believes that patents and other proprietary rights are vital to its
business. OSI'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
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upon trade secrets and improvements, unpatented proprietary know-how and
continuing technological innovations to develop and maintain its competitive
position. In this regard, OSI seeks restrictions in its agreements with third
parties, including research institutions, with respect to the use and disclosure
of OSI's proprietary technology. OSI also has confidentiality agreements with
its employees, consultants and scientific advisors.
OSI currently owns 13 U.S. patents and 41 foreign patents. In addition, OSI
currently has 24 pending applications for U.S. patents, 1 of which has been
allowed, and 33 applications for foreign patents, 2 of which have been allowed.
Further, other institutions have granted exclusive rights under their United
States and foreign patents and patent applications to OSI.
Included in the above, OSI has 6 applications for U.S. patents and 6
applications for foreign patents pending which contain composition of matter and
method of use claims for its receptor-subtype specific adenosine receptor
antagonist compounds. The Company intends to aggressively seek patent protection
for all lead compounds discovered or developed in OSI owned development
programs.
OSI has assembled a strong gene transcription patent position. OSI
currently has five issued patents in this expanding patent estate. These include
U.S. Patent Nos. 5,863,733 and 5,665,543 which cover the use of reporter genes
in many cell-based transcription assays used for drug discovery. U.S. Patent No.
5,776,502 covers methods of modulating gene transcription in-vivo using any low
molecular weight compound. Also U.S. Patent Nos. 5,580,722 and 5,846,720 cover
modulation of genes associated with cardiovascular disease. OSI has additional
patent applications pending which should further enhance OSI's patent position
in the area of gene transcription. The Company believes that this technology is
in widespread use throughout the pharmaceutical biotechnology sectors. OSI is
conducting a non-exclusive out-licensing program for this patent estate.
Currently OSI has licensed this technology to Aurora Biosciences Corporation and
Pharmacia & UpJohn SpA. Under these agreements, OSI receives annual fees
together with milestones and royalty payments from small-molecule gene
transcription modulators developed and marketed as pharmaceutical products. OSI
expects to execute similar additional license agreements with third parties that
use this technology.
There can be no assurance that patents will be issued based upon OSI'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 OSI's proprietary technology. OSI is aware of patents issued to
other entities with respect to technology potentially useful to it and, in some
cases, related to products and processes being used or developed by OSI. OSI
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 OSI or would
force OSI to seek licenses from such other entities currently is unknown as is
the availability to OSI of licenses from such other entities, and whether, if
available, licenses from other entities can be obtained on terms acceptable to
OSI.
COMPETITION
The pharmaceutical and biotechnology industries are intensely competitive.
OSI faces, and will continue to face, intense competition from organizations
such as large pharmaceutical companies, biotechnology companies, academic and
research institutions and government agencies. OSI faces significant competition
from industry participants who are pursuing the same or similar technologies as
those which constitute OSI's technology platform and from organizations that are
pursuing pharmaceutical products or therapies that are competitive with OSI's
potential products. Most of the major pharmaceutical organizations competing
with OSI have greater capital resources, greater R&D staffs and facilities, and
greater experience in drug development, obtaining regulatory approval and
pharmaceutical product manufacturing and marketing. OSI's major competitors
include fully integrated pharmaceutical companies, such as Merck & Co., Inc.,
Glaxo
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Wellcome Inc. and SmithKline Beecham plc, that conduct extensive drug discovery
efforts and are developing novel small molecule pharmaceuticals, as well as
numerous smaller companies.
With respect to OSI's small molecule drug discovery programs, other
companies have potential drugs in clinical trials to treat disease areas for
which OSI is seeking to discover and develop drug candidates. These competing
drug candidates may be further advanced in clinical development than are any of
OSI's potential products in its small molecule programs and may result in
effective, commercially successful products. Even if OSI and its collaborative
partners are successful in developing effective drugs, there can be no assurance
that OSI's products may be able to compete effectively with these products.
Furthermore, OSI cannot be certain that its competitors will not succeed in
developing and marketing products that either are more effective than those that
may be developed by OSI and its collaborative partners or are marketed prior to
any products developed by OSI or its collaborative partners.
In the cancer field, OSI's lead drug candidates are being developed by its
partner Pfizer. CP-358,774, an EGFR inhibitor and the most advanced drug
candidate, is currently in Phase II trials. At least two competitors,
Astra-Zeneca and Imclone also have compounds in clinical testing for this
target. CP-609,754, currently in Phase I trials, is being developed as a
farnesyl transferase inhibitor and has recently entered Phase I clinical trials.
This target is also the subject of active research and development at several
other companies including Merck & Co., Inc. and Johnson & Johnson. The
OSI/Pfizer alliance has a major effort in the area of angiogenesis. Several
other biotechnology and pharmaceutical companies are pursuing novel therapeutics
for angiogenesis including Bristol-Myers Squibb Co., Entremed, Inc. and Sugen,
Inc. (Pharmacia & UpJohn, Inc.).
Companies pursuing different but related fields also present significant
competition for OSI. 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 OSI. 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., ArQule, Inc. and
AxyS Pharmaceuticals, Inc., all of which have major collaborations with leading
pharmaceutical companies. OSI cannot be sure that competitors will not succeed
in developing technologies or products that are more effective than those of OSI
or that would render OSI's products or technologies obsolete or noncompetitive.
OSI's technology platform consists of a variety of cell free and live-cell
assay systems, 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, 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 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 OSI.
OSI 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.
GOVERNMENT REGULATION
OSI and its collaborative partners are subject to, and any potential
products discovered and developed must comply with, 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.
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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 (IND), 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 a new drug application (NDA) or, in the case of biological products,
such as TGF-Beta 3, a product license application (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.
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 must comply with FDA
regulations regarding current GLP. 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 matters such 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 OSI's and its collaborators' products, including a review
of the manufacturing processes and facilities used to produce these products,
will be required before they may be marketed in the United States. The process
of obtaining approvals from the FDA can be costly, time consuming and may be
affected by unanticipated delays. There can be no assurance that approvals of
OSI'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 OSI's business, financial condition and
results of operations. Moreover, even if regulatory approval is granted, the
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, or 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 some 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 the product,
manufacturer or NDA holder, including withdrawal of the product from the market.
Furthermore, new government requirements may be established that could delay or
prevent regulatory approval of OSI's products under development.
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For marketing outside the United States, OSI and its collaborators and the
drugs developed by them, if any, will be subject to foreign regulatory
requirements governing human clinical trials and marketing approval for drugs.
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.
In addition to regulations enforced by the FDA, OSI must also comply with
regulations 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.
OSI's R&D activities involve the controlled use of hazardous materials,
chemicals and various radioactive compounds. Although OSI believes that its
safety procedures for handling and disposing of hazardous 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, OSI could be held liable for any
damages, which could exceed OSI's resources.
EMPLOYEES
OSI believes that its success is largely dependent upon its ability to
attract and retain qualified personnel in scientific and technical fields. As of
November 30, 1999, OSI employed 195 persons worldwide (144 in the United
States), of whom 158 were primarily involved in R&D activities, with the
remainder engaged in executive and administrative capacities. Although OSI
believes that it has been successful to date in attracting skilled and
experienced scientific personnel, competition for personnel is intense and there
can be no assurance that OSI will continue to be able to attract and retain
personnel of high scientific caliber. OSI considers its employee relations to be
good.
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CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
(Cautionary Statements under the Private Securities Litigation Reform Act of
1995, as amended)
This report contains forward-looking statements that do not convey
historical information, but relate to predicted or potential future events, such
as statements of OSI's plans, strategies and intentions, or its future
performance or goals for OSI's product development programs. These statements
can often be identified by the use of forward-looking terminology such as
"believes," "expects," "intends," "may," "will," "should" or "anticipates" or
similar terminology. The statements involve risks and uncertainties and are
based on various assumptions. Investors and prospective investors are cautioned
that these statements are only projections. In addition, any forward-looking
statement that OSI makes is intended to speak only as of the date on which OSI
made the statement. OSI will not update any forward-looking statement to reflect
events or circumstances that occur after the date on which the statement is
made. The following risks and uncertainties, among others, may cause OSI's
actual results to differ materially from those described in forward-looking
statements made in this report or presented elsewhere by management from time to
time.
Although OSI has potential products that appear to be promising at early
stages of development, all of OSI's products will require significant research
and development and may not reach the market for a number of reasons, conditions
which would limit OSI's revenue potential.
Potential products may be found ineffective or cause harmful side effects
during pre-clinical testing or clinical trials, fail to receive necessary
regulatory approvals, be difficult to manufacture on a large scale, be
uneconomical to produce, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of third parties. There is no guarantee
that OSI's or its collaborative partners' product development efforts will be
successfully completed, that required regulatory approvals will be obtained or
that any products, if introduced, will be successfully marketed or achieve
customer acceptance.
To date, OSI has generated no revenue from the sale of pharmaceutical
products. Except for CP-358,774, with respect to which Pfizer has completed
Phase I safety and toxicity studies and has initiated Phase II clinical trials,
and CP-609,754 for which Pfizer has opened an IND for Phase I clinical trials,
all of the lead compounds in OSI's small molecule drug discovery programs are in
either a discovery or pre-clinical evaluation phase. Any products resulting from
OSI's development programs are not expected to be commercially available for
several years, if at all.
OSI's live-cell assays are novel as a drug discovery method and have not
yet been shown to be successful in the development of any commercialized drug.
Furthermore, OSI's drug discovery assays are focused on several target genes and
other molecular targets, the functions of many of which have not yet been fully
determined. OSI's live-cell assay technology may not result in lead compounds
that will be safe and useful. Development of new pharmaceutical products is
highly uncertain. Consequently, OSI's drug discovery technology may not result
in any commercially successful products.
Failure to obtain required governmental approvals will delay or preclude
OSI's partners from marketing drugs discovered or developed by OSI or limit the
commercial use of these products.
Prior to marketing by a collaborative partner, any new drug discovered by
OSI must undergo an extensive regulatory approval process in the United States
and other countries. This regulatory process, which includes pre-clinical
testing and clinical trials of each compound to establish its safety and
efficacy, can take many years and require the expenditure of substantial
resources. Moreover, data obtained from pre-clinical and clinical activities are
susceptible to varying interpretations that could delay, limit or prevent
regulatory approval.
Even if OSI obtains regulatory approval, a marketed product and its
manufacturer are subject to continuing review, including post-marketing
surveillance. Discovery of previously unknown problems with a product of OSI or
its manufacturer may have adverse effects on OSI's business, financial condition
and results of operations, including the withdrawal of the product from the
market. Violations of regulatory requirements at any stage may result in various
unfavorable consequences to OSI, including the FDA's delay in approving or its
refusal to approve a product, withdrawal of an approved product from the market
and the imposition of
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criminal penalties against the manufacturer and the new drug application holder.
Although Pfizer submitted an investigational new drug application, or IND, to
the FDA with respect to the epidermal growth factor receptor inhibitor
CP-358,774 and CP-609,754 for farnesylation, OSI has not submitted an IND for
any product candidate, and no product candidate has been approved for
commercialization in the United States or elsewhere. OSI intends to file INDs
for product candidates in its internal proprietary programs, but to rely on its
partners to file INDs in its collaborative programs. No assurance can be given
that OSI or any of its collaborative partners will be able to conduct clinical
testing or obtain the necessary approvals from the FDA or other regulatory
authorities for any products.
If OSI or its collaborative partners do not successfully develop,
commercialize, manufacture and market product candidates, OSI may never achieve
product revenues or profitability.
OSI has had net operating losses since its inception in 1983. At September
30, 1999, OSI's accumulated deficit was approximately $65.6 million. OSI's
losses have resulted principally from costs incurred in R&D, and from general
and administrative costs associated with OSI's operations. These costs have
exceeded OSI's revenues, which to date have been generated principally from
collaborative research agreements.
OSI expects to incur substantial additional operating expenses over the
next several years as a result of increases in its expenses for R&D, including
enhancements in its drug discovery technologies and with respect to its internal
proprietary projects. If OSI does not obtain additional third party funding for
these expenses, OSI expects that the expenses will result in increased losses
from operations. OSI does not expect to generate revenues from the sale of its
small molecule products for several years. OSI's future profitability depends,
in part, on:
- OSI's collaborative partners obtaining regulatory approval for
products derived from its collaborative research efforts;
- OSI's collaborative partners successfully producing and marketing
products derived from technology or rights licensed from OSI; and
- OSI's entering into agreements for the development, commercialization,
manufacture and marketing of any products derived from OSI's internal
proprietary programs.
OSI's future capital requirements will depend on many factors, which
include:
- Continued scientific progress in its R&D programs;
- Size and complexity of its R&D programs;
- Progress of pre-clinical testing and early stage clinical trials;
- Time and costs involved in obtaining regulatory approvals for its
product candidates;
- Costs involved in filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights;
- Competing technological and market developments;
- Establishment of additional collaborative arrangements;
- Costs of manufacturing arrangements;
- Costs of commercialization activities; and
- Costs of product in-licensing and strategic acquisitions, if any.
OSI intends to seek additional funding through arrangements with corporate
collaborators and may seek additional funding through public or private sales of
OSI's securities, including equity securities. Additional funding may not be
available on reasonable or acceptable terms, if at all. Furthermore, any
additional equity financings would be dilutive to OSI's stockholders. If
adequate funds are not available, OSI may be required to curtail significantly
one or more of its R&D programs or obtain funds through arrangements with
collaborative partners or others that may require OSI to relinquish its rights
to a number of its technologies or product candidates. If funding from one or
more of its collaborative programs were reduced or terminated, OSI would be
forced to devote additional internal resources to product development, scale
back or terminate selected development programs or seek alternative
collaborative partners.
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OSI's products may be subject to delays in manufacture if collaborative
partners or outside contractors give other products greater priority than OSI's
products.
The manufacture of OSI's candidate products for clinical trials and the
manufacture of resulting products for commercialization purposes are subject to
current good manufacturing practices regulations promulgated by the FDA. OSI
relies on collaborative partners or outside contractors to manufacture its
products in their FDA approved manufacturing facilities. OSI's collaborative
agreements allow its collaborative partners significant discretion in electing
to pursue or not to pursue the activities upon which it relies. The Company
cannot control the amount and timing of resources its collaborative partners
devote to its programs or potential products. OSI's products may be in
competition with other products for priority of access to these facilities. For
this and other reasons, there can be no assurance that OSI's collaborative
partners will manufacture OSI's products in an effective or timely manner. If
not performed in a timely manner, the clinical trial development of OSI's
product candidates or their submission for regulatory approval could be delayed,
and OSI's ability to deliver products on a timely basis could be impaired or
precluded. OSI may not be able to enter into any necessary third party
manufacturing arrangements on acceptable terms if at all. OSI's current
dependence upon others for the manufacture of its products could adversely
affect its future profit margin, if any, and its ability to commercialize
products on a timely and competitive basis.
