UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file
number: 0-15190
OSI PHARMACEUTICALS,
INC.
(Exact Name of Registrant as
Specified in its Charter)
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Delaware
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13-3159796
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(State or other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer Identification
No.)
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41 Pinelawn Road, Melville, N.Y.
(Address of Principal
Executive Offices)
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11747
(Zip
Code)
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Registrant’s Telephone Number, including area code
(631) 962-2000
Securities Registered Pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $.01 per share
Series SRPA Junior Participating
Preferred Stock Purchase Rights
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The NASDAQ Stock Market LLC
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Securities Registered Pursuant to Section 12(g) of the
Act: None
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
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No
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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
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§229.405 of this chapter) 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.
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Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
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No
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As of June 30, 2008, the aggregate market value of the
Registrant’s voting stock held by non-affiliates was
$1,372,090,100. 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 June 30, 2008 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 February 20, 2009, there were 57,920,762 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 2009 annual meeting of stockholders are incorporated by
reference into Part III of this
Form 10-K.
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
TABLE
OF CONTENTS
i
In this
Form 10-K,
“OSI,” “the Company,” “we,”
“us,” and “our” refer to OSI
Pharmaceuticals, Inc. and subsidiaries. “(OSI)
Eyetech” refers to Oldtech, Inc. (formerly, (OSI) Eyetech,
Inc.), our wholly-owned subsidiary.
We own or have rights to various copyrights, trademarks and
trade names used in our business including
Tarceva
®
(erlotinib) and
Novantrone
®
(mitoxantrone for injection concentrate). This
Form 10-K
also includes other trademarks, service marks and trade names of
other companies.
ii
PART I
We are a profitable biotechnology company committed to building
a scientifically strong and financially successful top tier
biopharmaceutical organization that discovers, develops and
commercializes innovative molecular targeted therapies, or MTTs,
addressing major unmet medical needs in oncology, diabetes and
obesity. Our strategic focus is in the area of personalized
medicine. We are building upon the knowledge and insights from
our flagship product, Tarceva, in order to establish a
leadership role in turning the promise of personalized medicine
into practice in oncology and in pioneering the adoption of
personalized medicine approaches in diabetes and obesity. We are
leveraging our targeted therapy expertise in drug discovery,
development and translational research to deliver innovative,
differentiated new medicines to the right patients, in the right
combinations and at the right doses. We believe this approach
optimally positions us to accomplish more rapid and
cost-effective drug development aimed at providing substantial
clinical benefit to the patients who can gain the most from our
innovations. We further believe that, with increasing healthcare
cost constraints and competition, leadership in personalized
medicine approaches will define the successful biopharmaceutical
companies of the future.
Our largest area of focus is oncology where our business is
anchored by Tarceva, a small molecule inhibitor of the epidermal
growth factor receptor, or EGFR, which is our primary source of
revenues. In November 2004, Tarceva was approved by the
U.S. Food and Drug Administration, or FDA, for the
treatment of advanced non-small cell lung cancer, or NSCLC, in
patients who have failed at least one prior chemotherapy regimen
and, subsequently, in November 2005, for the treatment of
patients with locally advanced and metastatic pancreatic cancer
in combination with the chemotherapy agent, gemcitabine. Tarceva
was also approved for sale in the European Union, or EU, for the
treatment of advanced NSCLC in September 2005 and, in January
2007, as a first-line therapy for metastatic pancreatic cancer
in combination with gemcitabine. In October 2007, Tarceva was
approved in Japan for the treatment of patients with
nonresectable, recurrent and advanced NSCLC which is aggravated
following therapy, and launched in Japan at the end of 2007.
Tarceva, which as of January 2009, was approved for sale in 94
countries for advanced NSCLC after failure of chemotherapy and
70 countries for pancreatic cancer, achieved global sales of
over $1.1 billion for 2008. We co-promote Tarceva in the
United States with Genentech, Inc., where we share profits
equally, and receive royalties on sales outside of the United
States from our international collaborator, Roche.
Prosidion Limited, our U.K. subsidiary which conducts our
research and development programs in diabetes and obesity,
contributes an important second source of revenues through the
licensing of our patent estate relating to the use of dipeptidyl
peptidase IV, or DPIV, inhibitors for the treatment of
type II diabetes and related indications. As of
February 15, 2009, twelve pharmaceutical companies have
non-exclusive licenses to these patents, which provide us with
upfront payments as well as potential milestones and royalties.
As of December 31, 2008, this patent estate has generated
approximately $111 million in upfront license fees,
milestones and royalties.
We expect that our revenues from Tarceva and our DPIV patent
estate, combined with our diligent management of expenses, will
continue to provide us with the capital resources necessary to
make disciplined investments in research and development, or
R&D, in order to support the continued growth of Tarceva
and our internal pipeline of clinical and pre-clinical assets.
As part of our lifecycle plan for Tarceva, we, together with
Genentech and Roche, continue to invest in a broad clinical
development program directed at maximizing Tarceva’s
long-term potential, including a number of large, randomized
clinical trials designed to expand Tarceva’s use in NSCLC
and new disease settings, such as hepatocellular carcinoma. We
have also prioritized investment in a portfolio of potentially
differentiated and competitive drug candidates and technologies
in oncology and diabetes and obesity. As a result, we have
successfully advanced four drug candidates into clinical trials
over the past two years, all of which were the result of our
internal discovery efforts.
In oncology, we have a pipeline of MTTs in clinical and
late-stage pre-clinical development which we intend to develop
and commercialize independently. These include OSI-906 (an
inhibitor of the insulin-like growth factor 1 receptor, or
IGF-1R, with potential utility for the treatment of all major
solid tumor types), which entered Phase I studies in June 2007,
OSI-027 (a next generation mammalian target of rapamycin, or
mTOR, kinase inhibitor), which entered Phase I studies in July
2008 and OSI-296 (a novel, potent tyrosine kinase inhibitor, or
TKI, developed
1
as an
epithelial-to-mesenchymal
transition, or EMT, inhibitor), which is in late-stage
pre-clinical development. In addition, we have two
anti-angiogenesis agents, OSI-930 and OSI-632, for which we are
seeking a development partner. Each of these MTTs, as well as
Tarceva, are small molecules designed to be administered orally
as a tablet rather than by the less convenient intravenous
infusion methods characteristic of most anti-cancer drugs. The
focus of our proprietary oncology research efforts is on
understanding multiple elements of tumor biology —
including the dependence of certain tumor cells on activated
oncogenic signaling pathways, or onco-addiction, and
compensatory signaling — but with a particular focus
on the biological process of EMT, which is of emerging
significance in understanding tumor development and disease
progression. This research has grown out of our translational
research efforts to understand which patients may optimally
benefit from Tarceva. Our EMT research investment, together with
related insights into mechanisms such as compensatory signaling,
is the cornerstone of our personalized medicine approach in
cancer, and should allow us to better design combinations of
MTTs for specific
sub-sets
of
cancer patients. This, in turn, may enable us to realize
significant improvements in patient outcomes and to enhance our
competitive position in the oncology marketplace.
We also have research and development programs in diabetes and
obesity which are conducted through Prosidion. Our discovery
efforts in diabetes and obesity are concentrated around the
neuroendocrine control of bodyweight and glycemia, which focuses
on central or peripheral nervous system or hormonal approaches
to the control of bodyweight for the treatment of obesity, as
well as the lowering of blood glucose together with meaningful
weight loss for the treatment of type 2 diabetes. Two compounds
from our diabetes and obesity research efforts, PSN821 and
PSN602, entered clinical trials in 2008. PSN821 is an orally
administered G protein-coupled receptor 119, or GPR119, agonist
with potential anti-diabetic and appetite suppressing features,
and PSN602 is an oral dual serotonin and noradrenaline reuptake
inhibitor and
5-HT
1A
agonist for the treatment of obesity.
Strategy
Our strategic focus is on turning the promise of innovative,
personalized medicine into practice in our industry. This
strategy, which is anchored around the continued growth of and
reinvestment in Tarceva, seeks to appropriately balance our
financial performance with disciplined, focused and selective
investments in R&D designed to realize long term growth for
our company. We anticipate that the continued growth of revenues
from Tarceva and our DPIV patent estate, coupled with
disciplined expense management, will allow us to support both a
broad lifecycle plan for Tarceva and to continue to make
R&D investments in those programs that we believe can
produce novel, differentiated,
“first-in-class”
or
“best-in-class”
drug candidates. Our longer term growth strategy seeks to
maintain significant ownership and control over these assets
throughout their development and commercial lifecycles. We also
believe that a key element to disciplined management of our
R&D investment is the pursuit of an out-licensing or
partnering strategy for any program or candidate that we
determine no longer meets our criteria as a core asset. We
further expect that our current financial resources and expected
future cash flows will permit us to be a selective acquirer of
attractive technologies, companies and pipeline assets where
these types of acquisitions strongly supplement and complement
our internal efforts in oncology and diabetes/obesity.
The goal of our R&D efforts is to pursue novel personalized
medicine therapies by discovering and developing innovative,
differentiated agents that deliver the right medicines, to the
right patients, in the right combinations and at the right
doses. We believe that this approach will lead to:
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More rapid and cost-effective drug development;
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The discovery and development of drugs that deliver meaningful
clinical benefit to patients; and
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Increased availability of innovative medicines to the patients
who can benefit from them the most.
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Over the past decade or more, we have demonstrated our ability
to discover MTTs in both oncology and diabetes/obesity, and this
remains at the core of our efforts to build a differentiated
pipeline. These discovery efforts have been guided by our
translational research program, which seeks to accelerate the
process of transforming scientific discoveries arising from the
laboratory and the clinic into new drugs and treatment options
for patients. Our translational research program has led us to
explore the possibilities of using biomarkers to predict, detect
and monitor disease, and has directed our research focus towards
the biology of EMT in oncology and neuroendocrine control in
diabetes and obesity. In oncology, we have learned from our
translational research efforts for Tarceva that
2
developing and exploiting a comprehensive understanding of the
biology of EMT may be a key to determining patient selection and
combination of MTTs for the treatment of cancer. We have,
therefore, invested internally and externally through
collaborations, such as our alliance with AVEO Pharmaceuticals,
Inc., or AVEO, in order to establish a leadership position in
the understanding of this process and establish contextual
models of human cancer biology in order to explore the
implications of EMT and phenomena such as compensatory signaling
mechanisms on oncology drug discovery and development. We
believe that our EMT-driven approach to oncology research will
provide us with a pathway to selecting responsive patient
populations and obtaining the efficacy improvements that will be
needed in order to compete in a growing and increasingly
competitive market for oncology therapeutics. Similarly, in
diabetes and obesity, we believe that our focus on the
neuroendocrine control of bodyweight and glycemia may allow us
to pioneer personalized medicine approaches in the future.
Our
Marketed Product — Tarceva
Overview
Tarceva is an oral,
once-a-day,
small molecule therapeutic designed to inhibit the receptor
tyrosine kinase activity of the protein product of the HER1/EGFR
gene. HER1/EGFR is a key component of the HER signaling pathway,
which plays a role in the abnormal growth of many cancer cells.
EGFR inhibitors were designed to arrest the growth of tumors,
referred to as cytostasis; however, under certain circumstances,
EGFR inhibition can lead to apoptosis, or programmed cell death,
which in turn results in tumor shrinkage. The HER1/EGFR gene is
over-expressed, mutated or amplified in approximately 40% to 60%
of all solid cancers and contributes to the abnormal growth
signaling in these cancer cells. There is a strong scientific
rationale and a substantial potential market for EGFR
inhibitors. The initial focus of our development program has
been on NSCLC and pancreatic cancer. We, together with our
collaborators or other third parties, are continuing to explore
the use of Tarceva in other tumor types, including
hepatocellular carcinoma, ovarian and colorectal cancers.
The American Cancer Society estimates that approximately 182,000
cancer patients in the United States were diagnosed with NSCLC
in 2008. Tarceva is approved for the treatment of NSCLC patients
in the second and third-line settings following a course of
front-line chemotherapy. Based on data from the Tandem Oncology
Monitor, a national audit in 2008 by Synovate, Inc. of cancer
patients receiving therapy, approximately 65,000 subsequent
courses of therapy were provided to NSCLC Stage IIIB/IV patients
in the United States following a course of front-line
chemotherapy. The American Cancer Society estimates that
approximately 34,000 cancer patients in the United States died
from pancreatic cancer in 2008, which makes it the fourth
leading cause of cancer death in the United States. In Europe,
based on information collected by the International Agency for
Research on Cancer in Lyon, France, the third most common
incident form of cancer in 2006 was lung cancer, with
approximately 380,000 cases. The International Agency for
Research on Cancer also reported that lung cancer was the most
common cause of cancer death in Europe, with approximately
340,000 deaths in 2006.
We have an ongoing collaboration with Genentech and Roche for
the continued development and commercialization of Tarceva. We
co-promote Tarceva in the United States with Genentech and
receive a 50% share of net profits after the deduction of costs
of goods and certain sales and marketing expenses. We are also
responsible for manufacturing and supply of Tarceva in the
United States and receive reimbursement of manufacturing costs
from Genentech. Roche is responsible for sales outside of the
United States and we receive a royalty on net sales of
approximately 20%. Tarceva R&D expenses that are part of
the alliance’s global development program generally are
shared equally among the three parties.
Lifecycle
Plan
We, together with Genentech and Roche, continue to invest in
Tarceva through a broad development program. The goal of our
lifecycle plan for Tarceva is to maximize the long-term market
potential of our flagship product through a series of extensive
and rationally-designed clinical trials. Our clinical trial
strategy for Tarceva has three key objectives:
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Expand the use of Tarceva into other NSCLC treatment areas;
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Expand the use of Tarceva into other pancreatic cancer treatment
areas and additional tumor types; and
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Develop therapies which combine Tarceva and other novel targeted
agents for the treatment of NSCLC and other tumor types.
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Studies
to Expand Tarceva into other NSCLC Treatment Areas.
Tarceva Maintenance Therapy Studies
.
In
November 2008, we and Genentech announced that a global
Phase III study, SATURN, met its primary endpoint of
progression free survival, or PFS, and showed with statistical
significance that Tarceva extended the time that patients with
advanced NSCLC lived without their disease advancing, referred
to as PFS, when given immediately following initial treatment
with platinum-based chemotherapy, compared to placebo. The
SATURN study was a double-blind randomized 850-patient
Phase III study to evaluate the efficacy of Tarceva as a
maintenance therapy versus placebo following chemotherapy in
patients with advanced, recurrent or metastatic NSCLC who have
not experienced disease progression or unacceptable toxicity
during four cycles of front-line chemotherapy. In February 2009,
Genentech informed us that another global Phase III Tarceva
study, ATLAS, was stopped early on the recommendation of an
independent data safety monitoring board after a pre-planned
interim analysis showed with statistical significance that
combining Tarceva and Avastin extended the time that these
patients lived without their disease advancing, compared with
Avastin plus placebo. Genentech further informed OSI that a
preliminary safety analysis showed adverse health events were
consistent with previous Avastin or Tarceva studies as well as
trials evaluating the two medicines together, and no new safety
signals were observed. ATLAS was a randomized, double-blind,
placebo-controlled, Phase IIIb study to evaluate the combination
of Avastin plus Tarceva as a maintenance therapy for the
treatment of locally advanced, recurrent, or metastatic NSCLC in
patients whose cancer did not progress following initial
treatment with Avastin and platinum-based chemotherapy. The
results of both of these studies are currently being analyzed
and will be presented at a future medical meeting.
We, together with Genentech and Roche, are currently discussing
a potential new indication for Tarceva with the FDA and the
European Health Authorities based on the results of the SATURN
study. The SATURN study was conducted by Roche, and has been
through the FDA’s special protocol assessment, or SPA,
process. The ATLAS study was funded by Genentech and Roche.
Under terms of our co-development and commercialization alliance
with Genentech and Roche, or the Tripartite Agreement, we may
elect to make certain payments for the ATLAS study.
BeTa Lung Study.
On October 6,
2008, we and Genentech announced that the BeTa Lung clinical
trial, a randomized Phase III study evaluating
Avastin
®
(bevacizumab) in combination with Tarceva in patients with
advanced NSCLC whose disease had progressed following
platinum-based chemotherapy, did not meet its primary endpoint
of improving overall survival compared to Tarceva alone. The
study did however provide evidence of clinical activity with
improvements in the secondary endpoints of progression-free
survival and response rate when Avastin was added to Tarceva
compared to Tarceva alone. The BeTa Lung clinical trial was the
first prospective randomized Phase III trial in which
Tarceva was dosed to a purely second-line NSCLC patient
population and data from the Tarceva plus placebo arm was
consistent with prior
sub-set
analysis data from the privotal BR.21 study showing a median
survival of approximately nine months in those second-line
patients.
RADIANT Study (Adjuvant Tarceva after Surgery and
Chemotherapy in Patients with Stage IB-IIIA
NSCLC)
.
Due to its demonstrated efficacy,
safety profile and convenience, we believe that Tarceva is well
suited for testing in the adjuvant treatment of patients with
fully resected stage IB through IIIA NSCLC. Over the last few
years, it has been demonstrated that certain patients with
resectable NSCLC may benefit from platinum-containing adjuvant
chemotherapy. This treatment paradigm is becoming the standard
of care in the United States. In the 945-patient RADIANT study,
patients with fully resected NSCLC who are EGFR-positive by
immunohistochemistry, or IHC,
and/or
fluorescent
in situ
hybridization, or FISH, and do or do
not receive platinum-containing adjuvant chemotherapy, are
randomized to receive Tarceva or placebo for up to two years.
This study has the potential to change the standard of care for
patients with early stage NSCLC. We expect to complete
enrollment in the first half of 2010 and, assuming we meet this
enrollment target, anticipate data from this trial by 2014. This
study is an important component of our later stage lifecycle
plan for Tarceva.
Smoker Maximum Tolerated Dose
Study
.
Pharmacokinetic analyses from our
BR.21 study for Tarceva in NSCLC which was the basis upon which
Tarceva was approved by the FDA for NSCLC in November 2004,
4
suggested that patients that are current smokers have lower drug
exposure. In addition, as judged by the lower incidence of rash
and diarrhea, these patients appear to have a less marked
biological effect from Tarceva. Retrospective analyses for the
BR.21 study showed that the treatment effect of Tarceva on
survival was less pronounced in this population. A Phase I study
in healthy volunteers demonstrated that the plasma levels of
Tarceva achieved in active smokers were approximately half of
those observed in non-smokers. In 2006, we initiated a two-stage
Phase I dose escalation study with Tarceva in NSCLC patients who
continue to smoke. The first part of the study established the
maximum tolerated dose, or MTD, of Tarceva in this population as
300 mg/day. The second stage of the study compared the
steady state pharmacokinetics of Tarceva at 300 mg/day
versus 150 mg/day. We filed a supplemental new drug
application, or sNDA, with the FDA in the fourth quarter of 2007
seeking a change in the prescribing information for Tarceva to
reflect the results from the study. The FDA approved this change
and we issued a new package insert with updated dosage
information for patients who smoke in September 2008.
Phase II Studies in
Never-smokers
.
The Cancer and Leukemia Group
B, or CALGB, is conducting a randomized Phase II study in
previously untreated NSCLC patients with adenocarcinoma who have
never smoked or were previous light smokers. For this study,
180 patients with Stage IIIB or IV disease will
receive either Tarceva alone or in combination with the drugs
carboplatin and paclitaxel. CALGB has indicated that accrual of
this trial is nearing completion. In addition, the Eastern
Cooperative Oncology Group has received approval from the Cancer
Therapy Evaluation Program for a similar Phase II study
which would randomize patients who have never smoked to either
chemotherapy plus Avastin or chemotherapy plus Avastin in
combination with Tarceva. The Southwest Oncology Group has also
initiated a Phase II study of Avastin and Tarceva in
never-smokers. These studies will add further insight to the
results seen in retrospective analyses of the never-smoker
patients in the prior TRIBUTE and BR.21 randomized
Phase III studies. In TRIBUTE, a first-line NSCLC study,
the
sub-population
of patients who were never-smokers receiving Tarceva in
combination with chemotherapy had a median survival of
22.5 months, compared to 10.1 months for those
receiving chemotherapy alone. In BR.21, the hazard ratio for
benefit in never-smokers was 0.42, with a response rate of 24.7%
for those patients who received Tarceva alone. A hazard ratio is
a statistical measure of the difference in overall survival
between the study drug and the control group. A hazard ratio of
less then one indicates a reduction in the risk of death.
TITAN Study
.
The TITAN study is a
randomized 650-patient Phase III study to evaluate the
efficacy of Tarceva compared to either of two chemotherapy
agents,
Alimta
®
(pemetrexed) or
Taxotere
®
(docetaxel), following front-line chemotherapy in advanced,
recurrent metastatic NSCLC patients who have experienced rapid
disease progression or unacceptable toxicity. The TITAN study is
part of our post-marketing commitments agreed to with the FDA
upon the approval of Tarceva. Patients with progressive disease
as best response to platinum-containing chemotherapy are
eligible for enrollment in TITAN and are randomized to Tarceva
or chemotherapy (Alimta or Taxotere at the discretion of the
investigator). The study enrollment rate has been significantly
lower than expected. As a result, it is difficult to predict
when enrollment will be complete for this study. This study is
designed to provide comparative data for Tarceva versus
chemotherapy in the
sub-set
of
patients who rapidly progress on front-line chemotherapy.
Phase II Study in Enriched
Population
.
We recently completed a
143-patient Phase II study in which we prospectively
selected patients with untreated NSCLC based on EGFR positivity
using IHC
and/or
FISH.
After enrollment, patients were randomized to either single
agent Tarceva or Tarceva intercalated with chemotherapy. We
elected not to proceed with a Phase III trial after the
Phase II trial data demonstrated a six month PFS for each
arm of the study that was lower than our targeted rate.
TASK Study
.
TASK is a 200-patient
randomized, open label, Phase II study of Tarceva in
combination with Avastin compared to standard chemotherapy
regimens (gemcitabine plus cisplatin or paclitaxel plus
carboplatin) plus Avastin in first-line NSCLC patients. Roche,
the study sponsor elected to halt further enrollment on this
study after data from a pre-planned interim analysis of the
first 120 patients showed that it was unlikely that the
study objective would be met.
Studies
to Expand Tarceva into other Pancreatic Cancer Treatment Areas
and Additional Tumor Types.
RACHEL
Study.
Sub-set
analysis from the PA.3 study in pancreatic cancer suggests that
those patients who have a grade 2 Tarceva-related rash have an
approximately two-fold increase in their rate of survival. The
RACHEL
5
study seeks to explore this observation in a prospective,
randomized fashion. This Phase II study is part of
Roche’s post-marketing commitments agreed to with the EU
regulatory authorities. Approximately 400 patients will be
entered into the study and will receive four weeks of the
standard gemcitabine plus 100 mg/day Tarceva regimen. Those
patients who have not either progressed or demonstrated a grade
2 or 3 rash will be randomized to either continue the standard
regimen or undergo a dose escalation protocol for the Tarceva
component of the regimen. This study is currently enrolling.
MARK Study
.
The MARK study is a
randomized Phase II study in pancreatic cancer which is
primarily designed to provide extensive biomarker
follow-up.
This study is part of Roche’s post-marketing commitments
agreed to with the EU regulatory authorities. Approximately
200 patients whose cancer has progressed on prior
chemotherapy or who were considered unsuitable for chemotherapy
will be randomized to Tarceva monotherapy or placebo. This study
is currently enrolling.
Ovarian and Colorectal
Cancer.
Additional collaborative group
Phase III trials are under way in both ovarian cancer and
colorectal cancer. The ovarian cancer study, which completed
enrollment in 2008, is an 830-patient Phase III trial being
conducted by the European Organization for Research into the
Treatment of Cancer, or EORTC, and follows a similar maintenance
design to the SATURN study, in which Tarceva is used as a
monotherapy following initial chemotherapy. The colorectal
cancer study is a 640-patient study being conducted through a
study group in the EU and also employs Tarceva in a maintenance
setting. This study tests Tarceva in combination with Avastin as
maintenance therapy compared to Avastin alone in patients who
have had a partial response or stable disease after treatment in
the first-line setting with modified FOLFOX 7 (folinic acid,
fluorouracil and oxaliplatin) plus Avastin or modified XELOX
(capecitabine plus oxaliplatin) plus Avastin, two widely
employed treatment regimens for colorectal cancer.
Hepatocellular Cancer.
Tarceva
demonstrated clinical activity in patients with hepatocellular
cancer, or HCC, in two small single arm Phase II trials. We
anticipate that a randomized Phase III trial will commence
in the first half of 2009 comparing Tarceva plus
Nexavar
®
(sorafenib) with placebo plus Nexavar, for the treatment of
advanced HCC. Nexavar is marketed and developed by Bayer AG and
Onyx Pharmaceuticals, Inc. This trial will be primarily
sponsored by Bayer and have a target enrollment of
700 patients.
Studies
Which Combine Tarceva with other Targeted Agents.
We believe that there are a number of opportunities to combine
Tarceva with other targeted agents to create improved patient
outcomes, both for NSCLC as well as other tumor types. As
discussed below, we initiated a Phase I study in the fourth
quarter of 2008 exploring the combination of Tarceva with
OSI-906, our oral small molecule IGF-1 receptor inhibitor. We
also are actively exploring opportunities to combine Tarceva
with other targeted therapies through investigator sponsored
studies and partnerships with other pharmaceutical and
biotechnology companies, including current partnerships with
Novartis AG and ArQule, Inc. that combine Tarceva with an mTOR
and mesenchymal-epithelial transition factor, or c-Met,
inhibitor, respectively.
Treatment Beyond Progression
.
From an
exploratory study conducted at Memorial Sloan Kettering Cancer
Center, it has been reported that, in patients who progressed on
EGFR TKI therapy, there appeared to be acceleration of disease
progression when EGFR TKI therapy was discontinued. Upon
reintroduction of EGFR TKI therapy, disease progression slowed.
Based upon this observation, we believe further study is
warranted as to whether continuing Tarceva therapy beyond
disease progression by adding other drugs, and in particular,
other targeted agents with a focus on EMT-driven combinations,
provides a treatment benefit. Three investigator-sponsored
studies are currently exploring this hypothesis, and an
additional study is planned in the future.
Investigator
Sponsored Studies.
In addition to the studies listed above, over 250 studies
investigating other Tarceva uses and regimens are ongoing or
planned, including both investigator-sponsored studies and
studies sponsored by the National Cancer Institute. These
studies are exploring monotherapy and combination uses of
Tarceva, including with other novel agents, in various tumor
types and with a variety of treatment modalities, such as
radiation and surgery. Some studies are also examining the use
of Tarceva earlier in the treatment paradigm in both the
adjuvant and
6
chemoprevention settings. In general, many of these studies are
carried out at minimal cost to us or our collaborators beyond
the supply of Tarceva.
Sales
and Marketing
In order to maximize the Tarceva brand and to ensure the optimal
competitive positioning of Tarceva on a global basis, we entered
into a co-development and commercialization alliance with
Genentech and Roche in January 2001. Under the alliance,
Genentech leads the marketing efforts in the United States and
Roche sells and markets the drug in the rest of the world. In
addition, we have agreed with Genentech that OSI employees will
comprise 50% of the combined U.S. sales force through the
end of the 2010 calendar year, after which time the size and
composition of the sales force may be adjusted. Our oncology
sales specialists currently perform sales calls to certain
high-volume physician call targets and associated medical staff,
in addition to attending our promotional exhibit booths at
medical meetings and tradeshows.
OSI/Genentech/Roche
Alliance
We manage the ongoing development program for Tarceva with
Genentech and Roche through a global development committee under
our co-development and commercialization alliance with Genentech
and Roche, the Tripartite Agreement. OSI and Genentech are
parties to a collaboration agreement which was amended in 2004
to provide us with the right to co-promote Tarceva. The
OSI/Genentech collaboration agreement continues until the date
on which neither we nor Genentech are entitled to receive a
share of the operating profits or losses on any products
resulting from the collaboration, that is, until the date that
we and Genentech mutually agree to terminate the collaboration
or until either party exercises its early termination rights as
described as follows. The OSI/Genentech collaboration agreement
is subject to early termination in the event of certain
customary defaults, such as material breach of the agreement and
bankruptcy. Genentech also has the right to terminate the
OSI/Genentech collaboration agreement with six months’
prior written notice. Upon such termination, the sole right to
commercialize Tarceva in the United States would revert to us.
The provisions of the amendment allowing us to co-promote are
also subject to termination by Genentech upon a material breach
of the amendment by us, which remains uncured, or upon a pattern
of non-material breaches which remain uncured. In 2004, we
signed a Manufacturing and Supply Agreement with Genentech that
clarified our role in supplying Tarceva for the
U.S. market. The OSI/Genentech collaboration agreement may
be assigned or transferred by either party to any purchaser of
all or substantially all of such party’s assets or all of
its capital stock, or to any successor corporation via merger or
consolidation.
We are also parties to an agreement with Roche whereby we have
provided Roche with the right to sell Tarceva worldwide except
for the United States, its territories, possessions and Puerto
Rico, in exchange for a royalty and milestones. The OSI/Roche
agreement continues until the date on which we are no longer
entitled to receive a royalty on products resulting from the
development of Tarceva, that is, until the date of expiration or
revocation or complete rejection of the last to expire patent
covering Tarceva or, in countries where there is no valid patent
covering Tarceva, on the tenth anniversary of the first
commercial sale of Tarceva in that country. The OSI/Roche
agreement is subject to early termination in the event of
certain customary defaults, such as material breach of the
agreement and bankruptcy. In addition, Roche has the right to
terminate the agreement on a
country-by-country
basis with six months’ prior written notice. We also
currently have the right to terminate the agreement on a
country-by-country
basis if Roche has not launched or marketed a product in such
country under certain circumstances. Upon a termination, the
sole right to commercialize Tarceva in any terminated country
would revert to us. The OSI/Roche agreement may be assigned or
transferred by either party to any purchaser of all or
substantially all of such party’s assets to which the
agreement relates or all of its capital stock, or to any
successor corporation via merger or consolidation.
Manufacturing
and Supply
We currently manage the supply of Tarceva in the United States
through third-party manufacturers. Under our collaboration
agreement with Genentech, we are responsible for the manufacture
and supply of erlotinib, the active pharmaceutical ingredient,
or API, and Tarceva tablets for pre-clinical and clinical trials
and for the supply of commercial quantities of Tarceva tablets
for sales within the United States. Under our collaboration
agreement with Roche, Roche is responsible for the manufacture
and supply of Tarceva tablets for sales outside of the United
States.
7
Erlotinib is manufactured in a three-step process with high
yield. Sumitomo Chemical Co., Ltd. and Dipharma S.p.A are our
manufacturers of the API used for commercial supplies. Both of
these manufacturers also manufacture API for Tarceva clinical
trials. Schwarz Pharma Manufacturing, Inc. is our manufacturer
of Tarceva tablets for clinical and commercial supplies, as well
as placebo for blinded clinical studies. We have entered into
long term supply agreements with our API and tablet
manufacturers. Clinical supplies of Tarceva tablets are
currently stored, labeled, packaged and distributed by Catalent
Pharma Solutions LLC and Acculogix, Inc., a subsidiary of Fisher
Clinical Services, Inc. Catalent Pharma Solutions also labels
and provides secondary packaging services for commercial
supplies of Tarceva tablets before their subsequent distribution
to Genentech or a storage facility designated by Genentech. All
manufacturers of the API and Tarceva tablets are required to
comply with current good manufacturing practices, or cGMPs. We
have produced sufficient quantities of Tarceva tablets to
conduct our ongoing clinical trials, and we have a supply chain
organization in place, with approximately six months or more of
inventory on hand, to support the commercial sales of Tarceva.
Our
Clinical Development Programs
We currently have four development candidates in Phase I
clinical trials in oncology and diabetes/obesity, all of which
are the result of our internal research efforts. Our immediate
goal is to move these programs through Phase I trials to
determine recommended doses and schedules, and if successful,
commence later-Phase clinical trials for each of these compounds
within the next twelve months. Longer term, we intend to
maintain significant control over these assets and to
commercialize them, in whole or in part, particularly in the
United States.
OSI-906.
OSI-906 is an oral small molecule
IGF-1R inhibitor which we believe is among the first small
molecule inhibitors against the IGF-1R target to enter clinical
trials. In pre-clinical studies, OSI-906 has demonstrated
synergy with Tarceva and potential utility in a number of
different cancers, including NSCLC, breast, pancreatic,
prostate, colorectal, adrenocortical, or ACC, and ovarian. We
believe that OSI-906 is potentially more effective than
antibodies, given its inhibition of the
P
AKT
survival pathway and its ability to modulate potential
compensatory signaling mechanisms in the tumor cell. We also
believe that its oral administration will provide more
scheduling flexibility and convenience than antibodies. OSI-906
is currently in Phase I studies exploring both continuous and
intermittent dose schedules, and an additional Phase I study of
OSI-906 in combination with Tarceva was initiated in the fourth
quarter of 2008. As of January 2009, over 60 patients have
been treated with OSI-906, and the drug has generally been well
tolerated by these patients. Indications of anti-tumor activity
have been seen in on-going Phase I program including a partial
response in a patient with ACC, a minor response in a patient
with NSCLC and disease stabilization in over 20% of evaluable
patients. We are exploring a number of potential indications for
OSI-906 both as a single agent and in combination with other
targeted strategies.
PSN821.
PSN821, a novel GPR119 agonist, is an
oral small molecule drug with potential anti-diabetic and
appetite suppressing effects, which is being developed for the
treatment of type 2 diabetes. In pre-clinical models, PSN821 has
been shown to release endogenous GLP-1 and increase beta-cell
cAMP leading to improved glucose control, delayed gastric
emptying, appetite suppression and weight loss. Based on the
pre-clinical data set, we believe that PSN821 has the potential
to be a
“best-in-class”
product. PSN821 is currently undergoing chemistry, manufacturing
and control, or CMC, development, as well as drug metabolism and
pharmacokinetics, or DMPK, and pre-clinical safety testing, to
support Phase II clinical studies. The
first-in-man
Phase I clinical study commenced in the third quarter of 2008
and includes both healthy volunteers and patients with type 2
diabetes. Pre-clinical data on PSN821 was the subject of an oral
presentation at the American Diabetes Association meeting in
San Francisco, California in June 2008.
PSN602.
PSN602 is a novel dual serotonin and
noradrenaline reuptake inhibitor which also elicits
5HT
1A
receptor agonism, which is being developed for the long-term
treatment of obesity. Inclusion of
5HT
1A
agonism has been shown in pre-clinical studies to counterbalance
the undesirable cardiovascular effects of increased
noradrenaline activity seen with other anti-obesity agents which
inhibit the reuptake of noradrenaline and serotonin, while
maintaining or improving upon efficacy. Because of this
potential to demonstrate a favorable side-effect profile,
and/or
greater efficacy, relative to current therapies, we believe that
PSN602 has the potential to be
“best-in-class.”
The
first-in-man
Phase I clinical study commenced in the second quarter of 2008
and includes single and multiple ascending dosing in both
healthy lean and overweight/obese volunteers. Pre-clinical data
on PSN602 was presented at the American Diabetes Association
meeting in San Francisco, California in June 2008.
8
OSI-027.
OSI-027 is a small molecule
TORC1/TORC2 inhibitor which has the potential to supersede first
generation mTOR inhibitors. Unlike existing agents targeting the
mTOR pathway, OSI-027 inhibits both the TORC1 and TORC2
signaling complexes, allowing for the potential for complete
truncation of aberrant cell signaling through this pathway.
Inhibition of TORC1 and TORC2 has been shown in pre-clinical
studies to elicit robust anti-tumor activity but to carry an
appreciable toxicity burden. We commenced a Phase I clinical
trial of OSI-027 in July 2008, which is currently enrolling. The
Phase I study has shown indications of some toxicities that may
limit the ability to optimally dose this agent.
Other
Development Programs and Significant Outlicensing
Activities
OSI-296.
OSI-296, a novel, potent TKI
developed to block compensatory signaling in epithelial tumor
cells, is the first pre-clinical candidate to emerge from our
EMT technology platform. In pre-clinical studies, OSI-296 has
shown efficacy in a number of EMT ligand-driven tumor models and
has blocked ligand-driven EMT and tumor growth.
PSN010.
In January 2007, we outlicensed our
glucokinase activator, or GKA, program, including the small
molecule Phase I clinical candidate PSN010, to Eli Lilly and
Company. GKAs have a dual effect in the pancreas and the liver
resulting in increased hepatic glucose uptake in the liver and
stimulated insulin secretion by the pancreas. Under the terms of
our license with Eli Lilly, Eli Lilly is responsible for all
aspects of clinical development, manufacturing and
commercialization of PSN010 or any
back-up
compound included within the licensed GKA program. In return for
such rights, we received an upfront payment of
$25.0 million and will potentially receive milestones and
other payments of up to $360.0 million and royalties based
on net sales of any product arising from the licensed GKA
program.
OSI-930.
OSI-930 is a multi-targeted tyrosine
kinase inhibitor that principally acts as a potent co-inhibitor
of the receptor tyrosine kinases c-kit and the vascular
endothelial growth factor receptor-2, or VEGFR-2. It is designed
to target the suppression of both cancer cell proliferation and
blood vessel growth, or angiogenesis, in selected tumors. We
have completed Phase I dose escalation studies of OSI-930 in
healthy volunteer patients and a Phase I dose escalation study
in cancer patients, which has determined the MTD for OSI-930
both as single agent and as a possible combination therapy with
Tarceva. Because of the large number of VEGFR-2 inhibitors
already on the market and currently in development,
differentiation of this program is critical and potentially
challenging. As a result, we are considering various strategic
alternatives for this program, including partnering, which would
enable us to support a more comprehensive development program.