OSI's limited experience in conducting clinical trials and reliance on the
pharmaceutical companies with which it collaborates for clinical development and
regulatory approvals may cause delays, terminations or setbacks in OSI's
business.
To date, only two product candidates have entered clinical trials in OSI's
small molecule drug discovery operations. Only one of the compounds discovered
using OSI's small molecule discovery technology has been proven safe in humans
and none have yet demonstrated efficacy. The failure of OSI to increase the
number of product candidates eligible for clinical trials and unsuccessful
completion of clinical trials in the future could adversely affect OSI's
business, condition and results of operation.
If OSI is unable to protect its intellectual property rights, its ability
to develop and commercialize its technology and products will be severely
limited.
OSI's success depends, in part, on its or its collaborative partners'
ability to:
- Obtain patent protection for product candidates;
- Maintain trade secret protection; and
- Operate without infringing on the proprietary rights of third parties.
The degree of future protection for OSI's proprietary rights will remain
uncertain if:
- OSI's pending patent applications are not approved for any reason;
- OSI is unable to develop additional proprietary technologies that are
patentable; or
- Patents issued do not provide OSI with a competitive advantage.
Furthermore, OSI cannot be sure that third parties:
- Will not independently develop similar or alternative technologies;
- Duplicate any of OSI's technologies;
- If patents are issued to OSI, design around OSI's patented
technologies; or
- Will not challenge issued patents.
OSI may incur substantial costs protecting its proprietary rights or
defending against charges of infringement of other's proprietary rights.
OSI is seeking to license to other companies rights to practice under OSI's
gene transcription patent estate. OSI believes technology and practices covered
by these patents are in widespread use in the pharmaceutical and biotechnology
industries. To date, OSI has granted two licenses to use its gene transcription
patent. If other pharmaceutical and biotechnology firms which use OSI's patented
technology are not willing to negotiate license arrangements with OSI on
reasonable terms, OSI may have to choose between (i) abandoning its licensing
strategy, or (ii) initiating legal proceedings against those firms. Legal
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action, including patent infringement litigation, would be extremely costly.
Consequently, OSI's strategy to commercialize its gene transcription patent
estate through licensing may not be successful.
If OSI is unable to maintain or enter into arrangements with collaborative
partners, its ability to proceed with R&D programs, manufacturing and the sale
of its product candidates will be severely limited.
OSI's limited resources and business strategy require it to enter into
collaborative arrangements with various research partners. OSI is largely
dependent on its collaborative partners for:
- Pre-clinical testing;
- Clinical development;
- Regulatory approval;
- Manufacturing and marketing products;
- Compound libraries;
- Patent protection and proprietary technology; and
- Funding.
Like many small biopharmaceutical companies, OSI's business strategy
includes funding from larger pharmaceutical companies to collaborate with to
support its R&D programs and the commercialization of OSI's product candidates.
In trying to attract partners to collaborate with, OSI faces serious competition
from other small biopharmaceutical companies and even in-house R&D staffs of
larger pharmaceutical companies. Failure to enter into collaborative agreements
on acceptable terms could have material adverse effects on OSI's business,
financial condition and results of operation.
If any of OSI's collaborative partners breach or terminate their agreements
with OSI or otherwise fail to conduct its collaborative activities successfully
in a timely manner, OSI's pre-clinical or clinical development,
commercialization of product candidates or research programs would be delayed or
terminated.
OSI faces potential problems with its collaborative partners which could
affect its success including:
- Competition with its collaborators;
- Potential disputes with collaborators concerning ownership rights to
developed technology;
- Short term of collaborative agreements which may require their
renewal;
- Delays; and
- Consolidations of pharmaceutical companies.
OSI's success depends, in large part, on the efforts of its collaborative
partners. Potential disagreements between collaborators and OSI, such as
disputes over ownership rights to any technology developed together, could lead
to delays in the collaborative R&D programs, or the commercialization of product
candidates. If OSI is confronted with disputes with its collaborative partners,
it may face costly delays to its research and development programs and even
litigation.
Because OSI generally agrees not to conduct independently, or with any
third party, any research that is competitive with the research conducted under
its collaborative programs, its collaborative relationships may have the effect
of limiting the areas of research OSI may pursue.
Under its collaborative research agreements with most of its partners, OSI
is prohibited, during the terms of the agreements, from pursuing or sponsoring
research aimed at the discovery of drugs which are the subject of the
collaborations. OSI's collaborative partners, however, may develop, either alone
or with others, products that are similar to or competitive with the products or
potential products that are the subject of OSI's collaborations with their
partners. Competing products, either developed by the collaborative partners or
to which the collaborative partners have rights, may mean their withdrawal of
support for OSI's product candidates, which may result in the impairment of
OSI's business, financial condition and results of operations.
Because all of OSI's collaborative programs with pharmaceutical companies
have terms of six or fewer years, which is generally less than the period
required for the discovery, clinical development and commerciali-
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zation of most drugs, the continuation of any of OSI's drug discovery and
development programs may be dependent on the periodic renewal of OSI's
collaborative arrangements.
All of OSI's collaborative research agreements may be terminated under
various circumstances. Some of OSI's collaborative research agreements provide
that, upon expiration of a specified period after commencement of the agreement,
its collaborative partners have the right to terminate the agreement on short
notice without cause. The termination or non-renewal of any collaborative
relationship could set back OSI's efforts in R&D.
Consolidations among companies with which OSI is engaged in collaborative
research can result in the diminution or termination of, or delays in, one or
more of OSI's collaborative programs.
In 1995, the pharmaceutical operations of three companies with which OSI
had collaborative research agreements, Hoechst AG, Hoechst Roussel
Pharmaceuticals, Inc. and Marion Merrell Dow Inc. were combined into one entity,
HMRI. This combination resulted in delays in OSI's collaborative programs with
each of the constituent companies and a reduction in the aggregate funding
received by OSI. Continued consolidations among large pharmaceutical companies
could produce similar problems.
Failure to attract, retain and motivate skilled personnel and cultivate key
academic collaborations will delay OSI's product development programs and
adversely affect its research and development efforts.
OSI is a small company with approximately 195 employees, and its success
depends on its continued ability to attract, retain and motivate highly
qualified management and scientific personnel and on its ability to develop and
maintain important relationships with leading academic institutions and
scientists. In particular, OSI's product development programs depend on its
ability to attract and retain highly skilled chemists and clinical development
personnel. Competition for personnel and relationships is intense. If OSI loses
the services of any of these personnel, it could impede significantly the
achievement of its research and development objectives. In particular, the loss
of Colin Goddard, OSI's Chief Executive Officer, would be detrimental to OSI.
OSI does not know if it will be able to attract, retain or motivate personnel.
If the continuing efforts of government and third-party payors to contain
or reduce the costs of health care succeed, the price that OSI or any of its
collaborative partners or other licensees receives for any drugs it may discover
or develop it may develop in the future may decrease significantly.
In foreign markets, pricing and profitability of prescription
pharmaceuticals are subject to government control. In the United States, OSI
expects that there will continue to be a number of federal and state proposals
to implement similar government control. In addition, increasing emphasis on
managed care in the United States will continue to put pressure on the pricing
of pharmaceutical products. To the extent that cost control initiatives have an
adverse effect on OSI's collaborative partners, OSI's ability to commercialize
its products and to realize royalties may also be adversely affected.
If OSI's licensees or collaborative partners are required to obtain
licenses from others, OSI's royalties on any commercialized products could be
reduced by up to 50 percent.
The extent to which efforts by other researchers have resulted or will
result in patents and the extent to which the issuance of patents to others
would have a material adverse effect on OSI or would force OSI or its
collaborative partners or other licensees to obtain licenses from others, if
available, is currently unknown. OSI's products, operations or technology may
infringe upon the rights of any third party.
OSI relies on trade secrets to protect technology where patent protection
is not believed to be appropriate or obtainable. OSI has entered, and will
continue to enter, into confidentiality agreements with its employees,
consultants, licensors and collaborative partners. Without patent protection,
others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to OSI's trade secrets.
Furthermore, obligations of confidentiality may not be honored and OSI may not
be able to effectively protect its rights to proprietary information.
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The use of any of OSI's potential products in clinical trials and the sale
of any approved products may expose OSI to liability claims resulting from the
use of products or product candidates.
Potential product liability claims might be made directly by consumers,
pharmaceutical companies, including OSI's collaborative partners, or others. OSI
does not independently maintain product liability insurance coverage for claims
arising from the use of its products in clinical trials. Insurance coverage is
becoming increasingly expensive, and no assurance can be given that OSI will be
a named insured with respect to trials underway by its collaborative partners or
others or obtain insurance in the future at a reasonable cost or in sufficient
amounts to protect OSI. OSI's inability to obtain adequate liability insurance
could have a material adverse effect on OSI's business, financial condition and
results of operations. A successful product liability claim or series of claims
brought against OSI could have a material adverse effect on its business,
financial condition and results of operations.
If OSI's competitors succeed in developing technologies or products that
are more effective than its own, OSI's products or technologies may be rendered
obsolete or noncompetitive.
OSI faces significant competition from industry participants who are
pursuing the same technologies as OSI and from organizations that are pursuing
pharmaceutical products that are competitive with OSI's potential products. Most
of the organizations competing with OSI have more (1) capital resources, (2) R&D
staffs and facilities, (3) experience in drug discovery and development, (4)
experience obtaining regulatory approval and (5) experience in pharmaceutical
product manufacturing and marketing than OSI. OSI's major competitors include
fully integrated pharmaceutical companies, such as Merck & Co., Inc., Glaxo
Wellcome Inc. and SmithKline Beecham plc, that have extensive drug discovery
efforts and are developing novel small molecule pharmaceuticals, as well as
numerous smaller companies. Companies pursuing different but related fields also
present significant competition for OSI. For example, research efforts with
respect to gene sequencing and mapping are identifying new and potentially
superior target genes.
Biotechnology and related pharmaceutical technology have undergone rapid
and significant change. OSI expects the technology associated with OSI's R&D
will continue to develop rapidly. OSI's future success will depend in large part
on its ability to maintain a competitive position with respect to this
technology. Rapid technological development by OSI or others may result in
compounds, products or processes becoming obsolete before OSI recovers any
expenses incurred to develop a compound, product or process.
If OSI is unable to remedy Y2K problems, its operations, including OSI's
R&D programs and basic business enterprise, may be substantially disrupted.
OSI has worked to resolve the potential impact of the Y2K problem on the
processing of date-sensitive information by OSI's computerized information
system. OSI cannot be sure that it has identified, replaced or corrected all of
its internal computer systems successfully. OSI would then be at a competitive
disadvantage relative to companies that have successfully corrected their Y2K
problems. Other than making inquiries to third parties, OSI is not in a position
to independently verify the Y2K compliance of third parties, such as its
suppliers, vendors and collaborators. Difficulties and failure of suppliers,
vendors or collaborators to be Y2K compliant could result in risks and
uncertainties that may have a material adverse effect on OSI's business,
financial condition and results of operation.
ITEM 2. PROPERTIES
The Company leases three facilities, one located at 106 Charles Lindbergh
Boulevard, Uniondale, New York, consisting of 30,000 square feet, one located at
777 Old Saw Mill Road, Tarrytown, New York, consisting of 45,000 square feet,
and another located at 50 Charles Lindbergh Boulevard, Uniondale, New York,
consisting of 4,500 square feet. The Uniondale facility houses the Company's
principal executive offices and drug discovery laboratory. The Tarrytown
facility houses an additional laboratory, which was acquired in the Cadus asset
acquisition on July 30, 1999. The smaller facility at 50 Charles Lindbergh
Boulevard houses the Company's finance and administrative offices. The Company
also leases an 11,000 square foot facility located at 80 Rogers Street, 129
Binney Street, Cambridge, Massachusetts. As of September 30, 1999 this facility
housed the offices and laboratories of the Company's diagnostic product
operations which was sold to
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Bayer as of November 30, 1999. The Company also has two other wholly owned
subsidiaries, Aston and MYCOsearch, Inc., each of which lease facilities that
house their offices and drug discovery laboratories. Aston leases a 13,800
square foot facility located at 10 Holt Court South, Aston Science Park,
Birmingham, England. MYCOsearch 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 is currently planning to
relocate its MYCOsearch operations to its recently acquired facility in
Tarrytown. The relocation is scheduled to occur on March 31, 2000. The Company
believes that its facilities are adequate to meet current requirements. If any
of the Company's collaborative programs is expanded, the Company may need to
acquire additional space, which it believes it would be able to secure on
reasonable terms.
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 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
OSI'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 common stock from
the first quarter of fiscal 1998 through September 30, 1999 as reported on the
NASDAQ National Market:
1999 FISCAL YEAR HIGH LOW
- ---------------- ---- ---
First Quarter............................................... $5 7/8 $2 1/4
Second Quarter.............................................. 5 1/16 2 11/16
Third Quarter............................................... 7 1/8 4
Fourth Quarter.............................................. 7 3 15/16
1998 FISCAL YEAR HIGH LOW
- ---------------- ---- ---
First Quarter............................................... $11 1/2 $5 7/8
Second Quarter.............................................. 8 5 7/8
Third Quarter............................................... 7 7/8 5 1/8
Fourth Quarter.............................................. 6 3/4 2 29/32
As of November 30, 1999, there were approximately 583 holders of record of
the common stock. OSI 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 OSI, its capital requirements and general business
conditions.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data with
respect to OSI for each of the years in the five-year period ended September 30,
1999. The information below should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this report.
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
1999(a) 1998(b) 1997(c) 1996(d) 1995(e)
------------ ------------ ------------ ------------ -----------
Statement of Operations
Data:
Revenues.................... $ 22,652,303 $ 19,468,337 $ 14,777,323 $ 9,718,437 $15,864,999
Expenses:
Research and
development.......... 24,484,540 19,877,339 16,804,844 14,462,644 13,992,459
Production and service
costs................ 1,753,474 813,464 635,768 134,529 1,252,990
Selling, general and
administrative....... 9,190,774 8,691,386 7,516,038 5,771,021 6,670,792
Amortization of
intangibles.......... 1,468,801 1,460,740 1,460,748 1,452,755 1,696,561
Loss from operations...... (14,245,286) (11,374,592) (11,640,075) (12,102,512) (7,747,803)
Other income -- net....... 1,155,834 1,190,124 2,053,838 2,160,377 768,744
Gain on sale of Anaderm
common stock........... 3,291,015 -- -- -- 2,720,389
Net loss.................. (9,798,437) (10,184,468) (9,586,237) (9,942,135) (4,258,670)
Basic and diluted loss per
share.................. (0.46) (0.48) (0.44) (0.50) (0.25)
Weighted average number of
shares of common stock
outstanding............ 21,450,812 21,372,655 21,604,344 19,712,274 16,757,370
SEPTEMBER 30,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ -----------
Balance Sheet Data:
Cash and investment
securities.............. $ 18,861,854 $ 24,418,281 $ 31,834,669 $ 47,542,745 $26,786,566
Accounts receivable....... 5,193,902 1,720,737 1,215,672 2,031,950 1,320,015
Working capital........... 14,562,336 22,268,346 29,612,616 47,181,407 26,127,781
Total assets.............. 47,031,328 50,417,980 59,585,565 73,537,054 44,057,421
Stockholders' equity...... 33,364,946 43,059,246 52,944,868 68,286,959 40,549,636
- ---------------
(a) During fiscal 1999, OSI acquired Cadus' research business and sold its
equity interest in Anaderm to Pfizer. Subsequent to September 30, 1999, the
Company sold its diagnostics business to Bayer. (See Notes 3(a), 5(b) and 17
to the Consolidated Financial Statements).