CP-868,596.
Pfizer is continuing to develop
one pre-clinical stage targeted therapy from our prior alliance,
CP-868,596, a PDGFR inhibitor. Pursuant to our agreement with
Pfizer for this collaboration, if Pfizer is successful in
commercializing this drug candidate, we will receive a royalty
from Pfizer on sales of this drug. If Pfizer chooses to
discontinue development of CP-868,596, it will revert to us and
we will have the right to pursue development of it.
Our
Oncology and Diabetes/Obesity Discovery Efforts
Oncology
Research
Our oncology research efforts are broadly centered around both
translational research and drug discovery, each of which is
anchored by our continued focus on understanding multiple
elements of tumor biology — including onco-addiction
and compensatory signaling — but with a particular
focus on the biological process known as EMT and its reverse,
mesenchymal-to-epithelial
transition, or MET, both of which are important phenomena in
developmental biology that are becoming increasingly associated
with tumor biology. EMT is characterized by the combined loss of
epithelial cell junction proteins, such as
E-cadherin,
and the gain of mesenchymal markers, such as vimentin,
fibronectin or MMP-2. An increase in the proportion of cancer
cells in a tumor that exhibit the loss of
E-cadherin
and the acquisition of a more mesenchymal phenotype is believed
to correlate with poor prognosis in multiple epithelial derived
solid tumors. We believe that EMT may be a marker of tumor
progression, with tumors that express mesenchymal markers having
a greater tendency to be invasive and to metastasize than those
tumors only expressing epithelial markers. Because mesenchymal
tumor cells co-opt different sets of oncogenic signaling
pathways, we believe that EMT targets represent a novel
therapeutic opportunity.
9
Our early understanding of EMT emanated from work done by our
translational research group, which observed that Tarceva’s
effects on different types of cancer cells appeared related to
the EMT-status of these cancer cells. Pursuing EMT may allow us
to better understand which patients might more optimally benefit
from Tarceva or other MTT treatments. Retrospective analysis of
tumor samples from the TRIBUTE Phase III study of Tarceva
in combination with chemotherapy for the treatment of front-line
NSCLC patients suggested that those patients whose tumors
abundantly expressed
E-cadherin
responded better to Tarceva. By acquiring or co-opting a
mesenchymal phenotype, we believe that epithelial derived tumor
cells utilize different growth and survival pathways and become
less dependent on EGFR signaling and ultimately acquire or gain
the ability to migrate, invade and metastasize. These properties
suggest the need to target distinctly different signaling
pathways in order to effectively treat these tumors. As a result
of our study of the signaling changes associated with EMT, we
have deepened our understanding of compensatory signaling
mechanisms associated with pharmacological inhibition of certain
receptor tyrosine kinases, or RTKs. These RTKs regulate EMT and
tumor growth processes and therefore are attractive therapeutic
targets in oncology. For example, we have determined that
inhibition of EGFR in tumor cells by Tarceva can lead to
enhanced phosphorylation
and/or
activation of IGF-1R. Conversely, inhibition of IGF-1R can
result in increased phosphorylation of EGFR. This observation
provides the principal underpinning of our proposed development
strategy combining OSI-906 and Tarceva. We believe that this
phenomenon may also apply to other RTKs, and this has caused us
to focus on identifying rational combinations of
molecular-targeted agents directed at EMT-linked targets in
order to confront compensatory signaling as a resistance
mechanism in tumor cells. This new insight is leading our
development project teams to plan and conduct studies of markers
of EMT and EGFR signaling in retrospective and prospective
clinical trials for Tarceva. These studies may enhance the
likelihood of success of Tarceva in additional indications by
selecting those patients most likely to better respond to
therapy.
Given the importance and relevance of EMT to the therapeutic
activity of Tarceva, we have focused our oncology discovery
efforts on exploiting our understanding of the signaling
pathways that drive EMT and on identifying drug targets that
could lead to novel molecular targeted therapies. These research
efforts include: (i) discovering and validating EMT-related
targets; (ii) developing novel therapies and combinations
of therapies against EMT-related targets; (iii) developing
specialized animal models that recapitulate EMT processes;
(iv) designing rational combination strategies that address
compensatory signaling as an EMT-associated drug-resistance
mechanism; and (v) identifying and validating biomarkers to
support these programs.
On September 28, 2007, we entered into a three-year
oncology drug discovery and translational research collaboration
with AVEO to help us to better understand the underlying
mechanisms of the process of EMT in cancer. A main focus of the
collaboration is the development of proprietary target-driven
tumor models for use in drug screening, translational research
and biomarker validation. As part of the collaboration, AVEO
provides us with access to its databases of tumor targets
identified from AVEO genetic screens focusing on tumor
maintenance genes that drive EMT. AVEO uses its proprietary
technology platform of genetically-defined mouse models of human
cancer to develop for us
in vivo
tumor models that we
believe more accurately portray contextual tumor biology then
traditional xenograph models. These models are driven by EMT
target genes of interest to us, which validate key EMT targets
and create tools for our oncology discovery and translational
research. Under the terms of the collaboration, we are
responsible for the development and commercialization of all
small molecule and non-antibody clinical candidates that arise
from the collaboration. We own exclusively all small molecule
intellectual property emanating from the collaboration and AVEO
retains the rights to any antibodies and antibody-related
biologics against targets from the collaboration. In addition to
an upfront payment, we pay AVEO for ongoing research funding,
and milestones and royalties upon successful development and
commercialization of products from the collaboration. In 2008,
we exercised our option on five targets evaluated as part of
this collaboration, which provided us with exclusive rights to
these targets for non-antibody-related therapeutic discovery and
development. In addition, in 2007 and 2008 we exercised options
on three tumor models developed for use in our translational
research programs on the development of OSI-906 and OSI-027. OSI
owns all translational research intellectual property emanating
from the use of such tumor models.
Diabetes/Obesity
Discovery
Prosidion’s discovery efforts currently focus on
innovative, small molecule, orally bioavailable MTTs for the
treatment of diabetes and obesity. The International Diabetes
Federation, or IDF, estimated in 2007 that up to
10
246 million people worldwide have diabetes and that this
number will reach 380 million by 2025. The IDF also
estimated that up to 3.8 million deaths worldwide each year
are a result of diabetes, representing the fourth leading cause
of death by disease globally. Diabetes is a chronic disease with
multiple complications, including cardiovascular and renal
disease, neuropathy, blindness and premature mortality. Type 2
diabetes accounted for approximately 90% of diabetes worldwide
as of 2007 and, while historically considered a disease found in
adults, it is increasingly occurring in obese children. As for
obesity, the World Heath Organization, or WHO, estimated in 2005
that over 1.6 billion adults worldwide were overweight, and
over 400 million adults were obese. The WHO estimates that
these figures will rise to 2.3 billion and
700 million, respectively, by 2015. Obesity is a major risk
factor for type 2 diabetes, cardiovascular disease,
musculo-skeletal disorders and certain cancers.
Beginning in 2008, Prosidion elected to concentrate its
discovery efforts around the neuroendocrine control of
bodyweight and glycaemia. This area covers central or peripheral
nervous system or hormonal approaches to the control of
bodyweight for the treatment of obesity, as well as the lowering
of blood glucose together with meaningful weight loss for the
treatment of type 2 diabetes. We believe that our focus in this
area may ultimately lead to the development of a research
platform that will allow us to identify biomarkers useful for
the development of personalized medicines for diabetes and
obesity. In December 2008, we acquired from 7TM Pharma A/S, a
number of early stage research assets and a G-Protein coupled
receptor, or GPCR, technology platform, which allows for the
rapid identification of potent small molecule ligands for both
orphan and known GPCRs. The purchase price was $4 million.
We expect that this platform will assist us in validating
targets within the neuroendocrine focus area.
Divestiture
of Eye Disease Business
On August 1, 2008, we completed the sale of the remaining
assets of our eye disease business to Eyetech Inc., a newly
formed corporation whose shareholders consist primarily of
members of the
Macugen
®
(pegaptanib sodium injection) sales team. These remaining assets
consisted principally of the right to market and sell Macugen in
the United States. We do not hold any equity or equity rights in
Eyetech Inc. Under the terms of the transaction, the principal
assets we transferred to Eyetech Inc. consisted of
Macugen-related intellectual property and inventory, as well as
$5.8 million in working capital primarily in the form of
Macugen trade receivables, in exchange for potential future
milestone and royalty payments. Our consideration for the
transaction also included payments in the event of any
subsequent
change-of-control
affecting Eyetech Inc., as well as Eyetech Inc.’s agreement
to assume certain obligations of (OSI) Eyetech. We also agreed
to provide certain transition services to Eyetech Inc. for a
period of time commencing with the closing of the transaction
through December 31, 2009. Michael G. Atieh, our former
Executive Vice President, Chief Financial Officer and Treasurer,
joined Eyetech Inc. in a part-time executive chairman role upon
his retirement from OSI in January 2009. Mr. Atieh also
holds stock in Eyetech Inc. which became voting and
participating with respect to dividends and distributions upon
his retirement from our company.
Our
Intellectual Property
Patents and other proprietary rights are vital to our business.
Our policy is to protect our intellectual property rights
through a variety of means, including applying for patents in
the United States and other major industrialized countries, to
operate without infringing on the valid proprietary rights of
others, and to prevent others from infringing our proprietary
rights. We also rely upon trade secrets and improvements,
unpatented proprietary know-how and continuing technological
innovations to develop and maintain our competitive position. In
this regard, we seek restrictions in our agreements with
third-parties, including research institutions, with respect to
the use and disclosure of our proprietary technology. We also
enter into confidentiality agreements with our employees,
consultants and scientific advisors.
Tarceva-Related
Intellectual Property
We have obtained patents for erlotinib, the API for Tarceva, in
the United States, Europe, Japan, and a number of other
countries. We are pursuing extensions of the patent term
and/or
of
the data exclusivity term in the countries where such extensions
are available. We have been granted patent term extensions that
extend our U.S. patent for erlotinib to November 2018 and
corresponding patents in Europe to March 2020 and in Japan to
June 2020. We also intend to seek pediatric exclusivity for
Tarceva from the FDA, which, if granted, would extend the
U.S. patent for
11
erlotinib by an additional six months. We are also currently
pursuing U.S. and international patents for new inventions
concerning various other formulations of erlotinib and related
intermediate chemicals and processes. We have obtained patents
covering a key polymorphic form of Tarceva in the United States
and Europe, which expire in 2020. We are also currently seeking
patent protection for additional methods of use for Tarceva,
including the use of Tarceva in combination with other compounds.
Separate and apart from this patent protection, the Drug Price
Competition and Patent Term Restoration Act of 1984, also known
as the Hatch-Waxman Act, entitles Tarceva to various periods of
non-patent statutory protection, known as marketing exclusivity.
The patent system and marketing exclusivity work in tandem to
protect our products. For Tarceva, under the Hatch-Waxman Act,
we have a five-year period of new chemical entity exclusivity.
This period of exclusivity expires on November 18, 2009. On
its own, this exclusivity means that another manufacturer cannot
submit an ANDA (i.e., an application for approval of a generic
version of our product) or a 505(b)(2) NDA (i.e., an application
for a modified version of Tarceva that relies to some degree on
the FDA’s previous approval of our product) until the
five-year marketing exclusivity period ends. There is an
exception, however, for a competitor that seeks to challenge our
patents. Four years into the exclusivity period (i.e., beginning
November 18, 2008), a manufacturer who alleges that one or
more of the patents listed in the FDA’s Orange Book are
invalid, unenforceable
and/or
not
infringed may submit an ANDA or 505(b)(2) NDA for a generic or
modified version of Tarceva. This patent challenge is commonly
known as a Paragraph IV certification. Tarceva is currently
covered by three patents listed in the FDA’s Approved Drugs
Products List (Orange Book).
We are currently reviewing Paragraph IV certifications
received in February 2009 from two generic pharmaceutical
companies — Teva Pharmaceuticals U.S.A., Inc., or Teva
U.S.A., and Mylan Pharmaceuticals, Inc. If we commence lawsuits
for patent infringement within 45 days of the date of
receipt of these certifications, as we expect to do, the FDA
cannot approve the ANDAs for either of these generic
pharmaceutical companies until seven and one-half years have
elapsed from the date of Tarceva’s initial approval (i.e.,
May 18, 2012). This period of protection, referred to as
the statutory litigation stay period, may end early however, in
the event of an adverse court action, such as if we were to lose
a patent infringement case against either Teva U.S.A. or Mylan
before the statutory litigation stay period expires (i.e., the
court finds the patent invalid, unenforceable, or not infringed)
or if we fail to reasonably cooperate in expediting the
litigation. On the other hand, if we were to prevail in an
infringement action against Teva U.S.A.
and/or
Mylan, the ANDA with respect to such generic pharmaceutical
company cannot be approved until the patent held to be infringed
expires.
In light of the increasingly aggressive challenges by generic
companies to innovator intellectual property, we, together with
our collaborators, Genentech and Roche, are continually
assessing the intellectual property estate for Tarceva around
the world. On February 27, 2008, we filed with the
U.S. Patent and Trademark Office, or USPTO, an application
to reissue our composition of matter patent for Tarceva,
U.S. Patent No. 5,747,498, or the ’498 patent, in
order to correct certain errors relating to the claiming of
compounds, other than Tarceva, which fall outside of the scope
of the main claim in the patent. The reissue application seeks
to correct these errors by deleting surplus compounds from the
claims. Like most composition of matter patents, the ’498
patent claims many compounds in addition to Tarceva. Tarceva
itself is accurately described in the ’498 patent. We
believe that eliminating these errors as an arguable basis for
challenging the ’498 patent is a prudent course of action
given the aggressive strategy of generic companies in seeking to
bring generic versions of innovator drugs to market at the
earliest possible time, notwithstanding the patent protection of
the innovator product. While we seek to correct these errors,
the ’498 patent remains listed in the Orange Book with the
FDA and subject to Paragraph IV certification by potential
ANDA filers and may be asserted by us in an infringement action.
In the reissue application, we are also seeking narrower claims
to the ’498 patent. In addition, we also filed with the
USPTO a request for a certificate of correction with respect to
the ’498 patent seeking to correct errors of a clerical or
typographical nature. The USPTO granted the certificate of
correction in September 2008.
We received the first office action from the USPTO in our
reissue application on February 26, 2009. The office action
includes an indication of allowability to composition of matter
claims, including a claim specifically directed to Tarceva,
while initially rejecting certain other claims. We are reviewing
the issues raised by the USPTO examiner and will respond as
appropriate. We believe this first step will allow us to
substantially complete the reissue process by the end of 2009,
however the process may take longer.
12
A patent corresponding to the ’498 patent for Tarceva was
granted in February 2007 in India and we, along with our
collaborator Roche, successfully opposed a pre-grant opposition
to this patent by Natco Pharma, Ltd. in July 2007. We also
opposed Natco Pharma’s request for a compulsory license to
manufacture Tarceva in India for export to Nepal and Natco
Pharma withdrew this request in September 2008. We and Roche are
also currently seeking to enforce our composition of matter
patent against CIPLA, Ltd. with respect to a generic form of
Tarceva launched by CIPLA in India in January 2008. We and Roche
filed a lawsuit against CIPLA in the High Court of Delhi in New
Delhi, India in January 2008, which included a request that the
court issue a preliminary injunction to prevent CIPLA from
manufacturing and distributing Tarceva in India. The court
denied this request in March 2008 and we subsequently appealed
the decision. We completed our appeal in September 2008 and are
awaiting a final decision. The court has also indicated that it
will set the trial schedule for the infringement action in
February 2009.
In addition, Teva Pharmaceutical Industries Ltd. filed an
opposition to the grant of a patent in Israel corresponding to
our U.S. patent directed to a particular polymorph of
Tarceva (U.S. Patent No. 6,900,221) in August 2007.
This Israeli proceeding will be delayed until prosecution of a
co-pending patent application in Israel is completed.
Other
Intellectual Property
The DPIV assets we acquired from Probiodrug AG in 2004 include a
portfolio of medical use patents. This portfolio contains a
number of patent families comprising of issued and pending
patents and patent applications with claims relating to the use
of DPIV inhibitors for the treatment of diabetes and related
indications. We also have licensed
sub-licensable
rights to patents and patent applications claiming the use of
combinations of DPIV inhibitors with other anti-diabetic drugs
such as metformin. Our rights to this patent estate provide us
with a source of upfront payments, and milestone and royalty
revenue through the issuance of non-exclusive licenses to the
patent estate. As of February 15, 2009, twelve
pharmaceutical companies, including Merck, Novartis and
Bristol-Myers Squibb Company, or BMS, have licenses to this
patent estate. These licenses provide us with upfront payments,
milestones and royalties which vary according to the individual
license agreements. As of December 31, 2008, we have
generated approximately $111 million in upfront license
fees, milestones and royalties from the patent estate. In
October 2006, Merck received FDA approval for its DPIV
inhibitor,
Januvia
tm
(sitagliptin). In March 2007, Merck received EU approval for
Januvia and FDA approval for
Janumet
tm
,
its combination product of sitagliptin and metformin. In July
2008, Merck also received EU approval for Janumet. In September
2007, Novartis received EU approval for its DPIV inhibitor,
Galvus
®
(vildagliptin), and in November 2007, received EU approval for
its combination product of vildagliptin and metformin,
Eucreas
®
.
We receive royalty payments from sales of Januvia, Janumet,
Galvus and Eucreas.
The patents which are the subject of these DPIV licenses will
expire between 2017 and 2027. In March 2008, we announced that
the decision of Opposition Division of the European Patent
Office to revoke one of our European patents relating to the use
of DPIV inhibitors for lowering blood glucose levels had been
upheld on appeal. As a result, royalties on sales of DPIV
inhibitor products have been or will be reduced or eliminated in
those territories where the patent has been revoked and where
there is no other patent protection. Royalties may be restored,
however, if certain currently pending patents, which are the
subject of these licenses, are issued.
We have filed a number of U.S. and international patent
applications relating to the OSI-906, OSI-027 and OSI-930
compounds, each of which we are developing as potential
treatments for cancer. We have been granted a U.S. patent
which protects the OSI-930 compound and method of use until
2024. We have also sought patent protection for PSN602, our oral
dual serotonin and noradrenaline reuptake inhibitor and
5HT
1A
agonist, and PSN821, our GPR119 agonist.
We have assembled a gene transcription patent portfolio which we
have non-exclusively out-licensed to a number of pharmaceutical
companies. We also have non-exclusive licenses from Cadus
Pharmaceutical Corporation and Wyeth to a portfolio of patents
and applications covering yeast cells engineered to express
heterologous GPCRs and G-protein polypeptides, methods of use
thereof in screening assays and DNAs encoding biologically
active yeast-mammalian hybrid GPCRs.
13
Our
Competition
The pharmaceutical and biotechnology industries are very
competitive. We face, and will continue to face, intense
competition from large pharmaceutical companies, as well as from
numerous smaller biotechnology companies and academic and
research institutions. Our competitors are pursuing technologies
that are similar to those that comprise our technology platforms
and are pursuing the development of pharmaceutical products or
therapies that are directly competitive with ours. Many of these
competitors have greater capital resources than we do, which
provide them with potentially greater flexibility in the
development and marketing of their products. In the case of
Tarceva, we chose to seek partnerships with leading
biotechnology and pharmaceutical industry companies, Genentech
and Roche, in order to ensure our competitiveness on a global
basis.
The market for oncology products is very competitive, with many
products currently in Phase III development. Most major
pharmaceutical companies and many biotechnology companies,
including our collaborators for Tarceva, Genentech and Roche,
currently devote significant operating resources to the research
and development of new oncology drugs or additional indications
for oncology drugs which are already marketed.
The current competition to Tarceva for the treatment of NSCLC
includes existing chemotherapy options such as Alimta, Taxotere
and
Gemzar
®
(gemcitabine), as well as Genentech’s Avastin, which is
approved in combination with chemotherapy for the first-line
treatment of patients with unresectable, locally advanced,
recurrent or metastatic non-squamous NSCLC. Eli Lilly presented
results at the June 2008 American Society of Clinical Oncology,
or ASCO, conference demonstrating a positive outcome for a
Phase III NSCLC maintenance therapy trial for Alimta. Eli
Lilly has also announced that Alimta, in combination with
cisplatin, has been approved by regulatory authorities in the
United States and Europe for the first-line treatment of NSCLC.
Tarceva also competes with AstraZeneca plc’s
Iressa
®
(gefitinib) in the limited markets where it is available, such
as Japan and Canada. AstraZeneca announced results in September
2007 from its international study comparing the use of Iressa
versus Taxotere for the treatment of NSCLC after the failure of
a first-line treatment showing that Iressa met the endpoint of
non-inferiority to Taxotere. In July 2008, AstraZeneca also
announced positive results for a
sub-set
of
its patients in a study in Asia, IPASS, comparing the use of
Iressa plus paclitaxel and carboplatin in the first-line
treatment of advanced NSCLC. In May 2008, AstraZeneca announced
that it had filed with the European Medicines Agency for the use
of Iressa as a treatment for locally advanced or metastatic
NSCLC in patients who have been pre-treated with
platinum-containing chemotherapy, which, if successful, would
result in additional competition for Tarceva in the EU. It is
also possible that AstraZeneca may seek to amend Iressa’s
label in the United States.
Tarceva may compete in the future with ImClone Systems
Incorporated and BMS’s
Erbitux
®
(cetuximab). In December 2008, ImClone Systems and BMS announced
that they had submitted an application to the FDA to broaden the
use of Erbitux to include first-line treatment of patients with
advanced NSCLC in combination with platinum-based chemotherapy.
The submission was based primarily on positive data from a
Phase III study, referred to as FLEX, of the combination of
Erbitux and chemotherapy in the treatment of first-line advanced
NSCLC. Imclone Systems and BMS subsequently announced in January
2009 that they had withdrawn this application, but stated that
they intend to resubmit the application in the future. A second
study that evaluated Erbitux in combination with a different
platinum containing chemotherapy, BMS-099, failed to meet its
primary or secondary endpoints. In 2008, ImClone Systems was
acquired by Eli Lilly.
Tarceva may also face competition in the future from
AstraZeneca’s
Zactima
tm
(vandetanib). In November 2008, AstraZeneca announced
preliminary results from three Phase III trials
investigating Zactima use in NSCLC. In a
head-to-head
superiority trial versus Tarceva in the second-line advanced
NSCLC setting, referred to as ZEST, AstraZeneca indicated that
Zactima failed to meet its primary endpoint of demonstrating
superior efficacy to Tarceva, but did meet the criteria of a
pre-planned non-inferiority analysis. AstraZeneca also indicated
that its trial combining Zactima with chemotherapy, referred to
as ZODIAC, met its primary endpoint of PFS, but its study
combining Zactima and Alimta, referred to as ZEAL, failed to
meet its primary endpoint. AstraZeneca has indicated that it
intends to file for FDA approval of Zactima in combination with
chemotherapy as a treatment for second-line NSCLC in the second
quarter of 2009. Other oncology drugs currently in clinical
trials for the treatment of NSCLC either as a single agent or as
a combination therapy, such as Amgen Inc.’s
Vectibix
tm
(panitumumab), Millennium Pharmaceuticals, Inc.’s
Velcade
®
(bortezomib), Pfizer’s
Sutent
®
(sunitinib malate) and Onyx’s Nexavar, could
14
compete for market share in NSCLC in the future. We are aware of
three current or planned Phase III clinical trials
evaluating Sutent as a treatment for NSCLC, including a
combination trial with Tarceva which is presently enrolling.
In the pancreatic cancer setting, Tarceva primarily competes
with Gemzar monotherapy in the first-line setting. In addition,
Tarceva’s use in pancreatic cancer may be affected by
experimental use of other products, such as Roche’s
Xeloda
®
(capecitabine) and Abraxis BioScience, LLC’s
Abraxane
®
(paclitaxel protein-bound particles for injectable suspension).
Our four Phase I development programs could face competition in
the future if successful. OSI-906 could face competition from a
number of other pre-clinical and clinical candidates which
target IGF-1R, including more advanced antibody clinical
candidates from Pfizer, ImClone Systems and Roche. OSI-027, a
small molecule inhibitor of both mTOR complexes, TORC1 and
TORC2, could compete with rapamycin analogs, such as
Wyeth’s
Torisel
tm
(temsirolimus) and Novartis’
Afinitor
®
(everolimus), which are known to inhibit the TORC1 complex.
OSI-906 and OSI-027 may also compete in the future with
therapeutic agents which target other molecular pathways or
cellular functions, but potentially have similar clinical
applications. PSN821, our GPR119 agonist for the treatment of
type 2 diabetes, would potentially compete with current and
future type 2 diabetes treatments, including GPR119 agonist
Phase I clinical candidates from Metabolex, Inc. and from Arena
Pharmaceuticals, Inc. in partnership with Ortho-McNeil-Janssen
Pharmaceuticals, Inc. PSN602, a dual serotonin and noradrenaline
reuptake inhibitor which also elicits
5HT
1A
receptor agonism, is designed to compete with compounds such as
Abbott Laboratories’
Meridia
®
(sibutramine) and could compete with current and future obesity
treatments, including Neurosearch A/S’s tesofensine, a
triple reuptake inhibitor currently in Phase III trials,
and other therapies for the treatment of obesity.
Government
Regulation
As developers and sellers of pharmaceutical products, we and our
collaborators are subject to, and any potential products
discovered and developed by us must comply with, comprehensive
regulation by the FDA, the Centers for Medicare and Medicaid
Services and other regulatory agencies in the United States and
by comparable authorities in other countries. These national
agencies and other state and local entities regulate, among
other things, the pre-clinical and clinical testing, safety,
effectiveness, approval, manufacture, quality, labeling,
distribution, marketing, export, storage, record keeping,
advertising, promotion and reimbursement of pharmaceutical and
diagnostic products.
Key
FDA Regulations
FDA approval of our products is required before the products may
be commercialized in the United States. The process of obtaining
new drug application, or NDA, approvals from the FDA can be
costly and time consuming and may be affected by unanticipated
delays.
The process required by the FDA before a new drug
(pharmaceutical product) or a new route of administration of a
pharmaceutical product may be approved for marketing in the
United States generally involves:
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pre-clinical laboratory and animal tests;
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submission to the FDA of an investigational new drug
application, or IND, which must be in effect before clinical
trials may begin;
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adequate and well-controlled human clinical trials to establish
the safety and efficacy of the drug for its intended
indication(s);
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FDA compliance inspection
and/or
clearance of all manufacturers;
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submission to the FDA of an NDA; and
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FDA review of the NDA or product license application in order to
determine, among other things, whether the drug is safe,
effective and of appropriate quality for its intended uses.
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15
New indications or other changes to an already approved product
also must be approved by the FDA. An sNDA is a supplement to an
existing NDA that provides for changes to the NDA and therefore
requires FDA approval. There are two types of sNDAs depending on
the content and extent of the change: (i) supplements
requiring FDA approval before the change is made and
(ii) supplements for changes that may be made pending FDA
approval. Supplements to the labeling that change the indication
section require prior FDA approval before the change can be made
to the labeling. Clinical trials are necessary to support sNDAs
for new indications.
The FDA reviews all NDAs submitted before it accepts them for
filing. It may refuse to file the application and request
additional information rather than accept an NDA for filing, in
which case the application must be resubmitted with the
supplemental information. Once an NDA is accepted for filing,
the FDA begins an in-depth review of the application to
determine, among other things, whether a product is safe and
effective for its intended use. Drugs that successfully complete
NDA review may be marketed in the United States, subject to all
conditions imposed by the FDA. Data obtained from clinical
activities are not always conclusive and may be susceptible to
varying interpretations, which could delay, limit or prevent
regulatory approval. The FDA has substantial discretion in the
approval process and may disagree with an applicant’s
interpretation of the data submitted in its NDA. If the FDA
cannot approve an NDA they will issue a “complete
response” letter describing the specific deficiencies and,
where possible, will outline recommended actions for the
applicant to take before the NDA can be approved. This may
include conducting additional studies.
Manufacturing procedures must conform to cGMPs, which must be
followed at all times. In complying with this requirement,
manufacturers, including a drug sponsor’s third-party
contract manufacturers, must continue to expend time, money and
effort in the area of production, quality assurance and quality
control to ensure compliance. Manufacturing establishments are
subject to periodic inspections by the FDA in order to assess,
among other things, compliance with cGMP. To supply products for
use in the United States, foreign manufacturing establishments
also must comply with cGMPs and are subject to periodic
inspection by the FDA or by regulatory authorities in certain
countries under reciprocal agreements with the FDA.
We are required to comply with requirements concerning
advertising and promotional labeling. Our advertising and
promotional labeling must be truthful, not misleading and
contain fair balance between claims of efficacy and safety. We
are prohibited from promoting any claim relating to safety and
efficacy that is not approved by the FDA, otherwise known as
“off-label” use of products. Physicians may prescribe
drugs for uses that are not described in the product’s
labeling and that differ from those approved by the FDA. Such
off-label uses are common across medical specialties, including
in the area of oncology. Physicians may believe that such
off-label uses are the best treatment for many patients in
varied circumstances. Although the FDA does not regulate the
behavior of physicians in their choice of treatments, the FDA
does restrict our communications to physicians and patients on
the subject of off-label use. Failure to comply with this
requirement could result in adverse publicity, significant
enforcement action by the FDA, including warning letters,
corrective advertising, orders to pull all promotional
materials, and substantial civil and criminal penalties. The
Department of Justice may also pursue enforcement actions
against off-label promotion which could result in criminal
and/or
civil
fines, as well as other restrictions on the future sales of our
products.
We are also required to comply with post-approval safety and
adverse event reporting requirements. Adverse events related to
our products must be reported to the FDA according to regulatory
timelines based on their severity and expectedness. Failure to
make required safety reports and to establish and maintain
related records could result in withdrawal of a marketing
application.
Violations of regulatory requirements at any stage, including
after approval, may result in various adverse consequences,
including the FDA’s delay in approving or refusal to
approve a product, withdrawal or recall of an approved product
from the market, other voluntary or FDA-initiated action that
could delay further marketing and the imposition of criminal
penalties against the manufacturer and NDA holder. In addition,
later discovery of previously unknown problems may result in
restrictions being placed on the product, manufacturer or NDA
holder, including withdrawal of the product from the market.
16
The
Hatch-Waxman Act
As discussed above, the Hatch-Waxman Act entitles our products
to various periods of non-patent statutory protection, known as
marketing exclusivity, which works in tandem with the patent
system to protect our products. Thus, even if our patents are
successfully challenged by our competitors, another manufacturer
cannot submit an application for generic or modified versions of
our products until the respective marketing exclusivity periods
end.
Four years into this marketing exclusivity period, the
Hatch-Waxman Act permits another manufacturer to submit an
application for approval of generic or modified versions of our
products by alleging that one or more of the patents listed in
the FDA’s Orange Book are invalid, unenforceable
and/or
not
infringed. This allegation is commonly known as a
Paragraph IV certification. If a Paragraph IV
certification is filed, the NDA and patent holders may bring a
patent infringement suit against the applicant. If this action
is brought within 45 days of receipt of the
Paragraph IV certification, the FDA cannot approve the ANDA
or 505(b)(2) application for 30 months from the date of our
receipt of the Paragraph IV certification. In addition, if
such patent infringement action is so commenced within such
45-day
period and occurs during the one-year period beginning on the
fourth anniversary of the commencement of the marketing
exclusivity period, the
30-month
period is extended by an amount of time such that the FDA cannot
approve the ANDA until seven and one-half years have elapsed
from the date of initial approval. This period of protection,
referred to as the statutory stay period, may end early,
however, if, for example, we lose the patent infringement case
before the statutory litigation stay period expires (i.e., a
court finds the patent invalid, unenforceable or not infringed)
or if we fail to reasonably cooperate in expediting the
litigation. On the other hand, if we win the patent suit, the
ANDA or 505(b)(2) application cannot be approved until the
expiration of the patent held to be infringed.
Under the Hatch-Waxman Act, the life of our patents may be
extended to compensate for marketing time lost while developing
our products and awaiting FDA approval of our applications. The
extension cannot exceed five years, and the total life of the
patent with the extension cannot exceed 14 years from a
product’s approval date. The period of extension is
generally one-half of the time between the effective date of the
IND and the date of submission of the NDA, plus the time between
the date of submission of the NDA and the date of FDA approval
of the product. Only one patent claiming each approved product
is eligible for the extension. We have been granted patent term
extensions that extend our U.S. patent for erlotinib
through November 2018, and corresponding patents in Europe have
been extended through March 2020 under European legislation for
supplementary protection certificates and in Japan through June
2020.
Pricing
and Reimbursement
Insurance companies, health maintenance organizations, other
third-party payors and federal and state governments seek to
limit the amount they reimburse for our drugs. Although there
are currently no government price controls over private sector
purchases in the United States, federal legislation requires
pharmaceutical manufacturers to pay prescribed rebates on
certain drugs to enable them to be eligible for reimbursement
under certain public health care programs. Various states have
adopted mechanisms under Medicaid that seek to control drug
reimbursement, including by disfavoring certain higher priced
drugs and by seeking supplemental rebates from manufacturers.
Managed care has also become a potent force in the market place
that increases downward pressure on the prices of pharmaceutical
products.
Effective January 1, 2006, an expanded prescription drug
benefit for all Medicare beneficiaries, known as Medicare
Part D, commenced. This is a voluntary benefit that is
being implemented through private plans under contractual
arrangements with the federal government. Like pharmaceutical
coverage through private health insurance, Medicare Part D
plans establish formularies and other utilization management
tools that govern access to the drugs and biologicals that are
offered by each plan. These formularies can change on an annual
basis, subject to federal governmental review. These plans may
also require beneficiaries to provide
out-of-pocket
payments for such products. As a prescription medication,
Tarceva is frequently administered through Medicare Part D
plans. As a result, changes in the formularies or utilization
management tools employed by these plans can restrict patient
access to Tarceva or increase the
out-of-pocket
cost for our drug, which in turn could negatively impact Tarceva
sales.
17
Regulatory approval of prices is required in most foreign
countries. Certain countries will condition their approval of a
product on the agreement of the seller not to sell that product
for more than a certain price in that country and in the past
have required price reductions after or in connection with
product approval. Certain foreign countries also require that
the price of an approved product be reduced after that product
has been marketed for a period of time. A number of European
countries, including Germany, Italy, Spain and the United
Kingdom, have implemented, or are considering, legislation that
would require pharmaceutical companies to sell their products
subject to reimbursement at a mandatory discount. Such mandatory
discounts would reduce the revenue we receive from our drug
sales in these countries.
Other
Regulation
In addition to regulations enforced by the FDA, we 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 federal, state and local regulations. If products are made
available to authorized users of the Federal Supply Schedule of
the General Services Administration, additional laws and
requirements may apply. All of these activities are also
potentially subject to federal and state consumer protection and
unfair competition laws. In addition, our research and
development activities involve the controlled use of hazardous
materials, chemicals and various radioactive compounds, the
handling and disposal of which are governed by various state and
federal laws and regulations.
We are subject to various federal and state laws pertaining to
health care “fraud and abuse,” including anti-kickback
laws and false claims laws. Anti-kickback laws generally make it
illegal for a prescription drug manufacturer to knowingly and
willfully solicit, offer, receive, or pay any remuneration in
exchange for, or to induce, the referral of business, including
the recommendation, purchase or prescription of a particular
drug. False claims laws prohibit, among other things, anyone
from knowingly and willfully presenting, or causing to be
presented for payment to third party payors (including Medicare
and Medicaid), claims for reimbursed drugs or services that are
false or fraudulent, claims for items or services not provided
as claimed or claims for medically unnecessary items or
services. Violations of fraud and abuse laws may be punishable
by criminal
and/or
civil
sanctions, including imprisonment, fines and civil monetary
penalties, as well as the possibility of exclusion from federal
health care programs (including Medicare and Medicaid). In
addition, under some of these laws, there is an ability for
private individuals to bring similar actions. Further, there are
an increasing number of state laws that require manufacturers to
make reports to states on pricing and marketing information.
Many of these laws contain ambiguities as to what is required to
comply with the laws.
We are also subject to the U.S. Foreign Corrupt Practices
Act, or the FCPA, which prohibits corporations and individuals
from engaging in specified activities to obtain or retain
business or to influence a person working in an official
capacity. Under the FCPA, it is illegal to pay, offer to pay or
authorize the payment of anything of value to any foreign
government official, government staff member, political party or
political candidate in an attempt to obtain or retain business
or to otherwise influence a person working in an official
capacity.
In addition, federal and state laws protect the confidentiality
of certain health information, in particular individually
identifiable information, and restrict the use and disclosure of
that information. At the federal level, the Department of Health
and Human Services promulgated health information privacy and
security rules under the Health Insurance Portability and
Accountability Act of 1996. In addition, many state laws apply
to the use and disclosure of health information.
In January 2009, we elected to adopt the revised voluntary Code
on Interactions with Healthcare Professionals, or PhRMA Code,
promulgated by the Pharmaceutical Research and Manufacturers of
America. The updated PhRMA Code, which became effective in
January 2009, addresses interactions with respect to marketed
products and related pre-launch activities and reinforces the
intention that interactions with healthcare professionals are
professional exchanges designed to benefit patients and to
enhance the practice of medicine.
Our
Employees
We believe that our success is largely dependent upon our
ability to attract and retain qualified employees. As of
December 31, 2008, we had a total of 491 full-time and
23 part-time employees worldwide.