(b) During fiscal 1998, OSI entered into collaborative agreements with
Fujirebio, Inc. and Vanderbilt, expanded its co-venture agreement with
Anaderm, and entered into a license agreement with Aurora (See Notes 2,
5(b), 5(d), and 5(m) to the Consolidated Financial Statements).
(c) During fiscal 1997, OSI 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, Dickinson and Company
(See Notes 3(b), 5 and 9(a) to the Consolidated Financial Statements).
(d) During fiscal 1996, OSI acquired MYCOsearch and Aston and completed an
offering of its common stock.
(e) During fiscal 1995, OSI sold its research products business and also sold
shares of its common stock to Novartis.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
REVENUES
Total revenues of $22.7 million in fiscal 1999 increased approximately $3.2
million or 16% compared to fiscal 1998 and total revenues of $19.5 million in
fiscal 1998 increased approximately $4.7 million or 32% compared to fiscal 1997.
Collaborative program revenues increased approximately $2.0 million or 12%, in
fiscal year 1999. Collaborative research and development agreements with Pfizer,
Anaderm, HMRI, Sankyo, Bayer, Fujirebio, Helicon, and Solvay accounted for
substantially all of the Company's collaborative program revenues. Increases in
collaborative revenues were primarily due to the expansion as of April 23, 1999
of the Pfizer/Anaderm program, for the discovery and development of
cosmeceuticals, pharmacologically active compounds for use in certain cosmetic
and quality-of-life indications. This agreement could result in up to $50
million in total payments to the Company over a 6-year period. The new research
agreement with Solvay, which also contributed to the increase in collaborative
revenues, was acquired on July 30, 1999 with the acquisition of certain assets
from Cadus. This program is directed toward GPCR drug discovery in the
cardiovascular field. Collaborative revenues were partially offset by the
conclusion in October 1998 of one of the Company's funded collaborative programs
with HMRI relating to the discovery and development of orally active drugs for
the treatment of chronic anemia.
Sales revenue, representing service revenue from the Company's Aston and
OSDI subsidiaries, increased approximately $99,000 or 9% compared to the prior
year. The increase was primarily due to the growth in sales of the Company's
diagnostic tests. Other research revenue, representing primarily government
grants and other research grants, decreased approximately $435,000 or 30%
compared to the prior fiscal year. This is related to a reduction in the number
of government grants received. OSI has narrowed its grant applications to its
disease areas of focus in order to more fully leverage its resources. License
revenue increased approximately $1.5 million or 202% compared to the prior year.
This increase is primarily related to a $2 million fee resulting from a license
agreement entered into in March, 1999 with BioChem Pharma, which replaces an
earlier collaborative program focused on anti-viral drug discovery. Under the
terms of the agreement, the Company is licensing to BioChem Pharma rights to the
Company's joint technology in certain anti-viral targets. In addition to the
licensing fee, the Company will receive milestones and royalties based upon
BioChem Pharma's successful development of drugs arising from leads discovered
in the program. During fiscal 1998, the Company recognized license revenue of
approximately $752,000 from the signing of a license agreement with Aurora
Biosciences covering the Company's gene transcription patent estate.
The increase in total revenues of approximately $4.7 million in fiscal 1998
compared to fiscal 1997 was attributable to the commencement on October 1, 1997
of the funded phase of the collaborative research and license agreement among
the Company, Anaderm and Pfizer as well as an increased level of research in the
collaborative program with Sankyo to discover and develop novel pharmaceutical
products to treat influenza which commenced in February, 1999. This increase in
revenues was partially offset by a decrease in revenues related to the Company's
collaborative program with HMRI to discover and develop small molecules that
induce gene expression of the protein erythropoietin. This decrease in revenues
was attributable to the Company's receipt of a $1 million initiation fee from
HMRI for the erythropoietin, or EPO, program in fiscal 1997 and reduced funding
in connection with the extension of the first phase of this program in April,
1998. The EPO program did not achieve sufficient positive data to warrant
further development. Consequently, in October, 1998, this program was
terminated. The increase in revenue was also offset by the completion in fiscal
1997 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.
EXPENSES
Research and development expenses increased by approximately $4.6 million
or 23% in fiscal 1999 compared to fiscal 1998 and increased by approximately
$3.1 million or 18% in fiscal 1998 compared to fiscal 1997. The increase in
fiscal 1999 was related to the Cadus asset acquisition on July 30, 1999. With
the acquisition, the Company assumed operations of Cadus' fully equipped
research facility in Tarrytown, New York, and retained 47 employees who have
since been employed in ongoing and expanding programs at both
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the Tarrytown site and at the Company's headquarters in Uniondale, New York.
Included in the acquisition is the GPCR-directed drug discovery programs. The
Company has also acquired Cadus' directed library of 150,000 small-molecule
compounds specifically designed for drug discovery in the GPCR area. The Company
recorded a charge of $806,000 for in-process R&D acquired in connection with the
Cadus asset acquisition which is included in R&D expense in fiscal 1999. Also
contributing to the increase in research and development expense is the
continued expansion of the Company's collaboration with Anaderm for the
discovery and development of novel compounds to treat pigmentation disorders,
wrinkles and baldness. The Company also expanded its medicinal chemistry
facility at its Aston subsidiary in the United Kingdom to accommodate the
increased chemistry efforts required in the expanded Anaderm collaboration.
These costs were somewhat offset by the conclusion in October, 1998 of the
Company's funded collaborative program with HMRI relating to the discovery and
development of orally active drugs for the treatment of chronic anemia.
The increase in R&D expenses in fiscal 1998 was due to the expansion of the
Company's collaboration with Anaderm and the collaborative agreement with Sankyo
for the discovery and development of novel pharmaceutical products to treat
influenza. In addition, research and development expenses include the
amortization of the Company's compound library assets which increased by
approximately $70,000 to $1.8 million in fiscal 1998 reflecting a full year of
amortization of the Dow Company compound library license acquired in March,
1997.
Production and service costs increased approximately $940,000 and $180,000
in fiscal 1999 and 1998, respectively. The increase in fiscal 1999 is related to
increased investment by the Company to continue developing its wholly owned
diagnostics subsidiary, OSDI. The increase in fiscal 1998 was also due to
continued investments in the OSDI diagnostics business as compared to the prior
period. On November 30, 1999, the Company sold its diagnostics business,
including the assets of OSDI, to Bayer.
Selling, general and administrative expenses increased approximately
$499,000 or 6% in fiscal 1999 compared to fiscal 1998 and approximately
$1,175,000 or 16% in fiscal 1998 compared to fiscal 1997. The increases in
fiscal 1999 compared to fiscal 1998 were primarily related to the increased
corporate development activity during the fiscal year and administration
expenses associated with the acquired operations in Tarrytown from the Cadus
asset acquisition. The increases between fiscal 1998 compared to fiscal 1997
were primarily related to the expenses associated with the expansion of the
Company's Aston and OSDI subsidiaries.
During fiscal 1999, the Company made the strategic decision to close down
its facilities in North Carolina and consolidate its natural products operations
into its Tarrytown facility in New York. The estimated cost of closing this
facility of approximately $535,000 has been accrued as of September 30, 1999,
and is included in R&D expense ($395,000) and selling, general and
administrative expenses ($140,000) in fiscal 1999.
Amortization of intangibles in fiscal 1999, 1998, and 1997 represents
primarily amortization of patents that resulted from the acquisition of the
cancer diagnostic business of Applied bioTechnology, Inc. in fiscal 1991 and
goodwill from the acquisition of Aston in fiscal 1996. The book value of patents
related to the Applied bioTechnology acquisition were written-off with the
transfer of these patents in the sale of the diagnostic business to Bayer on
November 30, 1999.
OTHER INCOME AND EXPENSE
Net investment income decreased approximately $177,000 or 12% in fiscal
1999 compared to fiscal 1998 and $625,000 or 30% in fiscal 1998 compared to
fiscal 1997. This decrease in fiscal 1999 was a result of the decline in
principal balance invested offset by a gain of approximately $436,000 from the
sale of 75,000 shares of Aurora Biosciences' common stock. Under the terms of a
license agreement entered into in May, 1998 with Aurora Biosciences, the Company
received 75,000 shares of Aurora Biosciences' common stock and $300,000 in cash,
for a non-exclusive license and certain sub-licensing rights. Also included in
other income is the gain recognized on the sale of Anaderm common stock. Under
the terms of the expanded Anaderm research agreement dated April 23, 1999,
between the Company and Pfizer, all shareholders of Anaderm were given the right
to require Pfizer to purchase their respective shares of Anaderm common stock
based upon a predetermined formula in the agreement. On September 23, 1999, the
Company exercised its right and sold to
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Pfizer all of its shares of common stock in Anaderm for approximately
$3,645,000. The sale net of the carrying value of the investment resulted in a
gain of approximately $3,291,000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, working capital (representing primarily cash, cash
equivalents and short-term investments) aggregated approximately $14.6 million.
In addition, on December 2, 1999, the Company received $9.2 million from Bayer
in the sale of assets related to its diagnostics business. Effective as of
November 30, 1999 and pursuant to an Asset Purchase Agreement dated as of
November 17, 1999, and amended November 30, 1999, the Company sold certain
assets of its diagnostics business to Bayer, including the assets of OSDI based
in Cambridge, Massachusetts. The assets sold include certain contracts,
equipment and machinery, files and records, intangible assets, intellectual
property, inventory, prepaid expenses and other assets primarily related to the
operation of the diagnostics business. Bayer intends to retain all employees of
OSDI and will maintain the unit's headquarters in Cambridge. In connection with
the sale, the Company and OSDI entered into certain agreements with Bayer
including an assignment and assumption of lease with respect to the OSDI
facility located in Cambridge and certain patent assignment and license
agreements. Certain employees of the Company and OSDI entered into employment
agreements with Bayer.
On July 30, 1999, the Company acquired certain assets from Cadus for
approximately $2.2 million in cash which included professional fees and other
costs and the assumption of certain liabilities. Forty-seven Cadus employees
were hired by the Company. The Company intends to utilize the acquired assets in
the GPCR-directed drug discovery program and the collaboration with Solvay, but
expects to deploy the balance of the assets in other research areas.
The Company also assumed Cadus' facility lease in Tarrytown, New York
(approximately 45,569 square feet) as of July 1, 1999 (approximately $898,249 in
rental payments per annum through December 31, 2002) and an equipment lease with
General Electric Capital Corporation (GECC). On August 23, 1999, the Company
elected to payoff the GECC lease in exchange for a payment of $2.8 million and
obtained ownership of the fixed assets covered by the lease agreement. On
September 21, 1999, Cadus reimbursed the Company $308,000 in exchange for those
fixed assets that have been retained by Cadus for its own use. The source of the
cash portion of the purchase price and the subsequent decision to payoff the
lease agreement with GECC was the Company's existing cash resources. Liabilities
and facility lease obligation assumed will be paid from existing cash resources
and working capital to be generated in future periods.
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 three 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 funded collaborations. In pursuing this
objective, the Company in fiscal 1999 expanded the scope of its discovery and
development activities without significantly increasing its 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
platform and pursue internal proprietary drug discovery programs.
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,
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32
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.
Y2K
The Company is aware of the challenges associated with the inability of
certain systems to properly format information after December 31, 1999. The
Company has worked to resolve the potential impact of the Y2K problem on the
processing of date-sensitive information by the Company's computerized
information systems. The Y2K 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 Y2K compliant, as
are its Novell network servers. The Company has completed the conversion of its
financial records to an Oracle based system which is Y2K compliant. The Company
expects these systems to be operational on December 31, 1999. The Company
believes it has fully remediated its Y2K programs and does not anticipate any
material disruption in its operations as the result of any failure by the
Company to fully remediate such programs. To date, the Company has not incurred
any significant costs in addressing the Y2K problem. Based on current
information, the cost of addressing remaining potential Y2K problems associated
with the Company's internal systems and operations are not expected to have a
material adverse impact to the Company's financial position, results of
operations, or cash flows in future periods.
The Company has conducted an evaluation of the extent to which the
operations of the material third parties with whom it regularly deals may be
disrupted by any Y2K non-compliance of any of their systems. These third parties
include the Company's collaborative partners and its suppliers and vendors.
Disruption of the operations of any of its partners could delay or halt
important research and development programs, cause the loss of data or have
other unforeseen consequences. The Company has contacted significant
collaborators, suppliers, vendors and financial institutions in order to
identify potential areas of concern. Given the responses it has received from
suppliers and vendors, the Company has not deemed it necessary to seek
alternative suppliers or vendors. If the Company determines to seek other
alternative suppliers or vendors in the future because of the current suppliers'
or venders' inability to assure Y2K compliance, the Company may not be able to
find adequate replacements. Y2K problems experienced by the Company's suppliers
and vendors could cause a disruption of the Company's operations. The Company
currently is unable to estimate the likelihood of any of these risks being
realized, or if realized, the impact they may have on the Company.
The Company has developed a contingency plan with respect to electric power
which the Company believes would most significantly affect its research activity
and operations. The Company's ability to conduct its R&D programs and to
function as a viable business enterprise, however, depends on the continued
availability of these basic infrastructure systems.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1999, the Financial Accounting Standard Board issued SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133." SFAS 137 amends SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities," which was issued in June,
1998 and was to be effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. SFAS 137 defers the effective date of SFAS 133 to all
fiscal quarters of fiscal years beginning after June 15, 2000. Earlier
application is permitted. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
The Company does not believe that the implementation of SFAS 133 will have a
material effect on its financial position or results of operations.