18
Available
Information
We file our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K
pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 electronically with the Securities and
Exchange Commission, or SEC. The public may read or copy any
materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, DC
20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding
issuers that file electronically with the SEC. The address of
that site is
http://www.sec.gov
.
You may obtain a free copy of our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K
and amendments to those reports on the day of filing with the
SEC on our website on the World Wide Web at
http://www.osip.com
or by contacting the Investor Relations Department at our
corporate offices by calling
(631) 962-2000
or sending an
e-mail
message to investorinfo@osip.com.
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This report contains forward-looking statements that do not
convey historical information, but relate to predicted or
potential future events, such as statements of our plans,
strategies and intentions, or our future performance or goals
for our product development programs. These statements can often
be identified by the use of forward-looking terminology such as
“believe,” “expect,” “intend,”
“may,” “will,” “should,” or
“anticipate” or similar terminology. The statements
involve risks and uncertainties and are based on various
assumptions. Stockholders and prospective stockholders are
cautioned that these statements are only projections. In
addition, any forward-looking statement that we make is intended
to speak only as of the date on which we made the statement.
Except for our ongoing obligations to disclose material
information under the federal securities laws, we 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 our 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.
Risks
Related to Our Business
We
depend heavily on our principal marketed product, Tarceva, to
generate revenues in order to fund our operations.
We currently derive most of our revenues from our principal
marketed product, Tarceva, which represented approximately 88%
of our total revenues from continuing operations for the year
ended December 31, 2008. For the next several years, we
will continue to rely on Tarceva to generate the majority of our
revenues. Our ability to maintain or increase our revenues for
Tarceva will depend on, and may be limited by, a number of
factors, including the following:
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Our ability to maintain and expand the market share, both in the
United States and in the rest of the world, and revenues for
Tarceva in the treatment of second-line and third-line NSCLC and
for first-line pancreatic cancer in the midst of numerous
competing products which are currently in late stage clinical
development;
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Whether the positive data from the SATURN and ATLAS studies will
be sufficient to achieve approval from the FDA and its foreign
counterparts to market and sell Tarceva as a maintenance therapy
in patients with advanced, recurrent or metastatic NSCLC who
have not experienced disease progression following chemotherapy,
and whether, if approved, Tarceva’s use in the setting will
gain acceptance among prescribing physicians and result in
increased Tarceva sales;
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Whether data from clinical trials for additional indications are
positive and whether such data, if positive, will be sufficient
to achieve approval from the FDA and its foreign counterparts to
market and sell Tarceva in such additional indications;
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Whether physicians are willing to switch from existing treatment
methods, including traditional chemotherapy agents (where
certain reimbursement practices in the United States favor the
use of intravenously administered drugs), to Tarceva;
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Current and future pricing pressures on Tarceva, including as a
result of government-imposed price reductions, an increase in
imports of Tarceva from lower cost countries to higher cost
countries and pressure on physicians to reduce prescriptions of
higher priced medicines like Tarceva;
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Adequate coverage or reimbursement for Tarceva by third-party
payors, including private health coverage insurers and health
maintenance organizations; and
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The ability of patients to afford any required co-payments for
Tarceva. The risk that patients will not be able to afford the
co-payments for Tarceva may become particularly acute if the
recent global financial crisis is prolonged or worsens.
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20
If
Tarceva were to become the subject of problems related to its
efficacy, safety, or otherwise, or if new, more effective
treatments were introduced into the market, our revenues from
Tarceva could decrease.
If Tarceva becomes the subject of problems, including those
related to, among others:
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efficacy or safety concerns with the product, even if not
justified;
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unexpected side-effects;
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regulatory proceedings subjecting the product to potential
recall;
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pressure from competitive products;
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introduction of more effective treatments; or
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manufacturing or quality problems that would reduce or disrupt
product availability;
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our revenues from Tarceva could decrease. For example, efficacy
or safety concerns from time to time arise, whether or not
justified, that could lead to additional safety warnings on the
label, including a “block box” warning that highlights
significant safety concerns, or to the recall or withdrawal of
Tarceva. In the event of a recall or withdrawal of Tarceva, our
revenues would decline significantly.
Our
strategy includes expanded use for Tarceva; however, there can
be no assurance that the positive results from the SATURN or
ATLAS trials will result in Tarceva receiving the required
regulatory approvals for expanded use in NSCLC or that data from
other clinical trials for additional indications will be
positive or sufficient to achieve approval from the FDA and its
foreign counterparts to market and sell Tarceva in such
additional indications.
In November 2008, we and Genentech announced that our global
Phase III study, SATURN, met its primary endpoint of PFS.
The SATURN study is a double-blind randomized 850-patient
Phase III study to evaluate the efficacy of Tarceva as a
maintenance therapy versus placebo following four cycles of
chemotherapy in patients with advanced, recurrent or metastatic
NSCLC who have not experienced disease progression or
unacceptable toxicity during the four cycles of front-line
chemotherapy. In February 2009, Genentech informed us that
another global Phase III study, ATLAS, was stopped early on
the recommendation of an independent data safety monitoring
board after a pre-planned interim analysis showed that combining
Tarceva and Avastin extended with statistical significance the
time that these patients lived without their disease advancing,
compared with Avastin plus placebo. ATLAS was a randomized,
double-blind, placebo-controlled, Phase IIIb study to evaluate
the combination of Avastin plus Tarceva for the treatment of
locally advanced, recurrent or metastatic NSCLC in patients
whose cancer did not progress following initial treatment with
Avastin and platinum-based chemotherapy.
While the SATURN and ATLAS studies have the potential to expand
Tarceva use in NSCLC into the maintenance setting following
first line treatment, there can be no assurance that Tarceva
will receive approval from the FDA and its foreign counterparts
for such an indication. The primary endpoint of the SATURN and
ATLAS studies is PFS. Although SATURN has been through the
FDA’s SPA process, there can be no guarantee that the PFS
endpoint will not be subject to further scrutiny by the FDA.
Overall survival was a secondary endpoint in the SATURN study
and these data, when available, will also be included in the
regulatory filings for this study. We do not anticipate that
this data will be available until after the sNDA for SATURN has
been submitted to the FDA. There can be no assurance that the
PFS data, nor any additional data required by the FDA or its
foreign counterparts, will be sufficient to support approval of
Tarceva in the first line maintenance setting. If the FDA or its
foreign counterparts do not approve Tarceva in this setting, it
could have an adverse impact on our potential future revenues
for Tarceva.
We are also conducting a number of other clinical trials which
seek to expand the existing indications for Tarceva. The results
from these clinical trials are difficult to predict; positive
results from pilot studies or other similar studies, including
subset analyses from prior studies, are not a guarantee of
success in subsequent studies. In addition, there can be no
guarantee that such studies, if positive, will result in
approvals from the FDA and its foreign counterparts for new
indications for Tarceva.
21
We
depend heavily on our co-development and marketing alliance with
Genentech and Roche for Tarceva. If Genentech or Roche terminate
these alliances, or are unable to meet their contractual
obligations, it could negatively impact our revenues and harm
our business until appropriate corrective measures have been
taken.
Tarceva is being developed and commercialized in an alliance
under co-development and marketing agreements with Genentech and
Roche. Genentech leads the marketing efforts in the United
States, and Roche markets the drug in the rest of the world. The
OSI/Genentech collaboration agreement continues until the date
on which neither we nor Genentech are entitled to receive a
share of the operating profits or losses on any products
resulting from the collaboration, that is, until the date that
we and Genentech mutually agree to terminate the collaboration
or until either party exercises its early termination rights as
described as follows. The OSI/Genentech collaboration agreement
is subject to early termination in the event of certain
customary defaults, such as material breach of the agreement and
bankruptcy. In addition, Genentech has the right to terminate
the OSI/Genentech collaboration agreement with six months’
prior written notice. The provisions of the amendment to the
agreement allowing us to co-promote are also subject to
termination by Genentech upon a material breach of the amendment
by us, which remains uncured, or upon a pattern of nonmaterial
breaches which remain uncured.
The OSI/Roche agreement continues until the date on which we are
no longer entitled to receive a royalty on products resulting
from the development of Tarceva, that is, until the date of
expiration or revocation or complete rejection of the last to
expire patent covering Tarceva or, in countries where there is
no valid patent covering Tarceva, on the tenth anniversary of
the first commercial sale of Tarceva in that country. The
OSI/Roche agreement is subject to early termination in the event
of certain customary defaults, such as material breach of the
agreement and bankruptcy. In addition, Roche has the right to
terminate the agreement on a
country-by-country
basis with six months’ prior written notice. We also
currently have the right to terminate the agreement with respect
to a particular country under certain circumstances if Roche has
not launched or marketed a product in such country.
If we do not maintain a successful collaborative alliance with
Genentech
and/or
Roche
for the co-development and commercialization of Tarceva, or if
Genentech or Roche are unable to meet their contractual
obligations, we may be forced to focus our efforts internally to
further commercialize and develop Tarceva without the assistance
of a marketing and promotion partner. This would require greater
financial resources and would result in us incurring greater
expenses and may cause a delay in market penetration while we
expand our commercial operations or seek alternative
collaborators. Such costs may exceed the increased revenues we
would receive from direct Tarceva sales, at least in the near
term.
Roche is the majority shareholder in Genentech. However, in
January 2009, Roche announced a tender offer to acquire the
outstanding public shares of Genentech, which it does not
currently own, for approximately $42.1 billion. As the
ultimate outcome of this proposed transaction is uncertain, we
cannot presently determine its potential impact on the future
commercialization and development of Tarceva and there can be no
assurance that any subsequent integration activities associated
with the transaction will not adversely affect the
commercialization of Tarceva, particularly in the United States.
If we
do not receive timely and accurate financial information from
Genentech and Roche regarding the development and sale of
Tarceva, we may be unable to accurately report our results of
operations.
Due to our collaborations with Genentech and Roche for Tarceva,
we are highly dependent on these companies for timely and
accurate information regarding the costs incurred in developing
and selling Tarceva, and any revenues realized from its sale, in
order to accurately report our results of operations. If we do
not receive timely and accurate information associated with the
co-promotion and development of Tarceva, we may be required to
record significant adjustments to our revenues or expenses in
future periods
and/or
restate our results for prior periods. Such inaccuracies or
restatements could cause a loss of investor confidence in our
financial reporting or lead to legal claims against us.
22
Our
business will be increasingly affected by pressures on drug
pricing, which may limit or reduce the prices we can charge for
Tarceva in the future and the pricing structure available to
future products emanating from our pipeline.
The growth of overall healthcare costs in many countries means
that governments and payors are under pressure to control
spending even more tightly. As a result, our business and the
pharmaceutical and biotechnology industries in general are
operating in an increasingly challenging environment with very
significant pricing pressures. These ongoing pressures include
government-imposed industry-wide price reductions, mandatory
pricing systems, an increase in imports of drugs from lower cost
countries to higher cost countries, shifting of the payment
burden to patients through higher co-payments and growing
pressure on physicians to reduce prescriptions of higher priced
medicines like Tarceva. We expect these efforts to continue as
healthcare payors — in particular
government-controlled health authorities, insurance companies
and managed care organizations — increase their
efforts to reduce the overall cost of healthcare, which may
limit or reduce the prices we can charge in the future for
Tarceva and any future products emanating from our pipeline.
These pricing pressures could become particularly acute if the
current global financial crisis is prolonged or worsens.
We are
responsible for the manufacture and supply of Tarceva in the
United States. Because we have no commercial manufacturing
facilities, we are dependent on two suppliers for the API for
Tarceva and a single supplier for the tableting of Tarceva in
the United States. If any of these third parties fails to meet
its obligations, our revenues from Tarceva could be negatively
affected.
We are responsible for manufacturing and supplying Tarceva in
the United States under the terms of a Manufacturing and Supply
Agreement entered into with Genentech in 2004. We rely on two
third-party suppliers to manufacture erlotinib, the API for
Tarceva. We also currently rely on a single manufacturer to
formulate the Tarceva tablets. If our relationships with any of
these manufacturers with respect to Tarceva terminate or if
these manufacturers are unable to meet their obligations, we
would need to find other sources of supply. Such alternative
sources of supply may be difficult to find on terms acceptable
to us or in a timely manner, and, if found, would require FDA
approval which could cause delays in the availability of
erlotinib and ultimately Tarceva tablets, which, in turn, would
negatively impact our revenues derived from Tarceva.
We may
not be able to successfully obtain the grant of the Tarceva
patent reissue application which could limit our ability to
assert the ’498 patent to prevent or stop competitors from
marketing or selling products similar to Tarceva.
On February 27, 2008, we filed a reissue application and a
request for a certificate of correction with the USPTO to
correct certain errors with respect to the ’498 patent. In
the reissue proceeding, the USPTO may ultimately determine that
one or more of the claims in the ’498 patent are
unpatentable. We are unable to predict the outcome of the
reissue proceeding. If we are unsuccessful in obtaining a grant
of a reissued ’498 patent with at least one claim covering
the erlotinib compound, which is the active molecule in Tarceva,
we would be limited in our ability to assert the ’498
patent to prevent or stop competitors from marketing or selling
products that are similar to Tarceva which would adversely
impact our revenues from Tarceva in the United States.
If our
competitors succeed in developing products and technologies that
are more effective than our own, or if scientific developments
change our understanding of the potential scope and utility of
our products, then our products and technologies may be rendered
less competitive.
We face significant competition from industry participants that
are pursuing products and technologies that are similar to those
we are pursuing and who are developing pharmaceutical products
that are competitive with our products and potential products.
Some of our industry competitors have greater capital resources,
larger overall research and development staffs and facilities,
and a longer history in drug discovery and development,
obtaining regulatory approval and pharmaceutical product
manufacturing and marketing than we do. With these additional
resources, our competitors may be able to respond to the rapid
and significant technological changes in the biotechnology and
pharmaceutical industries faster than we can. Our future success
will depend in large part on our ability to maintain a
competitive position with respect to these technologies. Rapid
technological development, as
23
well as new scientific developments, may result in our
compounds, products or processes becoming obsolete before we can
recover any of the expenses incurred to develop them.
The current competition to Tarceva for the NSCLC indication
includes existing chemotherapy options such as Alimta, Taxotere
and Gemzar, as well as Genentech’s Avastin, which is
approved in combination with chemotherapy for the first-line
treatment of patients with unresectable, locally advanced,
recurrent or metastatic non-squamous NSCLC. Eli Lilly presented
results at the June 2008 ASCO conference demonstrating a
positive outcome for a Phase III NSCLC maintenance therapy
trial for Alimta. Eli Lilly has also announced that Alimta, in
combination with cisplatin, has been approved by regulatory
authorities in the United States and Europe for the first-line
treatment of NSCLC.
Tarceva also competes with AstraZeneca’s Iressa in the
limited markets where it is available, such as Japan and Canada.
AstraZeneca announced results in September 2007 from its
international study comparing the use of Iressa versus Taxotere
for the treatment of NSCLC after the failure of a first-line
treatment, showing that Iressa met the endpoint of
non-inferiority to Taxotere. In July 2008, AstraZeneca also
announced positive results for a
sub-set
of
its patients in a study in Asia, IPASS, comparing the use of
Iressa versus paclitaxel and carboplatin in the first-line
treatment of advanced NSCLC. In May 2008, AstraZeneca announced
that it had filed with the European Medicines Agency for the use
of Iressa as a treatment for locally advanced or metastatic
NSCLC in patients who have been pre-treated with
platinum-containing chemotherapy, which, if successful, would
result in additional competition for Tarceva in the EU. It is
also possible that AstraZeneca may seek to amend Iressa’s
label in the United States.
Tarceva may compete in the future with Erbitux. In December
2008, Imclone Systems, BMS and Merck KGaA announced that they
had submitted an application to the FDA to broaden the use of
Erbitux to include first-line treatment of patients with
advanced NSCLC in combination with platinum based chemotherapy.
The submission was based primarily on positive data from a
Phase III study, referred to as FLEX, of the combination of
Erbitux and chemotherapy in the first-line treatment of advanced
NSCLC. Imclone Systems and BMS subsequently announced in January
2009 that they had withdrawn this application, but stated that
they intend to resubmit the application in the future. A second
study that evaluated Erbitux in combination with a different
platinum containing chemotherapy, BMS-099, failed to meet its
primary or secondary endpoints. In 2008, ImClone Systems was
acquired by Eli Lilly.
Tarceva could also face competition in the future from
AstraZeneca’s Zactima. In November 2008, AstraZeneca
announced preliminary results from three Phase III trials
investigating Zactima use in NSCLC. In a
head-to-head
superiority trial versus Tarceva in the second-line advanced
NSCLC setting, referred to as ZEST, AstraZeneca indicated that
Zactima failed to meet its primary endpoint of demonstrating
superior efficacy to Tarceva, but did not meet the criteria of a
pre-planned non-inferiority analysis. AstraZeneca also indicated
that its trial combining Zactima with chemotherapy, referred to
as ZODIAC, met its primary endpoint of PFS but a study combining
Zactima and Alimta, referred to as ZEAL, failed to meet its
primary endpoint. AstraZeneca has indicated that it intends to
file for FDA approval of Zactima in combination with
chemotherapy as a treatment for second-line NSCLC in the second
quarter of 2009. Other oncology drugs currently in clinical
trials for the treatment of NSCLC either as a single agent or as
a combination therapy, such as Amgen’s Vectibix,
Millennium’s Velcade, Pfizer’s Sutent and Bayer and
Onyx’s Nexavar, could compete for market share in NSCLC in
the future. We are aware of three current or planned
Phase III clinical trials evaluating Sutent as a treatment
for NSCLC, including a combination trial with Tarceva which is
presently enrolling.
In the pancreatic cancer setting, Tarceva primarily competes
with Gemzar monotherapy in the first-line. In addition, Tarceva
use in pancreatic cancer may be affected by experimental use of
other products, such as Roche’s Xeloda and Abraxis
Bioscience’s
Abraxane
®
(paclitaxel protein-bound particles for injectable suspension).
Our four Phase I development programs could face competition in
the future if successful. OSI-906, our oral small molecule IGF-1
receptor inhibitor, could face competition from a number of
other pre-clinical and clinical candidates which target the
IGF-1R, including more advanced antibody clinical candidates
from Pfizer, ImClone Systems and Roche. OSI-027, a small
molecule inhibitor of both mTOR complexes, TORC1 and TORC2,
could compete with rapamycin analogs, such as Wyeth’s
Torisel and Novartis’ Afinitor, which are known to inhibit
the TORC1 complex. OSI-906 and OSI-027 may also compete in the
future with therapeutic agents which target other molecular
pathways or cellular functions, but potentially have similar
clinical applications. PSN821, our GPR119
24
receptor agonist Phase I clinical candidate for the treatment of
type 2 diabetes, would potentially compete with current and
future type 2 diabetes treatments, including GPR119 agonist
Phase I clinical candidates from Metabolex and Arena
Pharmaceuticals in partnership with Ortho-McNeil-Janssen
Pharmaceuticals. PSN602, our dual serotonin and noradrenaline
reuptake inhibitor which also elicits
5HT
1A
receptor agonism, is designed to compete with compounds such as
Abbott Laboratories’ Meridia and could compete with current
and future obesity treatments, including Neurosearch’s
tesofensine, a triple reuptake inhibitor currently in
Phase III trials, and other targeted therapies for the
treatment of obesity.
Our
revenues from our DPIV patent portfolio licenses are contingent
upon the ability of our licensees to successfully develop and
commercialize their products which are the subject of these
licenses and our ability to protect our intellectual property
rights in our DPIV patent estate.
We have licensed our DPIV medical use patent portfolio to
pharmaceutical companies that develop and commercialize DPIV
inhibitor products. We currently derive, or have the potential
to derive in the future, revenues from the milestone and royalty
obligations under these license agreements. Licensees include
Merck, whose product Januvia was approved by the FDA in October
2006 and in the EU in March 2007. Merck’s combination
product with metformin, Janumet, was approved by the FDA in
March 2007 and in the EU in July 2008. Novartis is also a
licensee and it received EU regulatory approval for its product,
Galvus, in September 2007. Additionally, in November 2007,
Novartis received EU regulatory approval for its combination
product with metformin, Eucreas. There can be no assurance that
Galvus, Eucreas or any other DPIV inhibitor products covered by
license agreements with us will be approved by the FDA or other
regulatory authorities. The amount of royalties and other
payments that we derive from our DPIV patent estate is not only
dependent on the extent to which products covered by the license
agreements receive regulatory approval but is also dependent on
how successful Merck, Novartis and other licensees are in
expanding the global market for DPIV inhibitor products, as well
as other factors that could affect their market share, such as
safety issues. The extent to which we receive revenue under such
licenses also depends on our ability to enforce our patent
rights in our DPIV portfolio. As an example, in March 2008, we
announced that the decision of the Opposition Division of the
European Patent Office to revoke one of our European patents
relating to the use of DPIV inhibitor products for lowering
blood glucose levels had been upheld on appeal. As a result,
royalties on sales of DPIV inhibitor products have been or will
be reduced or eliminated in those territories where the patent
has been revoked and where there is no other patent protection.
Although
we have clinical and pre-clinical candidates in the pipeline for
oncology and diabetes and obesity that appear to be promising at
early stages of development, none of these potential products
may reach the commercial market for a number of
reasons.
Successful research and development of pharmaceutical products
is high risk. Most products and development candidates fail to
reach the market. Our success depends on the discovery and
development of new drugs that we can commercialize. Our pipeline
for our oncology and diabetes and obesity clinical programs,
including those that we deem to be core assets, is at an early
stage. Our four core development candidates — OSI-906,
OSI-027, PSN821 and PSN602 — are all in Phase I
clinical trials. Given the early stage of each of these clinical
candidates, there can be no assurance at this time that any of
them will become a marketed drug. As an example, in November
2007, we elected to discontinue development of our DPIV
inhibitor, PSN9301, which had completed Phase IIa studies, after
it failed to show an adequate safety margin in a three-month
primate toxicology study.
The clinical candidates in our pipeline may never reach the
market for a number of reasons. They may be found ineffective or
may cause harmful side-effects during pre-clinical testing or
clinical trials or fail to receive necessary regulatory
approvals. Interim results of pre-clinical or clinical studies
are not necessarily predictive of their final results, and
acceptable results in early studies might not be seen in later
studies, in large part because earlier phases of studies are
often conducted on smaller groups of patients than later
studies, and without the same trial design features, such as
randomized controls and long-term patient
follow-up
and analysis. We may find that certain products cannot be
manufactured on a commercial scale and, therefore, they may not
be economical to produce. Our products could also fail to
achieve market acceptance or be precluded from commercialization
by proprietary rights of third parties.
25
We must provide the FDA and similar foreign regulatory
authorities with pre-clinical and clinical data that demonstrate
that our product candidates are safe and effective for each
target indication before they can be approved for commercial
distribution. The pre-clinical testing and clinical trials of
any product candidates that we develop must comply with
regulations by numerous federal, state and local government
authorities in the United States, principally the FDA, and by
similar agencies in other countries. Clinical development is a
long, expensive and uncertain process and is subject to delays.
We may encounter delays or rejections based on our inability to
enroll or keep enrolled enough patients to complete our clinical
trials, especially as new competitors are approved to enter into
the market. Patient enrollment depends on many factors,
including the size of the patient population, the nature of the
trial protocol, the proximity of patients to clinical sites, the
eligibility criteria for the trial and the existence of
competing clinical trials. Delays in patient enrollment may
result in increased costs and a longer than anticipated period
of time until data become available, which could have a harmful
effect on our ability to develop products.
A significant portion of the research that we are conducting
involves new and unproven technologies. Research programs to
identify disease targets and product candidates require
substantial technical, financial and human resources, whether or
not we ultimately identify any candidates. Our research programs
may initially show promise in identifying potential product
candidates, yet fail to yield candidates for clinical
development for a number of reasons, including difficulties in
formulation which cannot be overcome, inadequate intellectual
property protection and timing and competitive concerns.
Our
reliance on third parties, such as clinical research
organizations, or CROs, and manufacturers, may result in delays
in completing, or a failure to complete, clinical trials if they
fail to perform under our agreements with them.
In the course of product development, we engage CROs to conduct
and manage clinical studies and to manufacture API and drug
product. Because we have engaged and intend to continue to
engage CROs and third-party manufacturers to help us conduct our
clinical studies, obtain market approval for our drug candidates
and manufacture API and drug product, many important aspects of
this process have been, and will be, out of our direct control.
If the CROs or third-party manufacturers fail to perform their
obligations under our agreements with them or fail to perform
their responsibilities with respect to clinical trials in
compliance with good clinical practices, cGMPs, regulations and
guidelines enforced by the FDA and similar foreign regulatory
authorities, such trials may be materially delayed or
terminated, adversely impacting our ability to commercialize our
drug candidates. Furthermore, any loss or delay in obtaining
contracts with such CROs and third-party manufacturers may also
delay the completion of our clinical trials and the market
approval of drug candidates.
Our
operating results could be adversely affected by fluctuations in
the value of the U.S. dollar against foreign
currencies.
A significant percentage of our revenues are derived from
royalties on sales of Tarceva outside of the United States by
Roche, and our operating expenses relating to Prosidion are
denominated in British pounds sterling, or GBP. As result, these
Tarceva revenues and Prosidion operating expenses are affected
by fluctuating foreign currency exchange rates. An increase in
the U.S. dollar relative to other currencies in which we
have revenues will cause our revenues to be lower than with a
stable exchange rate. Changes in exchange rates between the GBP
and the U.S. dollar can affect the recorded levels of the
assets, liabilities and expenses relating to Prosidion. The
primary foreign currencies in which we have exchange rate
fluctuation exposure are the Euro, the GBP and the Swiss franc,
but we also have exposure to exchange rate fluctuation in other
currencies. Exchange rates between these currencies and
U.S. dollars have fluctuated significantly in recent years,
particularly as the current global financial crisis has
unfolded, and may continue to do so in the future. We cannot
predict the impact of future exchange rate fluctuations on our
operating results.
26
We may
not be able to make our required payments of interest and
principal under our outstanding indebtedness when due, and may
not be able to repurchase for cash our 2% convertible senior
subordinated notes due 2025, or our 2025 Notes, or our 3%
convertible senior subordinated notes due 2038, or our 2038
Notes, if required to do so in 2010 and 2013, respectively. If
we elect to repurchase our
3
1
/
4
%
convertible senior subordinated notes due 2023, or our 2023
Notes, with our common shares, our shareholders would experience
dilution and our stock price may decline.
Our aggregate debt under our 2023 Notes, 2025 Notes and 2038
Notes was approximately $415 million as of
December 31, 2008. While we are currently generating
sufficient net cash flow to satisfy our anticipated annual
interest payments on our outstanding convertible debt, there can
be no assurance that we will be able to do so in the future. In
addition, the holders of the 2023 Notes, the 2025 Notes and the
2038 Notes have the right to require us to repurchase their
notes in September 2013, December 2010, and January 2013,
respectively. While the 2023 Notes provide us with the option of
delivering our common stock in lieu of cash in the event that
the holders of the 2023 Notes require us to repurchase all or a
portion of their 2023 Notes, the 2025 Notes and the 2038 Notes
must be repurchased with cash. If we do not have sufficient
resources at the time these obligations are due, we may be
required to borrow additional funds or sell additional equity to
meet these obligations, but there can be no guarantee that we
will be able to raise such capital at the appropriate time on
favorable terms or at all. If we are unable to make our annual
interest payments or repay any of our convertible notes when
due, we will default on our 2023 Notes, the 2025 Notes and the
2038 Notes, permitting the note holders to declare the notes
immediately due and payable. There can be no assurance that we
will have sufficient capital resources to repay our convertible
notes in the event that such a default right is triggered.
Global
credit and financial market conditions could negatively impact
the value of our current portfolio of cash equivalents and
investment securities.
Our cash and cash equivalents are maintained in highly liquid
investments with maturities of 90 days or less at the time
of purchase. Our investment securities consist of readily
marketable debt securities with remaining maturities of more
than 90 days at the time of purchase. As of the date of
this filing, we are not aware of any material losses or other
significant deterioration in the fair value of our cash
equivalents or investment securities since December 31,
2008; however, no assurance can be given that further
deterioration in conditions of the global credit and financial
markets would not negatively impact our current portfolio of
cash equivalents and investment securities and, as result, our
financial condition.
Risks
Relating to Regulatory Matters
Starting
in November 2008, generic competitors can challenge our U.S.
patents by filing an ANDA or a 505(b)(2) NDA for a generic or a
modified version of Tarceva and adversely affect our competitive
position.
Separate and apart from the protection provided under the
U.S. patent laws, Tarceva is also subject to the provisions
of the Hatch-Waxman Act which provides Tarceva with a five-year
period of marketing exclusivity following FDA approval on
November 18, 2004. The Hatch-Waxman Act prohibits the FDA
from accepting the filing of an ANDA application (for a generic
product) or a 505(b)(2) NDA (for a modified version of the
product) for such five-year period. A manufacturer who alleges
that one or more of the patents listed in the FDA’s Orange
Book are invalid, unenforceable or not infringed need not wait
five years, however, and may submit an ANDA or 505(b)(2) NDA for
a generic or modified version of Tarceva four years into the
exclusivity period (
i.e.,
beginning on November 18,
2008). This patent challenge is commonly known as a
Paragraph IV certification. Within the past several years,
the generic industry has aggressively pursued approvals of
generic versions of innovator drugs at the earliest possible
point in time.
We are currently reviewing a Paragraph IV certification
that we received on February 9, 2009 from Teva U.S.A. If we
commence a lawsuit for patent infringement within 45 days
of the date of receipt of the certification, as we expect to do,
the FDA cannot approve the ANDA until seven and one-half years
have elapsed from the date of Tarceva’s initial approval
(i.e., May 18, 2012). This period of protection, referred
to as the statutory litigation stay
27
period, may end early, however, in the event of an adverse court
action, such as if we were to lose the patent infringement case
before the statutory litigation stay period expires (i.e., the
court finds the patent invalid, unenforceable, or not infringed)
or if we fail to reasonably cooperate in expediting the
litigation. On the other hand, if we prevail in the infringement
action, the ANDA cannot be approved until the patent held to be
infringed expires. Tarceva is currently protected by three
patents listed in the FDA’s Approved Drugs Products List
(Orange Book). A lawsuit brought with respect to one or more of
those patents would restrict the FDA from approving Teva
U.S.A.’s ANDA until May 18, 2012, unless an adverse
ruling occurs prior to such time.
Additionally, following the conclusion of the statutory
litigation stay period, or earlier date due to a loss of the
statutory litigation stay protection, if the ANDA or 505(b)(2)
NDA filing has been approved, a generic company may choose to
launch a generic version of Tarceva notwithstanding the pendency
of our infringement action or any appeal. This is referred to as
an “at-risk launch” and is an aggressive strategy
pursued by generic companies that has occurred more frequently
in the last few years. Any launch of a generic version of
Tarceva prior to the expiration of patent protection, whether as
a result of the loss of the patent infringement litigation or
due to an at-risk launch, will have a material adverse effect on
our revenues for Tarceva and our results of operations.
If we
do not receive adequate third-party reimbursement for the sales
of Tarceva, we may see a reduction in the profitability of
Tarceva.
Sales of Tarceva depend, in part, upon the extent to which the
costs of Tarceva are paid by health maintenance organizations,
managed care, pharmacy benefit and similar reimbursement
sources, or reimbursed by government health administration
authorities, private health coverage insurers and other
third-party payors. Such third-party payors continue to
aggressively challenge the prices charged for healthcare
products and services. Additionally, federal, state and foreign
governments have prioritized the containment of healthcare
costs, and drug prices have been targeted in this effort. If
these organizations and third-party payors do not consider
Tarceva to be cost-effective, they may not reimburse providers
of our products, or the level of reimbursement may reduce the
profitability of Tarceva. As an example, while the U.K.’s
National Institute of Health and Clinical Excellence recommended
funding by the National Institute of Health for Tarceva in
NSCLC, it still has not recommended reimbursement for Tarceva
for the treatment of pancreatic cancer.
Beginning January 1, 2006, Medicare beneficiaries could
obtain expanded prescription drug coverage through a new
Medicare drug benefit that is administered by private,
Medicare-approved drug plans. This voluntary benefit allows
beneficiaries to choose among various Medicare prescription drug
plans based on cost and scope of coverage. Generally, such plans
include Tarceva within the scope of the plan, with beneficiaries
having to pay various amounts of copayments when obtaining
Tarceva. Since plans adjust their formularies on an annual
basis, we cannot provide assurance that Tarceva will continue to
be included in the same number of plans, and this could
adversely affect our revenues. In addition, new legislation may
be proposed that could change the Medicare prescription drug
benefit and affect the payments for Tarceva under the program.
Foreign
government involvement and/or control over pricing of
pharmaceutical products can have an effect on the revenues that
we receive from Tarceva.
In some foreign countries, particularly Canada and the EU
countries, the pricing of prescription pharmaceuticals is
subject to governmental control. In these countries, pricing
negotiations with governmental authorities can take six to
12 months or longer after the receipt of regulatory
marketing approval for a product. To obtain reimbursement or
pricing approval in some countries, we may be required to
conduct a clinical trial that compares the cost-effectiveness of
our products to other available therapies. In most countries
within Europe, individual governments determine the pricing of
medicines, which can result in wide variations for the same
product, and member states of the EU may impose new or
additional cost-containment measures for drug products. Indeed,
in recent years, price reductions and rebates have been mandated
in several European countries, including Germany, Italy, Spain
and the United Kingdom. Future mandatory price reductions in the
EU or Japan could adversely impact our royalty revenues for
Tarceva. In the United States, there is, and we expect that
there will continue to be, federal, state and local legislation
aimed at imposing pricing controls. If such additional
legislation is enacted, it would reduce the revenues that we
receive for Tarceva in the United States.
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The
manufacture and packaging of pharmaceutical products, such as
Tarceva, are subject to the requirements of the FDA and similar
foreign regulatory bodies. If we or our third party
manufacturers fail to satisfy these requirements, our or their
product development and commercialization efforts may be
materially harmed.
The manufacture and packaging of pharmaceutical products, such
as Tarceva and our future product candidates, are regulated by
the FDA and similar foreign regulatory bodies and must be
conducted in accordance with the FDA’s cGMPs and comparable
requirements of foreign regulatory bodies. There are a limited
number of manufacturers that operate under these cGMP
regulations who are both capable of manufacturing our products,
and willing to do so. Our failure or the failure of our third
party manufacturers to comply with applicable regulations,
requirements or guidelines could result in sanctions being
imposed on us or them, including fines, injunctions, civil
penalties, failure of regulatory authorities to grant marketing
approval of our products, delays, suspension or withdrawal of
approvals, license revocation, seizures or recalls of product,
operating restrictions and criminal prosecutions, any of which
could significantly and adversely affect our business. We cannot
be certain that we or our present or future suppliers will be
able to comply with the pharmaceutical cGMP regulations or other
FDA regulatory requirements. If we fail to meet our
manufacturing obligations for Tarceva, our collaborator,
Genentech, has the contractual right to take over the supply of
Tarceva in the United States.
Changes in the manufacturing process or procedure, including a
change in the location where a product is manufactured or a
change of a third party manufacturer, require prior FDA review
and/or
approval of the manufacturing process and procedures in
accordance with the FDA’s cGMPs. This review may be costly
and time consuming and could delay or prevent the launch of a
product or the use of a facility to manufacture a product. In
addition, if we elect to manufacture products at the facility of
another third party, we will need to ensure that the new
facility and the manufacturing process are in substantial
compliance with cGMPs. Any such change in facility would be
subject to a pre-approval inspection by the FDA and the FDA
would require us to demonstrate product comparability. Foreign
regulatory agencies have similar requirements.
Any prolonged interruption in the operations of our
contractor’s manufacturing facilities could result in
cancellations of shipments, loss of product in the process of
being manufactured, a shortfall or stock-out of available
product inventory or a delay in clinical trials, any of which
could have a material adverse impact on our business. A number
of factors could cause prolonged interruptions in manufacturing.
In addition, the U.S. federal government and several states
impose drug pedigree law requirements designed to record the
chain of custody of prescription drugs. Compliance with these
pedigree laws may require implementation of tracking systems as
well as increased documentation and coordination with our
customers. Although there may be changes in these requirements
and government enforcement may vary, failure to comply could
result in fines or penalties, as well as supply disruptions that
could have a material adverse effect on our business.
The FDA and similar foreign regulatory bodies may also implement
new standards or change their interpretation and enforcement of
existing standards and requirements for manufacture, packaging
or testing of products at any time. If we are unable to comply,
we may be subject to regulatory, civil actions or penalties
which could significantly and adversely affect our business.
If
government agencies do not grant us or our collaborators
required approvals for any of our potential products in a timely
manner or at all, we or our collaborators will not be able to
distribute or sell our products currently under
development.
All of our potential products must undergo extensive regulatory
approval processes in the United States and other countries.
These regulatory processes, which include pre-clinical testing
and clinical trials of each compound to establish safety and
efficacy, can take many years and require the expenditure of
substantial resources. The FDA and the other regulatory agencies
in additional markets which are material to us and our
collaborators, including the European Medicines Agency and the
Japanese Ministry of Health, may delay or deny the approval of
our potential products. Although we have been successful in
gaining regulatory approval for Tarceva in the United States and
our collaborators have gained approval for Tarceva in Canada,
Japan, the EU and a number of other territories, there can be no
guarantee of subsequent approvals for Tarceva in other
territories or for other indications in the United States or for
other products in the United States and other territories.