On December 3, 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 -- "Revenue Recognition in Financial
Statements" (SAB No. 101). SAB No. 101 provides
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the SEC staff's views on the recognition of revenue including nonrefundable
technology access fees received by biotechnology companies in connection with
research collaborations with third parties. SAB No. 101 states that in certain
circumstances the SEC staff believes that up-front fees, even if nonrefundable,
should be deferred and recognized systematically over the term of the research
arrangement. SAB No. 101 requires registrants to adopt the accounting guidance
contained therein by no later than the first fiscal quarter of the fiscal year
beginning after December 15, 1999 (fiscal year ending September 30, 2001 for the
Company). The Company is currently assessing the financial impact of complying
with SAB No. 101 and has not yet determined whether applying the accounting
guidance of SAB No. 101 will have a material effect on its financial position or
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 these matters and subject areas is qualified by
the inherent risks and uncertainties surrounding future expectations generally,
and these discussions may materially differ from OSI's actual future experience
involving any one or more of these matters and subject areas. These forward
looking statements are also subject generally to the other risks and
uncertainties that are described in this report in Item 1 "Business --
Cautionary Factors that May Affect Future Results."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
OSI's cash flow and earnings are subject to fluctuations due to changes in
interest rates in its investment portfolio of debt securities, to the fair value
of equity instruments held, and, to an immaterial extent, to foreign currency
exchange rates. OSI maintains an investment portfolio of various issuers, types
and maturities. These securities are generally classified as available-for-sale
and, consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a component of accumulated other
comprehensive income (loss) included in stockholders' equity. OSI's investments
in certain biotechnology companies are carried on either the equity method of
accounting or at cost for equity securities that do not have readily
determinable fair values. Other-than-temporary losses are recorded against
earnings in the same period the loss was deemed to have occurred. OSI does not
currently hedge this exposure and there can be no assurance that
other-than-temporary losses will not have a material adverse impact on OSI's
results of operations in the future.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements:
PAGE
NUMBER
------
Independent Auditors' Report................................ 34
Consolidated Balance Sheets -- September 30, 1999 and
1998........................................................ 35
Consolidated Statements of Operations -- Years ended
September 30, 1999, 1998 and 1997......................... 36
Consolidated Statements of Stockholders' Equity -- Years
ended September 30, 1999, 1998
and 1997.................................................. 37
Consolidated Statements of Cash Flows -- Years ended
September 30, 1999, 1998 and 1997......................... 38
Notes to Consolidated Financial Statements.................. 39
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INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
OSI Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of OSI
Pharmaceuticals, Inc. and subsidiaries (the "Company") as of September 30, 1999
and 1998, 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, 1999. 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. and subsidiaries at September 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1999 in conformity with generally accepted
accounting principles.
KPMG LLP
Melville, New York
December 22, 1999
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
1999 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,863,887 $ 11,315,166
Investment securities..................................... 9,997,967 13,103,115
Receivables, including amounts due from related parties of
$363,580 and $1,176,975 and trade receivables of
$236,067 and $258,905 at September 30, 1999 and 1998,
respectively........................................... 1,033,917 1,720,737
Receivable from sale of Anaderm common stock.............. 3,645,136 --
Interest receivable....................................... 171,340 283,908
Grants receivable......................................... 343,509 406,149
Prepaid expenses and other................................ 1,088,318 788,496
------------ ------------
Total current assets................................... 25,144,074 27,617,571
------------ ------------
Property, equipment and leasehold improvements -- net..... 10,915,589 7,996,555
Compound library assets -- net............................ 4,197,085 5,515,517
Loans to officers and employees........................... 3,333 6,433
Other assets.............................................. 370,955 1,557,903
Intangible assets -- net.................................. 6,400,292 7,724,001
------------ ------------
$ 47,031,328 $ 50,417,980
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 5,229,672 $ 4,232,540
Unearned revenue -- current............................... 5,185,410 1,116,685
Loans payable -- current.................................. 166,656 --
------------ ------------
Total current liabilities.............................. 10,581,738 5,349,225
------------ ------------
Other liabilities:
Unearned revenue -- long-term............................. 404,762 --
Loans payable -- long-term................................ 277,791 49,326
Deferred acquisition costs................................ 711,037 670,916
Accrued postretirement benefit cost....................... 1,691,054 1,289,267
------------ ------------
Total liabilities...................................... 13,666,382 7,358,734
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; no shares issued at September 30, 1999 and
September 30, 1998..................................... -- --
Common stock, $.01 par value; 50,000,000 shares
authorized, 22,404,096 shares issued at September 30,
1999 and 22,288,583 shares issued at
September 30, 1998..................................... 224,041 222,886
Additional paid-in capital................................ 105,173,158 104,963,082
Accumulated deficit....................................... (65,640,618) (55,842,181)
Accumulated other comprehensive (loss) income............. (333,933) 325
------------ ------------
39,422,648 49,344,112
Less: treasury stock, at cost; 865,386 shares at September
30, 1999 and 897,838 shares at September 30, 1998......... (6,057,702) (6,284,866)
------------ ------------
Total stockholders' equity............................. 33,364,946 43,059,246
------------ ------------
Commitments and contingencies............................... $ 47,031,328 $ 50,417,980
============ ============
See accompanying notes to consolidated financial statements.
35
37
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
Revenues:
Collaborative program revenues, principally from
related parties.................................. $ 18,166,693 $ 16,165,613 $ 12,200,801
Sales.......................................... 1,220,317 1,121,449 1,167,604
Other research revenue......................... 994,277 1,428,853 1,408,918
License revenue................................ 2,271,016 752,422 --
------------ ------------ ------------
22,652,303 19,468,337 14,777,323
------------ ------------ ------------
Expenses:
Research and development....................... 24,484,540 19,877,339 16,804,844
Production and service costs................... 1,753,474 813,464 635,768
Selling, general and administrative............ 9,190,774 8,691,386 7,516,038
Amortization of intangibles.................... 1,468,801 1,460,740 1,460,748
------------ ------------ ------------
36,897,589 30,842,929 26,417,398
------------ ------------ ------------
Loss from operations........................ (14,245,286) (11,374,592) (11,640,075)
------------ ------------ ------------
Other income (expense):
Net investment income.......................... 1,290,611 1,467,412 2,092,331
Other expense -- net........................... (134,777) (277,288) (38,493)
Gain on the sale of Anaderm common stock....... 3,291,015 -- --
------------ ------------ ------------
Net loss......................................... $ (9,798,437) $(10,184,468) $ (9,586,237)
============ ============ ============
Weighted average number of shares of common stock
outstanding.................................... 21,450,812 21,372,655 21,604,344
============ ============ ============
Basic and diluted net loss per weighted average
share of common stock outstanding.............. $ (0.46) $ (0.48) $ (0.44)
============ ============ ============
See accompanying notes to consolidated financial statements.
36
38
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE TOTAL
--------------------- PAID-IN ACCUMULATED INCOME TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT (LOSS) STOCK EQUITY
---------- -------- ------------ ------------ ------------- ----------- -------------
BALANCE AT SEPTEMBER 30,
1996........................ 22,175,214 $221,752 $104,347,231 $(36,071,476) $(210,548) $ -- $ 68,286,959
Comprehensive income (loss):
Net loss.................... -- -- -- (9,586,237) -- -- (9,586,237)
Unrealized holding gains on
investment securities, net
of reclassification
adjustment................ -- -- -- -- 107,493 -- 107,493
Translation adjustment...... -- -- -- -- (96,176) -- (96,176)
------------
Total comprehensive loss...... (9,574,920)
------------
Options exercised............. 74,618 746 407,503 -- -- -- 408,249
Issuance of common stock for
employee purchase plan...... 12,388 124 74,456 -- -- -- 74,580
Purchase of treasury stock.... -- -- -- -- -- (8,750,000) (8,750,000)
Issuance of treasury stock for
Dow Compound library
license..................... -- -- 34,866 -- -- 2,465,134 2,500,000
---------- -------- ------------ ------------ --------- ----------- ------------
BALANCE AT SEPTEMBER 30,
1997........................ 22,262,220 222,622 104,864,056 (45,657,713) (199,231) (6,284,866) 52,944,868
Comprehensive income (loss):
Net loss.................... -- -- -- (10,184,468) -- -- (10,184,468)
Unrealized holding gains on
investment securities, net
of reclassification
adjustment................ -- -- -- -- 116,780 -- 116,780
Translation adjustment........ -- -- -- -- 82,776 -- 82,776
------------
Total comprehensive loss...... (9,984,912)
------------
Options exercised............. 5,699 57 24,007 -- -- -- 24,064
Issuance of common stock for
employee purchase plan...... 20,664 207 75,019 -- -- -- 75,226
---------- -------- ------------ ------------ --------- ----------- ------------
BALANCE AT SEPTEMBER 30,
1998........................ 22,288,583 222,886 104,963,082 (55,842,181) 325 (6,284,866) 43,059,246
Comprehensive income (loss):
Net loss.................... -- -- -- (9,798,437) -- -- (9,798,437)
Unrealized holding gains on
investment securities, net
of reclassification
adjustment................ -- -- -- -- (185,710) -- (185,710)
Translation adjustment...... -- -- -- -- (148,548) -- (148,548)
------------
Total comprehensive loss...... (10,132,695)
------------
Options exercised............. 92,187 922 269,143 -- -- -- 270,065
Issuance of common stock for
employee purchase plan...... 23,326 233 68,097 -- -- -- 68,330
Issuance of treasury stock for
consulting services......... -- -- (127,164) -- -- 227,164 100,000
---------- -------- ------------ ------------ --------- ----------- ------------
BALANCE AT SEPTEMBER 30,
1999........................ 22,404,096 $224,041 $105,173,158 $(65,640,618) $(333,933) $(6,057,702) $ 33,364,946
========== ======== ============ ============ ========= =========== ============
See accompanying notes to consolidated financial statements
37
39
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1999 1998 1997
------------ ------------ -----------
Cash flow from operating activities:
Net loss.................................................... $(9,798,437) $(10,184,468) $(9,586,237)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Gain on sale of Anaderm common stock.................... (3,291,015) -- --
(Gain) loss on sale of investments...................... (435,907) 45,847 36,523
Depreciation and amortization........................... 2,574,776 1,944,344 1,518,751
In-process research and development charge on
acquisition of Cadus' research business............... 806,065 -- --
Amortization of library assets.......................... 1,761,809 1,811,583 1,101,509
Amortization of intangibles assets...................... 1,468,800 1,460,740 1,460,739
Accretion of deferred acquisition costs................. 40,121 40,120 40,121
Cashless exercise of stock options...................... -- -- 126,600
Common stock received for patent license fee............ -- (402,422) --
Issuance of treasury stock for consulting services...... 100,000 -- --
Changes in assets and liabilities, net of the effects of
the acquisition of Cadus' research business:
Receivables........................................... 680,934 (505,065) 816,278
Interest receivable................................... 112,568 191,892 4,250
Grants receivable..................................... 62,640 (226,409) 151,274
Prepaid expenses and other............................ 55,516 31,655 (196,324)
Other assets.......................................... 832,833 6,079 (72,514)
Accounts payable and accrued expenses................. 764,348 52,501 493,401
Unearned revenue...................................... 4,247,075 383,308 487,339
Accrued postretirement used in benefit cost........... 401,787 344,767 301,000
------------ ------------ -----------
Net cash provided by (used in) operating activities......... 383,913 (5,005,528) (3,317,290)
------------ ------------ -----------
Cash flows from investing activities:
Payments for acquisition of Cadus' research business...... (2,216,682) -- --
Additions to short-term investments....................... (10,676,970) (4,004,770) (4,019,935)
Maturities and sales of short-term investments............ 14,032,315 14,573,046 15,025,749
Change in other assets.................................... -- (276,200) (914,319)
Additions to property, equipment and leasehold
improvements............................................ (4,519,678) (2,188,613) (2,775,925)
Additions to compound library assets...................... (107,517) (526,694) (353,332)
Net change in loans to officers and employees............. 3,100 27,884 3,025
------------ ------------ -----------
Net cash (used in) provided by investing activities......... (3,485,432) 7,604,653 6,965,263
------------ ------------ -----------
Cash flows from financing activities:
Proceeds from exercise of stock options, employee stock,
stock purchase plan, and other.......................... 338,395 99,290 356,230
Proceeds from loan payable................................ 500,000 -- --
Payments on loan payable, net............................. (102,741) (102,659) 68,741
Purchase of treasury stock................................ -- -- (8,750,000)
------------ ------------ -----------
Net cash provided by (used in) financing activities......... 735,654 (3,369) (8,325,029)
------------ ------------ -----------
Net (decrease) increase in cash and cash equivalents........ (2,365,865) 2,595,756 (4,677,056)
Effect of exchange rate changes on cash and cash
equivalents............................................... (85,414) 82,776 (96,176)
Cash and cash equivalents at beginning of year.............. 11,315,166 8,636,634 13,409,866
------------ ------------ -----------
Cash and cash equivalents at end of year.................... $8,863,887 $11,315,166 $8,636,634
============ ============ ===========
Non-cash activities:
Issuance of treasury stock for acquisition of Dow compound
library license........................................... -- -- $2,500,000
============ ============ ===========
See accompanying notes to consolidated financial statements.
38
40
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(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., Oncogene Science Diagnostics, Inc. (OSDI) and Aston Molecules
Ltd. All intercompany balances and transactions have been eliminated. The
Company operates in one segment and utilizes a platform of drug discovery
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 development of drug
candidates.
(b) Revenue Recognition
Collaborative research revenues represent funding arrangements for the
conduct of research and development in the field of biotechnology and are
recognized when earned in accordance with the terms of the contracts and the
related development activities undertaken. Other research revenues are
recognized pursuant to the terms of grants which provide reimbursement of
certain expenses related to the Company's other research and development, or
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). Patent license fee revenues are recognized
pursuant to the terms of the license agreement.
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 R&D programs, including programs funded
pursuant to the R&D 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 R&D 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. The Company continually evaluates the
recoverability of its intangible assets by assessing whether the unamortized
value can be recovered through expected future results.
(d) Deferred Acquisition Costs
Deferred acquisition costs represent common stock purchase rights issued in
connection with the Company's acquisition of Aston on September 19, 1996. The
Company 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 such rights,
which are exercisable at the end of three and five years from the closing date,
amounted to $711,037 and $670,916 as of September 30, 1999 and 1998,
respectively.
39
41
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(e) Research and Development Costs
R&D 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 1999, 1998, and 1997, R&D activities include
approximately $12,296,000, $5,772,000, and $5,052,000 of independent R&D,
respectively. Included in R&D expenses in fiscal 1999 is $806,000 of in-process
R&D acquired in connection with the acquisition of Cadus' research business (See
Note 3(a)). Independent R&D represents those R&D activities, including R&D
activities funded by government research grants, substantially all the rights to
which the Company will retain. The balance of R&D represents expenses under the
collaborative agreements and co-ventures with Pfizer Inc., Anaderm Research
Corporation, Tanabe Seiyaku Co., Ltd., Vanderbilt University, Sankyo Company,
Ltd., Hoechst Marion Roussel, Inc., Solvay Pharmaceutical, B.V., Novartis Pharma
AG, Helicon Therapeutics, Inc., Wyeth-Ayerst Laboratories, Sepracor, Inc., Bayer
Corporation, Fujirebio, Inc., and BioChem Pharma, Inc.