29
Delays or rejections may be encountered during any stage of the
regulatory process based upon the failure of the clinical data
to demonstrate compliance with, or upon the failure of the
product to meet, a regulatory agency’s requirements for
safety, efficacy and quality. Any such delay could have a
negative effect on our business. A drug candidate cannot be
marketed in the United States until it has been approved by the
FDA. Once approved, drugs, as well as their manufacturers, are
subject to continuing and ongoing review, and discovery of
previously unknown problems with these products or the failure
to adhere to manufacturing or quality control requirements may
result in restrictions on their distribution, sale or use, or
their withdrawal from the market. The FDA also has the
authority, when approving a product, to impose significant
limitations on the product in the nature of warnings,
precautions and contra-indications, or restrictions on the
indicated use, conditions for use, labeling, advertising,
promotion, marketing, distribution
and/or
production of the product that could negatively affect the
profitability of a drug. Failure to comply with a Phase IV
commitment can lead to FDA action either to withdraw approval of
a drug or to limit the scope of approval.
Furthermore, once a drug is approved, it remains subject to
ongoing FDA regulation. For example, the FDA’s Amendments
Act of 2007 provides the FDA with expanded authority over drug
products after approval. This legislation enhances the
FDA’s authority with respect to post-marketing safety
surveillance, including, among other things, the authority to
require: (i) additional post-approval studies or clinical
trials; (ii) the submission of a proposed risk evaluation
and mitigation strategy; and (iii) label changes as a
result of safety findings. These requirements may affect our
ability to maintain marketing approval of our products or
require us to make significant expenditures to obtain or
maintain such approvals. This new law also enhances the
FDA’s enforcement authority, as well as civil and criminal
penalties for violations.
Approved drugs may be marketed only for the indications and
claims approved by the FDA. If we fail to comply with the FDA
regulations prohibiting promotion of off-label uses and the
promotion of products for which marketing clearance has not been
obtained, the FDA, the Office of the Inspector General of the
U.S. Department of Health and Human Services, the
Department of Justice or state Attorney Generals could bring an
enforcement action against us that would inhibit our marketing
capabilities and result in significant penalties. Additional
post-approval regulation by the FDA includes changes to the
product label, new or revised regulatory requirements for
manufacturing practices, written advisements to physicians or a
product recall.
The current regulatory framework could change or additional
regulations could arise at any stage during our product
development or marketing, which may affect our ability to obtain
or maintain approval of our products or require us to make
significant expenditures to obtain or maintain such approvals.
The ability to market and sell a drug product outside of the
United States is also subject to stringent and, in some cases,
equally complex regulatory processes that vary depending on the
jurisdiction.
Some
of our activities may subject us to risks under federal and
state laws prohibiting “kickbacks” and false or
fraudulent claims, which could subject us to potential civil and
criminal penalties and exclusion from federal healthcare
programs.
We are subject to the provisions of a federal law commonly known
as the Federal Health Care Programs’ anti-kickback law, and
several similar state laws, which prohibit, among other things,
payments intended to induce physicians or others either to
purchase or arrange for, or recommend the purchase of,
healthcare products or services. While the federal law applies
only to products or services for which payment may be made by a
federal healthcare program, state laws may apply regardless of
whether federal funds may be involved. These laws constrain the
sales, marketing and other promotional activities of
manufacturers of drugs such as us, by limiting the kinds of
financial arrangements, including sales programs, manufacturers
have with hospitals, physicians and other potential purchasers
or prescribers of drugs. Other federal and state laws generally
prohibit individuals or entities from knowingly and willfully
presenting, or causing to be presented, claims for payment from
Medicare, Medicaid, or other third-party payors that are false
or fraudulent, or are for items or services that were not
provided as claimed. Anti-kickback and false claims laws
prescribe civil and criminal penalties for noncompliance that
can be substantial, including the possibility of imprisonment,
fines and exclusion from federal healthcare programs (including
Medicare and Medicaid).
30
Pharmaceutical companies have been the target of lawsuits and
investigations alleging violations of government regulation,
including claims asserting violations of the federal False
Claims Act, the federal health care programs’ anti-kickback
statute and other violations in connection with off-label
promotion of products and Medicare
and/or
Medicaid reimbursement, or related to claims under state laws,
including state anti-kickback and false claims laws. While we
continually strive to comply with these complex requirements,
interpretations of the applicability of these laws to marketing
practices is ever evolving and even an unsuccessful challenge
could cause adverse publicity and be costly to respond to.
Future
legislative or regulatory reform of the healthcare system may
limit the commercial prospects of certain of our
products.
In both the United States and some
non-U.S. jurisdictions,
there have been a number of legislative and regulatory proposals
to change the healthcare system in ways that could limit the
commercial prospects of certain of our products. In the United
States, new legislation may be enacted at the federal and state
levels that would result in significant changes to the
healthcare system, either nationally or at the state level. For
example, federal Medicare proposals, along with state Medicaid
drug payment changes and healthcare reforms, could lower
payments for our products or create financial disincentives for
plans to provide access to Tarceva. Further, some states have
proposed health care reform legislation requiring greater price
reductions and narrowing coverage for drugs, which could impact
our products. Additionally, these proposals or separate state
and federal proposals could increase the costs of doing business
in their respective jurisdictions. If future legislative or
regulatory changes were to reduce reimbursement or make
reimbursement unavailable, it would adversely affect our
business.
If
Tarceva is imported into the United States, the EU or Japan from
countries where the cost of the drug is lower, it will affect
our sales and profitability and harm our business.
Our revenues for Tarceva will be adversely impacted if we face
competition in the United States, the EU, Japan or China from
lower priced imports from countries where government price
controls or other market dynamics have resulted in a lower price
for Tarceva. The ability of patients and other customers to
obtain these lower priced imports has grown significantly as a
result of the Internet, an expansion of pharmacies which
specifically target purchasers in countries where drug costs are
higher and other factors. Many of these foreign imports are
illegal under current law. However, the volume of imports
continues to rise due to the limited enforcement resources of
U.S. and foreign regulatory and customs authorities, and
political pressure in the United States, the EU and Japan to
permit the imports as a mechanism for expanding access to lower
priced medicines.
In the United States, in December 2003, federal legislation was
enacted to modify U.S. import laws and expand the ability
for lower priced pharmaceutical products to be imported from
Canada, where government price controls have been enacted. These
changes to the import laws will not take effect unless and until
the Secretary of Health and Human Services certifies that the
changes will lead to substantial savings for consumers and will
not create a public health safety issue. However, it is possible
that this Secretary, or a subsequent Secretary, could make such
a certification in the future. In addition, legislation has been
proposed to implement the changes to the import laws without any
requirement for certification from the Secretary of Health and
Human Services, and to broaden permissible imports in other
ways. Even if these changes to the import laws do not take
effect, and other changes are not enacted, lower priced imports
of products from Canada and elsewhere may continue to increase
due to market and political forces, and the limited enforcement
resources of the FDA, the U.S. Customs Service and other
government agencies. For example, state and local governments
have suggested that they may import drugs from Canada for
employees covered by state health plans or others, and some have
already enacted such plans.
In Europe, the importation of pharmaceutical products from
countries where prices are low to those where prices for those
products are higher, known as parallel trade, may increase.
Parallel trade occurs because third parties can exploit the
price differential by purchasing drug products in markets where
low prices apply and selling them to state authorities and other
purchasers in those markets where drugs can be sold at higher
prices. There are indications that parallel trade is affecting
markets in the EU, and the recent addition of countries from
central and eastern Europe to the EU could result in significant
increases in the parallel trading of drug products in that
region.
31
Lower priced imports will adversely affect our sales and
profitability. This impact could become more significant in the
future, and the impact could be even greater if there is a
further change in the law or if state or local governments take
further steps to permit lower priced imports from abroad.
Changes
in laws, regulations, accepted clinical procedures or social
pressures could restrict our use of animals in testing and
therefore adversely affect our R&D
activities.
Certain of our R&D activities involve the use of laboratory
animals. Changes in laws, regulations or accepted clinical
procedures relating to the use of animals in testing may
adversely affect our business by delaying or interrupting our
R&D activities. In addition, social pressures that would
restrict the use of animals in testing, or actions or protests
against us or our collaborators by groups or individuals opposed
to animal testing, could also delay or interrupt our R&D
activities and could disrupt our U.S. and U.K. operations.
Risks
Related to Intellectual Property and Legal Matters
If we
cannot successfully protect, exploit or enforce our intellectual
property rights, our ability to develop and commercialize our
products, and receive revenues from licenses under our
intellectual property, will be adversely affected.
We hold numerous U.S. and foreign patents as well as
trademarks and trade secrets; we also have many pending
applications for additional patents. We intend to continue to
seek patent protection for, or maintain as trade secrets, the
potentially valuable intellectual property arising from our
research and development activities, including commercially
promising product candidates that we have discovered, developed
or acquired. Our success depends, in part, on our ability and
our collaborators’ ability to obtain and maintain patent
protection for new product candidates, maintain trade secret
protection and operate without infringing the valid and
enforceable proprietary rights of third parties. As with most
biotechnology and pharmaceutical companies, our patent position
is highly uncertain and involves complex legal and factual
questions. Without patent and other similar protection, other
companies could offer the same or substantially identical
products for sale without incurring the sizeable discovery and
development costs that we have incurred. Our ability to recover
these expenditures and realize profits upon the sale of products
could be diminished. The process of obtaining patents can be
time-consuming and expensive with no certainty of success. Even
if we spend the necessary time and money, a patent may not issue
or it may insufficiently protect the technology it was intended
to protect. Even if issued, such issuance is not conclusive as
to a patent’s validity or its enforceability.
Our patents may be challenged, narrowed, invalidated or
circumvented, which could limit our ability to prevent or stop
competitors from marketing similar products or may limit the
length of term of patent protection we may have for our
products. Specifically, we are currently reviewing
Paragraph IV certifications received in February 2009 from
Teva U.S.A. and Mylan alleging that the three patents listed in
the Orange Book for Tarceva are invalid, unenforceable, or will
not be infringed by generic versions of erlotinib for which
these generic pharmaceutical companies have sought FDA approval
to commercialize in the United States. We, together with
Genentech, are currently reviewing these certifications and
expect to commence patent infringement lawsuits within the
45-day
period triggered by our receipt of these certifications. In
addition, a patent corresponding to the ’498 patent was
granted in February 2007 in India and survived a pre-grant
opposition by Natco Pharma, Ltd. in July 2007. We, with our
collaborator Roche, are currently seeking to enforce this patent
against CIPLA with respect to a generic form of Tarceva launched
by CIPLA in India. We and Roche filed a lawsuit against CIPLA in
the High Court of Delhi in New Delhi, India in January 2008,
which included a request that the court issue a preliminary
injunction to prevent CIPLA from manufacturing and distributing
Tarceva in India. The court denied this request in March 2008,
and we subsequently appealed this decision. We completed our
appeal in September 2008 and are awaiting a final decision. In
addition, Teva Pharmaceuticals filed an opposition to the grant
of a patent in Israel corresponding to our U.S. patent
directed to a particular polymorph of Tarceva (U.S. Patent
No. 6,900,221) in August 2007. This Israeli proceeding will
be delayed until prosecution of a co-pending patent application
in Israel is completed.
If we are unsuccessful in enforcing or defending our patents in
any of these proceedings and the patents are revoked without
possibility of appeal, this could reduce our future potential
royalty revenue from sales of Tarceva in
32
these countries and increase the possibility that generic
Tarceva will be unlawfully distributed
and/or
sold
into countries where we have patent exclusivity which, in turn,
would adversely impact our Tarceva revenues.
We can never be certain that we were first to develop technology
or that we were first to file a patent application for a
particular technology because most U.S. patent applications
are confidential until a patent publishes or issues, and
publications in the scientific or patent literature lag behind
actual discoveries. If our pending patent applications are not
approved for any reason or if we are unable to receive patent
protection for additional proprietary technologies that we
develop, the degree of future protection for our proprietary
rights will remain uncertain. Third parties may independently
develop similar or alternative technologies, duplicate some or
all of our technologies, design around our patented technologies
or challenge our pending or issued patents. Furthermore, the
laws of foreign countries may not protect our intellectual
property rights effectively or to the same extent as the laws of
the United States. In addition, some countries do not offer
patent protection for certain biotechnology-related inventions.
If our intellectual property rights are not adequately
protected, we may not be able to commercialize our technologies,
products or services and our competitors could commercialize our
technologies, which could result in a decrease in our sales and
market share that would harm our business and operating results.
We are also party to licenses that give us rights to third-party
intellectual property that may be necessary or useful to our
business. Our success will depend in part on the ability of our
licensors to obtain, maintain and enforce our licensed
intellectual property, in particular, those patents to which we
have secured exclusive rights. Our licensors may not
successfully prosecute the patent applications to which we have
licenses. Even if patents issue in respect of these patent
applications, our licensors may fail to maintain these patents,
may determine not to pursue litigation against other companies
that are infringing these patents or may pursue such litigation
less aggressively than we would. Without protection for the
intellectual property we license, other companies might be able
to offer substantially identical products for sale, which could
adversely affect our competitive business position and harm our
business prospects.
If we
or our collaborators are required to obtain licenses from third
parties, our revenues and royalties on any commercialized
products could be reduced.
The development of some of our products may require the use of
technology developed by third parties. The extent to which
efforts by other researchers have resulted or will result in
patents and the extent to which we or our collaborators will be
forced to obtain licenses from others, if available, on
commercially reasonable terms is currently unknown. If we or our
collaborators must obtain licenses from third parties, fees must
be paid for such licenses, which would reduce the revenues and
royalties we may receive on commercialized products.
If we
are unable to protect the confidentiality of our proprietary
information and know-how, the value of our technology and
products could be negatively impacted.
In addition to patented technology, we rely upon unpatented
proprietary technology, trade secrets, processes and know-how.
We seek to protect this information in part by entering into
confidentiality agreements with our employees, consultants and
third parties. These agreements may be breached, and we may not
have adequate remedies for any such breach. In addition, our
trade secrets may otherwise become known or be independently
developed by competitors.
The
failure to prevail in litigation and/or the costs of litigation,
including patent infringement claims, could harm our financial
performance and business operations and could cause delays in
product introductions.
We are susceptible to litigation. For example, as a public
company, we are subject to claims asserting violations of
securities laws and derivative actions. In addition, as a
biotechnology company, our processes and potential products may
conflict with patents that have been or may be granted to
competitors, academic institutions or others. We cannot ensure
that our products or methods do not infringe upon the patents or
other intellectual property rights of third parties. As the
biotechnology and pharmaceutical industries expand and more
patents are filed and issued, the risk increases that our
patents or patent applications for our product candidates may
give rise to a declaration of interference by the USPTO, or to
administrative proceedings in foreign patent offices, or that
our activities lead to
33
claims of patent infringement by other companies, institutions
or individuals. These entities or persons could bring legal
proceedings against us seeking substantial damages or seeking to
enjoin us from researching, developing, manufacturing or
marketing our products, which could result in substantial costs
and harm our reputation. If any of these actions are successful,
we may not only be required to pay substantial damages for past
use of the asserted intellectual property but we may also be
required to cease the infringing activity or obtain the
requisite licenses or rights to use the technology, that may not
be available to us on acceptable terms, if at all. Litigation
and other proceedings may also absorb significant management
time.
Litigation is inherently unpredictable and we may incur
substantial expense in defending ourselves or asserting our
rights in the litigation to which we are currently subject, or
in new lawsuits or claims brought against us. Litigation can be
expensive to defend, regardless of whether a claim has merit,
and the defense of such actions may divert the attention of our
management that would otherwise be engaged in running our
business and utilize resources that would otherwise be used for
the business. In the event of an adverse determination in a
lawsuit or proceeding, or our failure to license essential
technology, our sales could be harmed
and/or
our
costs increase, which would harm our financial condition and our
stock price may decline. While we currently maintain insurance
that we believe is adequate, we are subject to the risk that our
insurance will not be sufficient to cover claims.
The
use of any of our potential products in clinical trials and the
sale of any approved products exposes us to liability
claims.
The nature of our business exposes us to potential liability
risks inherent in the research, development, manufacturing and
marketing of drug candidates and products. If any of our drug
candidates in clinical trials or our marketed products harm
people or allegedly harm people, we may be subject to costly and
damaging product liability claims. Many patients who participate
in clinical trials are already ill when they enter a trial. The
waivers we obtain may not be enforceable and may not protect us
from liability or the costs of product liability litigation.
While we currently maintain product liability insurance that we
believe is adequate, we are subject to the risk that our
insurance will not be sufficient to cover claims. There is also
a risk that adequate insurance coverage will not be available in
the future on commercially reasonable terms, if at all. The
successful assertion of an uninsured product liability or other
claim against us could cause us to incur significant expenses to
pay such a claim, could adversely affect our product development
and could cause a decline in our product revenues. Even a
successfully defended product liability claim could cause us to
incur significant expenses to defend such a claim, could
adversely affect our product development and could cause a
decline in our product revenues.
Risks
Related to Our Common Stock
Our
stock price remains highly volatile which could make it
difficult for our stockholders to resell our common stock at
desirable prices.
If our stock price falls, our stockholders may not be able to
sell their stock at desirable prices. When the stock prices of
companies in the NASDAQ Biotechnology Index fall, our stock
price will most likely fall as well. The stock price of
biotechnology and pharmaceutical companies, including our stock
price, has been volatile and may remain volatile for the
foreseeable future.
The following factors, among others, some of which are beyond
our control, may also cause our stock price to decline:
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a decline in sales of Tarceva;
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a general economic slowdown in the United States, Europe or
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adverse events with respect to our intellectual property;
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announcement or launching of technological innovations or new
therapeutic products by third parties;
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positive or negative clinical efficacy or safety results from
our competitors’ products;
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public concern as to the safety, or withdrawal, of our products
and potential products;
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comments by securities analysts regarding us or our competitors
and general market conditions;
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future sales of substantial amounts of our common stock by us or
existing stockholders;
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negative developments concerning strategic alliance agreements;
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changes in government regulation, including pricing controls,
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•
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material delays in our key clinical trials;
|
|
|
|
|
•
|
negative or neutral clinical trial results, including clinical
trial results for additional indications for Tarceva;
|
|
|
|
|
•
|
delays with the FDA in the approval process for products and
clinical candidates; and
|
|
|
|
|
•
|
developments in laws or regulations that impact our patent or
other proprietary rights.
|
Our
governance documents and state law provide certain anti-takeover
measures which will discourage a third party from seeking to
acquire us and may impede the ability of stockholders to remove
and replace our board of directors and, therefore, our
management.
We have had a shareholder rights plan, commonly referred to as a
“poison pill,” since January 1999. The purpose of the
shareholder rights plan is to protect stockholders against
unsolicited attempts to acquire control of us that do not offer
a fair price to our stockholders as determined by our board of
directors. Under the plan, the acquisition of 17.5% or more of
our outstanding common stock by any person or group, unless
approved by our board of directors, will trigger the right of
our stockholders (other than the acquiror of 17.5% or more of
our common stock) to acquire additional shares of our common
stock, and, in certain cases, the stock of the potential
acquiror, at a 50% discount to market price, thus significantly
increasing the acquisition cost to a potential acquiror.
The shareholder rights plan may have the effect of dissuading a
potential hostile acquiror from making an offer for our common
stock at a price that represents a premium to the then-current
trading price. In addition, our certificate of incorporation and
by-laws contain certain additional anti-takeover protective
devices. For example,
|
|
|
|
|
|
•
|
no stockholder action may be taken without a meeting, without
prior notice and without a vote; solicitations by consent are
thus prohibited;
|
|
|
|
|
•
|
special meetings of stockholders may be called only by our board
of directors, or by our stockholders holding 20% of our
outstanding shares upon 90 days prior written notice;
|
|
|
|
|
•
|
nominations by stockholders of candidates for election to the
board of directors at our annual meeting of stockholders must be
made at least 45 days prior to the anniversary of the date
on which we first mailed our proxy materials for the prior
year’s annual meeting of stockholders; and
|
|
|
|
|
•
|
our board of directors has the authority, without further action
by the stockholders, to fix the rights and preferences, and
issue shares, of preferred stock. An issuance of preferred stock
with dividend and liquidation rights senior to the common stock
and convertible into a large number of shares of common stock
could prevent a potential acquiror from gaining effective
economic or voting control.
|
Further, we are subject to Section 203 of the Delaware
General Corporation Law which, subject to certain exceptions,
restricts certain transactions and business combinations between
a corporation and a stockholder owning 15% or more of the
corporation’s outstanding voting stock for a period of
three years from the date the stockholder becomes a 15%
stockholder. In addition to discouraging a third party from
acquiring control of us, the foregoing provisions could impair
the ability of existing stockholders to remove and replace our
management
and/or
our
board of directors.
35
|
|
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
There are no unresolved staff comments.
The following is a summary of the principal facilities which we
utilize in our operations:
Melville, New York.
We own a facility at 41
Pinelawn Road, Melville, New York, consisting of approximately
60,000 square feet. The facility houses our principal
executive, oncology, finance, legal and administrative offices.
Farmingdale, New York.
We lease a facility at
One BioScience Park Drive, Farmingdale, New York, consisting of
approximately 62,000 square feet. Our Farmingdale facility
contains our drug discovery laboratories for oncology.
Cedar Knolls, New Jersey.
We lease a facility
at 140 Hanover Avenue, Cedar Knolls, New Jersey, consisting of
approximately 25,000 square feet. Our Cedar Knolls facility
contains certain of our regulatory, quality control and drug
development operations for oncology and eye disease.
Boulder, Colorado.
We lease two facilities in
Boulder, Colorado, which together house our clinical and
pre-clinical research, regulatory and drug development
operations for oncology. One facility is located at 2860
Wilderness Place, and consists of approximately
60,000 square feet and the other one is located at 2970
Wilderness Place, and consists of approximately
29,000 square feet.
Oxford, England.
We lease a facility at
Watlington Road, Oxford, England, consisting of approximately
88,000 square feet. This facility houses our diabetes and
obesity corporate, R&D operations, as well as certain
oncology development operations.
|
|
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
Not applicable.
|
|
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
There were no matters submitted to a vote of our security
holders during the fourth quarter of fiscal 2008.
36
PART II
|
|
|
|
ITEM 5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information
Our 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 our common stock from
January 1, 2007 through December 31, 2008 as reported
on the NASDAQ National Market:
|
|
|
|
|
|
|
|
|
|
|
2008 FISCAL YEAR
|
|
HIGH
|
|
LOW
|
|
|
|
First Quarter
|
|
$
|
49.21
|
|
|
$
|
33.46
|
|
|
Second Quarter
|
|
$
|
42.10
|
|
|
$
|
32.10
|
|
|
Third Quarter
|
|
$
|
53.71
|
|
|
$
|
41.21
|
|
|
Fourth Quarter
|
|
$
|
48.98
|
|
|
$
|
31.33
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 FISCAL YEAR
|
|
HIGH
|
|
LOW
|
|
|
|
First Quarter
|
|
$
|
36.89
|
|
|
$
|
30.94
|
|
|
Second Quarter
|
|
$
|
38.37
|
|
|
$
|
33.09
|
|
|
Third Quarter
|
|
$
|
36.60
|
|
|
$
|
28.68
|
|
|
Fourth Quarter
|
|
$
|
52.00
|
|
|
$
|
33.27
|
|
Holders
and Dividends
As of February 20, 2009, there were approximately 2,663
holders of record of our common stock. We have not paid any cash
dividends since inception and we do not intend to pay any cash
dividends in the foreseeable future. Declaration of dividends
will depend, among other things, upon future earnings, our
operating and financial condition, our capital requirements and
general business conditions.
Securities
Authorized for Issuance Under Equity Compensation
Plans
Equity
Compensation Plan Information as of December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
securities
|
|
|
|
|
|
|
|
remaining
|
|
|
|
|
|
|
|
available for
|
|
|
|
Number of
|
|
|
|
future issuance
|
|
|
|
securities to be
|
|
|
|
under equity
|
|
|
|
issued upon
|
|
Weighted-average
|
|
compensation
|
|
|
|
exercise of
|
|
exercise price of
|
|
plans (excluding
|
|
|
|
outstanding
|
|
outstanding
|
|
securities
|
|
|
|
options, warrants
|
|
options, warrants
|
|
reflected in the
|
|
Plan category
|
|
and rights(a)
|
|
and rights(b)
|
|
first column)
|
|
|
|
Equity compensation plans approved by security holders
|
|
|
6,491,465
|
(c)
|
|
$
|
38.64
|
|
|
|
5,035,965
|
(e)
|
|
Equity compensation plans not approved by security holders
|
|
|
327,889
|
(d)
|
|
$
|
46.20
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,819,354
|
|
|
$
|
39.07
|
|
|
|
5,035,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes stock options, restricted stock, restricted stock units
and deferred stock units.
|
|
|
|
(b)
|
|
The weighted-average exercise price of outstanding options,
warrants and rights does not include restricted stock,
restricted stock units and deferred stock units, as they are
issued for no cash consideration.
|
|
|
|
(c)
|
|
Consists of four plans: the 1989 Incentive and Non-Qualified
Stock Option Plan, the 1997 Incentive and Non-Qualified Stock
Option Plan, the 1999 Incentive and Non-Qualified Stock Option
Plan and the Amended and Restated Stock Incentive Plan.
|
37
|
|
|
|
|
(d)
|
|
In connection with the acquisition of certain oncology assets
from Gilead Sciences, Inc. on December 21, 2001, we adopted
a Non-Qualified Stock Option Plan for Former Employees of Gilead
Sciences, Inc. We granted ten-year options to purchase an
aggregate of 693,582 shares of our common stock at a
purchase price of $45.01 per share, which represented the fair
value of our stock at the date granted. With respect to each
option grant, one-third of the options vested on the first
anniversary of the date of grant and the remainder vested
ratably monthly thereafter for 24 months.
|
|
|
|
|
|
In connection with the acquisition of Cadus Pharmaceutical
Corporation in July 1999, we adopted a Non-Qualified Stock
Option Plan for Former Employees of Cadus Pharmaceutical
Corporation. We granted ten-year options to purchase an
aggregate of 415,000 shares of our common stock at a
purchase price of $5.00 per share, which represented the fair
value of our stock at the date granted. These options became
exercisable on July 30, 2000, one year from the date of the
grant.
|
|
|
|
|
|
In connection with the acquisition of Eyetech Pharmaceuticals,
Inc., or Eyetech, in November 2005, we adopted a Stock Incentive
Plan for Pre-Merger Employees of Eyetech Pharmaceuticals, Inc.
We granted seven-year options to purchase an aggregate of
625,810 shares of our common stock at a purchase price of
$23.83, which represents the fair value of our stock at the date
granted. With respect to each option grant, one-fourth of the
options vested on the first anniversary and the remainder vest
ratably thereafter on a monthly basis for 36 months.
|
|
|
|
|
|
Also in connection with the acquisition of Eyetech, we assumed
Eyetech’s 2001 Stock Plan and to facilitate such
assumption, we adopted the Stock Plan for Assumed Options of
Pre-Merger Employees of Eyetech Pharmaceuticals, Inc. The number
of shares subject to each assumed option was determined by
dividing the assumed Eyetech per share option exercise price by
the conversion ratio of 0.491 and rounding that result down to
the nearest whole number for a total of 153,290 shares. The
exercise price was determined by dividing the assumed Eyetech
per share option exercise price by the conversion ratio of 0.491
and rounding up to the nearest whole cent.
|
|
|
|
|
|
Includes options established for certain outside consultants
related to clinical trial operations.
|
|
|
|
(e)
|
|
Consists of 352,930 shares reserved for issuance under the
1995 Employee Stock Purchase Plan and the stock purchase plan
for our U.K.-based employees, and 4,683,035 shares reserved
for issuance under the 1999 Incentive and Non-Qualified Stock
Option Plan and the Amended and Restated Stock Incentive Plan.
|
We have a policy of rewarding employees who achieve 10, 15, 20
and 25 years of continued service with our company with
100, 150 or 200 shares of our common stock depending on
years of service. We grant such shares of common stock on an
annual basis to those individuals who meet the stated
requirements.
Recent
Sales of Unregistered Securities
The following table reflects shares of common stock withheld
from employees to satisfy their tax withholding obligations
arising upon the vesting of restricted equity awards granted
under our Amended and Restated Stock Incentive Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
Maximum Number (or
|
|
|
|
|
|
|
|
Shares (or Units)
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
Purchased as Part
|
|
Value) Shares (or Units)
|
|
|
|
Total Number
|
|
Average Price
|
|
of Publicly
|
|
that May Yet Be
|
|
|
|
Shares (or Units)
|
|
Paid per Share
|
|
Announced Plans or
|
|
Purchased Under the
|
|
Period
|
|
Purchased
|
|
(or Unit)
|
|
Programs
|
|
Plans or Programs
|
October 1, 2008 –
October 31, 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
N/A
|
|
|
|
N/A
|
|
November 1, 2008 –
November 30, 2008
|
|
|
—
|
|
|
|
—
|
|
|
|
N/A
|
|
|
|
N/A
|
|
December 1, 2008 –
December 31, 2008
|
|
|
73,251
|
(1)
|
|
$
|
33.41
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
(1)
|
|
Consists of shares of common stock withheld from employees to
satisfy their tax withholding obligations arising upon the
vesting of restricted equity awards granted under our Amended
and Restated Stock Incentive Plan.
|
38
|
|
|
|
ITEM 6.
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
Subsequent to the end of our 2004 fiscal year, we changed our
fiscal year end to December 31st. On February 9, 2005, we
filed a transition report on
Form 10-QT
for the three-month period ended December 31, 2004. The
following table sets forth our selected consolidated financial
data as of and for the years ended December 31, 2008, 2007,
2006 and 2005, the three months ended December 31, 2004,
and the year ended September 30, 2004. As a result of our
decision to divest the eye disease business held by our wholly
owned subsidiary, (OSI) Eyetech, the operating results for (OSI)
Eyetech are shown as discontinued operations for all periods
subsequent to our acquisition on November 14, 2005. The
information below should be read in conjunction with the
consolidated financial statements and notes thereto included
elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
(In thousands, except per share data)
|
|
2008(a)
|
|
|
2007(b)
|
|
|
2006(c)
|
|
|
2005(d)
|
|
|
2004(e)
|
|
|
2004(f)
|
|
|
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
379,388
|
|
|
$
|
341,030
|
|
|
$
|
241,037
|
|
|
$
|
138,423
|
|
|
$
|
12,347
|
|
|
$
|
42,800
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
9,315
|
|
|
|
9,399
|
|
|
|
8,671
|
|
|
|
5,035
|
|
|
|
(1,247
|
)
|
|
|
8,985
|
|
|
Net expense — unconsolidated joint business
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,661
|
|
|
|
—
|
|
|
Research and development
|
|
|
135,344
|
|
|
|
123,531
|
|
|
|
117,527
|
|
|
|
116,655
|
|
|
|
31,913
|
|
|
|
110,398
|
|
|
Acquired in-process research and development
|
|
|
4,000
|
|
|
|
9,664
|
|
|
|
—
|
|
|
|
3,542
|
|
|
|
—
|
|
|
|
32,785
|
|
|
Selling, general and administrative
|
|
|
94,930
|
|
|
|
99,159
|
|
|
|
107,458
|
|
|
|
89,205
|
|
|
|
20,313
|
|
|
|
98,909
|
|
|
Impairment of intangible assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,599
|
|
|
Amortization of intangibles
|
|
|
2,489
|
|
|
|
1,840
|
|
|
|
1,809
|
|
|
|
15,281
|
|
|
|
3,804
|
|
|
|
18,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
133,310
|
|
|
|
97,437
|
|
|
|
5,572
|
|
|
|
(91,295
|
)
|
|
|
(50,097
|
)
|
|
|
(251,482
|
)
|
|
Other income (expense) — net
|
|
|
(166
|
)
|
|
|
7,902
|
|
|
|
1,128
|
|
|
|
6,201
|
|
|
|
1,702
|
|
|
|
(8,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
133,144
|
|
|
|
105,339
|
|
|
|
6,700
|
|
|
|
(85,094
|
)
|
|
|
(48,395
|
)
|
|
|
(260,371
|
)
|
|
Income tax (benefit) provision business
|
|
|
(333,457
|
)
|
|
|
2,732
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
466,601
|
|
|
|
102,607
|
|
|
|
6,700
|
|
|
|
(85,094
|
)
|
|
|
(48,395
|
)
|
|
|
(260,371
|
)
|
|
Income (loss) from discontinued operations — net of
tax business
|
|
|
4,884
|
|
|
|
(36,288
|
)
|
|
|
(610,930
|
)
|
|
|
(72,029
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before extraordinary gain
|
|
|
471,485
|
|
|
|
66,319
|
|
|
|
(604,230
|
)
|
|
|
(157,123
|
)
|
|
|
(48,395
|
)
|
|
|
(260,371
|
)
|
|
Extraordinary gain — net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
22,046
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
471,485
|
|
|
$
|
66,319
|
|
|
$
|
(582,184
|
)
|
|
$
|
(157,123
|
)
|
|
$
|
(48,395
|
)
|
|
$
|
(260,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
8.14
|
|
|
$
|
1.78
|
|
|
$
|
0.12
|
|
|
$
|
(1.63
|
)
|
|
$
|
(1.02
|
)
|
|
$
|
(6.50
|
)
|
|
Income (loss) from discontinued operation
|
|
|
.09
|
|
|
|
(0.63
|
)
|
|
|
(10.73
|
)
|
|
|
(1.38
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Net income (loss) before extraordinary gain
|
|
|
8.23
|
|
|
|
1.15
|
|
|
|
(10.61
|
)
|
|
|
(3.02
|
)
|
|
|
(1.02
|
)
|
|
|
(6.50
|
)
|
|
Extraordinary gain
|
|
|
—
|
|
|
|
—
|
|
|
|
0.39
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net income (loss)
|
|
$
|
8.23
|
|
|
$
|
1.15
|
|
|
$
|
(10.22
|
)
|
|
$
|
(3.02
|
)
|
|
$
|
(1.02
|
)
|
|
$
|
(6.50
|
)
|
|
Diluted earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
7.19
|
|
|
$
|
1.70
|
|
|
$
|
0.12
|
|
|
$
|
(1.63
|
)
|
|
$
|
(1.02
|
)
|
|
$
|
(6.50
|
)
|
|
Loss from discontinued operations
|
|
|
.07
|
|
|
|
(0.58
|
)
|
|
|
(10.60
|
)
|
|
|
(1.38
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Net income (loss) before extraordinary gain
|
|
|
7.26
|
|
|
|
1.11
|
|
|
|
(10.48
|
)
|
|
|
(3.02
|
)
|
|
|
(1.02
|
)
|
|
|
(6.50
|
)
|
|
Extraordinary gain
|
|
|
—
|
|
|
|
—
|
|
|
|
0.38
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net income (loss)
|
|
$
|
7.26
|
|
|
$
|
1.11
|
|
|
$
|
(10.10
|
)
|
|
$
|
(3.02
|
)
|
|
$
|
(1.02
|
)
|
|
$
|
(6.50
|
)
|
|
Shares used in the calculation of income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
57,316
|
|
|
|
57,665
|
|
|
|
56,939
|
|
|
|
52,078
|
|
|
|
47,375
|
|
|
|
40,083
|
|
|
Diluted
|
|
|
66,911
|
|
|
|
62,241
|
|
|
|
57,645
|
|
|
|
52,078
|
|
|
|
47,375
|
|
|
|
40,083
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
As of
|
|
As of
|
|
As of
|
|
As of
|
|
As of
|
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
September 30,
|
|
(In thousands)
|
|
2008(a)
|
|
2007(b)
|
|
2006(c)
|
|
2005(d)
|
|
2004(e)
|
|
2004(f)
|
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and investment securities (unrestricted
and restricted)
|
|
$
|
515,511
|
|
|
$
|
305,098
|
|
|
$
|
216,368
|
|
|
$
|
179,606
|
|
|
$
|
656,239
|
|
|
$
|
257,229
|
|
|
Receivables
|
|
|
100,242
|
|
|
|
87,523
|
|
|
|
80,075
|
|
|
|
152,482
|
|
|
|
14,077
|
|
|
|
12,112
|
|
|
Working capital
|
|
|
629,260
|
|
|
|
197,631
|
|
|
|
266,496
|
|
|
|
276,171
|
|
|
|
630,246
|
|
|
|
228,223
|
|
|
Total assets
|
|
|
1,093,059
|
|
|
|
558,380
|
|
|
|
457,732
|
|
|
|
1,058,582
|
|
|
|
780,116
|
|
|
|
388,029
|
|
|
Long-term liabilities
|
|
|
460,392
|
|
|
|
166,930
|
|
|
|
349,555
|
|
|
|
337,788
|
|
|
|
195,814
|
|
|
|
186,574
|
|
|
Stockholders’ equity
|
|
|
571,546
|
|
|
|
138,956
|
|
|
|
28,594
|
|
|
|
578,466
|
|
|
|
539,390
|
|
|
|
154,233
|
|
|
|
|
|
|
(a)
|
|
The calendar 2008 consolidated financial statements include a
$4.0 million in-process R&D charge related to the
purchase of intellectual property and a $336.6 million
gain, included in the income tax provision related recognition
of certain deferred tax assets. During 2008, we issued
$200.0 million principal amount of our 2038 Notes in a
private placement for net proceeds of approximately
$193 million, of which $65.0 million was used to
purchase, concurrently with the offering, 1.5 million
shares of our common stock. In addition, we repurchased
approximately $50 million of our 2023 Notes. The 2023 Notes
have been reclassified as long-term in the December 31,
2008 consolidated balance sheet.
|
|
|
|
(b)
|
|
The calendar 2007 consolidated financial statements include a
$9.7 million in-process R&D charge related to the
payment made under our research collaboration with AVEO and the
purchase of AdipoGenix, Inc. intellectual property, and a
$4.1 million gain, included in “Other income
(expense) — net,” related to our decision to
curtail our post-retirement medical and life insurance plan. The
2023 Notes were classified as current in the December 31,
2007 consolidated balance sheet.
|
|
|
|
(c)
|
|
The calendar 2006 loss from discontinued operations includes
$506.0 million of impairment charges related to (OSI)
Eyetech goodwill and (OSI) Eyetech amortizable intangibles
($320.3 million and $185.7 million, respectively) and
a $26.4 million charge for obsolete and expiring inventory.