(f) 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 fungal cultures and compounds acquired in connection
with the acquisition of MYCOsearch in fiscal 1996, the acquisition of Cadus
Pharmaceutical Corporation's research business in fiscal 1999 (See Note 3(a)),
and amortization of The Dow Company compound library license (See Note 3(b)) are
on a straight-line basis over five years, which represents the estimated period
over which the fungal cultures, compounds and license will be used in the
Company's R&D efforts.
(g) 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.
(h) Investments
Investment securities at September 30, 1999 and 1998 consist of U.S.
Treasury obligations and corporate debt and equity securities. The Company
classifies its investments as available-for-sale. These securities are recorded
at their fair value. Unrealized holding gains and losses, net of the related tax
effect, 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.
40
42
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(i) Net Loss Per Share
Basic and diluted net loss per share is computed by dividing the net loss
by the weighted average number of common shares outstanding during the period.
The diluted loss per share presented excludes the number of common share
equivalents (stock options and warrants), since such inclusion in the
computation would be anti-dilutive.
(j) 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. Such cash equivalents amounted to $2,582,281 and $9,227,339 as of
September 30, 1999 and 1998, respectively.
(k) 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.
(l) Comprehensive Income (Loss)
In October 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) 130, "Reporting Comprehensive Income". SFAS 130 establishes new
rules for the reporting and display of comprehensive income and its components.
SFAS 130 requires unrealized gains or losses on the Company's available-for-sale
securities (referred to as investment securities on the accompanying
consolidated balance sheets) and foreign currency translation adjustments, which
prior to adoption were reported separately in stockholders' equity, to be
included in other comprehensive income (loss).
A summary of unrealized holding gains on investment securities, net of
reclassification adjustment is as follows:
1999 1998 1997
--------- -------- --------
Unrealized holding gains arising during period....... $ 250,197 $ 70,933 $ 70,970
Less: reclassification adjustment for (gains) and
losses realized in net loss........................ (435,907) 45,847 36,523
--------- -------- --------
Unrealized holding gains on investment securities,
net of reclassification adjustment................. $(185,710) $116,780 $107,493
========= ======== ========
(m) Basis of Presentation
Certain reclassifications have been made to the prior period financial
statements to conform them to current presentations.
(2) LICENSE AGREEMENTS
Pursuant to a license agreement effective May 26, 1998, the Company granted
to Aurora Biosciences Corporation a non-exclusive worldwide license to practice
the technology under the Company's patent for live-cell gene transcription
assays utilizing a reporter gene. The Company also granted Aurora an option to
obtain a non-exclusive license to practice the technology under the Company's
patent concerning Methods of
41
43
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
Modulation. The duration of each license is to be coextensive with the life of
the last to expire of the underlying patents. Under the license agreement,
Aurora has the right to grant sublicenses. In addition, Aurora will pay the
Company an annual fee of $50,000, milestone payments and royalties on sales of
products derived from the licensed patents, if any. The Company has exclusive
control over prosecution, maintenance and enforcement of the patents subject to
the agreement. The Company received 75,000 shares of Aurora's common stock with
an estimated fair market value of $473,000 and a license fee of $300,000 upon
execution of the agreement. The shares of common stock were subsequently sold in
September 1999 at a then fair market value of $909,000. The resulting realized
gain of approximately $436,000 is included in net investment income in the
accompanying consolidated statement of operations for fiscal 1999.
Pursuant to a license agreement effective July 29, 1999, the Company
granted to Pharmacia & UpJohn SpA a non-exclusive, non-transferable, worldwide,
royalty-bearing license of certain gene transcription patents for drug discovery
and development of product candidates for human therapeutic or diagnostic
purposes (other than in the area of cosmeceuticals). Following April 24, 2002,
the scope of the non-exclusive license will be expanded to include the discovery
and development of cosmeceuticals. The duration of the license is to be
coextensive with the life of the last to expire of the underlying patents. Upon
signing the license agreement, Pharmacia & UpJohn paid the Company $100,000.
Pharmacia & UpJohn will pay OSI an annual fee of $50,000, and milestone and
royalty payments on sales of products derived from the licensed patents, if any.
The Company has exclusive control over prosecution, maintenance and enforcement
of the patents subject to the agreement.
(3) ACQUISITIONS
(a) Cadus Pharmaceutical Corporation
On July 30, 1999, the Company acquired certain assets from Cadus
Pharmaceutical Corporation for approximately $2.2 million in cash which includes
professional fees and other costs and the assumption of certain liabilities. The
acquisition was accounted for under the purchase method of accounting. The
purchase price has been allocated to the assets and the liabilities assumed
based on the fair values at the date of acquisition. The excess of the fair
value of the net assets acquired over the purchase price paid representing
negative goodwill was approximately $2.9 million. The negative goodwill was
allocated proportionately to reduce the value of the noncurrent assets acquired
and the in-process R&D which was charged to operations. The in-process R&D
charge is included in R&D expenses in the accompanying consolidated statement of
operations for the year ended September 30, 1999. The purchase price was
allocated as follows (in thousands):
Prepaid expenses and other current assets................... $ 362
Work force intangible....................................... 145
In-process R&D acquired..................................... 806
Compound library............................................ 336
Fixed assets................................................ 1,045
------
Total assets and in-process R&D acquired.................... 2,694
Less liabilities assumed.................................... (477)
------
Cash paid................................................... $2,217
======
The Company obtained an independent valuation of the amount of in-process
R&D acquired. The value of the purchased in-process R&D from the acquisition was
determined by estimating the projected net cash flows related to products under
development, based upon the future revenues to be earned upon commercialization
of such products. The percentage of the cash flow allocated to purchased
in-process research and development was based upon the estimated percentage
complete for each of the R&D projects. These cash
42
44
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
flows were discounted back to their net present value. The resulting projected
net cash flows from such projects were based on management's estimates of
revenues and operating profits related to such projects.
The assets purchased include (a) certain assets associated with certain of
Cadus' research programs (including the G-protein coupled receptor (GPCR)
directed drug discovery program and a collaboration with Solvay), (b) Cadus'
compound library of 150,000 components, (c) the purchase or license of certain
intellectual property rights, and (d) certain furniture, equipment, inventory,
and supplies. Several assets were retained by Cadus, including (a) monies in
escrow in connection with the judgment of SIBIA Neurosciences, Inc. against
Cadus, (b) cash and accounts receivable, (c) Cadus' Living Chip Technology, (d)
Cadus' Functional Genomics Program, and (e) Cadus' Research Collaboration and
License Agreement with SmithKline Beecham Corporation. Forty-seven Cadus
employees were hired by the Company. The Company intends to utilize the acquired
assets in the GPCR Directed Chemistry Program and the collaboration with Solvay,
but expects to deploy the balance of the assets in other research areas.
The Company also assumed Cadus' facility lease in Tarrytown, New York
(approximately 45,569 square feet) as of July 1, 1999 (approximately $898,249 in
rental payments per annum through December 31, 2002) and an equipment lease with
General Electric Capital Corporation (GECC). On August 23, 1999, the Company
elected to payoff the GECC lease in exchange for a payment of $2.8 million and
obtained ownership of the fixed assets covered by the lease agreement. On
September 21, 1999, Cadus reimbursed the Company $308,000 in exchange for those
fixed assets that have been retained by Cadus for its own use. The source of the
cash portion of the purchase price and the subsequent decision to payoff the
lease agreement with GECC was the Company's existing cash resources. Liabilities
and the facility lease obligation assumed will be paid from existing cash
resources and working capital to be generated in future periods.
In connection with the acquisition, the Company entered into the following
additional agreements with Cadus: (a) a Patent License Agreement, (b) a
Technology License Agreement, and (c) a Software License Agreement, pursuant to
which the Company obtained non-exclusive licenses for the use and practice of
certain of Cadus' patents, Cadus' technology and Cadus' software programs,
respectively. The Company and Cadus also entered into another Patent License
Agreement under which the Company will license back to Cadus on a non-exclusive
basis certain of the patents which were assigned to the Company as part of the
acquisition.
In connection with the acquisition, the Company adopted a Non-Qualified
Stock Option Plan for former employees of Cadus. The Company granted options to
purchase an aggregate of 415,000 shares of common stock of the Company at a
purchase price of $5.00 per share, which represents the fair value of the
Company's stock at the date granted. These options become exercisable on July
30, 2000.
The operating results of Cadus' research business have been included in the
consolidated statements of operations from July 30, 1999. The following
unaudited pro forma information presents a summary of consolidated results of
operations for the years ended September 30, 1999 and 1998 assuming the asset
acquisition had taken place as of October 1, 1998 and October 1, 1997,
respectively:
1999 1998
-------- --------
(UNAUDITED)
Revenues............................................... $ 24,902 $ 22,168
Net loss............................................... (15,013) (16,452)
Net loss per share..................................... (0.70) (0.77)
43
45
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
The pro forma results give effect to the amortization of acquired
intangibles and reduction of investment income. The pro forma information is not
necessarily indicative of the results of operations had the asset acquisition
been affected on the assumed date.
(b) Compound Library License
On March 18, 1997, the Company entered into a license agreement with The
Dow Chemical Company 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 Chemical is also entitled, in certain instances where
pre-existing Dow Chemical patents are in effect, to royalty payments from any
new drug products that may result from the screening of the subset of the
compound library covered by such patents. The common stock issued to Dow
Chemical 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 did not conduct
significant research utilizing these compounds during fiscal 1997, the Company
began amortizing the license agreement cost in October 1997 and recorded
$505,446 of amortization expense in both fiscal 1998 and 1999.
(4) INVESTMENTS
The Company invests its excess cash in U.S. Government securities and debt
and equity instruments of financial institutions and corporations with strong
credit ratings. The Company has established guidelines relative to
diversification of its investments and their maturities 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, 1999 and 1998:
GROSS
UNREALIZED
1999 COST (LOSSES) GAINS FAIR VALUE
- ---- ----------- -------------- ----------
US Treasury Securities and obligations of US
Government agencies....................... $ 9,149,811 $(166,905) $8,982,906
Corporate debt securities................... 1,014,786 275 1,015,061
----------- --------- ----------
Total.................................. $10,164,597 $(166,630) $9,997,967
----------- --------- ----------
GROSS
UNREALIZED
1998 COST (LOSSES) GAINS FAIR VALUE
- ---- ----------- -------------- -----------
US Treasury Securities and obligations of
US Government agencies................... $ 9,201,681 $(17,154) $ 9,184,527
Corporate debt securities.................. 3,479,932 36,234 3,516,166
Corporate equity securities................ 402,422 -- 402,422
----------- -------- -----------
Total................................. $13,084,035 $ 19,080 $13,103,115
----------- -------- -----------
Net realized gains on sales of investments during fiscal 1999 were
approximately $436,000, and net realized losses on sales of investments during
1998 and 1997 were approximately $46,000 and $37,000, respectively.
44
46
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
The Company also has investments in certain biotechnology companies which
are included in other noncurrent assets in the accompanying consolidated balance
sheets. The net investments are summarized as follows:
SEPTEMBER 30,
----------------------
1999 1998
-------- ----------
Anaderm Research Corporation......................... $ -- $ 977,471
Helicon Therapeutics, Inc............................ -- 200,000
Tularik Inc.......................................... 250,000 250,000
-------- ----------
$250,000 $1,427,471
======== ==========
As further discussed in Note 5, the Company has collaborative research
agreements with Anaderm and Helicon and the investments were carried based on
the equity method of accounting. On September 23, 1999, the Company exercised
its right to require Pfizer to purchase all of its shares of Anaderm common
stock at a sale price of $3.6 million. As of September 30, 1999, the Company
recognized a gain of $3.3 million on the sale of the Anaderm common stock and
recorded a receivable of $3.6 million. On November 10, 1999, the Company
received a cash payment of this receivable from Pfizer. As of September 30,
1999, the Company has fully reserved its investment in Helicon as more fully
discussed in Note 5(i). The investment in Tularik Inc. is carried at cost and
approximates fair market value.
(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. It may, however, 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. 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.
Effective as of April 1, 1999, the Company entered into a Development
Agreement with Pfizer for the development of certain compounds derived from the
collaborative research agreement described above for the treatment of psoriasis.
Under the Development Agreement, the Company will conduct a development program
formulated by the Company and Pfizer which includes pre-clinical and clinical
research through and including Phase II clinical trials for compounds to assess
their safety and efficacy to be developed as therapeutic agents for the
treatment of psoriasis and other related dermal pathologies. Pursuant to the
terms, Pfizer has granted to the Company an exclusive, with the exception of
Pfizer, license to make and use the compounds for all research purposes in the
development program other than the sale or manufacture for sale of products or
processes. At the end of the development program, Pfizer must notify the Company
of its intention to continue development and commercialization of a compound
within three (3) months following
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
receipt of the data package from the clinical studies. If Pfizer does so notify
the Company of such intention, it will have an exclusive, world-wide license,
with the right to grant sublicenses, to make, use, sell, offer for sale and
import products developed in the course of the development program subject to
the reimbursement of clinical development costs. If Pfizer fails to notify the
Company of such intention, the Company will receive an exclusive, world-wide,
royalty-bearing license, including the right to grant sublicenses, to
manufacture, use, sell, offer for sale and import products developed in the
course of the development program. The Company, however, has the right to refuse
to accept this license. The party receiving the license must pay milestone and
royalty payments as consideration therefor. The duration of the licenses is
coextensive with the lives of patents related to the licensed compounds. Each of
the parties has rights and obligations to prosecute and maintain patent rights
related to specified areas of the research under the Development Agreement. The
Development Agreement is subject to early termination in the event of certain
defaults by the parties.
(b) Anaderm
In April 1996, in connection with the formation of Anaderm, the Company
entered into a Stockholders' Agreement (1996 Stockholders' Agreement) among the
Company, Pfizer, Anaderm, New York University and certain NYU faculty members,
and a Collaborative 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
since exercised their options fully, and until November 10, 1999 Pfizer held
82%, the Company held 14% and NYU and the faculty members collectively held 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 1996 Research Agreement. The term of the 1996 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.
With Pfizer's approval, the funded phase commenced on October 1, 1997. During
this phase, Anaderm made 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. In December
1997, the Company and Pfizer entered into an agreement for a second round of
equity financing for Anaderm. The agreement called for an equity contribution of
$14 million, of which the Company contributed $2 million in drug discovery
resources, including assay biology, high throughout screening, lead optimization
and chemistry, through 1999.
On April 23, 1999, the Company entered into an Amended and Restated
Collaborative Research Agreement (1999 Research Agreement) with Pfizer and
Anaderm to expand the collaborative program begun by the 1996 Research Agreement
and an Amended and Restated Stockholders' Agreement with Pfizer, Anaderm, NYU
and the faculty members (1999 Stockholders' Agreement). The 1999 Research
Agreement is for a term of three years. Pfizer may terminate the 1999 Research
Agreement, however, after the first or second year of the term in its sole
discretion after consultation with Anaderm and the Company to determine whether
satisfactory progress has been made in the research program during the previous
year. The 1999 Research Agreement provides for funding by Pfizer of up to $35
million in total payments to Anaderm to fund the Company's research and
development activities during the three-year term and up to $15 million in
phase-down funding following expiration of the three-year term or earlier
termination by Pfizer. In the expanded program, the Company will continue to
provide a full range of capabilities including assay biology, high throughput
screening, compound libraries, combinatorial, medicinal, and natural product
chemistry, as well as pharmaceutics, pharmacokinetics and molecular biology. The
Company anticipates a significant increase in its staffing of the program to
conduct its drug discovery efforts during the term of the 1999
46
48
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
Research Agreement. Anaderm or Pfizer will pay royalties to the Company on the
sales of products resulting from the collaboration.
A significant change to the 1996 Stockholders' Agreement by the 1999
Stockholders' Agreement is the addition of a right on the part of each of the
Company, NYU and each of the faculty members, exercisable at any time prior to
December 31, 1999, to require Anaderm or Pfizer to purchase all, but not less
than all, of the shares of common stock of Anaderm held by each such stockholder
for a fixed price based upon a formula as set forth in the 1999 Stockholders'
Agreement. The stockholders, also continue to have the right, exercisable at any
time subsequent to April 23, 2000, to require Anaderm or Pfizer to purchase all,
but not less than all, of the shares of common stock of Anaderm held by each
such stockholder at the "Fair Value" (as such term is defined in the 1999
Stockholders' Agreement) of such shares. In addition, Anaderm or Pfizer had the
right, exercisable at any time subsequent to April 23, 2002, to require the
Company, NYU or any faculty member to sell to Anaderm all, but not less than
all, of the shares of common stock of Anaderm held by such stockholder at the
Fair Value of such shares. In the 1996 Stockholders' Agreement, this call right
was exercisable by Anaderm only with respect to the shares owned by NYU and the
faculty members.
As of September 30, 1999, the Company has expended approximately $12.5
million, of which, $2.6 million has been capitalized as the cost of the
Company's 14% interest in Anaderm. This capitalized cost has been offset by the
Company's interest in the loss of Anaderm through September 23, 1999. As
discussed in Note 4, the Company exercised its option to sell its Anaderm common
stock to Pfizer as of September 23, 1999 for a total sale price of $3.6 million.
The Company's net investment in Anaderm at the date of the sale was
approximately $354,000 resulting in a net gain of $3.3 million on the sale of
common stock. During fiscal 1999 and 1998, the Company recorded revenue of
approximately $6.6 million and $3.5 million, respectively, from Anaderm for
contracted research activities.
(c) Tanabe
Effective as of October 1, 1999, the Company entered into a Collaborative
Research and License Agreement with Tanabe. The collaboration is focused on
discovering and developing novel pharmaceutical products to treat diabetes.
Under the agreement, the Company is responsible for identification of
targets (subject to Tanabe's approval), assay development, screening of
compounds from the Company's library and Tanabe's library against identified
targets, identification of seed compounds meeting certain criteria specified in
the agreement, optimization of such seed compounds, and identification of lead
compounds meeting certain criteria specified in the agreement. Tanabe maintains
responsibility for further development and marketing of a lead compound in
exchange for milestone and royalty payments to the Company.
If Tanabe determines to initiate further development of a lead compound
identified by the Company, the Company will grant to Tanabe exclusive, worldwide
licenses to, among other things, use, manufacture and sell all products
containing such lead compounds directed to the identified targets. In exchange
for these licenses, Tanabe will pay the Company 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 or ten years from first commercial
sale, whichever is longer. If Tanabe determines not to initiate further
development of a lead compound or if Tanabe discontinues development of
candidate compounds, the Company will have the sole and exclusive right to
develop, use, manufacture and sell all products resulting from the
collaboration, and it will pay royalties to Tanabe. 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 is prohibited during the term of the contract from
pursuing independently, having sponsored or sponsoring research and development
of compounds and products in the diabetes area
47
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
relating to the identified targets in the agreement. Tanabe is prohibited from
sponsoring research relating to the identified targets and from being sponsored
by another pharmaceutical company with respect to research relating to the
identified targets. The agreement is for a term of four years, with the option
to extend for an additional one two year period. Tanabe, however, has the right
to terminate the agreement after two years under certain circumstances. On the
effective date of the agreement Tanabe was required to pay the Company a
technology access fee of $3.5 million. On September 28, 1999, the Company
received $4,312,500 from Tanabe which represented advanced funding of the
technology access fee of $3.5 million and research funding of $812,500 for the
first quarter of fiscal 2000. This amount has been recorded in deferred
revenue -- current in the accompanying consolidated balance sheet as of
September 30, 1999. See Note 16 for a discussion of SEC Staff Accounting
Bulletin No. 101 on revenue recognition of technology access fees.
(d) Vanderbilt
Effective as of April 28, 1998, the Company entered into a Collaborative
Research, Option and Alliance Agreement with Vanderbilt University to conduct a
collaborative research program and seek a corporate partner to fund a technology
collaboration for the discovery and development of drugs to treat diabetes. The
collaborative research was funded by the Company in exchange for which the
Company received an option to negotiate a commercially reasonable, worldwide,
exclusive license from Vanderbilt to develop, make, use, and sell products
derived from the research program. The Company and Vanderbilt committed equal
resources to the program, including, among other things, access to all their
respective laboratory facilities and dedicated teams of research scientists. The
Company had certain rights and obligations to prosecute and maintain patent
rights related to specified areas of the research under the agreement. The
agreement was for a term of one year, and was extended until the execution of a
third-party research collaboration agreement by the Company -- i.e., the
agreement with Tanabe.
Concurrently with the execution of the Tanabe agreement, the Company and
Tanabe entered into an Amended and Restated Collaborative Research, License and
Alliance Agreement with Vanderbilt with an effective date of August 31, 1999.
This agreement amended and restated the agreement from April 1998 to add Tanabe
as a party to the agreement with respect to certain sections and to amend
certain other provisions to clarify Vanderbilt's role in the OSI/Tanabe research
program. The term of the research program conducted by OSI and Vanderbilt
commenced on April 28, 1998 and will end upon termination of the contract period
under the Tanabe agreement unless mutually extended by the Company and
Vanderbilt.
The OSI/Vanderbilt research program is comprised of two parts: research
directed toward the targets identified in the Tanabe agreement and research
directed toward additional targets which are not targets under the Tanabe
agreement. The Company may offer to Tanabe any of the additional targets for
inclusion in the OSI/Tanabe research program. As part of the OSI/Vanderbilt
research program, Vanderbilt will assist the Company in fulfilling its
obligations under the Tanabe/OSI research program by providing access to
Vanderbilt's drug discovery resources, including laboratories and assays.
The Company will provide funding to Vanderbilt to conduct the
OSI/Vanderbilt research program. A portion of such funding will come from
Tanabe's funding of the OSI/Tanabe research program. The Company will also pay
to Vanderbilt a percentage of the revenues (milestone and royalty payments) it
receives from Tanabe and any other third party which is commercializing products
resulting from the OSI/Vanderbilt research program. The percentage received by
Vanderbilt will vary in accordance with the extent to which Vanderbilt
technology and patents contributed to the product giving rise to such revenue.
The Company also paid Vanderbilt a one-time success fee in the amount of
$500,000 in October, 1999 in respect of the Company entering into the Tanabe
agreement.
48
50
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(e) 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, 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. In November 1999,
the Company and Sankyo renewed the collaboration for an additional two years.
During 1997, the Company received and recorded $267,000 for a non-refundable
technology disclosure fee upon signing the agreement. During fiscal 1999 and
1998, the Company recorded revenue of approximately $2.1 million and $2.6
million, respectively, from Sankyo pursuant to this 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.
(f) Hoechst Marion (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,
Hoechst Roussel and Hoechst AG. This resulted from the corporate reorganization
of HMRI in July 1995 in which the pharmaceutical operations Marion, Hoechst
Roussel and Hoechst AG 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 various 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's discovery
efforts, and as of September 30, 1999, the Company has recognized an aggregate
of $22.8 million in research funding from HMRI and its predecessors.
The Company has granted to HMRI an exclusive, worldwide license (and rights
to acquire additional licenses) with respect to, among other things, the use,
manufacture and sale of products resulting from the Company's lead seeking
efforts against individual drug targets. 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.
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
49
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
cancer. This collaboration identified active lead compounds that were advanced
to a pre-clinical development stage. During fiscal 1997, the Company received
and recorded as income a $1.0 million initiation fee from HMRI in connection
with this collaboration. This research effort, however, did not achieve
sufficient data to warrant further development. Consequently, in October 1998,
this program was terminated.
(g) Solvay
With the acquisition of certain assets of Cadus, the Company assumed a
Collaborative Research and License Agreement effective as of November 1, 1995
between Cadus and Solvay. The collaboration is directed toward GPCR drug
discovery in differing fields of use. The Company's fields of use include
cancer, autoimmune and inflammatory diseases. Solvay's fields of use include
central nervous system disorders, cardiovascular and gastrointestinal diseases.
The parties are to develop and manufacture screens that incorporate targets
which are the subject of the agreement. The screens are to enable Solvay and the
Company to test compounds for biological activity as part of their respective
drug discovery efforts in their respective fields. The parties are responsible
for the identification of targets and the Company undertakes assay development
using funds from Solvay. In exchange for milestone and royalty payments, Solvay
maintains sole responsibility for pre-clinical and clinical development as well
as marketing and commercialization of any lead compound it discovers from its
use of the screens developed as part of the collaboration.
Under the agreement, Cadus granted to Solvay a worldwide license in
Solvay's fields of use to, among other things, use and practice the screens to
identify and confirm potential human therapeutics. The license is exclusive for
the term of the research program, or longer if Solvay has identified or
confirmed a potential product during the exclusive period, and non-exclusive for
five years following the research program. In exchange for these licenses,
Solvay will pay the Company, as Cadus' successor, license fees and royalties on
product sales. If Solvay discontinues the development of candidate compounds,
the Company, as Cadus' successor, will have the sole and exclusive right to
develop, use, manufacture and sell all products resulting from the
collaboration, and the Company will pay milestones and royalties to Solvay. Each
of the parties has rights and obligations to prosecute and maintain patent
rights related to specified areas of the research under the agreement. The term
of the research program is until December 31, 2000. The Company is to receive
$2.5 million per year in research funding plus cost of living adjustments. The
Company recorded revenue of $447,000 from Solvay for the two months ended
September 30, 1999.
(h) Novartis
The Company entered into an agreement with Novartis in April 1995 (1995
Agreement) for the development of TGF-Beta 3 for various indications. TGF-Beta 3
is a naturally occurring human growth factor, first isolated by the Company,
that exerts either stimulatory or inhibitory effects depending upon the
particular cell type to which it is applied. This agreement granted to Novartis
an exclusive, worldwide license to use and sell TGF-Beta 3 products for wound
healing and oral mucositis, as well as certain other indications, in exchange
for royalty payments to the Company on the sale of TGF-Beta 3 products.
During 1998, Phase II clinical trials being conducted by Novartis for both
wound healing and oral mucositis failed to achieve their primary clinical end
points. Consequently, no further clinical development of TGF-Beta 3 by Novartis
for either wound healing or oral mucositis has been anticipated.
In May 1999, certain terms of the 1995 Agreement including the definition
of licensed indications, the supply of TGF-Betas, the amount of royalty
payments, and the schedules of the Company's patents and applications and
Novartis' patents were amended. Specifically, oral mucositis and the healing of
soft wound tissue were removed from the licensed indications. Novartis
acknowledged that it has discontinued develop-
50
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
ment of products for the indications of oral mucositis and healing of soft wound
tissue. The parties agreed that all licenses theretofore granted to Novartis
with respect to such discontinued indications are terminated and that the
Company is free to continue development work and to grant licenses to third
parties with respect to such discontinued indications. The Company is also free
to use the results of any development work with respect to the discontinued
indications carried out by Novartis prior to the date of the amendment provided
that the Company pays to Novartis royalties and/or certain other agreed-upon
amounts with respect to sales of products resulting from any such continued
development work by the Company or a licensee thereof. Under the amendment, the
new licensed indications are bone, cartilage and tendon repair. Under the
amended agreement, Novartis' exclusive option has been amended to include in the
definitions of licensed indications, the treatment of transplant patients (e.g.,
graft protection), the treatment of ischemia (e.g., angina pectoris and
peripheral vascular disease), the treatment of stroke patients, and the
treatment of inflammatory bowel disease, and Novartis also has a non-exclusive
option to include any other additional indications relating to TGF-Betas (other
than the discontinued indications) upon payment of a milestone payment. The
exercise of the option will result in Novartis making a milestone payment of
$5.0 million or purchasing $5.0 million of the Company's common stock at a per
share price equal to 115% of the average closing price for the 30-day period
ending on the date of purchase. The time period to exercise the option was
extended until May 31, 2003. The Company's agreement with Novartis ends upon the
expiration of the last of the Company's patents relating to TGF-Beta 3.
(i) Helicon
In July 1997, the Company, Cold Spring Harbor Laboratory and Hoffman-La
Roche Inc. formed Helicon Therapeutics, Inc., a new Delaware corporation. In
exchange for approximately 30% of Helicon's outstanding capital stock, the
Company contributed to Helicon molecular screening services and a nonexclusive
license with respect to certain screening technology. Such services were
completed in fiscal 1998. 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. Hoffman-La 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 entered into various collaborative research and license
agreements pursuant to which they were to 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 conducted research under the program, which was
funded by Helicon (except for the molecular screening services that the Company
contributed to Helicon). Helicon received this funding from Hoffman-La Roche for
the first two years of the program. Hoffman-La Roche terminated the program at
the end of the second year and the terms of termination are being negotiated.
Helicon had granted to Hoffman-La Roche a worldwide license to commercialize
pharmaceutical products resulting from the collaborative program in exchange for
certain milestone payments and royalties on Hoffman-La Roche's sales of such
products. The Company is currently contributing funds to Helicon on an as-needed
basis in amounts required to cover the costs of conducting research activities,
which amounts are charged to R&D expense.
As of September 30, 1998, the Company had capitalized $1.0 million as the
cost of the Company's 30% interest in Helicon, which was offset by the Company's
equity interest in the losses of Helicon and a reserve for impairment based on
the uncertainty of Helicon's future profitability. The Company's net investment
in Helicon at September 30, 1998 of $200,000 was included in other assets in the
accompanying consolidated balance sheet. At September 30, 1999, this investment
was reduced by recognition of the Company's equity interest in Helicon's net
losses and the balance of the equity interest has been written off in
recognition of the impairment of the investment upon the termination of the
Hoffman-La Roche research collaboration. The
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
Company recorded revenue of $642,000 and $203,000 from Helicon in fiscal 1999
and 1998, respectively, in connection with its collaborative research and
license agreement.