A $22.0 million extraordinary gain was recognized in the
2006 fiscal year as a result of reversing the accrued contingent
consideration recorded in connection with the acquisition of
Cell Pathways, Inc. in the 2003 fiscal year.
|
|
|
|
(d)
|
|
The calendar 2005 consolidated financial statements reflect:
(a) the acquisition of Eyetech in November 2005 for
aggregate consideration of $909.3 million
($637.4 million net of cash and investments acquired),
including cash consideration of $702.1 million, the value
of 5.6 million shares of our common stock issued to Eyetech
shareholders, the value of converted stock options issued to
Eyetech shareholders and transaction-related costs incurred;
(b) an in-process R&D charge of $60.9 million
related to the acquisition of Eyetech recorded as a loss from
discontinued operations; (c) in-process R&D charges of
$3.5 million related to the acquisition of the minority
interest in Prosidion; and (d) the issuance of
$115.0 million principal amount of our 2025 Notes in a
private placement for net proceeds of $111.0 million, of
which approximately $24 million was used to purchase,
concurrently with the offering, 500,000 shares of our
common stock and a call spread option with respect to our common
stock.
|
|
|
|
(e)
|
|
The three months ended December 31, 2004 includes:
(a) the sale of 6.9 million shares of our common stock
for net proceeds of $419.9 million; (b) net expense
from unconsolidated joint business of $7.7 million related
to our co-promotion and manufacturing agreements with Genentech
for Tarceva; and (c) a net credit adjustment of
$1.4 million to reduce a previously recorded provision for
excess
Gelclair
®
Bioadherent Oral Gel, or Gelclair, inventory.
|
|
|
|
(f)
|
|
The fiscal 2004 consolidated financial statements include:
(a) the acquisition of certain assets from Probiodrug for
approximately $36.4 million in cash; (b) an impairment
charge related to the Gelclair intangible asset of
$24.6 million; (c) the conversion of
$160.0 million aggregate principal amount of 4% convertible
senior subordinated notes due 2009 into 3.2 million shares
of our common stock; (d) the charge of $8.6 million
relating to excess Gelclair inventory; and (e) the
recognition of $3.0 million of Tarceva-related milestone
revenues.
|
40
|
|
|
|
ITEM 7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
We are a profitable biotechnology company committed to building
a scientifically strong and financially successful top tier
biopharmaceutical organization that discovers, develops and
commercializes innovative molecular targeted therapies
addressing major unmet medical needs in oncology, diabetes and
obesity. Our strategic focus is in the area of personalized
medicine. We are building upon the knowledge and insights from
our flagship product, Tarceva, in order to establish a
leadership role in turning the promise of personalized medicine
into practice in oncology and pioneering the adoption of
personalized medicine approaches in diabetes and obesity. We are
leveraging our targeted therapy expertise in drug discovery,
development and translational research to deliver innovative,
differentiated new medicines to the right patients, in the right
combinations and at the right doses. We believe this approach is
essential in order for us to accomplish more rapid and more
cost-effective drug development aimed at providing substantial
clinical benefit to the patients who can gain the most from our
innovations. We further believe that, with increasing healthcare
cost constraints and competition, leadership in personalized
medicine approaches will define the successful biopharmaceutical
companies of the future.
Tarceva, which, as of January 2009, was approved for sale in 94
countries for the treatment of advanced non-small cell lung
cancer, or NSCLC, after failure of chemotherapy and 70 countries
for the treatment of pancreatic cancer, is our primary source of
U.S. revenue. We share 50% of the profits from U.S. sales
of Tarceva (which are recorded by our collaborator for Tarceva,
Genentech) and we receive royalties of approximately 20% on
ex-U.S. sales of Tarceva by Roche, which is responsible for
the marketing and sale of Tarceva outside of the United States.
During 2008, we recorded $335.0 million of Tarceva-related
revenue, which represented approximately 88% of our total
revenues. While this level of revenue resulted in substantial
profitability for us in 2008, it remains important to our future
that Tarceva sales continue to grow on a worldwide basis.
Tarceva’s sales growth, especially in the United States
where we retain approximately 49% of each new marginal sales
dollar, results in additional earnings to us and, if achieved,
will continue to provide us with the opportunity to make the
necessary investments in our research and development, or
R&D, portfolio in order to build a scientifically strong,
top-tier biopharmaceutical company. Oncology and
diabetes/obesity R&D is an expensive and risky endeavor. We
have a promising pipeline of Phase I and pre-clinical product
candidates which we expect will require increasing levels of
investment. However, we must continue to balance the ongoing
investment in our pipeline with the need to deliver financial
performance. Tarceva’s continued growth, and our share of
the resulting increased revenues, is critical for us to achieve
this balance.
Tarceva’s ability to grow in the future is dependent on a
number of factors, including our and our collaborators’
ability to expand market share for Tarceva both in the United
States and the rest of the world, competitive developments in
our industry, our ability to expand the approved indications for
Tarceva by succeeding on key clinical trials and the changing
reimbursement environment. As part of our lifecycle plan for
Tarceva, we, together with Genentech and Roche, continue to
invest in a broad clinical development program directed at
maximizing Tarceva’s long-term potential. This program
includes a number of large, randomized clinical trials designed
to expand Tarceva’s use in both NSCLC and other treatment
areas.
Recognizing that we have limited resources, we have adopted a
highly disciplined approach to R&D, prioritizing investment
in a portfolio of differentiated and competitive drug candidates
and technologies which we hope will enable us to deliver higher
clinical success rates than the industry average. In oncology,
we have an emerging pipeline of molecular target therapies, or
MTTs, in clinical and late-stage pre-clinical development which
we intend to develop and commercialize independently. These
include OSI-906 (an inhibitor of the insulin-like growth factor
1 receptor, or IGF-1R, with potential utility for the treatment
of all major solid tumor types) which entered Phase I studies in
June 2007, OSI-027 (a next generation mammalian target of
rapamycin, or mTOR, kinase inhibitor) which entered Phase I
studies in July 2008 and OSI-296 (a novel, potent tyrosine
kinase inhibitor, or TKI, developed as an
epithelial-to-mesenchymal
transition, or EMT, inhibitor), which is in late-stage
preclinical development. Each of these MTTs, as well as Tarceva,
are small molecules designed to be administered orally as a
tablet rather than by the less convenient intravenous infusion
methods characteristic of most anti-cancer drugs. The focus of
our proprietary oncology research efforts is on understanding
multiple elements of tumor biology —
41
including the dependence of certain tumor cells on activated
oncogenic signaling pathways, or onco-addiction, and
compensatory signaling — but with a particular focus
on the biological process of EMT, which is of emerging
significance in understanding tumor development and disease
progression. This research has grown out of our translational
research efforts to understand which patients may optimally
benefit from Tarceva. Our EMT research investment, together with
related insights into mechanisms such as compensatory signaling,
is the cornerstone of our personalized medicine approach in
cancer, and should allow us to better design combinations of
MTTs for specific
sub-sets
of
cancer patients. This in turn may enable us to realize
significant improvements in patient outcomes and to enhance our
competitive position in the oncology marketplace.
We also have research and early development programs in diabetes
and obesity which are conducted through our U.K. subsidiary,
Prosidion Limited. Two compounds from our diabetes and obesity
research efforts, PSN821 and PSN602, entered clinical trials in
2008. PSN821 is an orally administered G protein-coupled
receptor 119, or GPR119, agonist with potential anti-diabetic
and appetite suppressing features, and PSN602 is an oral dual
serotonin and noradrenaline reuptake inhibitor and
5-HT
1A
agonist for the treatment of obesity. Our discovery
efforts in diabetes and obesity are concentrated around the
neuroendocrine control of bodyweight and glycemia, which focuses
on central or peripheral nervous system or hormonal approaches
to the control of bodyweight for the treatment of obesity, as
well as the lowering of blood glucose together with meaningful
weight loss for the treatment of type 2 diabetes.
Prosidion contributes an important second source of revenues to
us from the licensing of our patent estate relating to the use
of DPIV inhibitors for the treatment of type 2 diabetes and
related indications. As of February 15, 2009, twelve
pharmaceutical companies had non-exclusive licenses to these
patents, which have provided us with upfront payments as well as
potential milestones and royalties. During 2008, we earned
approximately $41 million in royalty revenue from this
patent estate. The royalty revenue from our DPIV patent estate
has the potential to grow substantially over the next five
years, assuming sales of licensed DPIV inhibitors continue on
their current growth trajectory, and we believe our DPIV
revenues will contribute to a significant portion of our overall
anticipated revenue growth rate.
As we enter 2009, we are focused on delivering shareholder value
by continuing to balance financial performance against the
necessary reinvestment in R&D to further leverage our
strong Tarceva franchise and develop an innovative and
differentiated research platform and pipeline. By maintaining
financial discipline around our R&D investments and
controlling our spending on general and administrative expenses,
we believe that we can deliver credible near term growth, while
continuing to invest in attractive opportunities for long-term
value creation.
Critical
Accounting Policies
We prepare our consolidated financial statements in accordance
with U.S. generally accepted accounting principles. As
such, we are required to make certain estimates, judgments and
assumptions that we believe are reasonable based upon the
information available. These estimates and assumptions affect
the reported amounts of assets and liabilities as of the date of
the consolidated financial statements and the reported amounts
of revenues and expenses during the periods presented. Actual
results could differ significantly from our estimates and the
estimated amounts could differ significantly under different
assumptions and conditions. We believe that the following
discussion addresses our most critical accounting policies,
which are those that are most important to the portrayal of our
financial condition and results of operations and which require
our most difficult and subjective judgments, often as a result
of the need to make estimates about the effect of matters that
are inherently uncertain. Note 1 to the accompanying
consolidated financial statements includes a summary of the
significant accounting policies used in the preparation of the
consolidated financial statements.
Revenue
Recognition
Net
Revenues from Unconsolidated Joint Business
Net revenue from unconsolidated joint business is related to our
co-promotion and manufacturing agreements with Genentech for
Tarceva. It consists of our share of the pretax co-promotion
profit generated from our co-promotion arrangement with
Genentech for Tarceva, the partial reimbursement from Genentech
of our sales and marketing costs related to Tarceva and the
reimbursement from Genentech of our manufacturing costs related
to
42
Tarceva. Under the co-promotion arrangement, all U.S. sales
of Tarceva and associated costs and expenses, except for a
portion of our sales- related costs, are recognized by
Genentech. Genentech is also responsible for estimating reserves
for anticipated returns of Tarceva and monitoring the adequacy
of these reserves. During 2008, in response to increased levels
of Tarceva product returns, Genentech has modified its Tarceva
returns policy and increased its reserve estimate for future
Tarceva returns. We record our 50% share of the co-promotion
pretax profit on a quarterly basis, as set forth in our
agreement with Genentech. Pretax co-promotion profit under the
co-promotion arrangement is derived by calculating U.S. net
sales of Tarceva to third-party customers and deducting costs of
sales, distribution and selling and marketing expenses incurred
by Genentech and us. If actual future results differ from our
estimates, we may need to adjust these estimates, which could
have an effect on earnings in the period of adjustment. The
reimbursement of sales and marketing costs related to Tarceva is
recognized as revenue as the related costs are incurred. We
defer the recognition of the reimbursement of our manufacturing
costs related to Tarceva until the time Genentech ships the
product to third-party customers, at which time our risk of
inventory loss no longer exists.
Royalties
We estimate royalty revenue and royalty receivables in the
periods these royalties are earned, in advance of collection.
Our estimate of royalty revenue and royalty receivables is based
upon communication with our collaborators and our licensees.
Differences between actual royalty revenue and estimated royalty
revenue are adjusted in the period in which they become known,
typically the following quarter. Historically, such adjustments
have not been material to our consolidated financial condition
or results of operations.
The royalty amount with respect to ex-U.S. Tarceva sales is
calculated by converting the Tarceva sales for each country in
their respective local currency into Roche’s functional
currency (Swiss francs) and then to U.S. dollars. The
royalties are paid to us in U.S. dollars on a quarterly
basis. As a result, fluctuations in the value of the
U.S. dollar against foreign currencies will impact our
royalty revenue.
License
Fees and Milestones
Our revenue recognition policies for all nonrefundable upfront
license fees and milestone arrangements are in accordance with
the guidance provided in the Securities and Exchange Commission,
or SEC, Staff Accounting Bulletin No. 101,
“Revenue Recognition in Financial Statements,” as
amended by SEC Staff Accounting Bulletin No. 104,
“Revenue Recognition.” In addition, we follow the
provisions of Emerging Issues Task Force Issue, or
EITF 00-21,
“Revenue Arrangements with Multiple Deliverables,” for
multiple element revenue arrangements entered into or materially
amended after June 30, 2003. As a result of an amendment to
our collaboration agreement with Genentech in June 2004,
milestone payments received from Genentech after June 2004 and
the remaining portion of the unearned upfront fee are being
recognized in accordance with
EITF 00-21.
Milestones received from Genentech after June 2004 and the
remaining unearned upfront fee are being recognized over the
term of our Manufacturing and Supply Agreement with Genentech,
under which the last items of performance to be delivered to
Genentech are set forth, on a straight line basis, which
approximates the expected level of performance under the
Manufacturing and Supply Agreement. In March 2005, we agreed to
a further global development plan and budget with our
collaborators, Genentech and Roche, for the continued
development of Tarceva. For purposes of
EITF 00-21,
the revised development plan and budget for Tarceva was deemed a
material amendment to our Roche agreement and therefore, future
milestones received from Roche will be recognized in accordance
with
EITF 00-21.
Accordingly, milestone payments received from Roche after March
2005 have been, or will be initially recorded as unearned
revenue and recognized over the expected term of the research
collaboration on a straight-line basis, which approximates the
expected level of performance under the development plan.
Investments
and
Other-than-Temporary
Impairments
Investment securities at December 31, 2008 and 2007
consisted primarily of U.S. government securities,
U.S. government agency securities and debt securities of
financial institutions and corporations with strong credit
ratings. As of December 31, 2008, approximately 82% of our
investment securities consisted of AAA rated and A1
43
rated securities, including our money market funds, which are
AAA rated. We classify our investments as
available-for-sale
securities, as defined by Statement of Financial Accounting
Standards, or, SFAS No. 115, “Accounting for
Certain Investments in Debt and Equity Securities.” These
securities are recorded at their fair value. Unrealized holding
gains and losses, net of the related tax effect, if any, on
available-for-sale
securities are excluded from earnings and are reported in
accumulated other comprehensive income (loss), a separate
component of stockholders’ equity, until realized. The
specific identification basis is utilized to calculate the cost
to determine realized gains and losses from the sale of
available-for-sale
securities.
A decline in the market value of any
available-for-sale
marketable security below its cost that is deemed to be
other-than-temporary
results in a reduction in its carrying amount to fair value. The
impairment is charged to operations and a new cost basis for the
security is then established. The determination of whether an
available-for-sale
marketable security is
other-than-temporarily
impaired requires significant judgment and consideration of
available quantitative and qualitative evidence in evaluating
the potential impairment. Factors evaluated to determine whether
the investment is
other-than-temporarily
impaired include: (i) whether there has been a significant
deterioration in the issuer’s earnings performance, credit
rating, or asset quality; (ii) the business prospects of
the issuer; (iii) adverse changes in the general market
conditions in which the issuer operates; (iv) the length of
time that the fair value has been below our cost; (v) our
expected future cash flows from the security; and (vi) our
intent and ability to retain the investment for a sufficient
period of time to allow for recovery in the market value of the
investment. Assumptions associated with these factors are
subject to future market and economic conditions, which could
differ from our assessment. During 2007 and 2006 we did not
recognize any
other-than-temporary
impairments. In the fourth quarter of 2008, we recorded a
$1.2 million impairment charge in other income
(expense) — net related to an
other-than-temporary
decline in the fair value of common stock and warrants that we
previously received as part of a licensing transaction.
Inventory
The valuation of inventory requires us to make certain
assumptions and judgments to estimate net realizable value.
Inventories are reviewed and adjusted for obsolescence and aging
based upon estimates of future demand, technology developments
and market conditions. We determine the cost of raw materials,
work-in-process
and finished goods inventories using the weighted average
method. Inventory costs include material, labor and
manufacturing overhead. Inventories are valued at the lower of
cost or market (realizable value) in accordance with Accounting
Research Bulletin No. 43, or ARB 43. ARB 43 requires
that inventory be valued at its market value where there is
evidence that the utility of goods will be less than cost and
that such write-down should occur in the current period.
Accordingly, at the end of each period we evaluate our inventory
and adjust to net realizable value the carrying value and excess
quantities.
Inventory includes raw materials and
work-in-process
for Tarceva that may be used in the production of pre-clinical
and clinical product, which will be expensed to R&D cost
when consumed for these uses. Tarceva is stated at the lower of
cost or market, with cost being determined using the weighted
average method.
Stock-Based
Compensation
As discussed further in Note 16 to the accompanying
consolidated financial statements, we adopted
SFAS No. 123(R), “Accounting for Stock-Based
Compensation,” on January 1, 2006, using the modified
prospective method.
We have used and expect to continue to use the Black-Scholes
option-pricing model to compute the estimated fair value of
stock-based awards. The Black-Scholes option pricing model
includes assumptions regarding dividend yields, expected
volatility, expected option term and risk-free interest rates.
We estimate expected volatility based upon a combination of
historical, implied and adjusted historical stock prices. The
risk-free interest rate is based on the U.S. treasury yield
curve in effect at the time of grant. The fair value of the
options is estimated at the date of grant using a Black-Scholes
option pricing model with the expected option term determined
using a Monte Carlo simulation model that incorporates
historical employee exercise behavior and post-vesting employee
termination rates.
44
The assumptions used in computing the fair value of stock-based
awards reflect our best estimates, but involve uncertainties
relating to market and other conditions, many of which are
outside of our control. As a result, if other assumptions or
estimates had been used, the stock-based compensation expense
that was recorded for the years ended December 31, 2008,
2007 and 2006 could have been materially different. Furthermore,
if different assumptions are used in future periods, stock-based
compensation expense could be materially impacted in the future.
Accruals
for Clinical Research Organization and Clinical Site
Costs
We record accruals for estimated clinical study costs. Clinical
study costs represent costs incurred by clinical research
organizations, or CROs, and clinical sites. These costs are
recorded as a component of R&D expenses. We analyze the
progress of the clinical trials, including levels of patient
enrollment, invoices received and contracted costs, when
evaluating the adequacy of our accrued liabilities. Significant
judgments and estimates must be made and used in determining the
accrued balance in any accounting period. Actual costs incurred
may not match the estimated costs for a given accounting period.
Actual results could differ from those estimates under different
assumptions.
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 basis and operating loss
and tax credit carry forwards. 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.
For the year ended December 31, 2008, we recorded a
$333.5 million income tax benefit from continuing
operations, which included a favorable adjustment in the fourth
quarter of 2008 of $336.6 million resulting from the
reversal of a significant portion of the valuation allowance.
The reduction of the valuation allowance is based on the fact
that we determined that it was more likely than not that we will
generate sufficient taxable income to realize the benefits of
our deferred assets, primarily resulting from our net operating
losses, or NOLs. The determination was based upon our assessment
of our cumulative profitability in the United States over the
past three years and our expectation of future taxable income.
As of December 31, 2008, we had accumulated approximately
$949 million of NOLs related to our U.S. and foreign
operations. The U.S. NOLs, which, subject to limitations,
can be used to offset our future U.S. taxable income,
expire between the years 2021 and 2026. Utilization of a portion
of the U.S. NOLs may be limited under U.S. Internal
Revenue Code Section 382. The U.K. NOLs, which can be used
to offset our future U.K. taxable income, do not expire. Future
utilization of the U.K. NOLs is uncertain based upon the
historical results of our U.K. operations. As of
December 31, 2008, we have recorded $336.6 million net
in deferred tax assets relating to the U.S. and foreign tax
benefit from the potential future use of these NOLs. We have
also accumulated an additional approximately $100 million
in other net deferred tax assets based on temporary differences
between book and tax reporting.
On January 1, 2007, we adopted the provisions of Financial
Accounting Standards Board, or FASB, Financial Interpretation
No. 48, “Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement
No. 109,” or FIN 48. FIN 48 clarifies the
criteria that must be met prior to recognition of the financial
statement benefit of a position taken in a tax return.
FIN 48 provides a benefit recognition model with a two-step
approach consisting of a “more-likely-than-not”
recognition criteria, and a measurement attribute that measures
a given tax position as the largest amount of tax benefit that
is greater than 50% likely of being realized upon ultimate
settlement. FIN 48 also requires the recognition of
liabilities created by differences between tax positions taken
in a tax return and amounts recognized in the financial
statements. As of December 31, 2008 and 2007, we did not
have any liabilities relating to tax uncertainties.
45
Goodwill
and Other Long-Lived Assets
We account for goodwill and other intangible assets in
accordance with SFAS No. 141, “Business
Combinations,” or SFAS No. 141, and
SFAS No. 142, “Goodwill and Other Intangible
Assets,” or SFAS No. 142. SFAS No. 141
requires that the purchase method of accounting be used for all
business combinations. It specifies the criteria which
intangible assets acquired in a business combination must meet
in order to be recognized and reported apart from goodwill.
SFAS No. 142 requires that goodwill and intangible
assets determined to have indefinite lives no longer be
amortized but instead be tested for impairment at least annually
and whenever events or circumstances occur that indicate
impairment might have occurred.
Our identifiable intangible assets are subject to amortization.
SFAS No. 142 requires that intangible assets with
finite useful lives be amortized over their respective estimated
useful lives and reviewed for impairment in accordance with
SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” SFAS No. 144
requires, among other things, that long-lived assets be measured
at the lower of carrying amount or fair value, less cost to
sell, whether reported in continuing operations or in
discontinued operations. We review our intangibles with
determinable lives and other long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable.
Our judgment regarding the existence of impairment indicators is
based on historical and projected future operating results,
changes in the manner of our use of the acquired assets or our
overall business strategy, and market and economic trends. In
the future, events could cause us to conclude that impairment
indicators exist and that certain other intangibles with
determinable lives and other long-lived assets are impaired
which may result in an adverse impact on our financial condition
and results of operations.
Discontinued
Operations
On November 6, 2006, we announced our intention to divest
our eye disease business. During the first quarter of 2007, we
finalized our exit plan and began to actively market our eye
disease business assets. As a result of the finalization of our
plan to sell the business during the first quarter of 2007, in
accordance with the provision of SFAS No. 144, the
results of operations of (OSI) Eyetech for the current and prior
periods have been reported as discontinued operations. In
addition, assets and liabilities of (OSI) Eyetech have been
classified as assets and liabilities related to discontinued
operations, including those held for sale.
On August 1, 2008, we completed the sale of the remaining
assets of our eye disease business to Eyetech Inc., a newly
formed corporation whose shareholders consist primarily of
members of the
Macugen
®
(pegaptinib sodium injection) sales team. Under the terms of the
transaction, the principal assets we transferred to Eyetech Inc.
consisted of Macugen-related intellectual property and
inventory, as well as $5.8 million in working capital
primarily in the form of Macugen trade receivables, in exchange
for potential future milestone and royalty payments. We have
determined that, under FASB Interpretation No. 46(R),
“Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51,” issued in January 2003,
or FIN 46(R), Eyetech Inc. qualifies as a variable interest
entity, or VIE, but as we are not its primary beneficiary,
consolidation is not required. FIN 46(R) requires an entity
to be classified as a VIE where (i) the reporting company,
or its related parties, participated significantly in the design
of the entity, or where substantially all of the activities of
the entity either involve or are conducted on behalf of the
reporting company or its related parties, and (ii) its
equity investors do not have a controlling financial interest or
where the entity is unable to finance its activities without
additional financial support from other parties. Based on this
test, we determined that Eyetech Inc. qualified as a VIE due to
its inability at the time of its acquisition of the remaining
assets of our eye disease business to finance its activities
without additional financial support from third parties, and due
to the fact that Mr. Atieh, our former Executive Vice
President, Chief Financial Officer and Treasurer, is a
stockholder in Eyetech Inc., participated in the design of the
entity and agreed to serve as its part-time executive chairman
upon his retirement from our company.
FIN 46(R) further requires the consolidation of entities
which are determined to be VIEs when the reporting company
determines itself to be the primary beneficiary — in
other words, the entity that will absorb a majority of the VIEs
expected losses or receive a majority of the VIEs expected
residual returns. We determined that OSI is not the primary
beneficiary of Eyetech Inc. as (i) OSI does not hold an
equity position in Eyetech Inc., (ii) OSI’s
46
ongoing interest in this entity is limited to OSI’s
contingent right to receive future royalties and milestones, and
(iii) OSI does not have liability for the future losses.
Years
Ended December 31, 2008 and 2007
Results
of Operations
Net income for the year ended December 31, 2008 was
$471.5 million compared to $66.3 million for the year
ended December 31, 2007. Our net income from continuing
operations for the years ended December 31, 2008 and 2007
was $466.6 million and $102.6 million, respectively.
The increase in net income from continuing operations was
primarily due to a $336.6 million non-cash gain recorded in
the fourth quarter of 2008 related to the recognition of certain
deferred tax assets (primarily resulting from our NOLs) and an
increase in Tarceva-related revenues and royalties from our DPIV
patent estate. Included in net income for 2008 and 2007 are
income from discontinued operations of $4.8 million for
2008 and a net loss from discontinued operations of
$36.3 million for 2007. As a result of our decision to exit
the eye disease business and the finalization of our exit plan
in March 2007, the results of the eye disease business are
presented as discontinued operations for all periods presented.
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
(in thousands)
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
|
|
Tarceva-related revenues
|
|
|
334,653
|
|
|
|
267,799
|
|
|
|
66,854
|
|
|
Other revenues
|
|
|
44,735
|
|
|
|
73,231
|
|
|
|
(28,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
379,388
|
|
|
$
|
341,030
|
|
|
$
|
38,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tarceva-Related
Revenues
Tarceva-related revenues for the years ended December 31,
2008 and 2007 were $334.7 million and $267.8 million,
respectively, and included net revenue from our unconsolidated
joint business, Tarceva-related royalties and Tarceva-related
milestones.
Net
Revenue from Unconsolidated Joint Business
Net revenue from unconsolidated joint business is related to our
co-promotion and manufacturing agreements with Genentech for
Tarceva. For the years ended December 31, 2008 and 2007,
Genentech recorded net sales of Tarceva in the United States and
its territories of approximately $457 million and
$417 million, respectively. The increase in net sales of
Tarceva for the year ended December 31, 2008 was primarily
a result of price increases and a lower level of reserve
adjustments recorded in the year ended December 31, 2008
compared to the year ended December 31, 2007, partially
offset by a slight decrease in demand. Our share of these net
sales is reduced by the cost of goods sold for Tarceva and the
costs related to the sales and marketing of the product. For the
year ended December 31, 2008, we reported net revenues from
our unconsolidated joint business for Tarceva of
$196.1 million compared to $168.8 million for the same
period last year. The increase in net revenue from
unconsolidated joint business for the year ended
December 31, 2008 was primarily due to higher sales, higher
reimbursement of our sales and marketing costs and overall lower
combined sales and marketing costs incurred by the collaboration.
Tarceva-Related
Royalties
We receive royalties from Roche of approximately 20% on net
sales of Tarceva outside of the United States and its
territories. The royalty amount is calculated by converting the
respective countries’ Tarceva sales in local currency to
Roche’s functional currency (Swiss francs) and then to
U.S. dollars. The royalties are paid to us in
U.S. dollars on a quarterly basis. As a result,
fluctuations in the value of the U.S. dollar against
foreign currencies will impact our earnings. For the years ended
December 31, 2008 and 2007, Roche reported U.S. dollar
equivalent rest of world sales of approximately
$665 million and $470 million, respectively. For the
years ended December 31, 2008 and 2007, we recorded
$134.6 million and $95.2 million in royalty revenue
from these sales, respectively. The
47
increase in royalty revenue was primarily due to increased sales
volume outside the United States, including sales in Japan,
which has been a market for Tarceva since December 2007, and the
net favorable impact of foreign exchange rates.
Tarceva-Related
Milestones
Milestone revenues from Tarceva include the recognition of the
ratable portion of upfront fees from Genentech and milestone
payments received from Genentech and Roche in connection with
various regulatory acceptances and approvals for Tarceva in the
United States, Europe and Japan. These payments were initially
deferred and are being recognized as revenue in accordance with
EITF 00-21.
The ratable portions of the upfront fees and milestone payments
recognized as revenue for the years ended December 31, 2008
and 2007 were $3.9 million and $3.8 million,
respectively. The unrecognized deferred revenue related to these
upfront fees and milestone payments was $37.1 million and
$41.0 million as of December 31, 2008 and 2007,
respectively. We are also entitled to additional milestone
payments from Genentech and Roche upon the occurrence of certain
regulatory approvals and filings with respect to Tarceva. The
ultimate receipt of these additional milestone payments is
contingent upon the applicable regulatory approvals and other
future events.
Other
Revenues
Other revenues for the years ended December 31, 2008 and
2007 were $44.7 million and $73.2 million,
respectively, and include non-Tarceva related license,
milestone, royalty and commission revenues.
We recognized $41.1 million and $17.1 million of
royalty revenue for the years ended December 31, 2008 and
2007, respectively, from previously granted worldwide
non-exclusive license agreements entered into by Prosidion under
our DPIV patent portfolio covering the use of DPIV inhibitors
for treatment of type 2 diabetes and related indications. Our
royalty revenue in 2008 and 2007 was principally derived from
sales of Merck’s DPIV inhibitor product,
Januvia
tm
,
and its DPIV combination product with metformin,
Janumet
tm
.
We also derived royalty revenue from sales of Novartis’
DPIV inhibitor products,
Galvus
®
and
Eucreas
®
.
The year ended December 31, 2007 also included
$17.7 million of upfront payments and milestones under the
non-exclusive license for our DPIV patent portfolio. The amount
of license revenues generated from our DPIV patent estate can be
expected to fluctuate significantly from year to year based on:
(i) the level of future product sales by our licensees;
(ii) the ability of our licensees to achieve specified
events under the license agreements which entitle us to
milestone payments; and (iii) our ability to enter into
additional license agreements in the future.
In February 2008, we licensed to a third party our transforming
growth factor, or TGF ß3, compound for certain indications,
for an upfront fee of $2.0 million. We recognized the
$2.0 million payment as license revenue in the first
quarter of 2008 since we had no future performance obligations.
Pursuant to the terms of a cross license with Novartis AG,
approximately $350,000 of the amount we received was paid to
Novartis.
In January 2007, we licensed our glucokinase activator program,
including our clinical candidate PSN010, to Eli Lilly for an
upfront fee of $25.0 million and up to $360.0 million
in potential development and sales milestones and other
payments, plus royalties on any compounds successfully
commercialized from this program. For the year ended
December 31, 2007, we recognized the full
$25.0 million upfront fee based upon completion of our
obligation to provide technical support during a transitional
period of nine months from the date of execution.
During the third quarter of 2007, we received $7.5 million
of license revenue from Renovo Group plc in connection with its
license agreement with Shire plc for its TGF ß3 drug
candidate
Juvista
®
.
Under our agreement with Renovo, we are entitled to a fixed
percentage of any upfront payment, development and sales
milestones and royalties that Renovo receives from Shire under
the license agreement. We are contractually obligated under a
cross-license to pay Novartis 15% of any amounts we receive from
Renovo.
During the fourth quarter of 2007, we recognized
$2.4 million of revenue from the consideration received as
a result of outlicensing OSI-7904L, an oncology clinical
candidate for which we had ceased development, to OncoVista
Innovative Therapies, Inc. The consideration included cash of
$500,000 and OncoVista common stock and warrants with a fair
value of $1.9 million. The common stock is publicly traded
and was recorded as an
available-for-sale
security. In the fourth quarter of 2008, we recorded a
$1.2 million impairment charge in other
48
income (expense)-net related to an
other-than-temporary
decline in fair value of the equity and warrants that we
previously received as part of a licensing transaction.
Included in other revenues are sales commissions earned on the
sales of
Novantrone
®
(mitoxantrone for injection concentrate) in the United States
for oncology indications. Sales commissions for the years ended
December 31, 2008 and 2007 were $171,000 and
$2.5 million, respectively. Sales commissions declined
significantly subsequent to April 2006 due to the patent
expiration of Novantrone in April 2006, which resulted in our
loss of market exclusivity for this product and the launch of
generic competitors.
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
(in thousands)
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
|
|
Cost of goods sold
|
|
$
|
9,315
|
|
|
$
|
9,399
|
|
|
$
|
(84
|
)
|
|
Research and development
|
|
|
135,344
|
|
|
|
123,531
|
|
|
|
11,813
|
|
|
Acquired in-process research and development
|
|
|
4,000
|
|
|
|
9,664
|
|
|
|
(5,664
|
)
|
|
Selling, general and administrative
|
|
|
94,930
|
|
|
|
99,159
|
|
|
|
(4,229
|
)
|
|
Amortization of intangibles
|
|
|
2,489
|
|
|
|
1,840
|
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
246,078
|
|
|
$
|
243,593
|
|
|
$
|
2,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Goods Sold
Total cost of goods sold for the years ended December 31,
2008 and 2007 were $9.3 million and $9.4 million,
respectively, and related to Tarceva sales.
Research
and Development
R&D expenses increased by $11.8 million for the year
ended December 31, 2008 compared to the year ended
December 31, 2007. The increase was primarily due to an
increase in R&D expenses related to non-Tarceva oncology
programs and equity-based compensation, partially offset by
declines in R&D expenses for Tarceva and for our diabetes
and obesity programs.
We manage the ongoing development program for Tarceva with our
collaborators, Genentech and Roche, through a global development
committee under a Tripartite Agreement among the parties.
Together with our collaborators, we have implemented a
broad-based global development strategy for Tarceva that
implements simultaneous clinical programs currently designed to
expand the number of approved indications for Tarceva and
evaluate the use of Tarceva in new
and/or
novel
combinations. Since 2001, the collaborators have committed an
aggregate of approximately $900 million to the global
development plan to be shared by the three parties. As of
December 31, 2008, we had invested in excess of
$245 million in the development of Tarceva, representing
our share of the costs incurred through December 31, 2008
under the tripartite global development plan and additional
investments outside of the plan.
We consider the active management and development of our
clinical pipeline crucial to the long-term process of getting a
clinical candidate approved by the regulatory authorities and
brought to market. We manage our overall research, development
and in-licensing efforts in a highly disciplined manner designed
to advance only high quality, differentiated agents into
clinical development. The duration of each phase of clinical
development and the probabilities of success for approval of
drug candidates entering clinical development will be impacted
by a variety of factors, including the quality of the molecule,
the validity of the target and disease indication, early
clinical data, investment in the program, competition and
commercial viability. Because we manage our pipeline in a
dynamic and disciplined manner, it is difficult to give accurate
guidance on the anticipated proportion of our R&D
investments assigned to any one program prior to the
Phase III stage of development, or to the future cash
inflows from these programs. For the years ended
December 31, 2008 and 2007, we invested a total of
$54.3 million and $47.4 million, respectively, in
research and $81.0 million and $76.1 million,
respectively, in pre-clinical and clinical
49
development. We believe that this represents an appropriate
level of investment in R&D for our company when balanced
against our goals of financial performance and the creation of
longer-term shareholder value.
Acquired
In-Process Research and Development
In the fourth quarter of 2008, our subsidiary, Prosidion,
acquired intellectual property and other assets from 7TM Pharma
A/S for $4.0 million. The $4.0 million was recorded as
an in-process R&D charge, since it was associated with the
intellectual property which was deemed early stage with no
alternative future use in accordance with SFAS No. 2,
“Accounting for Research and Development Costs.”
In September 2007, we entered into a small molecule drug
discovery and translational research collaboration with AVEO
Pharmaceuticals, Inc., or AVEO. Under the terms of our
collaboration, we delivered to AVEO an upfront cash payment of
$10.0 million, consisting of $7.5 million for access
to certain AVEO technology and $2.5 million to fund the
first year of research under the collaboration, and purchased
$5.5 million of AVEO’s preferred stock. We are also
obligated to provide AVEO with certain future research funding,
as well as milestones and royalties upon successful development
and commercialization of products from the collaboration. The
AVEO technology is deemed to have no alternative future use in
accordance with SFAS No. 2 since it was intended to be
used to support our early development technologies. Accordingly,
we expensed the $7.5 million payment as acquired in-process
R&D in the third quarter of 2007.
In the fourth quarter of 2007, Prosidion acquired intellectual
property and laboratory equipment from AdipoGenix, Inc. for
$2.3 million. Of the $2.3 million purchase price,
$2.2 million was recorded as an in-process R&D charge
since it was associated with the intellectual property which was
deemed early stage with no future alternative use in accordance
with SFAS No. 2. The remainder of the cost was
allocated to the laboratory equipment acquired, based upon its
fair value, and capitalized.
Selling,
General and Administrative
Selling, general and administrative expenses for the year ended
December 31, 2008 were $94.9 million, a decrease of
$4.2 million from the same period last year. The decrease
was primarily attributable to a decline in license related fees
and general corporate expenses, partially offsetting higher
equity based compensation and salaries.
Other
Income and Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
(in thousands)
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
|
|
Investment
income-net
|
|
$
|
12,961
|
|
|
$
|
12,830
|
|
|
$
|
131
|
|
|
Interest expense
|
|
|
(11,932
|
)
|
|
|
(7,235
|
)
|
|
|
(4,697
|
)
|
|
Other income (expense)-net
|
|
|
(1,195
|
)
|
|
|
2,307
|
|
|
|
(3,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
$
|
(166
|
)
|
|
$
|
7,902
|
|
|
$
|
(8,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income for the year ended December 31, 2008
remained relatively constant to the same period last year.
However, despite an increase in the funds available for
investments, investment income was negatively impacted by lower
rates of return on our investments.
Interest expense for the year ended December 31, 2008
increased by $4.7 million compared to the same period last
year, due to the additional interest expense resulting from the
issuance of $200.0 million 3% Convertible Senior
Subordinated Notes due 2038, or our 2038 Notes, in January 2008.
The increase was partially offset by the repurchase of
$50.0 million of our 3.25% Convertible Senior
Subordinated Notes due 2023, or our 2023 Notes, through the
first three quarters of 2008.
Other income (expense) — net was a $1.2 million
expense for the year ended December 31, 2008 compared to
$2.3 million of income for the same period last year. The
year ended December 31, 2008 includes higher amortization
of debt issuance cost, expenses associated with redeeming a
portion of our 2023 Notes and a
50
$1.2 million impairment charge related to common stock and
warrants that we previously received as part of a licensing
transaction for which we concluded the decline in market value
was other- than-temporary. Partially offsetting the higher
expenses in 2008 was $3.4 million of foreign exchange gains
recognized by our U.K. operations. The other income in the year
ended December 31, 2007 was primarily a result of a
$4.0 million curtailment gain related to our decision to
curtail our post-retirement medical and life insurance plan.
Income
Taxes
For the year ended December 31, 2008, we recorded a
$333.5 million income tax benefit from continuing
operations, which included a favorable adjustment of
$336.6 million in the fourth quarter of 2008 resulting from
the reversal of a significant portion of the valuation
allowance. In accordance with FAS 109, “Accounting for
Income Taxes,” the reduction of the valuation allowance is
based on the fact that we determined that it was more likely
than not that we will generate sufficient taxable income to
realize the benefits of our deferred assets, primarily resulting
from our NOLs. The determination was based upon our assessment
of our cumulative profitability in the United States over the
past three years and our expectation of future taxable income.
Income
(loss) from Discontinued Operations
On November 6, 2006, we announced our intention to divest
our eye disease business. During the first quarter of 2007, we
finalized our exit plan and began to actively market our eye
disease business assets. As a result of the finalization of our
plan to sell the business during the first quarter of 2007, in
accordance with the provision of SFAS No. 144, the
results of operations of (OSI) Eyetech for the current and prior
periods have been reported as discontinued operations. In
addition, assets and liabilities of (OSI) Eyetech have been
classified as assets and liabilities related to discontinued
operations, including those held for sale.
On August 1, 2008, we completed the sale of the remaining
assets of our eye disease business to Eyetech Inc. Under the
terms of the transaction, the principal assets we transferred to
Eyetech Inc. consisted of Macugen-related intellectual property
and inventory, as well as $5.8 million in working capital
primarily in the form of Macugen trade receivables, in exchange
for potential future milestone and royalty payments. Macugen net
product revenues for the seven months ended July 31, 2008,
or the last date that we held the remaining assets of our eye
disease business, were $7.2 million. Net income for the
year ended December 31, 2008 was $4.9 million compared
to net losses of $36.3 million, in the same period last
year. As a result of the sale of the remaining assets of our eye
disease business, during the year ended December 31, 2008
we incurred $14.1 million of charges relating to the
write-down of the assets held for sale to their net realizable
value as well as transaction-related charges. We also
recognized: (i) the remaining balance of the
$27.9 million of unearned revenue as income in the third
quarter of 2008 as a result of the assignment to Eyetech, Inc.
of certain obligations under our amended and restated license
agreement with Pfizer; and (ii) a $2.0 million expense
in the third quarter of 2008 related to a third-party milestone
obligation for Macugen.
Years
Ended December 31, 2007 and 2006
Results
of Operations
Our net income from continuing operations for the years ended
December 31, 2007 and 2006 was $102.6 million and
$6.7 million, respectively. The increase in net income from
continuing operations was primarily due to increases in revenue
related to Tarceva, and milestones and upfront fees from our
worldwide license agreements. Net income for the year ended
December 31, 2007 was $66.3 million compared to a net
loss of $582.2 million for the year ended December 31,
2006. Included in net income for 2007 and the net loss for 2006
are the losses from discontinued operations of
$36.3 million and $610.9 million, respectively. Also
included in the net loss for 2006 was a $22.0 million
extraordinary gain relating to the reversal of the contingent
value rights liability.
51
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
(in thousands)
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
|
|
Tarceva-related revenues
|
|
|
267,799
|
|
|
|
208,298
|
|
|
|
59,501
|
|
|
Other revenues
|
|
|
73,231
|
|
|
|
32,739
|
|
|
|
40,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
341,030
|
|
|
$
|
241,037
|
|
|
$
|
99,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tarceva-Related
Revenues
Tarceva revenues for the years ended December 31, 2007 and
2006 were $267.8 million and $208.3 million,
respectively, and include net revenues from our unconsolidated
joint business, Tarceva-related royalties and Tarceva-related
milestones.
Net
Revenue from Unconsolidated Joint Business
Net revenue from unconsolidated joint business is related to our
co-promotion and manufacturing agreements with Genentech for
Tarceva. For the years ended December 31, 2007 and 2006,
Genentech recorded net sales of Tarceva in the United States and
its territories of approximately $417 million and
$402 million, respectively. Our share of these net sales is
reduced by the costs incurred for cost of goods sold and the
sales and marketing expenses related to the product. For the
years ended December 31, 2007 and 2006, we reported net
revenue from our unconsolidated joint business for Tarceva of
$168.8 million and $154.9 million, respectively. The
increase in net revenue from unconsolidated joint business for
the year ended December 31, 2007 was primarily due to
higher sales related to price increases and higher reimbursement
of marketing and sales costs. Despite relatively stable unit
volume year over year, net sales of Tarceva for 2007 were
negatively impacted by approximately $22 million of higher
than anticipated product returns and returns reserve
requirements recorded by Genentech in the second and third
quarters of 2007.
Tarceva-Related
Royalties
We receive royalties from Roche of approximately 20% on net
sales of Tarceva outside of the United States and its
territories. The royalty amount is calculated by converting the
respective countries’ Tarceva sales in local currency to
Roche’s functional currency (Swiss francs) and then to
U.S. dollars. Conversion from local currencies to Swiss
francs occurs quarterly based on an average year-to-date
exchange rate while the conversion from Swiss francs to U.S.
dollars occurs quarterly based on the average exchange rate for
the quarter. The royalties are paid to us in U.S. dollars
on a quarterly basis. As a result, fluctuations in the value of
the U.S. dollar against foreign currencies impact our
earnings. For the years ended December 31, 2007 and 2006,
Roche reported U.S. dollar equivalent sales of
approximately $470 million and $247 million,
respectively, and we recorded $95.2 million and
$50.2 million, respectively, in royalty revenue from these
sales. The increase in royalty revenue was primarily due to
increased demand outside the United States and, to some extent,
changes in foreign exchange rates.
Tarceva-Related
Milestones
Milestone revenues from Tarceva include the recognition of the
ratable portion of upfront fees from Genentech and milestone
payments received from Genentech and Roche in connection with
various regulatory acceptances and approvals for Tarceva in the
United States, Europe and Japan. These payments were initially
deferred and are being recognized as revenue in accordance with
EITF 00-21.
The ratable portion of the upfront fee and milestone payments
recognized as revenue for the years ended December 31, 2007
and 2006 were $3.8 million and $3.2 million,
respectively. The unrecognized deferred revenue related to these
upfront fees and milestone payments received was
$41.0 million and $39.8 million as of
December 31, 2007 and 2006, respectively. We also are
entitled to additional milestone payments from Genentech and
Roche upon the occurrence of certain regulatory approvals and
filings with respect to Tarceva. The ultimate receipt of these
additional milestone payments is contingent upon the applicable
regulatory approvals and other future events.
52
Other
Revenues
Other revenues for the years ended December 31, 2007 and
2006 were $73.2 million and $32.7 million,
respectively, and includes non-Tarceva related licenses,
milestone, royalty and commission revenues.
We recognized $17.1 million and $0.9 million of
royalty revenue for the years ended December 31, 2007 and
2006, respectively, from previously granted worldwide
non-exclusive license agreements entered into by Prosidion under
our DPIV patent portfolio covering the use of DPIV inhibitors
for treatment of type 2 diabetes and related indications. The
years ended December 31, 2007 and 2006 also included
$17.7 million and $18.3 million, respectively, of
upfront payments and milestones, under these license agreements.
The amount of license revenues generated from our DPIV patent
estate can be expected to fluctuate significantly from quarter
to quarter based on: (i) the level of future product sales
by our licensees; (ii) the ability of our licensees to
achieve specified events under the license agreements which
entitle us to milestone payments; and (iii) our ability to
enter into additional license agreements in the future.
In January 2007, we licensed our glucokinase activator program,
including our clinical candidate PSN010, to Eli Lilly for an
upfront fee of $25.0 million and up to $360.0 million
in potential development and sales milestones and other
payments, plus royalties on any compounds successfully
commercialized from this program. For the year ended
December 31, 2007, we recognized the full
$25.0 million upfront fee based upon completion of our
obligation to provide technical support during a transitional
period of nine months from the date of execution.
During the third quarter of 2007, we received $7.5 million
of license revenue from Renovo Group plc in connection with its
license agreement with Shire plc for its transforming growth
factor, or TGF ß3, drug candidate,
Juvista
®
.
Under our agreement with Renovo, we are entitled to a fixed
percentage of any upfront payment, development and sales
milestones and royalties that Renovo receives from Shire under
the license agreement. We are contractually obligated under a
cross-license to pay Novartis 15% of any amounts we receive from
Renovo.
During the fourth quarter of 2007, we recognized
$2.4 million of revenue from the consideration received as
a result of outlicensing OSI-7904L, an oncology clinical
candidate for which we had ceased development, to OncoVista
Innovative Therapies, Inc. The consideration included cash of
$500,000 and OncoVista common stock and warrants with a fair
value of $1.9 million. The common stock is publicly traded
and was recorded as an
available-for-sale
security. The warrants were recorded at their estimated fair
value in other assets.
Included in license, milestone and other revenues are sales
commissions earned on the sales of Novantrone in the United
States for oncology indications. Sales commissions for the years
ended December 31, 2007 and 2006 were $2.5 million and
$11.8 million, respectively. Sales commissions declined
significantly subsequent to April 2006 due to the patent
expiration of Novantrone in April 2006, which resulted in our
loss of market exclusivity for this product and the launch of
generic competitors.
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
(in thousands)
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
|
|
Cost of goods sold
|
|
$
|
9,399
|
|
|
$
|
8,671
|
|
|
$
|
728
|
|
|
Research and development
|
|
|
123,531
|
|
|
|
117,527
|
|
|
|
6,004
|
|
|
Acquired in-process research and development
|
|
|
9,664
|
|
|
|
—
|
|
|
|
9,664
|
|
|
Selling, general and administrative
|
|
|
99,159
|
|
|
|
107,458
|
|
|
|
(8,299
|
)
|
|
Amortization of intangibles
|
|
|
1,840
|
|
|
|
1,809
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
243,593
|
|
|
$
|
235,465
|
|
|
$
|
8,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Goods Sold
Total cost of goods sold for the years ended December 31,
2007 and 2006 were $9.4 million and $8.7 million,
respectively. Cost of goods sold for the year ended
December 31, 2006 included $8.4 million related to
Tarceva and a small amount related to
Gelclair
®
Bioadherent Oral Gel.
53
Prior to receipt of approval of Tarceva for commercial sale on
November 18, 2004, we had expensed all costs associated
with the production of Tarceva to R&D. Effective
November 18, 2004, we began to capitalize the costs of
manufacturing Tarceva as inventory, including the costs to
label, package and ship previously manufactured bulk inventory
whose costs had already been expensed as R&D. During 2006,
we had sold all of the inventory partially produced and expensed
prior to November 18, 2004. Cost of goods sold for the year
ended December 31, 2006 would have been $1.4 million
higher if the Tarceva inventory sold had reflected the full
absorption of manufacturing costs.
Research
and Development
R&D expenses increased by $6.0 million for the year
ended December 31, 2007 compared to the year ended
December 31, 2006. For the years ended December 31,
2007 and 2006, we invested a total of $47.4 million and
$46.4 million, respectively, in research and
$76.1 million and $71.1 million, respectively, in
pre-clinical and clinical development. The increase was
primarily due to an $8.9 million increase in R&D
expenses related to non-Tarceva oncology programs, equity based
compensation and severance costs, partially offset by minor
declines in R&D expenses for Tarceva and for our diabetes
and obesity programs.
We manage the ongoing development program for Tarceva with our
partners, Genentech and Roche, through a global development
committee under a Tripartite Agreement among the parties.
Together with our collaborators, we have implemented a
broad-based global development strategy for Tarceva that
implements simultaneous clinical programs currently designed to
expand the number of approved indications for Tarceva and
evaluate the use of Tarceva in new
and/or
novel
combinations. Our global development plan has included major
Phase III clinical trials in lung and pancreatic cancer in
the past, and currently includes additional major Phase III
clinical trials in lung cancer in the maintenance and adjuvant
settings. As of December 31, 2007, we had invested in
excess of $212 million in the development of Tarceva,
representing our share of the costs incurred through
December 31, 2007 under the tripartite global development
plan and additional investments outside of the plan.
Acquired
In-Process Research and Development
On September 28, 2007, we entered into a small molecule
drug discovery and translational research collaboration with
AVEO. The purpose of this collaboration is the development of
molecular therapies that target the underlying mechanisms of EMT
in cancer. Under the terms of our collaboration agreement, we
delivered to AVEO a $10.0 million upfront cash payment
(which includes $2.5 million of research funding for the
first year of the collaboration) and purchased $5.5 million
of AVEO preferred stock. We also agreed to provide AVEO with
additional research funding, as well as milestones and royalties
upon successful development and commercialization of products
from the collaboration.
The $7.5 million of the upfront payment was recorded as an
in-process R&D charge, since it was non-refundable and
deemed to have no alternative future use. The $2.5 million
of first-year research funding was recognized as a prepaid asset
and is being amortized over one year, or the period that AVEO is
expected to provide research efforts under the collaboration.
The acquired preferred stock was recorded as a cost-based
investment in other assets in the accompanying balance sheet as
of December 31, 2007.
In the fourth quarter of 2007, Prosidion acquired intellectual
property and laboratory equipment from AdipoGenix for
$2.3 million. Of the $2.3 million purchase price,
$2.2 million was recorded as an in-process R&D charge,
since it was associated with the intellectual property that was
deemed early stage with no alternative use. The remainder of the
cost was allocated to the laboratory equipment acquired, based
upon its fair value, and capitalized.
Selling,
General and Administrative
Selling, general and administrative expenses for the year ended
December 31, 2007 were $99.2 million compared to
$107.5 million for the year ended December 31, 2006.
The $8.3 million decrease in expenses was primarily
attributable to a $7.0 million decline in maintenance fees
for Novantrone, costs savings and facility restructuring charges
recorded in 2006. Partially offsetting these declines were an
increase in commercial costs associated with Tarceva, a
$1.1 million license fee due to Novartis as a result of the
$7.5 million license fee we received from Renovo and an
increase in equity based compensation and severance related
costs.
54
Other
Income and Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
(in thousands)
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
|
|
Investment
income-net
|
|
$
|
12,830
|
|
|
$
|
11,098
|
|
|
$
|
1,732
|
|
|
Interest expense
|
|
|
(7,235
|
)
|
|
|
(7,339
|
)
|
|
|
104
|
|
|
Other income (expense)-net
|
|
|
2,307
|
|
|
|
(2,631
|
)
|
|
|
4,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
$
|
7,902
|
|
|
$
|
1,128
|
|
|
$
|
6,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in investment
income-net
for the year ended December 31, 2007 compared to the year
ended December 31, 2006 was primarily due to an increase in
funds available for investment and prevailing interest rates.
The year ended December 31, 2006 included $2.6 million
in interest earned on escrow funds for unexchanged shares in
connection with the Eyetech acquisition.
Other income (expense)-net for the year ended December 31,
2007 included a $4.0 million curtailment gain related to
our decision to curtail our post-retirement medical and life
insurance plan. Other income (expense)-net for the years ended
December 31, 2007 and 2006 included the amortization of
debt issuance costs related to the convertible senior
subordinated notes and other miscellaneous income and expense
items.
Income
Taxes
For the year ended December 31, 2007, we recorded a
provision for income taxes of $2.7 million related to
income from continuing operations and a tax benefit of
approximately $640,000 related to our loss from discontinued
operations. Based on our ability to fully offset our taxable
income by our net operating loss carry forwards, our estimated
tax expense was principally related to alternative minimum tax.
Loss from
Discontinued Operations
Total revenue from (OSI) Eyetech was $37.4 million for the
year ended December 31, 2007 compared to
$134.7 million for the year ended December 31, 2006.
Total U.S. net sales of Macugen in 2007 were approximately
$18 million and were significantly impacted by the launch
of a competitor’s product. Losses declined
$574.6 million to $36.3 million for the year ended
December 31, 2007, compared to $610.9 million in the
same period last year. The decline in losses was primarily
attributable to the $532.4 million of impairment and
inventory related charges we recognized in 2006, and lower
operating expenses in 2007. As a result of the decline in
revenues for Macugen and developments in the wet age-related
macular degeneration marketplace, we recognized impairment
charges in the second and third quarters of 2006 of
approximately $320.3 million in the aggregate for the
goodwill relating to our eye disease business, and additional
charges in the fourth quarter of 2006 of $185.7 million
relating to the Macugen intangible assets and $26.4 million
relating to the Macugen obsolete and expiring inventory. In the
third and fourth quarters of 2007, we assessed the net
realizable carrying amount or fair value of the assets held for
sale and recognized additional impairment charges of
$5.6 million and $5.1 million, respectively, in order
to reduce the carrying value of the assets.
Extraordinary
Gain
In connection with the 2003 acquisition of Cell Pathways, Inc.,
we recognized contingent consideration of $22.0 million in
the form of five-year contingent value rights pursuant to which
each share of Cell Pathways common stock was eligible for an
additional 0.04 share of our common stock in the event of a
filing of a new drug application by June 12, 2008 for
either of the two clinical candidates acquired from Cell
Pathways, OSI-461 or Aptosyn. We ceased our development efforts
for these two clinical candidates and pursued outlicensing
efforts with respect to these two candidates. During the second
quarter of fiscal 2006, we concluded that, in our judgment, the
milestone would not be met based upon the progress of our
outlicensing efforts and the technical hurdles for filing a new
drug application by June 2008 and therefore, we reversed the
$22.0 million liability and recorded an extraordinary gain
during the year ended December 31, 2006. The milestone was
not met by the June 12, 2008 deadline.
55
Liquidity
and Capital Resources
At December 31, 2008, cash and investments, including
restricted securities, were $515.5 million compared to
$305.1 million at December 31, 2007. The increase of
$210.4 million was primarily due to the following changes:
(i) net cash of $139.0 million generated from
operating activities and $200.0 million in proceeds from
the issuance of our 2038 Notes in January 2008, offset by a
$65.0 million treasury stock buy back in January 2008 and
cash used to repurchase $50.0 million of the
$150.0 million in aggregate indebtedness that was
outstanding under our 2023 Notes.
On January 9, 2008, we issued $200.0 million aggregate
principal amount of our 2038 Notes in a private placement,
resulting in net proceeds to us of approximately
$193 million. We used a portion of the proceeds to
repurchase approximately 1.5 million shares of our common
stock concurrently with the offering for an aggregate price of
$65.0 million. The 2038 Notes bear interest semi-annually
in arrears through maturity at an annual rate of 3% and mature
on January 15, 2038. We may redeem, for cash, all or part
of the 2038 Notes at any time on or after January 15, 2013,
at a price equal to 100% of the principal amount of the 2038
Notes, plus accrued and unpaid interest. Holders of the 2038
Notes have the right to require us to purchase, for cash, all or
any portion of their 2038 Notes on January 15, 2013, 2018,
2023, 2028 and 2033 at a price equal to 100% of the principal
amount of the 2038 Notes to be purchased, plus accrued and
unpaid interest. The 2038 Notes are unsecured and are
subordinated to all of our existing and future senior
indebtedness. The 2038 Notes rank equally in right of payment
with all of our existing and future senior subordinated
indebtedness. The 2038 Notes will be convertible, in certain
circumstances, into our common stock based upon a base
conversion rate, which, under certain circumstances will be
increased pursuant to a formula that is subject to a maximum
conversion rate. The initial base conversion rate is
13.5463 shares per $1,000 principal amount of notes
(equivalent to an initial base conversion price of approximately
$73.82 per share of our common stock). The initial base
conversion price represents a premium of 65% to the $44.74 per
share closing price of OSI’s common stock on
January 3, 2008. Upon conversion, holders of the 2038 Notes
will have the right to receive shares of our common stock,
subject to our right to deliver cash in lieu of all or a portion
of such shares.
Through diligent management of our business, in particular our
expenses, we have sustained our profitability and strengthened
our financial position. If we continue to execute on our
internal plans, we expect over the next two years that our
R&D investments, capital requirements and the potential
redemption of our 2% Convertible Senior Subordinated Notes
due 2025, or our 2025 Notes, in December 2010 could be funded
from the generation of cash flow from Tarceva and our DPIV
patent estate licenses. Certain potential exceptions to this
include the possible need to fund strategic acquisitions of
products
and/or
businesses should we identify any such strategic opportunities
in the future.
Commitments
and Contingencies
Our major outstanding contractual obligations relate to our
senior subordinated convertible notes and our facility leases.
The following table summarizes our significant contractual
obligations at December 31, 2008 and the effect such
obligations are expected to have on our liquidity and cash flow
in future periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 &
|
|
|
|
|
2009
|
|
|
2010-2011
|
|
|
2012-2013
|
|
|
Thereafter
|
|
|
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior convertible debt(a)
|
|
$
|
11,548
|
|
|
$
|
23,097
|
|
|
$
|
23,097
|
|
|
$
|
622,034
|
|
|
Operating leases
|
|
|
11,074
|
|
|
|
21,543
|
|
|
|
20,303
|
|
|
|
66,619
|
|
|
Purchase obligations(b)
|
|
|
33,800
|
|
|
|
40,800
|
|
|
|
13,400
|
|
|
|
10,200
|
|
|
Obligations related to exit activities(c)
|
|
|
1,817
|
|
|
|
—
|
|
|
|
1,409
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
58,239
|
|
|
$
|
85,440
|
|
|
$
|
58,209
|
|
|
$
|
698,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Our senior convertible debt obligations assume the payment of
interest on our senior convertible notes through their
respective maturity dates and the payment of their outstanding
principal balance at their respective maturity dates. The
interest payments on our senior convertible notes are at a rate
of (i) 3.25% per annum relating to the $99.95 million
principal amount of the 2023 Notes, (ii) 2% per annum
relating to the
|
56
|
|
|
|
|
|
|
$115.0 million principal amount of the 2025 Notes, and
(iii) 3% per annum relating to the $200.0 million
principal amount of the 2038 Notes. The holders of the 2023
Notes have the right to require us to purchase, for cash, all of
the 2023 Notes, or a portion thereof, in September 2013. In the
event that the holders of the 2023 Notes exercise this right, we
will have the option of delivering to the holders a specified
number of shares of our common stock in lieu of cash as set
forth in the indenture for the 2023 Notes. Holders of the 2025
Notes have the right to require us to purchase, for cash, all of
the 2025 Notes, or a portion thereof, in December 2010. Holders
of the 2038 Notes have the right to require us to purchase, for
cash, all of the 2038 Notes, or a portion thereof, in January
2013.
|
|
|
|
(b)
|
|
Includes commercial and research commitments and other
significant purchase commitments. Also includes our share of the
remaining future commitment related to the Tarceva global
development costs of approximately $93 million.
|
|
|
|
(c)
|
|
Includes payments for termination benefits and facility
refurbishments.
|
Other
significant commitments and contingencies include the
following:
|
|
|
|
|
|
•
|
We are committed to share certain commercialization costs
relating to Tarceva with Genentech. Under the terms of our
agreement, there are no contractually determined amounts for
future commercial costs.
|
|
|
|
|
•
|
Under agreements with external CROs, we will continue to incur
expenses relating to clinical trials of Tarceva and other
clinical candidates. The timing and amount of these
disbursements can be based upon the achievement of certain
milestones, patient enrollment, services rendered or as expenses
are incurred by the CROs and therefore, we cannot reasonably
estimate the potential timing of these payments.
|
|
|
|
|
•
|
We have outstanding letters of credit of $1.9 million,
which primarily serve as security for over performance under
various lease obligations.
|
|
|
|
|
•
|
We have a retirement plan which provides post-retirement medical
and life insurance benefits to eligible employees, board members
and qualified dependents. We curtailed this plan in 2007;
however, certain employees, board members and qualified
dependents remain eligible for these benefits. Eligibility is
determined based on age and years of service. We had an accrued
liability for post-retirement benefit costs of $2.7 million
at December 31, 2008.
|
|
|
|
|
•
|
Under certain license and collaboration agreements with
pharmaceutical companies and educational institutions, we are
required to pay royalties, milestone
and/or
other
payments upon the successful development and commercialization
of products. However, successful research and development of
pharmaceutical products is high risk, and most products fail to
reach the market. Therefore, at this time the amount and timing
of the payments, if any, are not known.
|
|
|
|
|
•
|
Under certain license and other agreements, we are required to
pay license fees for the use of technologies and products in our
R&D activities or milestone payments upon the achievement
of certain predetermined conditions. These license fees are not
deemed material to our consolidated financial statements and the
amount and timing of the milestone payments, if any, are not
known due to the uncertainty surrounding the successful
research, development and commercialization of the products.
|
Accounting
Pronouncements
In May 2008, FASB issued FASB Staff Position, or FSP,
No. APB
14-1,
“Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement).” This FSP clarifies that convertible debt
instruments that may be settled in cash upon conversion
(including partial cash settlement) are not addressed by
paragraph 12 of APB Opinion No. 14, “Accounting
for Convertible Debt and Debt Issued with Stock Purchase
Warrants.” Additionally, this FSP specifies that issuers of
such instruments should separately account for the liability and
equity components in a manner that will reflect the
entity’s nonconvertible debt borrowing rate when interest
cost is recognized in subsequent periods. This FSP will be
effective beginning with our financial statements issued for the
first quarter of 2009. We are currently evaluating the impact
this FSP will have on our financial position or results of
operations and anticipate the adoption of this FSP will have a
material impact on the carrying value and the interest expense
associated with our 2025 Notes and 2038 Notes.
57
In April 2008, the FASB issued FSP
No. FAS 142-3,
“Determination of the Useful Life of Intangible
Assets.” FSP
FAS 142-3
removes the requirement within SFAS No. 142 for an
entity to consider, when determining the useful life of a
recognized intangible asset, whether an intangible asset can be
renewed without substantial cost or material modifications to
the existing terms and conditions. FSP
FAS 142-3
requires an entity to consider its own historical experience in
developing renewal or extension assumptions. In the absence of
entity specific experience, FSP
FAS 142-3
requires an entity to consider assumptions that a marketplace
participant would use about renewal or extension that are
consistent with the highest and best use of the asset by a
marketplace participant. FSP
FAS 142-3
is effective prospectively for all intangible assets acquired
after its effective date, for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal
years, with additional disclosures required for all recognized
intangible assets as of the effective date. We do not expect the
adoption of FSB
FAS 142-3
to have a material impact on our financial position, results of
operations or cash flows.
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities.” SFAS No. 159 permits entities to
choose to measure many financial instruments and certain items
at fair value that are not currently required to be measured at
fair value. Effective January 1, 2008, we elected to adopt
the provisions of SFAS No. 159 for our fiscal year
ending December 31, 2008. The adoption of
SFAS No. 159 did not have a material impact on our
financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements,” to clarify the definition
of fair value, establish a framework for measuring fair value
and expand the disclosures on fair value measurements.
SFAS No. 157 defines fair value as the price that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date. SFAS No. 157 also stipulates
that, as a market-based measurement, fair value measurement
should be determined based on the assumptions that market
participants would use in pricing the asset or liability, and
establishes a fair value hierarchy that distinguishes between:
(a) market participant assumptions developed based on
market data obtained from sources independent of the reporting
entity, or observable inputs; and (b) the reporting
entity’s own assumptions about market participant
assumptions developed based on the best information available in
the circumstances, or unobservable inputs. Except for the
deferral for the implementation of SFAS No. 157 for
specified other non-financial assets and liabilities,
SFAS No. 157 is effective for our fiscal year ended
December 31, 2008. The adoption of SFAS No. 157
did not have a material impact on our financial position,
results of operations or cash flows.
In February 2008, the FASB issued
FSP 157-2,
“Effective Date of FASB Statement No. 157,” which
delays the effective date of SFAS No. 157 for non-financial
assets and non-financial liabilities. The delay is intended to
allow the FASB and constituents additional time to consider the
effect of various implementation issues that have arisen, or
that may arise, from the application of SFAS No. 157.
For items within the scope of
FSP 157-2,
this FSP defers the effective date of SFAS No. 157 to
fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years. We currently do not believe
that the adoption of the deferred portion of SFAS No. 157
will have a material impact on our financial condition, results
of operations or cash flows.
On June 27, 2007, EITF Issue
07-03,
“Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities,” was issued. EITF Issue
07-03
provides that nonrefundable advance payments made for goods or
services to be used in future R&D activities are deferred
and capitalized until such time as the related goods or services
are delivered or are performed, at which point the amounts will
be recognized as an expense. EITF Issue
07-03
is
effective for new contracts entered into after January 1,
2008. The adoption of EITF Issue
07-03
did
not have a material impact on our financial position, results of
operations or cash flows in 2008.
In November 2007, EITF Issue
07-01,
“Accounting for Collaborative Arrangements,” was
issued. EITF Issue
07-01
requires collaborators to present the results of activities for
which they act as the principal on a gross basis and report any
payments received from (made to) other collaborators based on
other applicable generally accepted accounting principles or, in
the absence of other applicable generally accepted accounting
principles, based on analogy to authoritative accounting
literature or a reasonable, rational and consistently applied
accounting policy election. EITF Issue
07-01
is
effective for fiscal years beginning after December 15,
2008. We currently do not believe that this EITF will have a
material impact on the results of our operations, financial
position or cash flows.
58
In December 2007, the FASB issued SFAS No. 141R,
“Business Combinations.” SFAS No. 141R
replaces SFAS No. 141 and establishes principles and
requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. SFAS No. 141R also provides
guidance on how the acquirer should recognize and measure the
goodwill acquired in the business combination and determine what
information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141R is effective for
us in its fiscal year beginning January 1, 2009. Most of
the requirements of SFAS No. 141R are only to be
applied prospectively to business combinations entered into on
or after January 1, 2009.
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51.”
SFAS No. 160 states that accounting and reporting
for minority interests will be recharacterized as noncontrolling
interests and classified as a component of equity.
SFAS No. 160 also establishes reporting requirements
that provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160
applies to all entities that prepare consolidated financial
statements, except
not-for-profit
organizations, but will affect only those entities that have an
outstanding noncontrolling interest in one or more subsidiaries
or that deconsolidate a subsidiary. SFAS No. 160 is
effective for fiscal years beginning after December 15,
2008. We currently do not believe that the adoption of
SFAS No. 160 will have a material impact on the
results of our operations, financial position or cash flows.
Forward
Looking Statements
A number of the matters and subject areas discussed in this
Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” in
Item 1, “Business,” and elsewhere in this report,
that are not historical or current facts, deal with potential
future circumstances and developments. The discussion of these
matters and subject areas is qualified by the inherent risks and
uncertainties surrounding future expectations generally, and
these discussions may materially differ from our actual future
experience involving any one or more of these matters and
subject areas. These forward-looking statements are also subject
generally to the other risks and uncertainties that are
described in this report in Item 1A, “Risk
Factors.”
|
|
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|
Our cash flow and earnings are subject to fluctuations due to
changes in interest rates in our investment portfolio of debt
securities and to foreign currency exchange rates. We maintain
an investment portfolio of various issuers, types and
maturities. These securities are generally classified as
available-for-sale
as defined by SFAS No. 115, 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. These securities are reported at their amortized cost,
which includes the direct costs to acquire the securities, plus
the amortization of any discount or premium, and accrued
interest earned on the securities. We have not used or held
derivative financial instruments in our investment portfolio.
A hypothetical 10% change in interest rates during the twelve
months ended December 31, 2008 would have resulted in a
$1.3 million change in our net income for 2008.
Our limited investments in certain biotechnology companies are
carried on the equity method or cost method of accounting using
the guidance of applicable accounting literature.
Other-than-temporary
losses are recorded against earnings in the same period the loss
was deemed to have occurred.
The royalty revenue we receive from Roche on net sales of
Tarceva outside of the U.S. is calculated by converting the
respective countries’ Tarceva sales in local currency to
Roche’s functional currency (Swiss francs) and then to
U.S. dollars. The royalties are paid to us in
U.S. dollars on a quarterly basis. As a result,
fluctuations in the value of the U.S. dollar against
foreign currencies will impact our earnings. A hypothetical 10%
change in current rates during the year ended December 31,
2008 would have resulted in an approximate $13.5 million
change to our net income.
59
Our convertible senior subordinated notes totaled
$414.95 million at December 31, 2008, and were
comprised of our 2023 Notes which bear interest at a fixed rate
of 3.25%, our 2025 Notes which bear interest at a fixed rate of
2% and our 2038 Notes which bear interest at a fixed rate of 3%.
Underlying market risk exists related to an increase in our
stock price or an increase in interest rates, which may make the
conversion of the 2023 Notes, 2025 Notes or 2038 Notes to common
stock beneficial to the holders of such notes. Conversion of the
2023 Notes, 2025 Notes or 2038 Notes would have a dilutive
effect on any future earnings and book value per common share.
60
|
|
|
|
ITEM 8.
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
Index to Consolidated Financial Statements:
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
Number
|
|
|
|
|
|
|
62
|
|
|
|
|
|
63
|
|
|
|
|
|
64
|
|
|
|
|
|
65
|
|
|
|
|
|
66
|
|
|
|
|
|
67
|
|
61
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON THE CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors and Stockholders
OSI Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of
OSI Pharmaceuticals, Inc. and subsidiaries as of
December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity, and cash
flows for each of the years in the three-year period ended
December 31, 2008. 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 the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of OSI Pharmaceuticals, Inc. and subsidiaries as of
December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2008, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), OSI
Pharmaceuticals, Inc. and subsidiaries’ internal control
over financial reporting as of December 31, 2008, based on
criteria established in
Internal Control —
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated February 27, 2009 expressed an unqualified opinion on
the effectiveness of the Company’s internal control over
financial reporting.