(j) 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 three 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.
(k) Sepracor
Pursuant to an Amendatory and Collaborative Agreement dated March 31, 1998,
the Company and Sepracor amended their Collaborative Research, Development and
Commercialization Agreement dated March 7, 1997, terminating certain provisions
contained therein, including, without limitation, provisions establishing the
research program. Each party will be free to independently pursue the discovery
of new compounds in the anti-infective area without incurring any responsibility
to the other party. To the extent Sepracor commercializes certain compounds
arising out of the joint venture, however, it will pay royalties to the Company.
The Company provided discovery biology and certain other services to Sepracor
until September 1, 1998, in exchange for fees. In fiscal 1999, the Company had
received approximately $74,000 in funding from Sepracor pursuant to the amended
agreement.
(l) 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 diagnostic technology in
exchange for royalties on net sales. Bayer owns all the technology, and has the
exclusive right to commercialize automated clinical diagnostic products derived
from the collaboration. The Company retained rights and was actively selling
non-automated, or manual, versions of these tests to the clinical research
market and retained the right to commercialize automated the manual versions in
the clinical diagnostic market. Bayer's license is perpetual with respect to
non-patented technology and would terminate with respect to patented technology
upon the expiration of the last to expire of the Company's patents. Bayer
provided 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 was
required to provide up to $500,000 in annual funding for the collaboration to
the extent the Company derived net revenues from out-licensing any cancer
diagnostics technology or the sale of any clinical diagnostic or clinical
research products. The agreement was to terminate on December 31, 2002. Bayer
had the right to terminate the agreement at any time after December 31, 1997
upon 12 months notice. Upon the sale of the Company's diagnostic business to
Bayer, the agreement terminated. During fiscal 1999 and 1998, the Company
recorded revenue of approximately $1.1 million and $1.5 million, respectively,
from Bayer pursuant to this agreement. See Note 17 for sale of the Company's
diagnostic business to Bayer on November 30, 1999.
(m) Fujirebio
The Company, through its wholly-owned subsidiary OSDI, entered into a
Research Collaboration and License Agreement with Fujirebio effective April 1,
1998, creating a collaborative program focused on
52
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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
discovering and developing certain proprietary cancer assays and commercializing
cancer products. Under the agreement, Fujirebio funded the Company's research
and development of cancer assays over a four-year term. The Company provided
Fujirebio with antibodies, antigens and other substances necessary to
manufacture the diagnostic products derived from the collaboration. Further, the
Company granted to Fujirebio a non-exclusive license to, among other things,
develop, manufacture and sell the products developed pursuant to the
collaboration in exchange for license fees and royalties on product sales. The
duration of the license was coextensive with the lives of the patents related to
the licensed products. Each of the parties had rights and obligations to
prosecute and maintain patent rights related to specified areas of the research
under the agreement. The agreement was subject to early termination by either
party in the event of certain defaults. Upon the sale of the Company's
diagnostics business to Bayer, the agreement was assigned to Bayer. During
fiscal 1999, the Company recorded $433,333 of revenue under this agreement. See
Note 17 for sale of the Company's diagnostic business on November 30, 1999.
(n) BioChem
Pursuant to an Agreement, dated March 19, 1999, the Company and BioChem
Pharma, Inc. (formerly BioChem Pharma (International) Inc.) amended their
Collaborative Research, Development and Commercialization Agreement, effective
as of May 1, 1996, terminating certain provisions contained therein, including,
without limitation, provisions establishing the research program. Under the
amended agreement, BioChem received from the Company a worldwide, irrevocable,
exclusive license, and right to grant sublicenses, in a certain anti-viral
target for a license fee of $2 million in cash, which is included in license fee
income in the accompanying consolidated statement of operations for the year
ended September 30, 1999. In addition, each party will be free to independently
pursue the discovery of new compounds in the Hepatitis B and HIV areas without
incurring any responsibility to the other party. To the extent BioChem completes
any clinical trials or pursues any regulatory approvals for any products covered
by the license, it will pay milestones to the Company. In addition, to the
extent BioChem commercializes certain compounds arising out of the joint
venture, it will pay royalties to the Company.
(o) 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.
53
55
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
Total program research revenues under the aforementioned agreements are as
follows:
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Related Parties:
Pfizer...................................... $ 4,001,043 $ 3,682,056 $ 3,622,363
Hoechst Marion............................ 2,420,787 4,301,263 5,136,257
BioChem Pharma............................ 80,000 100,000 517,888
Anaderm................................... 6,633,536 3,467,203 388,254
Helicon................................... 641,640 203,437 --
----------- ----------- -----------
Total related parties.................. 13,777,006 11,753,959 9,664,762
Bayer..................................... 1,125,000 1,500,000 1,125,000
Sankyo.................................... 2,082,570 2,614,297 1,011,039
Sepracor.................................. 74,416 197,357 --
Solvay.................................... 447,368 -- --
SmithKline Beecham........................ 227,000 -- --
Fujirebio................................. 433,333 100,000 --
Wyeth..................................... -- -- 400,000
----------- ----------- -----------
Total.................................. $18,166,693 $16,165,613 $12,200,801
=========== =========== ===========
Included in receivables are the following amounts due from related parties:
SEPTEMBER 30,
----------------------
1999 1998
-------- ----------
Pfizer...................................................... $108,987 $ 125,975
Hoechst Marion.............................................. 59,317 74,623
Anaderm..................................................... -- 803,240
Helicon..................................................... 195,276 173,137
-------- ----------
Total.................................................. $363,580 $1,176,975
======== ==========
(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) 1999 1998
------------- ----------- -----------
Laboratory equipment....................... 5-15 $14,209,633 $10,728,319
Office furniture and equipment............. 5-10 4,870,206 3,945,292
Automobile equipment....................... 3 119,654 122,775
Leasehold improvements..................... Life of lease 6,582,509 5,520,703
----------- -----------
25,782,002 20,317,089
Less: accumulated depreciation and
amortization............................. 14,866,413 12,320,534
----------- -----------
Net property, equipment and leasehold
improvements............................. $10,915,589 $ 7,996,555
=========== ===========
54
56
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(7) INTANGIBLE ASSETS
The components of intangible assets are as follows:
SEPTEMBER 30,
------------------------
1999 1998
---------- ----------
Patents..................................................... $4,876,189 $5,643,401
Goodwill.................................................... 1,387,072 2,080,600
Acquired work force......................................... 137,031 --
---------- ----------
$6,400,292 $7,724,001
========== ==========
The above amounts reflect accumulated amortization of $8,226,456 and
$6,757,655 at September 30, 1999 and 1998, respectively. On November 30, 1999
the Company sold all of its capitalized patents in the sale of assets of its
diagnostics business to Bayer. (See Note 17).
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at September 30, 1999 and 1998 are
comprised of:
SEPTEMBER 30,
------------------------
1999 1998
---------- ----------
Accounts payable............................................ $1,357,400 $1,064,242
Accrued future lease escalations............................ 465,765 446,137
Accrued payroll and employee benefits....................... 638,530 350,831
Accrued incentive compensation.............................. 750,000 625,000
Accrued closing costs (see Note 15)......................... 535,000 --
Accrued expenses............................................ 1,482,977 1,746,330
---------- ----------
$5,229,672 $4,232,540
========== ==========
(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 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.
(b) Stock Option Plans
The Company has established five stock option plans for its employees,
officers, directors and consultants, including a stock option plan adopted upon
the acquisition of Cadus' research business (See Note 3(a)). 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.
55
57
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
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 at 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................................... (55,887) 3.50 9.00 5.19
---------
Balance at September 30, 1997
Unexercised................................. 2,985,052 $1.75 $9.32 $6.07
Granted..................................... 840,250 3.25 6.75 5.26
Exercised................................... (5,699) 3.50 9.25 4.22
Forfeited................................... (37,872) 3.75 9.00 6.66
---------
Balance at September 30, 1998
Unexercised................................. 3,781,731 $1.75 $9.32 $5.89
Granted..................................... 996,258 2.94 6.00 4.36
Exercised................................... (92,187) 1.75 4.13 2.93
Forfeited................................... (251,033) 1.94 9.00 4.38
---------
Balance at September 30, 1999
Unexercised................................. 4,434,769 $1.75 $9.32 $5.70
---------
At September 30, 1999, the Company has reserved 4,243,406 shares of its
authorized common stock for all shares issuable under options. At September 30,
1999, 1998, and 1997 options exercisable were 3,077,028, 2,454,082 and
1,290,829, respectively.
Information regarding stock options outstanding as of September 30, 1999,
is as follows:
OPTIONS OUTSTANDING OPTIONS
----------------------- EXERCISABLE
WEIGHTED --------------------------
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
SHARES EXERCISE CONTRACTUAL SHARES EXERCISE
PRICE RANGE (IN THOUSANDS) PRICE LIFE (IN THOUSANDS) PRICE
- ----------- -------------- -------- ----------- -------------- --------
Under $4.50............. 1,718 $3.91 6.52 1,243 $3.89
$4.50 - $7.00........... 1,942 6.01 7.69 1,061 6.41
Over $7.00.............. 775 8.89 6.57 773 8.89
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 123, "Accounting for Stock-Based Compensation," requires the
use of option valuation models to determine the fair value of options granted
after 1995. Pro forma information regarding net loss and loss per share shown
below was determined as if the Company had accounted for its employee stock
options and shares sold under its stock purchase plan under the fair value
method of SFAS 123.
The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997 respectively: risk-free
56
58
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
interest rates of 5.75%, 4.38% and 5.84%; dividend yields of 0%; volatility
factors of the expected market price of the Company's common stock of 60.7%,
64.9% and 65.8% and expected life of the options 3.7 years for all three years.
These assumptions resulted in weighted-average fair values of $2.22, $2.87 and
$3.61 per share for stock options granted in 1999, 1998 and 1997, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The pro forma effect on
net loss for the periods presented is not representative of the pro forma effect
on net income or loss in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
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,
-------------------------------
1999 1998 1997
------- -------- --------
Pro forma net loss.................................. $12,563 $(12,802) $(11,205)
Pro forma net loss per share:
Basic............................................. $ (0.59) $ (0.57) $ (0.51)
(a) Preferred Stock
During 1999, the Company adopted certain amendments to its certificate of
incorporation which included the authorization of 5,000,000 shares of preferred
stock with a par value of $.01 per share with such designations, preferences,
privileges, and restrictions as may be determined from time to time by the
Company's Board of Directors.
(b) 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 Merrell Dow. 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 was
exercisable until December 10, 1999. The proceeds to the Company were $6
million.
(c) 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 1999, 1998 and 1997, 23,326, 20,664 and 12,388 shares were issued with
55, 52 and 48 employees participating in the plan, respectively.
(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 assets.
57
59
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
The tax effect of temporary differences, net operating loss carry forwards
and research and development tax credit carry forwards as of September 30, 1999
and 1998 are as follows:
SEPTEMBER 30,
----------------------------
1999 1998
------------ ------------
Deferred tax assets:
Net operating loss carry forwards....................... $ 19,530,528 $ 16,942,035
Research and development credits........................ 867,171 874,246
Intangible assets....................................... 695,702 797,137
Other................................................... 2,845,293 2,041,480
------------ ------------
23,938,694 20,654,898
Valuation allowance..................................... (23,938,694) (20,654,898)
------------ ------------
$ -- $ --
============ ============
As of September 30, 1999, the Company has available federal net operating
loss carry forwards of approximately $57 million which will expire in various
years from 2000 to 2019, and may be subject to certain annual limitations. The
Company's research and development tax credit carry forwards expire in various
years from 2000 to 2019.
(11) COMMITMENTS AND CONTINGENCIES
(a) Lease Commitments
The Company leases office, operating and laboratory space under various
lease agreements.
Rent expense was approximately $1,533,000, $1,090,000 and $1,081,000 for
the fiscal years ended September 30, 1999, 1998, and 1997, respectively.
The following is a schedule by fiscal years of future minimum rental
payments required as of September 30, 1999, assuming expiration of the leases
for the two Uniondale facilities on July 31, 2003 and June 30, 2006,
respectively, the Durham facility on October 31, 2004, the Tarrytown facility on
June 30, 2008, the Birmingham facility on April 30, 2006, and the transfer of
the Cambridge facility on November 30, 1999 to Bayer (see Note 17).
2000........................................................ $ 1,958,475
2001........................................................ 1,931,941
2002........................................................ 1,950,877
2003........................................................ 2,000,365
2004........................................................ 1,829,898
2005 and thereafter......................................... 4,140,403
-----------
$13,811,959
===========
(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
58
60
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
conduct of its research. The Company's future royalties, if any, may be reduced
by up to 50% if its licensees or collaborative partners are required to obtain
licenses from third parties whose patent rights are infringed by the Company's
products, technology or operations. In addition, should any infringement claims
result in a patent infringement lawsuit, the Company could incur substantial
costs in defense of such a suit, which could have a material adverse effect on
the Company's business, financial condition and results of operations,
regardless of whether the Company were successful in the defense.
(c) Borrowings
As of September 30, 1999, the Company had a line of credit with a
commercial bank in the amount of $10 million. This line expires annually on
March 31st, and its current rate of interest is prime plus 3/4. There were no
amounts outstanding under the line of credit as of September 30, 1999. In
addition, in 1999, the Company obtained a secured loan of $500,000 from the same
bank. The loan is payable over a three-year period, with monthly principal
payments of $13,888, plus interest at 8.12%. The carrying value of the loan
approximates fair value at September 30, 1999, based on borrowing rates
currently available for similar loans with similar terms.
(12) RELATED PARTY TRANSACTIONS
Effective January 1, 1995, the Company compensates its independent outside
directors on a $1,500 retainer per month. For the years ended September 30,
1999, 1998 and 1997, such fees amounted to $141,000, $135,000 and $126,000,
respectively. The Company also has compensated directors for consulting services
performed. For the years ended September 30, 1999, 1998 and 1997, consulting
services in the amounts of $465,000, $157,000 and $144,000, respectively, were
paid by the Company pursuant to these arrangements.
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, 1999, 1998 and 1997 were approximately $525,000, $604,000 and $404,000,
respectively.
During fiscal 1997, the Board of Directors of the Company approved the
cashless exercise 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 acquired by Tularik) and Helicon. The Company's
chairman was a member of the board of directors of Anaderm through September 23,
1999 and is on the board of directors of Helicon. An executive officer of the
Company is vice president of Helicon. A board member is the chief executive
officer and a board member of Helicon. The Company has investments in Tularik
and Helicon and has collaborative research agreements with Anaderm and Helicon.