/s/ KPMG LLP
Melville, New York
February 27, 2009
62
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008 AND 2007
(In thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
ASSETS
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
272,936
|
|
|
$
|
162,737
|
|
|
Investment securities
|
|
|
240,328
|
|
|
|
137,439
|
|
|
Restricted investment securities
|
|
|
2,247
|
|
|
|
4,922
|
|
|
Accounts receivables — net
|
|
|
100,242
|
|
|
|
87,523
|
|
|
Inventory — net
|
|
|
20,139
|
|
|
|
21,064
|
|
|
Interest receivable
|
|
|
1,428
|
|
|
|
1,116
|
|
|
Prepaid expenses and other assets
|
|
|
6,719
|
|
|
|
9,882
|
|
|
Assets related to discontinued operations
|
|
|
917
|
|
|
|
25,442
|
|
|
Deferred tax assets — net
|
|
|
45,425
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
690,381
|
|
|
|
450,125
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, equipment and leasehold improvements — net
|
|
|
43,443
|
|
|
|
46,694
|
|
|
Debt issuance costs — net
|
|
|
7,080
|
|
|
|
3,047
|
|
|
Goodwill
|
|
|
38,648
|
|
|
|
39,411
|
|
|
Other intangible assets — net
|
|
|
7,711
|
|
|
|
4,966
|
|
|
Other assets
|
|
|
14,591
|
|
|
|
14,137
|
|
|
Deferred tax assets — net
|
|
|
291,205
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,093,059
|
|
|
$
|
558,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
49,052
|
|
|
$
|
45,843
|
|
|
Unearned revenue — current
|
|
|
10,547
|
|
|
|
10,912
|
|
|
Liabilities related to discontinued operations
|
|
|
1,522
|
|
|
|
45,739
|
|
|
Convertible senior subordinated notes
|
|
|
—
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
61,121
|
|
|
|
252,494
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
Rent obligations and deferred rent expense
|
|
|
8,154
|
|
|
|
10,812
|
|
|
Unearned revenue — long-term
|
|
|
33,398
|
|
|
|
37,075
|
|
|
Convertible senior subordinated notes
|
|
|
414,950
|
|
|
|
115,000
|
|
|
Accrued post-retirement benefit cost and other
|
|
|
3,890
|
|
|
|
4,043
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
521,513
|
|
|
|
419,424
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (See Note 17)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; 5,000 shares
authorized; no shares issued at December 31, 2008 and 2007,
respectively
|
|
|
—
|
|
|
|
—
|
|
|
Common stock, $.01 par value; 200,000 shares
authorized, 61,124 and 60,352 shares issued at
December 31, 2008 and 2007, respectively
|
|
|
611
|
|
|
|
604
|
|
|
Additional paid-in capital
|
|
|
1,693,263
|
|
|
|
1,658,737
|
|
|
Accumulated deficit
|
|
|
(1,016,201
|
)
|
|
|
(1,487,686
|
)
|
|
Accumulated other comprehensive income (loss)
|
|
|
(3,908
|
)
|
|
|
4,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
673,765
|
|
|
|
176,177
|
|
|
Less: treasury stock, at cost; 3,396 and 1,943 shares at
December 31, 2008 and 2007, respectively
|
|
|
(102,219
|
)
|
|
|
(37,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
571,546
|
|
|
|
138,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,093,059
|
|
|
$
|
558,380
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
63
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tarceva-related revenues
|
|
$
|
334,653
|
|
|
$
|
267,799
|
|
|
$
|
208,298
|
|
|
Other revenues
|
|
|
44,735
|
|
|
|
73,231
|
|
|
|
32,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
379,388
|
|
|
|
341,030
|
|
|
|
241,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
9,315
|
|
|
|
9,399
|
|
|
|
8,671
|
|
|
Research and development
|
|
|
135,344
|
|
|
|
123,531
|
|
|
|
117,527
|
|
|
Acquired in-process research and development
|
|
|
4,000
|
|
|
|
9,664
|
|
|
|
—
|
|
|
Selling, general and administrative
|
|
|
94,930
|
|
|
|
99,159
|
|
|
|
107,458
|
|
|
Amortization of intangibles
|
|
|
2,489
|
|
|
|
1,840
|
|
|
|
1,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
246,078
|
|
|
|
243,593
|
|
|
|
235,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
133,310
|
|
|
|
97,437
|
|
|
|
5,572
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income — net
|
|
|
12,961
|
|
|
|
12,830
|
|
|
|
11,098
|
|
|
Interest expense
|
|
|
(11,932
|
)
|
|
|
(7,235
|
)
|
|
|
(7,339
|
)
|
|
Other income (expense) — net
|
|
|
(1,195
|
)
|
|
|
2,307
|
|
|
|
(2,631
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
133,144
|
|
|
|
105,339
|
|
|
|
6,700
|
|
|
Income tax (benefit) provision
|
|
|
(333,457
|
)
|
|
|
2,732
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
466,601
|
|
|
|
102,607
|
|
|
|
6,700
|
|
|
Income (loss) from discontinued operations — net of tax
|
|
|
4,884
|
|
|
|
(36,288
|
)
|
|
|
(610,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before extraordinary gain
|
|
|
471,485
|
|
|
|
66,319
|
|
|
|
(604,230
|
)
|
|
Extraordinary gain — net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
22,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
471,485
|
|
|
$
|
66,319
|
|
|
$
|
(582,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
8.14
|
|
|
$
|
1.78
|
|
|
$
|
0.12
|
|
|
Discontinued operations
|
|
|
0.09
|
|
|
|
(0.63
|
)
|
|
|
(10.73
|
)
|
|
Net income (loss) before extraordinary gain
|
|
|
8.23
|
|
|
|
1.15
|
|
|
|
(10.61
|
)
|
|
Extraordinary gain
|
|
|
—
|
|
|
|
—
|
|
|
|
0.39
|
|
|
Net income (loss)
|
|
$
|
8.23
|
|
|
$
|
1.15
|
|
|
$
|
(10.22
|
)
|
|
Diluted earnings (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
7.19
|
|
|
$
|
1.70
|
|
|
$
|
0.12
|
|
|
Discontinued operations
|
|
|
0.07
|
|
|
|
(0.58
|
)
|
|
|
(10.60
|
)
|
|
Net income (loss) before extraordinary gain
|
|
|
7.26
|
|
|
|
1.11
|
|
|
|
(10.48
|
)
|
|
Extraordinary gain
|
|
|
—
|
|
|
|
—
|
|
|
|
0.38
|
|
|
Net income (loss)
|
|
$
|
7.26
|
|
|
$
|
1.11
|
|
|
$
|
(10.10
|
)
|
|
Weighted average shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares
|
|
|
57,316
|
|
|
|
57,665
|
|
|
|
56,939
|
|
|
Diluted shares
|
|
|
66,911
|
|
|
|
62,241
|
|
|
|
57,645
|
|
See accompanying notes to consolidated financial statements.
64
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Stockholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
Equity
|
|
|
|
|
Balance at December 31, 2005
|
|
|
58,728
|
|
|
$
|
587
|
|
|
$
|
1,592,155
|
|
|
$
|
(7,341
|
)
|
|
$
|
(971,469
|
)
|
|
$
|
1,755
|
|
|
$
|
(37,221
|
)
|
|
$
|
578,466
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(582,184
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(582,184
|
)
|
|
Unrealized holding losses on investment securities —
net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(233
|
)
|
|
|
—
|
|
|
|
(233
|
)
|
|
Translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,148
|
|
|
|
—
|
|
|
|
2,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(580,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply SFAS 158
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,316
|
)
|
|
|
—
|
|
|
|
(1,316
|
)
|
|
Options exercised
|
|
|
391
|
|
|
|
4
|
|
|
|
7,888
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,892
|
|
|
Issuance of common stock for employee purchase plan and other
|
|
|
45
|
|
|
|
1
|
|
|
|
1,129
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,130
|
|
|
Issuance of common stock in connection with buyout of Prosidion
minority interest
|
|
|
3
|
|
|
|
—
|
|
|
|
145
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
145
|
|
|
Issuance of restricted stock to employees
|
|
|
12
|
|
|
|
—
|
|
|
|
1,539
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,539
|
|
|
Reclassification of deferred compensation due to the adoption of
SFAS 123(R)
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,045
|
)
|
|
|
7,341
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,296
|
|
|
Equity based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
19,063
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,063
|
|
|
Adjustment for EITF
06-02
(sabbatical leave)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(352
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
59,179
|
|
|
|
592
|
|
|
|
1,616,874
|
|
|
|
—
|
|
|
|
(1,554,005
|
)
|
|
|
2,354
|
|
|
|
(37,221
|
)
|
|
|
28,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,319
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,319
|
|
|
Unrealized holding gains on investment securities — net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
486
|
|
|
|
—
|
|
|
|
486
|
|
|
Curtailment of post-retirement plan
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,316
|
|
|
|
—
|
|
|
|
1,316
|
|
|
Translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
366
|
|
|
|
—
|
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
68,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
1,052
|
|
|
|
11
|
|
|
|
25,622
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,633
|
|
|
Issuance of common stock under employee purchase plan and other
|
|
|
26
|
|
|
|
—
|
|
|
|
776
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
776
|
|
|
Issuance of restricted stock to employees
|
|
|
95
|
|
|
|
1
|
|
|
|
18
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19
|
|
|
Equity based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
15,447
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
60,352
|
|
|
|
604
|
|
|
|
1,658,737
|
|
|
|
—
|
|
|
|
(1,487,686
|
)
|
|
|
4,522
|
|
|
|
(37,221
|
)
|
|
|
138,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
471,485
|
|
|
|
—
|
|
|
|
—
|
|
|
|
471,485
|
|
|
Unrealized holding losses on investment securities —
net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(727
|
)
|
|
|
—
|
|
|
|
(727
|
)
|
|
Post-retirement plan
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
378
|
|
|
|
—
|
|
|
|
378
|
|
|
Translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,081
|
)
|
|
|
—
|
|
|
|
(8,081
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
463,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
568
|
|
|
|
5
|
|
|
|
15,733
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,738
|
|
|
Issuance of common stock under employee purchase plan and other
|
|
|
25
|
|
|
|
—
|
|
|
|
843
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
843
|
|
|
Issuance of restricted stock to employees
|
|
|
179
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
Equity based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
17,494
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,494
|
|
|
Purchase of treasury stock- 1,453 shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(64,998
|
)
|
|
|
(64,998
|
)
|
|
Excess tax benefits from stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
456
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
61,124
|
|
|
$
|
611
|
|
|
$
|
1,693,263
|
|
|
$
|
—
|
|
|
$
|
(1,016,201
|
)
|
|
$
|
(3,908
|
)
|
|
$
|
(102,219
|
)
|
|
$
|
571,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
65
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
471,485
|
|
|
$
|
66,319
|
|
|
$
|
(582,184
|
)
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary gain from reversal of contingent consideration
|
|
|
—
|
|
|
|
—
|
|
|
|
(22,046
|
)
|
|
Loss (gain) on sale and disposals of equipment
|
|
|
9
|
|
|
|
1,471
|
|
|
|
(5
|
)
|
|
Gain on sale of intellectual property
|
|
|
—
|
|
|
|
(7,892
|
)
|
|
|
—
|
|
|
Depreciation and amortization
|
|
|
13,198
|
|
|
|
12,471
|
|
|
|
34,235
|
|
|
Loss on sale of eye disease business and non-cash impairment
charges
|
|
|
14,136
|
|
|
|
—
|
|
|
|
—
|
|
|
Impairment of assets
|
|
|
1,217
|
|
|
|
10,765
|
|
|
|
505,985
|
|
|
Provision for excess inventory — net
|
|
|
—
|
|
|
|
—
|
|
|
|
26,408
|
|
|
Impact of inventory
step-up
related to inventory sold
|
|
|
51
|
|
|
|
2,365
|
|
|
|
19,924
|
|
|
Amortization of premiums and discounts on investments
|
|
|
(1,151
|
)
|
|
|
(2,578
|
)
|
|
|
1,858
|
|
|
In-process research and development charge
|
|
|
4,000
|
|
|
|
9,664
|
|
|
|
—
|
|
|
Non-cash compensation charge
|
|
|
20,727
|
|
|
|
17,099
|
|
|
|
19,703
|
|
|
Gain on recognition of certain deferred tax assets
|
|
|
(336,629
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,895
|
)
|
|
|
(23,262
|
)
|
|
|
69,569
|
|
|
Inventory
|
|
|
536
|
|
|
|
12
|
|
|
|
(9,551
|
)
|
|
Prepaid expenses and other current assets
|
|
|
2,994
|
|
|
|
(1,054
|
)
|
|
|
1,715
|
|
|
Other assets
|
|
|
(67
|
)
|
|
|
(1,077
|
)
|
|
|
(3,755
|
)
|
|
Accounts payable and accrued expenses
|
|
|
(12,925
|
)
|
|
|
6,038
|
|
|
|
(17,017
|
)
|
|
Collaboration profit share payable
|
|
|
—
|
|
|
|
(9,257
|
)
|
|
|
(37,829
|
)
|
|
Unearned revenue
|
|
|
(33,616
|
)
|
|
|
(1,331
|
)
|
|
|
29,104
|
|
|
Accrued post-retirement benefit cost and other
|
|
|
(134
|
)
|
|
|
(3,944
|
)
|
|
|
1,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
138,936
|
|
|
|
75,809
|
|
|
|
37,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments (restricted and unrestricted)
|
|
|
(337,355
|
)
|
|
|
(258,085
|
)
|
|
|
(239,268
|
)
|
|
Maturities and sales of investments (restricted and unrestricted)
|
|
|
237,565
|
|
|
|
287,628
|
|
|
|
80,788
|
|
|
Net additions to property, equipment and leasehold improvements
|
|
|
(4,977
|
)
|
|
|
(4,332
|
)
|
|
|
(10,728
|
)
|
|
Purchase of intangible assets
|
|
|
(8,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Purchase of intellectual property and capitalized patent defense
costs
|
|
|
(4,886
|
)
|
|
|
(9,664
|
)
|
|
|
—
|
|
|
Proceeds from sale of intellectual property
|
|
|
—
|
|
|
|
4,000
|
|
|
|
—
|
|
|
Proceeds from sale of fixed assets
|
|
|
—
|
|
|
|
335
|
|
|
|
795
|
|
|
Purchase of compound library assets
|
|
|
(257
|
)
|
|
|
(3
|
)
|
|
|
(31
|
)
|
|
Payments made in connection with disposal of eye disease business
|
|
|
(1,240
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(119,150
|
)
|
|
|
19,879
|
|
|
|
(168,444
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options, employee purchase
plan, and other
|
|
|
17,038
|
|
|
|
26,409
|
|
|
|
9,138
|
|
|
Employees taxes paid related to equity awards
|
|
|
(3,233
|
)
|
|
|
(1,654
|
)
|
|
|
—
|
|
|
Proceeds from the issuance of convertible senior subordinated
notes
|
|
|
200,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Debt issuance costs
|
|
|
(6,730
|
)
|
|
|
—
|
|
|
|
(102
|
)
|
|
Payments on loans and capital leases payable
|
|
|
—
|
|
|
|
—
|
|
|
|
(640
|
)
|
|
Purchase of treasury stock
|
|
|
(64,998
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Repurchase of a portion of the 2023 Notes
|
|
|
(50,050
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
456
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
92,483
|
|
|
|
24,755
|
|
|
|
8,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
112,269
|
|
|
|
120,443
|
|
|
|
(122,533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(2,070
|
)
|
|
|
266
|
|
|
|
477
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
162,737
|
|
|
|
42,028
|
|
|
|
164,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
272,936
|
|
|
$
|
162,737
|
|
|
$
|
42,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
2,108
|
|
|
$
|
1,400
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
9,770
|
|
|
$
|
7,175
|
|
|
$
|
7,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock and warrants received from sale of intellectual property
|
|
$
|
—
|
|
|
$
|
3,892
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-retirement benefit obligation upon adoption of
SFAS No. 158
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
66
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
In this Annual Report on
Form 10-K,
“OSI,” “our company,” “we,”
“us,” and “our” refer to OSI
Pharmaceuticals, Inc. and subsidiaries.
|
|
|
|
(1)
|
Summary
of Significant Accounting Policies
|
|
|
|
|
(a)
|
Principles
of Consolidation
|
The consolidated financial statements are presented in
accordance with accounting principles generally accepted in the
United States. Our consolidated financial statements include the
accounts of OSI Pharmaceuticals, Inc., and our wholly-owned
subsidiaries, Oldtech Inc. (formerly known as (OSI) Eyetech), or
(OSI) Eyetech, Prosidion Limited and OSI Pharmaceuticals (U.K.)
Limited, or OSI U.K. This report on
Form 10-K
includes the statement of operations, statement of cash flows
and statement of stockholders’ equity for the years ended
December 31, 2008, 2007 and 2006. All intercompany balances
and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the Consolidated
Statements of Operations for the years ended December 31,
2007 and 2006 to conform to the presentation for the fiscal year
ended December 31, 2008. These reclassifications include a
reclassification of revenue categories within total revenues to
conform to the 2008 fiscal year presentation.
Tarceva-related revenues includes net revenue from
unconsolidated joint business and Tarceva-related milestones and
royalties. Other revenues include license, milestone, royalty
and commission from sources other than Tarceva. Our revenue
recognition polices with respect to these revenue sources are
described below.
|
|
|
|
(i)
|
Net
Revenue from Unconsolidated Joint Business
|
Net revenue from unconsolidated joint business is related to our
co-promotion and manufacturing agreements with Genentech, Inc.,
our U.S. collaborator for Tarceva. It consists of our share
of the pretax co-promotion profit generated from our
co-promotion arrangement with Genentech for Tarceva, the partial
reimbursement from Genentech of our sales and marketing costs
related to Tarceva and the reimbursement from Genentech of our
manufacturing costs related to Tarceva. Under the co-promotion
arrangement, all U.S. sales of Tarceva and associated costs
and expenses, except for a portion of our sales related and
marketing costs, are recognized by Genentech.
Genentech is also responsible for estimating reserves for
anticipated returns of Tarceva and monitoring the adequacy of
these reserves. In response to increased levels of Tarceva
product returns in 2008, Genentech has modified its Tarceva
returns policy and increased its reserve for estimated future
Tarceva returns.
For the year ended December 31, 2008, Genentech recorded
approximately $457 million in net sales of Tarceva in the
United States and its territories. We record our 50% share of
the co-promotion pretax profit on a quarterly basis, as set
forth in our agreement with Genentech. Pretax co-promotion
profit under the co-promotion arrangement is derived by
calculating U.S. net sales of Tarceva to third-party
customers and deducting costs of sales, distribution and selling
and marketing expenses incurred by Genentech and us. If actual
future results differ from our estimates and Genentech’s,
we may need to record an adjustment which could have an effect
on earnings in the period containing the adjustment. The
reimbursement of our sales and marketing costs related to
Tarceva is recognized as revenue as the related costs are
incurred. We defer the recognition of the reimbursement of our
manufacturing costs related to Tarceva until the time Genentech
ships the product to third-party customers, at which time our
risk of inventory loss no longer exists. The unearned revenue
related to shipments by our third party manufacturers of Tarceva
to Genentech that have not been shipped to third-party customers
was $6.6 million and
67
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$7.0 million as of December 31, 2008 and 2007,
respectively, and is included in unearned revenue-current in the
accompanying consolidated balance sheets.
For the years ended December 31, 2008, 2007 and 2006,
revenues from our share of the pretax co-promotion profit
generated from our co-promotion arrangement with Genentech for
Tarceva and the partial reimbursement from Genentech of our
sales and marketing costs related to Tarceva were
$186.2 million, $159.0 million and
$143.7 million, respectively, and revenues from the
reimbursement of our manufacturing costs were $9.9 million,
$9.7 million and $11.2 million, respectively.
We estimate royalty revenue and royalty receivables in the
periods these royalties are earned, in advance of collection.
Our estimate of royalty revenue and royalty receivables is based
upon communication with our collaborators and our licensees.
Differences between actual royalty revenue and estimated royalty
revenue are adjusted in the period in which they become known,
typically the following quarter. Historically, such adjustments
have not been material to our consolidated financial condition
or results of operations.
The royalty amount with respect to ex-U.S. Tarceva sales is
calculated by converting the Tarceva sales for each country in
their respective local currency into Roche’s functional
currency (Swiss francs) and then to U.S. dollars. The
royalties are paid to us in U.S. dollars on a quarterly
basis. As a result, fluctuations in the value of the
U.S. dollar against foreign currencies will impact our
royalty revenue.
|
|
|
|
(iii)
|
License,
Milestones, and Commissions
|
Our revenue recognition policies for all nonrefundable upfront
license fees and milestone arrangements are in accordance with
the guidance provided in the Securities and Exchange
Commission’s, or SEC’s, SEC Staff Accounting
Bulletin No. 104, “Revenue Recognition.” In
addition, we follow the provisions of Emerging Issues Task Force
Issue, or
EITF 00-21,
“Revenue Arrangements with Multiple Deliverables,” for
multiple element revenue arrangements entered into or materially
amended after June 30, 2003.
We received a total of $25.0 million in upfront fees from
Genentech and Roche, our ex-U.S. collaborator for Tarceva,
in January 2001, which was being recognized on a straight-line
basis over the expected term of our required research and
development, or R&D, efforts under the tripartite agreement
with Genentech and Roche. As a result of an amendment to our
collaboration agreement with Genentech in June 2004, the
remaining unearned upfront fee from Genentech of
$1.8 million is being recognized in accordance with
EITF 00-21,
as discussed further below. The upfront fee from Roche was fully
recognized as of December 31, 2004.
Since September 2004, we have received $34.0 million in
milestone payments from Genentech based upon certain
U.S. Food and Drug Administration, or FDA, filings and
approvals of Tarceva in accordance with our agreement with
Genentech. As a result of the amendment to our collaboration
agreement with Genentech in June 2004, these payments are, and
any future milestone payments will be, recognized in accordance
with
EITF 00-21.
Milestones which have been received from Genentech after June
2004, and the remaining unearned upfront fee as of June 2004,
are being recognized over the term of our Manufacturing and
Supply Agreement with Genentech, under which the last items of
performance to be delivered to Genentech are set forth, or on a
straight-line basis, which approximates the expected level of
performance under the Manufacturing and Supply Agreement. The
unrecognized unearned revenue related to the milestones and
upfront payment received from Genentech was $27.3 million
as of December 31, 2008, of which $2.3 million was
classified as short-term and the balance of $25.0 million
was classified as long-term in the accompanying consolidated
balance sheet. The unrecognized unearned revenue related to the
milestones and upfront payment received from Genentech was
$29.6 million as of December 31, 2007, of which
$2.3 million was classified as short-term and the balance
of $27.3 million was classified as long-term in the
accompanying consolidated balance sheet.
In March 2005, OSI, Genentech and Roche agreed to a further
global development plan and budget for the continued development
of Tarceva in earlier stage lung cancer, other cancer
indications and in a variety of
68
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PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
combinations with other oncology drugs. The cost of the
development plan is being shared by the three collaborators. For
purposes of
EITF 00-21,
the revised development plan and budget for Tarceva was deemed a
material amendment to our Roche agreement and requires
milestones received from Roche to be recognized in accordance
with
EITF 00-21.
Accordingly, milestone payments received from Roche are
initially recorded as unearned revenue and recognized over the
expected term of the research collaboration on a straight-line
basis, which approximates the expected level of performance
under the development plan. In September 2005, we recorded a
$4.0 million milestone payment from Roche upon approval of
Tarceva by the European Commission for sale in the European
Union, or EU. In November 2005, we recorded a $4.0 million
milestone payment from Roche upon acceptance for review by the
European Agency for the Evaluation of Medicinal Products for the
application of Tarceva in combination with gemcitabine
chemotherapy for the treatment of advanced pancreatic cancer in
patients who have not received previous chemotherapy. In May
2006, we recorded a $1.0 million milestone payment from
Roche upon acceptance for review by the Japanese Ministry of
Health of the application of Tarceva for the treatment of
advanced non-small cell lung cancer, or NSCLC. In January 2007,
we recorded a $4.0 million milestone payment from Roche
upon the European Commission’s marketing authorization for
Tarceva in combination with gemcitabine as first-line therapy
for metastatic pancreatic cancer. In November 2007, we recorded
a $1.0 million milestone payment from Roche upon approval
in Japan for the use of Tarceva in the treatment of advanced
NSCLC. All of these payments have been included in deferred
revenue. The unearned revenue related to the milestones we
received from Roche was $9.7 million as of
December 31, 2008, of which $1.6 million was
classified as short-term and the balance of $8.1 million
was classified as long-term in the accompanying consolidated
balance sheet. The unearned revenue related to the milestones we
received from Roche was $11.3 million as of
December 31, 2007, of which $1.6 million was
classified as short-term and the balance of $9.7 million
was classified as long-term in the accompanying consolidated
balance sheet.
We have entered into several worldwide non-exclusive license
agreements under our dipeptidyl peptidase IV, or DPIV, patent
portfolio covering the use of DPIV inhibitors for the treatment
of type 2 diabetes and related indications. In addition to
upfront fees received from these agreements, we are entitled to
receive milestone payments upon the achievement of certain
events and royalty payments on net sales. Under the terms of the
agreements, we recognized upfront license and milestone revenue
and royalties of $41.1 million and $34.7 million for
the years ended December 31, 2008 and 2007, respectively.
In January 2007, we licensed our glucokinase activator, or GKA,
program, including our clinical candidate PSN010, to Eli Lilly
and Company for an upfront fee of $25.0 million and up to
$360.0 million in potential development and sales
milestones and other payments, plus royalties on any compounds
successfully commercialized from this program. We recognized the
upfront fee as revenue in 2007 since we had no future
performance obligation under the agreement beyond the end of
2007.
Included in other revenues are sales commissions earned on the
sales of the drug, Novantrone, in the United States for oncology
indications pursuant to a co-promotion agreement dated
March 11, 2003 with Ares Trading S.A., an affiliate of
Merck Serono, S.A. Merck Serono markets Novantrone in multiple
sclerosis indications and records all U.S. sales for all
indications including oncology indications. Sales commissions
from Novantrone on net oncology sales are recognized in the
period the sales occur based on the estimated split between
oncology sales and multiple sclerosis sales.
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(d)
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Research
and Development Costs
|
R&D costs are charged to operations as incurred and include
direct costs of R&D-related personnel and equipment,
contracted costs and an allocation of laboratory facility and
other core scientific services. Included in R&D costs are
our share of development expenses related to the Tripartite
Agreement with Genentech and Roche (see Note 2(a)). Our
R&D costs related to the Tripartite Agreement include
estimates by the parties to the agreement. If actual future
results vary, we may need to adjust these estimates, which could
have an effect on our
69
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PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
earnings in the period of adjustment. Historically such
adjustments have not been material to our consolidated financial
condition or results of operations.
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(e)
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Acquired
In-Process Research and Development
|
In accordance with SFAS No. 2, “Accounting for
Research and Development Costs,” costs to acquire
in-process R&D projects and technologies which have no
alternative future use and which have not reached technological
feasibility at the date of acquisition are expensed as incurred.
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(f)
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Cash
and Cash Equivalents
|
We characterize money market funds, treasury bills, commercial
paper and time deposits with original maturities of three months
or less as cash equivalents. Such cash equivalents amounted to
$194.3 million and $81.9 million as of
December 31, 2008 and 2007, respectively.
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(g)
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Investment
Securities
|
Investment securities at December 31, 2008 and 2007
consisted primarily of U.S. government securities,
U.S. government agency securities and debt securities of
financial institutions and corporations with strong credit
ratings. We classify our investments as
available-for-sale
securities, as defined by SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity
Securities.” These securities are recorded at their fair
value. Unrealized holding gains and losses, net of the related
tax effect, if any, on
available-for-sale
securities are excluded from earnings and are reported in
accumulated other comprehensive income (loss), a separate
component of stockholders’ equity, until realized. The
specific identification basis is utilized to calculate the cost
to determine realized gains and losses from the sale of
available-for-sale
securities. Dividend and interest income are recognized when
earned. A portion of our marketable investments have stated
maturities greater than one year. We have classified these
investments as current assets based upon the classification as
available-for-sale
and the underlying liquidity of the assets.
Certain of our facility leases have outstanding letters of
credit issued by commercial banks which serve as security for
our performance under the leases. Included in restricted
investment securities as of December 31, 2008 and 2007 were
$2.2 million and $4.9 million, respectively, of
investments to secure these letters of credit.
We have certain investments in privately-owned companies that
are carried on the cost method of accounting.
Other-than-temporary
losses are recorded against earnings in the period that the
decrease in value of the investment is deemed to have occurred.
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(h)
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Other-Than-Temporary
Impairments of
Available-For-Sale
Marketable Securities
|
A decline in the market value of any
available-for-sale
marketable security below its cost that is deemed to be
other-than-temporary
results in a reduction in its carrying amount to fair value. The
impairment is charged to operations and a new cost basis for the
security is then established. The determination of whether an
available-for-sale
marketable security is
other-than-temporarily
impaired requires significant judgment and consideration of
available quantitative and qualitative evidence in evaluating
the potential impairment. Factors evaluated to determine whether
the investment is
other-than-temporarily
impaired include: (i) significant deterioration in the
issuer’s earnings performance, credit rating or asset
quality; (ii) the business prospects of the issuer;
(iii) adverse changes in the general market conditions in
which the issuer operates; (iv) the length of time that the
fair value has been below our cost; (v) our expected future
cash flows from the security; and (vi) our intent and
ability to retain the investment for a sufficient period of time
to allow for recovery in the market value of the investment.
Assumptions associated with these factors are subject to future
market and economic conditions, which could differ from our
assessment. During 2007 and 2006 we did not recognize any
other-than-temporary
impairments. In the fourth quarter of 2008, we recorded a
$1.2 million impairment charge in other income
(expense) — net related to an
70
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PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
other-than-temporary
decline in fair value of an equity investment and warrants
received as part of a licensing transaction.
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(i)
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Goodwill
and Intangible Assets
|
We account for goodwill and other intangible assets in
accordance with SFAS No. 141, “Business
Combinations,” or SFAS No. 141, and
SFAS No. 142, “Goodwill and Other Intangible
Assets,” or SFAS No. 142. SFAS No. 141
requires that the purchase method of accounting be used for all
business combinations. It specifies the criteria which
intangible assets acquired in a business combination must meet
in order to be recognized and reported apart from goodwill.
SFAS No. 142 requires that goodwill and intangible
assets determined to have indefinite lives no longer be
amortized but instead be tested for impairment at least annually
and whenever events or circumstances occur that indicate
impairment might have occurred. SFAS No. 142 also
requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives and
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may
not be recoverable.
As discussed in Note 20, we recorded an impairment charge
of $320.3 million related to the goodwill initially
recorded as part of our November 2005 acquisition of Eyetech
Pharmaceuticals Inc. during the year ended December 31,
2006.
As a result of our R&D programs, including programs funded
pursuant to R&D funding agreements we have applied for a
number of patents in the United States and abroad. Costs
incurred in connection with patent applications for our R&D
programs have been expensed as incurred. Legal costs incurred
related to defense of our commercialized patents are capitalized
and amortized over the remaining patent term.
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(j)
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Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of
|
In accordance with SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” or
SFAS No. 144, we review long-lived assets to determine
whether an event or change in circumstances indicates the
carrying value of the asset may not be recoverable. We base our
evaluation on such impairment indicators as the nature of the
assets, the future economic benefit of the assets and any
historical or future profitability measurements, as well as
other external market conditions or factors that may be present.
If such impairment indicators are present or other factors exist
that indicate that the carrying amount of the asset may not be
recoverable, we determine whether an impairment has occurred
through the use of an undiscounted cash flows analysis at the
lowest level for which identifiable cash flows exist. If
impairment has occurred, we recognize a loss for the difference
between the carrying amount and the fair value of the asset.
Fair value is the amount at which the asset could be bought or
sold in a current transaction between a willing buyer and seller
other than in a forced or liquidation sale and can be measured
at the asset’s quoted market price in an active market or,
where an active market for the asset does not exist, our best
estimate of fair value based on discounted cash flow analysis.
Assets to be disposed of by sale are measured at the lower of
carrying amount or fair value less estimated costs to sell.
In 2005, we acquired core and developed technology related to
Macugen. As discussed in Note 20, at December 31,
2006, we assessed the carrying value of Macugen intangibles with
definitive lives and determined that the assets were impaired
and we recorded a $185.7 million impairment charge, which
is included in the loss from discontinued operations for the
year ended December 31, 2006.
Inventory is stated at the lower of cost or market, with cost
being determined using the weighted average method. Included in
inventory are raw materials and
work-in-process
that may be used in the production of pre-clinical and clinical
product, which will be expensed to R&D cost when consumed
for these uses. Inventory is comprised of three components: raw
materials, which are purchased directly by us,
work-in-process,
which is
71
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PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
primarily active pharmaceutical ingredient, or API, where title
has transferred from our contract manufacturer to us, and
finished goods, which is packaged product ready for commercial
sale.
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(l)
|
Depreciation
and Amortization
|
Depreciation of fixed assets is recognized 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
remainder of the lease term.
Amortization of compounds acquired by us (which are included in
other assets on the accompanying consolidated balance sheets) is
on a straight-line basis over five years.
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(m)
|
Computer
Software Costs
|
We record the costs of computer software in accordance with the
American Institute of Certified Public Accountants, Statement of
Position
98-1,
“Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use,” or
SOP 98-1.
SOP 98-1
requires that certain internal-use computer software costs be
capitalized and amortized over the useful life of the asset.
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(n)
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Accrual
for Clinical Research Organization and Clinical Site
Costs
|
We record accruals for estimated clinical study costs. Clinical
study costs represent costs incurred by clinical research
organizations, or CROs, and clinical sites. These costs are
recorded as a component of R&D expenses. We analyze the
progress of the clinical trials, including levels of patient
enrollment
and/or
patient visits, invoices received and contracted costs when
evaluating the adequacy of the accrued liabilities. Significant
judgments and estimates must be made and used in determining the
accrued balance in any accounting period. Actual costs incurred
may or may not match the estimated costs for a given accounting
period. Actual results could differ from those estimates under
different assumptions.
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(o)
|
Foreign
Currency Translation
|
The assets and liabilities of our
non-U.S. subsidiaries,
OSI U.K. and Prosidion, which operate in their local currency,
are translated to U.S. dollars at exchange rates in effect
at the balance sheet date with resulting translation adjustments
directly recorded as a separate component of accumulated other
comprehensive income (loss). Income and expense accounts are
translated at the average exchange rates during the year.
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 basis and operating loss
and tax credit carry forwards. 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.
In July 2006, the Financial Accounting Standards Board, or FASB,
issued Financial Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes — an interpretation of
FASB Statement No. 109,” or FIN 48, which
clarifies the criteria that must be met prior to recognition of
the financial statement benefit of a position taken in a tax
return. FIN 48 provides a benefit recognition model with a
two-step approach consisting of a
“more-likely-than-not” recognition criteria, and a
measurement attribute that measures a given tax position as the
largest amount of tax benefit that is greater than 50% likely of
being realized upon ultimate settlement. FIN 48 also
requires the recognition of liabilities created by differences
between tax positions taken in a tax return and amounts
recognized
72
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
in the financial statements. FIN 48 is effective as of the
beginning of the first annual period beginning after
December 15, 2006, and became effective for us on
January 1, 2007. The adoption of FIN 48 on
January 1, 2007 had no impact on our financial condition,
results of operations, or cash flows for the year ended
December 31, 2007, as the Company had no unrecognized tax
benefits at that time.
Costs incurred in issuing our 3% Convertible Senior
Subordinated Notes due 2038, or our 2038 Notes, our
2% Convertible Senior Subordinated Notes due 2025, or our
2025 Notes, and our 3.25% Convertible Senior Subordinated
Notes due 2023, or our 2023 Notes, are amortized using the
straight-line method over the five-year terms, which represents
the earliest date that notes can be redeemed by the holders. The
amortization of debt issuance cost is included in other expense
in the accompanying consolidated statements of operations.
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(r)
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Stock-Based
Compensation
|
As discussed further in Note 16, we adopted
SFAS No. 123(R), “Accounting for Stock-Based
Compensation,” on January 1, 2006 using the modified
prospective method.
We have used and expect to continue to use the Black-Scholes
option-pricing model to compute the estimated fair value of
stock-based awards. The Black-Scholes option-pricing model
includes assumptions regarding dividend yields, expected
volatility, expected option term and risk-free interest rates.
We estimate expected volatility based upon a combination of
historical, implied and adjusted historical stock prices. The
risk-free interest rate is based on the U.S. treasury yield
curve in effect at the time of grant. The fair value of the
options is estimated at the date of grant using a Black-Scholes
option-pricing model with the expected option term determined
using a Monte Carlo simulation model that incorporates
historical employee exercise behavior and post-vesting employee
termination rates.
The assumptions used in computing the fair value of stock-based
awards reflect our best estimates but involve uncertainties
relating to market and other conditions, many of which are
outside of our control. As a result, if other assumptions or
estimates had been used, the stock-based compensation expense
that was recorded for the years ended December 31, 2008,
2007 and 2006 could have been materially different. Furthermore,
if different assumptions are used in future periods, stock-based
compensation expense could be materially impacted in the future.
Operating segments are determined based on the Company’s
management approach. The management approach, as defined by
SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information,” is based on the way
that the chief operating decision-maker organizes the segments
within an enterprise for making decisions about resources to be
allocated and assessing their performance. Prior to August 2008,
while our results of operations were primarily reviewed on a
consolidated basis, the chief operating decision-maker managed
the enterprise in three operating segments: (i) oncology;
(ii) diabetes and obesity; and (iii) eye disease. As
of August 2008, we completed the sale of the remaining assets of
our eye disease business, and therefore we have two remaining
operating segments. In accordance with SFAS No. 131,
given the similar economic characteristics of the remaining two
operating segments, we determined that we have one reportable
segment.
We have made a number of estimates and assumptions related to
the reported amounts in our financial statements and
accompanying notes to prepare these consolidated financial
statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates and
assumptions.
73
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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(2)
|
Product
Development/Commercialization Agreements/License
Agreements
|
On January 8, 2001, we entered into an alliance with
Genentech and Roche for the global co-development and
commercialization of Tarceva. We have entered into separate
agreements with both Genentech and Roche with respect to the
alliance, as well as a Tripartite Agreement.
Under the Tripartite Agreement, we agreed with Genentech and
Roche to optimize the use of each party’s resources to
develop Tarceva in certain countries around the world and share
certain global development costs; to share information generated
under a global development plan; to facilitate attainment of
necessary regulatory approvals of Tarceva for commercial
marketing and sale in the world; and to work together on such
matters as the parties agree from time to time during the
development of Tarceva. We, as well as Genentech and Roche, may
conduct clinical and pre-clinical activities for additional
indications for Tarceva not called for under the global
development plan, subject to certain conditions. The Tripartite
Agreement will terminate when either the OSI/ Genentech
collaboration agreement or the OSI/Roche agreement terminates.
Any reimbursement from or payments to Genentech or Roche for
R&D costs under the cost sharing arrangement of the
Tripartite Agreement are recorded as an increase or decrease to
R&D expenses in the accompanying consolidated statements of
operations.