A board member is on the faculty of Vanderbilt with which the Company has a
collaborative research agreement. He also has a consulting agreement with the
Company. A board member is a controlling member of MEHTA Partners, LLC with
which the Company has a strategic and financial services arrangement. During
fiscal 1999, the Company paid MEHTA Partners, LLC $75,000 in cash and issued
32,452 shares of treasury stock with a fair value of $100,000 in exchange for
consulting services received.
(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 Septem-
59
61
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
ber 30, 1999, 1998, and 1997, the Company's expenses related to the plan were
approximately $203,000, $197,000 and $233,000, 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 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 106, the
Company elected to amortize over a 20 year period the accumulated postretirement
benefit obligation related to prior service costs.
On October 1, 1998, the Company adopted SFAS 132, "Employers' Disclosures
about Pension and Other Postretirement Benefits". SFAS 132 revises employers'
disclosures about pension and other postretirement benefit plans. SFAS 132 does
not change the method of accounting for such plans.
Net postretirement benefit cost for the years ended September 30, 1999,
1998 and 1997 includes the following components:
1999 1998 1997
-------- -------- --------
Service cost for benefits earned during the
period........................................... $278,219 $220,785 $194,900
Interest cost on accumulated postretirement benefit
obligation......................................... 122,122 104,831 99,600
Amortization of unrecognized net loss.............. -- 3,327 9,600
Amortization of initial benefits attributed to past
service.......................................... 19,803 17,493 17,500
-------- -------- --------
Net postretirement benefit cost.................... $420,144 $346,436 $321,600
======== ======== ========
The accrued postretirement benefit cost at September 30, 1999 and 1998 was
as follows:
1999 1998
---------- ----------
Accumulated postretirement benefit obligation -- fully
eligible active plan participants......................... $2,193,325 $1,721,206
Unrecognized prior service cost............................. (203,893) --
Unrecognized cumulative net loss............................ (65,764) (181,832)
Unrecognized transition obligation.......................... (232,614) (250,107)
---------- ----------
Accrued postretirement benefit cost......................... $1,691,054 $1,289,267
========== ==========
The accumulated postretirement benefit obligation was determined using a
discount rate of 7.5 percent in 1999 and in 1998 and a health care cost trend
rate of approximately 6 percent in 1998, decreasing down to 5 percent in 1999
and thereafter. 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,
1999 by approximately $326,000 and the net postretirement benefit cost by
approximately $88,000. Benefits paid during fiscal 1999 and 1998 were $18,357
and $1,669, respectively.
60
62
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(15) CONSOLIDATION OF FACILITIES
During fiscal 1999 the Company made the strategic decision to close down
its facilities in North Carolina and consolidate its natural products operations
into its Tarrytown facility in New York. This close down is scheduled to occur
on March 31, 2000. The fungal extract libraries and certain equipment will be
relocated to the Tarrytown facility. It is anticipated that none of the current
employees in the North Carolina facility will be relocating. Under the plan for
relocating this facility, 16 research and administrative employees will receive
a severance package which will include continued payment of four months salary,
plus four months of continuous health insurance. The leases in North Carolina
expire in 2004. The Company believes that, due to the desirable space and
location, it should be able to secure another party to take over its lease;
however, the Company has accrued an estimate of a reserve for an expected delay
in finalizing a new tenant and entering into a sublease agreement. The estimated
cost of closing this facility is approximately $535,000, and has been included
in the accompanying consolidated balance sheet in accrued expenses as of
September 30, 1999, and in R&D expense ($395,000) and selling, general and
administrative expenses ($140,000) in the accompanying consolidated statement of
operations for the year ended September 30, 1999.
(16) NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standard Board issued SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133." SFAS 137 amends SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities," which was issued in June
1998 and was to be effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. SFAS 137 defers the effective date of SFAS 133 to all
fiscal quarters of fiscal years beginning after June 15, 2000. Earlier
application is permitted. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
The Company does not believe that the implementation of SFAS 133 will have a
material effect on its financial position or results of operations.
On December 3, 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 -- "Revenue Recognition in Financial
Statements" (SAB No. 101). SAB No. 101 provides the SEC staff's views on the
recognition of revenue including nonrefundable technology access fees received
by biotechnology companies in connection with research collaborations with third
parties. SAB No. 101 states that in certain circumstances the SEC staff believes
that up-front fees, even if nonrefundable, should be deferred and recognized
systematically over the term of the research arrangement. SAB No. 101 requires
registrants to adopt the accounting guidance contained therein by no later than
the first fiscal quarter of the fiscal year beginning after December 15, 1999
(fiscal year ending September 30, 2001 for the Company). The Company is
currently assessing the financial impact of complying with SAB No. 101 and has
not yet determined whether applying the accounting guidance of SAB No. 101 will
have a material effect on its financial position or results of operations.
(17) SUBSEQUENT EVENT
On November 30, 1999, the Company sold assets of its diagnostics business
to Bayer including the assets of the Company's wholly-owned diagnostics
subsidiary, OSDI, based in Cambridge, Massachusetts. The assets sold include
certain contracts, equipment and machinery, files and records, intangible
assets, intellectual property, inventory, prepaid expenses and other assets
primarily related to the operations of the diagnostics business. In connection
with the sale, the Company and OSDI entered into certain agreements with Bayer
including an Assignment and Assumption of Lease with respect to the OSDI
facility located in Cambridge and certain patent assignment and license
agreements. Certain employees of the Company and OSDI entered
61
63
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
into employment agreements with Bayer. Under the terms of the agreement, the
Company will receive $9.2 million up-front from Bayer with additional contingent
payments of $1.25 million to be made to the Company by 2001. Bayer intends to
retain all employees of OSDI and will maintain the unit's headquarters in
Cambridge. The Company expects to record a gain on the sale of approximately
$3.5 million in the first quarter of fiscal 2000. The assets sold to Bayer
include approximately $4.9 million of unamortized patent costs and approximately
$600,000 of fixed assets, net of depreciation and amortization as of September
30, 1999.
62
64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
similarly named section of the Registrant's Proxy Statement for its 2000 Annual
Meeting to be filed with the Securities and Exchange Commission not later than
120 days after September 30, 1999 (the 2000 Proxy).
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
similarly named section of the Registrant's 2000 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 2000 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 2000 Proxy.
63
65
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 are attached or
incorporated herein by reference and filed as a part of this report.
(b) Reports on Form 8-K
None.
64
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
OSI PHARMACEUTICALS, INC.
By: /s/ COLIN GODDARD, PH.D.
------------------------------------
Colin Goddard, Ph.D.
President and Chief Executive
Officer
Date: December 29, 1999
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Company and in the capacities and on the days indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ COLIN GODDARD, PH.D. President and Chief December 29, 1999
- --------------------------------------------------- Executive Officer and
Colin Goddard, Ph.D. Director
/s/ ROBERT L. VAN NOSTRAND Vice President and Chief December 29, 1999
- --------------------------------------------------- Financial Officer
Robert L. Van Nostrand
/s/ G. MORGAN BROWNE Director December 29, 1999
- ---------------------------------------------------
G. Morgan Browne
/s/ GARY E. FRASHIER Chairman of the Board of December 29, 1999
- --------------------------------------------------- Directors
Gary E. Frashier
/s/ JOHN H. FRENCH, II Director December 29, 1999
- ---------------------------------------------------
John H. French, II
/s/ EDWIN A. GEE, PH.D Director December 29, 1999
- ---------------------------------------------------
Edwin A. Gee, Ph.D
/s/ DARYL K. GRANNER, M.D. Director December 29, 1999
- ---------------------------------------------------
Daryl K. Granner, M.D.
/s/ WALTER M. LOVENBERG, PH.D. Director December 29, 1999
- ---------------------------------------------------
Walter M. Lovenberg, Ph.D.
/s/ STEVEN M. PELTZMAN Director December 29, 1999
- ---------------------------------------------------
Steven M. Peltzman
Director December , 1999
- ---------------------------------------------------
Viren Mehta
/s/ JOHN P. WHITE Director December 29, 1999
- ---------------------------------------------------
John P. White, Esquire
65
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INDEX TO EXHIBITS
EXHIBIT
- -------
2.1 + Asset Purchase Agreement, dated July 30, 1999, by and
between Cadus Pharmaceutical Corporation and the Company(1)
2.2 OSI Pharmaceuticals, Inc. Non-Qualified Stock Option Plan
for Former Employees of Cadus Pharmaceutical Corporation(1)
2.3 + Asset Purchase Agreement, dated November 17, 1999, by and
among the Company, Oncogene Science Diagnostics, Inc. and
Bayer Corporation(2)
2.4 Amendment No. 1 to Asset Purchase Agreement, dated November
30, 1999(2)
3.1 Certificate of Incorporation, as amended(3)
3.2 Amended and Restated By-Laws(4)
4.1 Form of Preferred Stock Plan, dated as of June 23, 1999,
between the Company, and the Bank of New York, as Rights
Agent, including Terms of Series SRP Junior Participating
Preferred Stock (Exhibit A thereto), Summary of Rights to
Purchase Preferred Stock (Exhibit B thereto), and Form of
Right Certificate (Exhibit C thereto)(5)
10.1 1985 Stock Option Plan (filed as an exhibit to the Company's
registration statement on Form S-8 (file no. 33-8980) and
incorporated herein by reference)
10.2 1989 Incentive and Non-Qualified Stock Option Plan (filed as
an exhibit to 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.(6)
10.8 + License Agreement, dated April 1, 1996, between the Company
and Pfizer Inc.(6)
10.9 + Stockholders' Agreement, dated April 23, 1996, among Anaderm
Research Corp., the Company, Pfizer Inc., New York
University and certain individuals(6)
10.10+ Collaborative Research Agreement, dated April 23, 1996,
amount the Company, Pfizer Inc. and Anaderm Research
Corp.(6)
10.11 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(6)
10.12 Employment Agreement, dated April 11, 1996, between the
Company and Dr. Barry Katz(6)
10.13 Common Stock Purchase Warrant granted to Marion Merrell Dow,
Inc. dated December 11, 1992(7)
10.14 Collaborative Agreement, dated April 19, 1995, between the
Company and Novartis Pharma AG(8)
10.15 Letter Agreement, dated April 19, 1995, between the Company
and Novartis Pharma AG(8)
10.16 Registration Rights Agreement, dated April 19, 1995, between
the Company and Novartis Pharma AG(8)
10.17+ Agreement, dated September 27, 1996, between the Company and
Becton, Dickinson and Company(9)
10.18+ Collaborative Research and License Agreement, dated January
1, 1997, between the Company and Bayer Corporation(10)
10.19+ Collaborative Research, Development and License Agreement,
dated February 12, 1997, by and among the Company, Sankyo
Company, Ltd., and MRC Collaborative Center(11)
68
EXHIBIT
- -------
10.20+ License Agreement, dated March 18, 1997, between the Company
and The Dow Chemical Company(11)
10.21+ Amended and Restated Collaborative Research and License
Agreement, effective April 1, 1997, by and among the
Company, Hoechst Marion Roussel, Inc. and Hoechst
Aktiengesellschaft(12)
10.22+ Stock Subscription Agreement, dated July 17, 1997, by and
between the Company and Helicon Therapeutics, Inc.(7)
10.23+ License and Services Agreement, dated July 17, 1997, by and
between the Company and Helicon Therapeutics, Inc.(7)
10.24+ Stockholders' Agreement, dated July 17, 1997, by and among
Helicon Therapeutics, Inc. and certain stockholders of
Helicon Therapeutics, Inc.(7)
10.25+ Convertible Preferred Stock Purchase Agreement, dated July
17, 1997, by and among Helicon Therapeutics, Inc., the
Company, Hoffman-La Roche, Inc. and Cold Spring Harbor
Laboratory(7)
10.26+ Collaborative Research and License Agreement, effective July
1, 1997, by and between Hoffman-La Roche, Inc. and Helicon
Therapeutics, Inc.(7)
10.27 Employment Agreement, dated April 30, 1998, between the
Company and Colin Goddard, Ph.D.(13)
10.28+ Amendatory and Collaborative Agreement, dated as of March
31, 1998, by and between the Company and Sepracor, Inc.(13)
10.29+ Research Collaboration and License Agreement, dated April 1,
1998, by and among the Company, Oncogene Science
Diagnostics, Inc. and Fujirebio, Inc.(13)
10.30+ License Agreement, dated May 26, 1998, by and between the
Company and Aurora Biosciences Corporation(13)
10.31 Consulting Agreement, dated October 1, 1998, between the
Company and Gary E. Frashier(14)
10.32+ Agreement, dated March 19, 1999, by and between the Company
and BioChem Pharma Inc.(15)
10.33+ Collaborative Research Agreement, dated April 23, 1999, by
and among Pfizer, Inc., the Company and Anaderm Research
Corp.(1)
10.34+ Anaderm Research Corp. Amended and Restated Stockholders'
Agreement, dated April 23, 1999(1)
10.35+ Development Agreement, dated April 1, 1999, by and between
Pfizer Inc. and the Company(1)
10.36 Amendment No. 1, dated May 31, 1999, by and between Novartis
Pharma AG and the Company(1)
10.37+ Amendment No. 2, dated April 13, 1999, by and between
Novartis Pharma AG and the Company(1)
10.38+* Collaborative Research, License and Alliance Agreement,
dated August 31, 1999, by and among the Company and
Vanderbilt University
10.39+* Collaborative Research and License Agreement, dated October
1, 1999, by and between the Company and Tanabe Seiyaku Co.
Ltd.
21 * Subsidiaries of the Company
23 * Consent of KPMG LLP, independent public accountants
27 * Financial Data Schedule
- ---------------
* 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 quarterly report on Form 10-Q for the
fiscal quarter ended June 30, 1999 and incorporated herein by reference.
(2) Filed as an exhibit to the Company's current report on Form 8-K filed on
December 15, 1999, and incorporated herein by reference.
69
(3) Filed as an exhibit to the Company's quarterly report filed on Form 10-Q
for the quarter ended March 31, 1999, filed on May 24, 1999, and
incorporated herein by reference.
(4) Filed as an exhibit to the Company's current report on Form 8-K filed on
January 8, 1999, and incorporated herein by reference.
(5) Filed as an exhibit to the Company's current report on Form 8-K filed on
June 28, 1999, and incorporated herein by reference.
(6) 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.
(7) Filed as an exhibit to the Company's annual report on Form 10-K for the
fiscal year ended September 30, 1997, and incorporated herein by reference.
(8) 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.
(9) 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.
(10) 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.
(11) 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.
(12) 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.
(13) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the
fiscal quarter ended June 30, 1998 and incorporated herein by reference.
(14) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the
fiscal quarter ended December 31, 1998 and incorporated herein by
reference.
(15) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the
fiscal quarter ended March 31, 1999 and incorporated herein by reference.