Under the OSI/Genentech collaboration agreement, we agreed to
collaborate in the product development of Tarceva with the goals
of obtaining regulatory approval for commercial marketing and
sale in the United States of products resulting from the
collaboration, and subsequently, supporting the
commercialization of the product. Consistent with the
development plan and with the approval of a joint steering
committee, we agreed with Genentech as to who will own and be
responsible for the filing of drug approval applications with
the FDA other than the first new drug application, or NDA, which
we owned and filed, and the first supplemental NDA, which we
owned and filed. Genentech has primary responsibility for the
design and implementation of all product launch activities and
the promotion, marketing and sales of all products resulting
from the collaboration in the United States, its territories and
Puerto Rico.
We have certain co-promotion rights under the OSI/Genentech
collaboration agreement, which are defined in amendments to the
agreement effective as of June 4, 2004 and April 11,
2007. We have agreed with Genentech that OSI employees will
comprise 50% of the combined U.S. sales force through the
end of the 2010 calendar year, after which time the size and
composition of the sales force may be adjusted. We share equally
in the operating profits or losses on products resulting from
the collaboration. Under the OSI/Genentech collaboration
agreement, we granted to Genentech a royalty-free
non-transferable (except under certain circumstances),
non-sublicensable (except under certain circumstances),
co-exclusive license under our patents and know-how related to
Tarceva to use, sell, offer for sale and import products
resulting from the collaboration in the United States, its
territories and Puerto Rico. In addition, Genentech granted to
us a royalty-free non-transferable (except under certain
circumstances), non-sublicensable (except under certain
circumstances), co-exclusive license to certain patents and
know-how held by Genentech to use, make, have made, sell, offer
for sale and import products resulting from the collaboration in
the United States, its territories and Puerto Rico. We have
primary responsibility for patent filings for the base patents
protecting Tarceva and, in addition, we have the right, but not
the obligation, to institute, prosecute and control patent
infringement claims relating to the base patents.
In connection with our collaboration with Genentech, Genentech
recognizes all U.S. sales of Tarceva. We recognize revenues
and losses from our alliance with Genentech, which consists of
our 50% share of the pre-tax profits (loss) generated from the
sales of Tarceva in the United States. We also recognize
manufacturing revenue from the sale of inventory to Genentech
for commercial sales of Tarceva in the United States and
reimbursement from Genentech of our Tarceva-related commercial
expenses. In addition, we are entitled to milestones under
certain circumstances. We receive royalties on sales of Tarceva
outside of the United States by Roche.
The OSI/Genentech collaboration agreement continues until the
date on which neither we nor Genentech are entitled to receive a
share of the operating profits or losses on any products
resulting from the collaboration, that is, until the date that
we and Genentech mutually agree to terminate the collaboration
or until either party exercises its
74
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
early termination rights. The OSI/Genentech collaboration
agreement is subject to early termination in the event of
certain customary defaults, such as material breach of the
agreement and bankruptcy. The provisions of the amendment
allowing us to co-promote are also subject to termination by
Genentech upon a material breach by us of the amendment, which
remains uncured, or upon a pattern of nonmaterial breaches which
remains uncured. In addition, Genentech has the right to
terminate the OSI/Genentech collaboration agreement with six
months’ prior written notice.
Effective June 4, 2004, we entered into a Manufacturing and
Supply Agreement with Genentech that defined each party’s
responsibilities with respect to the manufacture and supply of
clinical and commercial quantities of Tarceva. Under certain
circumstances, if we fail to supply such clinical and commercial
quantities, Genentech has the right, but not the obligation, to
assume responsibility for such supply. The Manufacturing and
Supply Agreement will terminate upon the termination of the
OSI/Genentech collaboration agreement.
Under the OSI/Roche agreement, we granted to Roche a license to
our intellectual property rights with respect to Tarceva. Roche
is collaborating with us and Genentech in the continued
development of Tarceva and is responsible for marketing and
commercialization of Tarceva outside of the United States in
certain territories as defined in the agreement. The grant is a
royalty-bearing, non-transferable (except under certain
circumstances), non-sublicensable (except under certain
circumstances), and provides for the sole and exclusive license
to use, sell, offer for sale and import products resulting from
the development of Tarceva worldwide, other than the territories
covered by the OSI/Genentech collaboration agreement. In
addition, Roche has the right, which it has exercised, to
manufacture commercial supplies of Tarceva for its territory,
subject to certain exceptions. Roche is obligated to pay us
certain milestone payments and royalty payments on sales of
products resulting from the collaboration including Tarceva. We
have primary responsibility for patent filings for the base
patents protecting Tarceva and, in addition, we have the right,
but not the obligation, to institute, prosecute and control
patent infringement claims relating to the base patents. The
OSI/Roche agreement continues until the date on which we are no
longer entitled to receive a royalty on products resulting from
the development of Tarceva, that is, until the date of
expiration or revocation or complete rejection of the last to
expire patent covering Tarceva or, in countries where there is
no valid patent covering Tarceva, on the tenth anniversary of
the first commercial sale of Tarceva in that country, or until
either party exercises early termination rights. The OSI/Roche
agreement is subject to early termination in the event of
certain customary defaults, such as material breach of the
agreement and bankruptcy. In addition, Roche has the right to
terminate the agreement on a
country-by-country
basis with six months’ prior written notice and we have the
right to terminate the agreement on a
country-by-country
basis if Roche has not launched or marketed a product in such
country under certain circumstances.
On September 28, 2007, we entered into a small molecule
drug discovery and translational research collaboration with
AVEO Pharmaceuticals, Inc. The purpose of this collaboration is
the development of molecular therapies that target the
underlying mechanisms of
epithelial-to-mesenchymal
transition, or EMT, in cancer. EMT is a process of emerging
significance in tumor development and disease progression and
the focal point of our proprietary oncology research services
under the collaboration. We are collaborating with AVEO to
develop proprietary target-driven tumor models for use in drug
screening and biomarker validation, and intend to employ these
models in support of our oncology drug discovery and clinical
programs. Under the terms of our collaboration agreement, we
paid AVEO a $10.0 million upfront cash payment (which
included $2.5 million research funding for the first year
of the collaboration) and purchased $5.5 million of AVEO
preferred stock. We also agreed to provide AVEO with future
research funding, as well as milestones and royalties upon
successful development and commercialization of products from
the collaboration.
As with many early stage development efforts, launch of an
eventual product is not expected in the near term. As a result,
$7.5 million of the upfront payment was recognized as an
in-process R&D charge since it was non-refundable and
deemed to have no alternative future use. The $2.5 million
of first year research funding was
75
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
recognized as a prepaid asset and was amortized over one year,
or the period AVEO delivered research services under the
collaboration. The acquired preferred stock was recorded as a
cost based investment in other assets in the accompanying
balance sheets as of December 31, 2008.
In January 2007, we licensed our glucokinase activator, or GKA,
program, including our clinical candidate PSN010, to Eli Lilly
and Company for an upfront fee of $25.0 million and up to
$360.0 million in potential development and sales
milestones and other payments, plus royalties on any compounds
successfully commercialized from this program. We recognized the
upfront fee as license revenue in 2007 since we have no future
performance obligation under the agreement beyond the end of
2007.
During the fourth quarter of 2007, we recognized
$2.4 million of revenue from the consideration received as
a result of outlicensing OSI-7904L, an oncology clinical
candidate for which we had ceased development, to OncoVista
Innovative Therapies, Inc. The consideration included cash of
$500,000 and OncoVista common stock and warrants with a fair
value of $1.9 million. The common stock is publicly traded
and recorded as an
available-for-sale
security. The warrants are recorded at their estimated fair
value in other assets. In the fourth quarter of 2008, we
concluded that the decline in the fair value of the common stock
and warrants was
other-than-temporary,
which resulted in the recording of a $1.2 million
impairment charge, which is included in other income
(expense) — net for the year ended December 31,
2008.
We have entered into various license agreements with third
parties to grant the use of our proprietary assets. These
licenses include the use of our patented gene transcription
estate as well as the use of our DPIV patent estate acquired
from Probiodrug AG in fiscal 2004. Licensees may be obligated to
pay us license fees, annual fees, and milestones and royalties
on net sales of product based on the development and sale of
products derived from the licensed patents. Generally, the
duration of each license is to be coextensive with the life of
the last to expire of the underlying patents. For the years
ended December 31, 2008 and 2007 we recognized as revenue
$41.1 million and $34.7 million, respectively, of
license, milestone and royalty payments from our DPIV patent
estate.
In February 2008, we licensed our transforming growth factor, or
TGF ß3, compound for certain indications for an upfront fee
of $2.0 million. We recognized the $2.0 million
payment as license revenue in the first quarter of 2008 since we
had no future performance obligations. Pursuant to the terms of
a cross license with Novartis AG, approximately $350,000 of the
amount we received was paid to Novartis.
|
|
|
|
(3)
|
Net
Earnings (Loss) Per Share
|
Basic earnings per share is computed by dividing net income by
the weighted average number of common shares outstanding during
the reporting period. Diluted earnings per common share is
computed by dividing net income by the weighted average number
of common shares outstanding during the reporting period,
increased to include all additional common shares that would
have been outstanding assuming potentially dilutive common share
equivalents had been issued. Dilutive common share equivalents
include the dilutive effect of
in-the-money
shares related to stock options, and are calculated based on the
average share price for each period using the treasury stock
method. Under the treasury stock method, the exercise price of
an option, the average amount of compensation cost, if any, for
future service that we have not yet recognized and the amount of
tax benefits that would be recorded in additional paid-in
capital, if any, when the option is exercised, are assumed to be
used to repurchase shares in the current period. Dilutive common
share equivalents also reflect the dilutive effect of unvested
restricted
76
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
stock units, deferred stock units and restricted stock and the
conversion of convertible debt which is calculated using the
“if-converted” method. In addition, in computing the
dilutive effect of convertible debt, the numerator is adjusted
to add back the after-tax amount of interest and debt issuance
cost recognized in the period. As of December 31, 2008, our
outstanding convertible senior debt consisted of our 2023 Notes,
2025 Notes and our 2038 Notes.
The computations for basic and diluted income per share from
continuing operations were as follows (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Net income from continuing operations — basic
|
|
$
|
466,601
|
|
|
$
|
102,607
|
|
|
$
|
6,700
|
|
|
Add: Interest and issuance cost related to convertible debt
|
|
|
14,351
|
|
|
|
3,040
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations — diluted
|
|
$
|
480,952
|
|
|
$
|
105,647
|
|
|
$
|
6,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding — basic
|
|
|
57,316
|
|
|
|
57,665
|
|
|
|
56,939
|
|
|
Dilutive effect of options and restricted stock
|
|
|
729
|
|
|
|
668
|
|
|
|
706
|
|
|
Dilutive effect of 2025 Notes
|
|
|
3,908
|
|
|
|
3,908
|
|
|
|
—
|
|
|
Dilutive effect of 2023 Notes
|
|
|
2,308
|
|
|
|
—
|
|
|
|
—
|
|
|
Dilutive effect of 2038 Notes (issued in January 2008)
|
|
|
2,650
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares and dilutive potential common
shares — diluted
|
|
|
66,911
|
|
|
|
62,241
|
|
|
|
57,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
8.14
|
|
|
$
|
1.78
|
|
|
$
|
0.12
|
|
|
Diluted
|
|
$
|
7.19
|
|
|
$
|
1.70
|
|
|
$
|
0.12
|
|
Under the “if-converted” method, 2,998,875 common
share equivalents related to our 2023 Notes were not included in
diluted earnings per share for the year ended December 31,
2007 because their effect would be anti-dilutive. For the year
ended December 31, 2006, both the 2025 Notes and the 2023
Notes were not included in diluted earnings per share because
their effect would be anti-dilutive. The table below sets forth
the common share equivalents related to convertible debt and
equity plans; contingent shares; and the interest expense
related to the convertible notes not included in dilutive shares
because their effect was anti-dilutive (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
Common share equivalents — convertible debt
|
|
|
—
|
|
|
|
2,999
|
|
|
|
6,907
|
|
|
Common share equivalents — equity plans
|
|
|
2,865
|
|
|
|
3,285
|
|
|
|
4,054
|
|
|
Contingent shares
|
|
|
—
|
|
|
|
—
|
|
|
|
1,585
|
|
|
Convertible note interest and issuance expense not added back
under the “if converted” method
|
|
$
|
—
|
|
|
$
|
5,936
|
|
|
$
|
9,038
|
|
The contingent shares represent contingently issuable shares
granted pursuant to contingent valued rights issued in
connection with the acquisition of Cell Pathways, Inc. They were
not included in dilutive shares since the contingency condition
was not satisfied.
In connection with the 2003 acquisition of Cell Pathways, we
recognized contingent consideration of $22.0 million in the
form of five-year contingent value rights pursuant to which each
share of Cell Pathways common stock was eligible for an
additional 0.04 share of our common stock in the event of a
filing of a new drug application by June 12, 2008 for
either of the two clinical candidates acquired from Cell
Pathways, OSI-461 or Aptosyn. We ceased our development efforts
of these two clinical candidates and sought to outlicense these
77
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
candidates. During the second quarter of fiscal 2006, we
concluded that, in our judgment, the milestone would not be met
based upon the current progress of our outlicensing efforts and
the technical hurdles for filing a new drug application by June
2008 and therefore, we reversed the $22.0 million liability
and recorded an extraordinary gain during the year ended
December 31, 2006. The milestone was not met by the
June 12, 2008 deadline.
|
|
|
|
(4)
|
Comprehensive
Income (Loss)
|
Comprehensive income (loss) includes foreign currency
translation adjustments, post-retirement adjustment and
unrealized gains or losses on our
available-for-sale
securities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Net income (loss)
|
|
$
|
471,485
|
|
|
$
|
66,319
|
|
|
$
|
(582,184
|
)
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(8,081
|
)
|
|
|
366
|
|
|
|
2,148
|
|
|
Post-retirement plan
|
|
|
378
|
|
|
|
1,316
|
|
|
|
—
|
|
|
Unrealized holding gains (losses) arising during period
|
|
|
(727
|
)
|
|
|
486
|
|
|
|
(233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,430
|
)
|
|
|
2,168
|
|
|
|
1,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
463,055
|
|
|
$
|
68,487
|
|
|
$
|
(580,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive income were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Cumulative foreign currency translation adjustment
|
|
$
|
(3,739
|
)
|
|
$
|
4,342
|
|
|
Post-retirement plan
|
|
|
378
|
|
|
|
—
|
|
|
Unrealized gains (losses) on
available-for-sale
securities
|
|
|
(547
|
)
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
(3,908
|
)
|
|
$
|
4,522
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, approximately 82% of our cash
equivalents and investment securities consisted of AAA rated and
A1 rated securities, including our money market funds, which are
AAA rated. The remainder of our investment securities consisted
primarily of investment grade corporate debt. The overall
average credit rating of our portfolio of investment securities
was AA+/Aa1 as of December 31, 2008. We have established
guidelines relative to the diversification of our investments
and their maturities with the principal objectives of capital
preservation and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and
interest rates.
78
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following is a summary of
available-for-sale
securities as of December 31, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
2008
|
|
Costs
|
|
|
Gains (Losses)
|
|
|
Fair Value
|
|
|
|
|
U.S. government and U.S. government agency securities
|
|
$
|
66,007
|
|
|
$
|
607
|
|
|
$
|
66,614
|
|
|
Corporate and financial institutions debt
|
|
|
170,634
|
|
|
|
(1,173
|
)
|
|
|
169,461
|
|
|
Municipal securities
|
|
|
4,237
|
|
|
|
16
|
|
|
|
4,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
240,878
|
|
|
|
(550
|
)
|
|
|
240,328
|
|
|
Restricted investments
|
|
|
2,244
|
|
|
|
3
|
|
|
|
2,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
243,122
|
|
|
$
|
(547
|
)
|
|
$
|
242,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
2007
|
|
Costs
|
|
|
Gains
|
|
|
Fair Value
|
|
|
|
|
U.S. government and U.S. government agency securities
|
|
$
|
128,416
|
|
|
$
|
156
|
|
|
$
|
128,572
|
|
|
Corporate and financial institutions debt
|
|
|
8,847
|
|
|
|
20
|
|
|
|
8,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
137,263
|
|
|
|
176
|
|
|
|
137,439
|
|
|
Restricted investments
|
|
|
4,918
|
|
|
|
4
|
|
|
|
4,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
142,181
|
|
|
$
|
180
|
|
|
$
|
142,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) on sales of investment securities
during the years ended December 31, 2008, 2007 and 2006
were $12,000, $(4,000) and $170,000, respectively.
The gross unrealized losses on our investments were
$1.2 million as of December 31, 2008, all of which
occurred during 2008. Because we have the ability and intent to
hold these investments until a recovery of fair value, which may
be maturity, we do not consider these investments to be
other-than-temporarily
impaired as of December 31, 2008. As of December 31,
2007, we did not have any unrealized losses on investment
securities.
Maturities of investment securities classified as
available-for-sale,
were as follows at December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
2009
|
|
$
|
157,885
|
|
|
$
|
158,049
|
|
|
2010
|
|
|
79,494
|
|
|
|
78,788
|
|
|
2011
|
|
|
3,499
|
|
|
|
3,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
240,878
|
|
|
$
|
240,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6)
|
Fair
Value Measurements
|
On January 1, 2008, we adopted the provisions of
SFAS No. 157, “Fair Value Measurements,”
which established a framework for measuring fair value in
accordance with U.S. generally accepted accounting
principles, or GAAP, and expanded on disclosures about fair
value instruments. SFAS No. 157 defines fair value as
the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date (i.e., the exit price).
SFAS No. 157 does not require assets and liabilities
that were previously recorded at cost to be recorded at fair
value. The adoption of SFAS No. 157 did not have an
effect on our financial condition or results of operations for
the year ended December 31, 2008.
79
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
SFAS No. 157 established a three-tier fair value
hierarchy which prioritizes the inputs used in measuring fair
value. The three tiers include:
(i)
Level 1
— quoted prices in active
markets for identical assets and liabilities;
(ii)
Level 2 —
observable inputs
other than quoted prices in active markets for identical assets
and liabilities; and
(iii)
Level 3
— unobservable inputs
for which little or no market data exists, requiring management
to develop its own assumptions.
Investment securities at December 31, 2008 consisted
primarily of U.S. government agency securities and debt
securities of financial institutions and corporations. The
following table summarizes the fair value at December 31,
2008 and the classification by level of input within the fair
value hierarchy, defined in SFAS. No. 157 above, of our
cash equivalents, investment securities, restricted investments
and convertible senior subordinated notes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
|
|
|
|
|
|
|
As
|
|
Market
|
|
Significant
|
|
|
|
|
|
|
|
Reflected
|
|
for
|
|
Other
|
|
Significant
|
|
|
|
|
|
on the
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
|
|
|
Balance
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
|
|
|
|
Sheet
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
250,380
|
|
|
|
248,181
|
|
|
$
|
2,201
|
|
|
|
—
|
|
|
$
|
250,382
|
|
|
Investment securities
|
|
|
240,328
|
|
|
|
—
|
|
|
|
240,328
|
|
|
|
—
|
|
|
|
240,328
|
|
|
Restricted investments
|
|
|
2,247
|
|
|
|
—
|
|
|
|
2,247
|
|
|
|
—
|
|
|
|
2,247
|
|
|
Other assets
|
|
|
1,104
|
|
|
|
—
|
|
|
|
1,104
|
|
|
|
—
|
|
|
|
1,104
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2038 Notes
|
|
|
200,000
|
|
|
|
—
|
|
|
|
161,220
|
|
|
|
—
|
|
|
|
161,220
|
|
|
2025 Notes
|
|
|
115,000
|
|
|
|
—
|
|
|
|
157,010
|
|
|
|
—
|
|
|
|
157,010
|
|
|
2023 Notes
|
|
|
99,950
|
|
|
|
—
|
|
|
|
85,407
|
|
|
|
—
|
|
|
|
85,407
|
|
The $272.9 million of cash and cash equivalents at
December 31, 2008, included $250.4 million of cash
equivalents consisting of money market funds and commercial
paper with original maturities of three months or less. In
accordance with SFAS No. 115, “Accounting for
Certain Investments in Debt and Equity Securities,” our
cash equivalents are carried at cost, and not
marked-to-market.
The estimated fair value of our convertible senior subordinated
notes is provided in accordance with SFAS No. 107
“Disclosures about Fair Value of Financial Instruments (as
amended).” Our convertible senior subordinated notes are
not
marked-to-market
and are shown in the accompanying consolidated balance sheets at
their original issuance value.
Included in other assets in the accompanying balance sheets as
of December 31, 2008 and 2007 are $7.5 million of
cost-based equity investments in non-public biotechnology
companies. The determination of fair value of these investments
was not deemed practical given that the cost of such
determination would be excessive relative to the materiality of
these investments to our financial position. We do not believe
that any of these investments were impaired as of
December 31, 2008 and 2007.
Tarceva is stated at the lower of cost or market, with cost
being determined using the weighted average method. Inventory is
comprised of three components: raw materials, which are
purchased directly by us,
work-in-process,
80
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
which is primarily active pharmaceutical ingredient, or API,
where title has transferred from our contract manufacturer to
us, and finished goods, which are packaged product ready for
commercial sale.
Inventory at December 31, 2008 and 2007 consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Raw materials
|
|
$
|
676
|
|
|
$
|
1,704
|
|
|
Work-in-process
|
|
|
8,532
|
|
|
|
8,595
|
|
|
Finished goods on hand, net
|
|
|
4,897
|
|
|
|
4,614
|
|
|
Inventory subject to return
|
|
|
6,034
|
|
|
|
6,151
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
20,139
|
|
|
$
|
21,064
|
|
|
|
|
|
|
|
|
|
|
|
Inventory subject to return represents the amount of Tarceva
shipped to Genentech which has not been recognized as revenue.
|
|
|
|
(8)
|
Property,
Equipment and Leasehold Improvements
|
Property, equipment and leasehold improvements are recorded at
cost and consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Life
|
|
|
December
|
|
|
|
|
(years)
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Land
|
|
|
—
|
|
|
$
|
3,600
|
|
|
$
|
3,600
|
|
|
Building and improvements
|
|
|
10-35
|
|
|
|
23,249
|
|
|
|
23,395
|
|
|
Laboratory equipment
|
|
|
5-15
|
|
|
|
26,917
|
|
|
|
26,478
|
|
|
Office furniture and equipment and computer equipment
|
|
|
3-7
|
|
|
|
13,503
|
|
|
|
16,025
|
|
|
Capitalized software
|
|
|
1-3
|
|
|
|
7,114
|
|
|
|
6,942
|
|
|
Manufacturing equipment
|
|
|
3-7
|
|
|
|
135
|
|
|
|
136
|
|
|
Leasehold improvements
|
|
|
Life of lease
|
|
|
|
30,634
|
|
|
|
34,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
105,152
|
|
|
|
111,101
|
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
|
|
(61,709
|
)
|
|
|
(64,407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, equipment and leasehold improvements, net
|
|
|
|
|
|
$
|
43,443
|
|
|
$
|
46,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense relating to continuing operations for the
years ended December 31, 2008, 2007 and 2006 was
$7.4 million, $7.3 million and $9.6 million,
respectively. We had $7.1 million and $6.9 million of
capitalized computer software costs as of December 31, 2008
and 2007, respectively, of which $6.4 million and
$6.3 million was amortized as of December 31, 2008 and
2007, respectively. Depreciation expense related to discontinued
operations for the years ended December 31, 2008, 2007 and
2006 was $751,000, $929,000 and $4.0 million, respectively.
|
|
|
|
(9)
|
Goodwill
and Other Intangible Assets
|
The carrying amount of goodwill was $38.6 million and
$39.4 million as of December 31, 2008 and 2007,
respectively. The balance of goodwill as of December 31,
2008 and 2007 included a $(764,000) and $38,000, respectively,
effect from foreign currency exchange rate fluctuations during
fiscal 2008 and 2007. We completed our annual impairment review
of goodwill as of December 31, 2008 and determined that no
impairment charge was required.
81
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The components of other intangible
assets-net
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Book
|
|
|
|
|
|
Accumulated
|
|
|
Book
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Carrying Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
|
|
Novantrone technology
|
|
$
|
46,009
|
|
|
$
|
(46,009
|
)
|
|
$
|
—
|
|
|
$
|
46,009
|
|
|
$
|
(44,558
|
)
|
|
$
|
1,451
|
|
|
Acquired intangibles
|
|
|
9,386
|
|
|
|
(1,675
|
)
|
|
|
7,711
|
|
|
|
4,754
|
|
|
|
(1,239
|
)
|
|
|
3,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
55,395
|
|
|
$
|
(47,684
|
)
|
|
$
|
7,711
|
|
|
$
|
50,763
|
|
|
$
|
(45,797
|
)
|
|
$
|
4,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the first quarter of 2008, we entered into an amended license
agreement pursuant to which we terminated our obligation to pay
royalties to a licensor of certain intellectual property with
whom we had a cross-license related to our DPIV patent estate in
consideration for an $8.0 million upfront payment and
potential future milestones. The upfront payment has been
recorded as an intangible asset and is being amortized on a
straight-line basis from February 2008 through February 2019,
the last to expire patent covered under the license agreement.
Future milestones, if any, will be recognized when paid and
amortized from the date of payment.
A certain portion of our intangible assets are recorded on the
books of Prosidion and denominated in British pounds sterling.
As a result, the balance reported fluctuates based upon the
changes in exchange rates.
Amortization expense related to continuing operations for our
intangible assets for the years ended December 31, 2008,
2007 and 2006 was $2.5 million, $1.8 million and
$1.8 million, respectively. Amortization expense is
estimated to be $916,000 for each of the years 2009 through
2014. For the year ended December 31, 2006, amortization
expense related to discontinued operations was
$18.1 million. We did not recognize any amortization
expense related to discontinued operations for the years ended
December 31, 2008 and 2007.
|
|
|
|
(10)
|
Accounts
Payable and Accrued Expenses
|
Accounts payable and accrued expenses at December 31, 2008
and 2007 are comprised of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Accounts payable
|
|
$
|
6,659
|
|
|
$
|
5,249
|
|
|
Accrued payroll, incentive compensation and employee benefits
|
|
|
11,766
|
|
|
|
3,398
|
|
|
Accrued exit costs
|
|
|
492
|
|
|
|
2,589
|
|
|
Accrued interest
|
|
|
3,856
|
|
|
|
1,619
|
|
|
Accrued CRO and site costs
|
|
|
4,094
|
|
|
|
4,969
|
|
|
Accrued commercial and development costs
|
|
|
7,272
|
|
|
|
6,566
|
|
|
Other accrued expenses
|
|
|
14,913
|
|
|
|
21,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,052
|
|
|
$
|
45,843
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 and 2007, $1.5 million and
$13.4 million, respectively, of accounts payable and
accrued expenses related to (OSI) Eyetech have been classified
as liabilities related to discontinued operations.
82
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
(11)
|
Consolidation
of Facilities
|
In November 2006, we committed to a plan to re-scale our
operations. The plan included the consolidation of facilities,
as well as a reduction in the workforce. We recognized
$2.5 million of anticipated costs in 2006 related to our
continuing operations. During the year ended December 31,
2007, we recognized $1.3 million of additional severance
charges and an additional $702,000 for lease obligations. As of
December 31, 2008, all of the costs have been paid. The
activity for the years ended December 31, 2008 and 2007 was
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Opening liability
|
|
$
|
1,556
|
|
|
$
|
1,897
|
|
|
Accrual for severance payments
|
|
|
—
|
|
|
|
1,292
|
|
|
Accrual for lease payments
|
|
|
(51
|
)
|
|
|
702
|
|
|
Cash paid for severance
|
|
|
(410
|
)
|
|
|
(1,525
|
)
|
|
Cash paid for rent, net of buildout allowance
|
|
|
(1,095
|
)
|
|
|
(810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Ending liability
|
|
$
|
—
|
|
|
$
|
1,556
|
|
|
|
|
|
|
|
|
|
|
|
In August 2004, we announced the decision to consolidate all of
our U.K.-based oncology R&D activities into our New York
locations. During the year ended December 31, 2005, we
recorded a charge of $4.4 million, in selling, general and
administrative expenses for estimated facility lease return
costs and the remaining rental obligation net of estimated
sublease rental income in accordance with
SFAS No. 146, “Accounting for Costs Associated
with Exit or Disposal Activities.” The activity for the
years ended December 31, 2008 and 2007 was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Opening liability
|
|
$
|
2,882
|
|
|
$
|
4,062
|
|
|
Accrual for lease payments
|
|
|
390
|
|
|
|
—
|
|
|
Cash paid for rent
|
|
|
(906
|
)
|
|
|
(1,251
|
)
|
|
Other
|
|
|
(467
|
)
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending liability
|
|
$
|
1,899
|
|
|
$
|
2,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
Eyetech
Acquired Facilities
|
In connection with the acquisition of Eyetech Pharmaceuticals,
Inc. in November 2005, we implemented a plan to consolidate
certain facilities. Included in the liabilities assumed in the
acquisition, we recognized $5.4 million for the present
value of future lease commitments. The facilities included in
the accrual were Lexington, Massachusetts, a portion of the New
York City office and one of our leased facilities in Boulder,
Colorado. The present value of the lease payments was determined
based upon the date that we planned to exit the facility and the
remaining lease expiration, offset by estimated sublease income.
Rental payments for the facilities prior to closure were
included in operating expense. During 2006, we assigned the
lease for the Boulder, Colorado facility and we subleased a
portion of the New York City office. In addition, the Lexington
facility and the remaining portion of the New York City office
were closed during 2006, and subsequently subleased during 2007.
In 2007, we recorded $3.7 million of additional costs as a
result of reevaluating our rental assumptions based upon the
current rental market. These accruals are not included in the
liabilities related to discontinued operations as of
83
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
December 31, 2007 since the obligations were not
transferred to Eyetech Inc. in connection with the divestiture
of the remaining assets of the eye disease business.
The activity for the year ended December 31, 2008 and 2007
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Opening liability
|
|
$
|
3,282
|
|
|
$
|
2,054
|
|
|
Accrual for lease termination cost
|
|
|
—
|
|
|
|
3,709
|
|
|
Accretion expense
|
|
|
159
|
|
|
|
248
|
|
|
Cash paid for rent
|
|
|
(5,698
|
)
|
|
|
(4,601
|
)
|
|
Sublease income
|
|
|
4,552
|
|
|
|
1,872
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending liability
|
|
$
|
2,295
|
|
|
$
|
3,282
|
|
|
|
|
|
|
|
|
|
|
|
The income tax (benefit) provision from continuing operations
for the years ended December 31, 2008, 2007 and 2006
included the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,007
|
|
|
$
|
2,190
|
|
|
$
|
—
|
|
|
State and Local
|
|
|
1,033
|
|
|
|
196
|
|
|
|
—
|
|
|
Foreign
|
|
|
132
|
|
|
|
346
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,172
|
|
|
$
|
2,732
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(300,578
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
State and Local
|
|
|
(36,051
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(336,629
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(333,457
|
)
|
|
$
|
2,732
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on our ability to fully offset current taxable income by
our NOLs, our current provision for both the 2008 and
2007 years is principally related to U.S. alternative
minimum tax. For the year ended December 31, 2008, we
recorded a current provision for income taxes of approximately
$3.2 million related to income from continuing operations
and a tax benefit of approximately $1.3 million related to
discontinued operations. For the year ended December 31,
2007, we recorded a current provision for income taxes of
approximately $2.7 million related to income from
continuing operations and a tax benefit of approximately
$640,000 related to our loss from discontinued operations. There
is no current provision or benefit for federal, state or foreign
income taxes for the year ended December 31, 2006 because
we were not subject to the alternative minimum tax during the
period.
The deferred tax provision for 2008 includes the recognition of
$336.6 million of net tax benefits as a result of reducing
certain valuation allowances previously established in the
United States as further discussed below.
84
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The components of earnings before income taxes from continuing
operations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
United States
|
|
$
|
133,180
|
|
|
$
|
93,471
|
|
|
$
|
25,904
|
|
|
Foreign
|
|
|
(36
|
)
|
|
|
11,868
|
|
|
|
(19,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
$
|
133,144
|
|
|
$
|
105,339
|
|
|
$
|
6,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our effective tax rate differs from the statutory
U.S. Federal income tax rate as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Statutory U.S. federal tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
State and local taxes, net of federal benefit
|
|
|
0.5
|
|
|
|
0.2
|
|
|
Foreign taxes
|
|
|
0.1
|
|
|
|
0.3
|
|
|
Current utilization of net operating losses and other deferred
tax assets
|
|
|
(33.6
|
)
|
|
|
(35.1
|
)
|
|
Reversal of valuation allowance
|
|
|
(252.8
|
)
|
|
|
—
|
|
|
Other, net
|
|
|
0.4
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(250.4
|
)%
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
The tax effect of NOLs, R&D tax credit carry forwards and
temporary differences as of December 31, 2008 and 2007 was
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
333,443
|
|
|
$
|
412,877
|
|
|
R&D tax credit carry forwards
|
|
|
12,115
|
|
|
|
35,243
|
|
|
Intangible assets
|
|
|
11,021
|
|
|
|
11,951
|
|
|
Unearned revenue
|
|
|
17,108
|
|
|
|
31,174
|
|
|
Purchased R&D
|
|
|
39,498
|
|
|
|
45,968
|
|
|
Capitalized R&D
|
|
|
5,278
|
|
|
|
7,235
|
|
|
Other
|
|
|
26,992
|
|
|
|
18,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
445,455
|
|
|
|
562,752
|
|
|
Valuation allowance
|
|
|
(96,801
|
)
|
|
|
(562,246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
348,654
|
|
|
|
506
|
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(7,385
|
)
|
|
|
—
|
|
|
Contingent bond interest
|
|
|
(3,479
|
)
|
|
|
—
|
|
|
Other
|
|
|
(1,161
|
)
|
|
|
(506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,025
|
)
|
|
|
(506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
336,629
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, we had available U.S. federal
and foreign NOLs of approximately $859 million and
$90 million, respectively. The U.S. NOLs will expire
in various years from 2021 to 2026 and may be subject to
85
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
certain annual limitations. The U.K. NOLs do not have an
expiration date. Included in the $333.4 million of deferred
tax asset NOLs noted in the table above, as of December 31,
2008, was approximately $67 million of deductions for
equity-based compensation for which the tax benefit will be
credited to additional paid-in capital, if and when realized.
Our R&D tax credit carry forwards expire in various years
from 2009 through 2028. Approximately $3 million of the
$12.1 million of R&D tax credit carry forwards relates
to equity-based compensation and will be recorded as an increase
to additional paid-in capital, if and when realized. In
accordance with SFAS No. 123(R), we recorded a valuation
allowance of approximately $70 million against the
$67 million of deductions for
equity-based
compensation and $3.0 million of equity-based R&D tax
credits as these tax benefits can only be recognized when
realized. Certain of our NOLs and R&D tax credit carry
forwards may be subject to significant limitations under
Section 382 of the Internal Revenue Code. As of
December 31, 2008, we also had accumulated approximately
$97 million in other net deferred tax assets based on
temporary differences between book and tax reporting.
As part of our evaluation of deferred tax assets, we recognized
a tax benefit of approximately $337 million at the end of
the 2008 fourth quarter relating to the reduction of certain
valuation allowances previously established in the United
States. As our U.K. operations have not achieved profitability,
we were unable to conclude that the utilization of our U.K. NOLs
would be more likely than not and therefore, did not reduce any
U.K.-based valuation allowances at December 31, 2008. Our
evaluation encompassed (i) a review of our recent history
of profitability in the United States for the past three years;
(ii) a review of internal financial forecasts demonstrating
our expected utilization of NOLs prior to expiration; and
(iii) a reassessment of tax benefits recognition under
FIN 48.
FIN 48 clarifies the criteria that must be met prior to
recognition of the financial statement benefit of a position
taken in a tax return. FIN 48 provides a benefit
recognition model with a two-step approach consisting of a
“more-likely-than-not” recognition criteria, and a
measurement attribute that measures a given tax position as the
largest amount of tax benefit that is greater than 50% likely of
being realized upon ultimate settlement. FIN 48 also
requires the recognition of liabilities created by differences
between tax positions taken on a tax return and amounts
recognized in the financial statements. Our initial adoption of
FIN 48, on January 1, 2007 did not result in us
establishing liabilities for tax uncertainties because we had no
unrecognized tax benefits at the time.
Our FIN 48 assessment in 2008, resulted in the reassessment
and re-measurement of tax attributes resulting in the reversal
of certain deferred tax assets relating to NOLs and R&D tax
credit carry forwards of approximately $25 million. Since
we have not previously recognized these benefits, due to having
recorded a full valuation allowance in prior periods, there was
no financial impact from this reduction in deferred tax assets.
As of December 31, 2008, we did not record any liabilities
relating to tax uncertainties as we had not recognized any tax
benefits associated with these NOLs and R&D tax credit
carry forwards. In the event that we are able to utilize these
tax attributes in the future, an assessment of the benefits
would be performed at that time, in accordance with FIN 48,
and we may be required to establish a liability for tax
uncertainties.
The amount of our unrecognized tax benefits may increase or
decrease in the future for various reasons, including adding or
reducing amounts for current year tax positions, the expiration
of statutes of limitation on open income tax returns, changes in
our management’s judgment about the level of uncertainty,
the status of tax examinations and legislative activity. We do
not expect the unrecognized tax benefits to significantly
decrease over the next twelve months.
As previously mentioned, approximately $67 million of our
deferred tax assets related to our U.S. NOLs consists of
deductions for equity-based compensation for which the tax
benefit will be credited to additional paid-in capital if and
when realized. These assets relate to equity-based compensation
deductions that were recognized on our U.S. income tax
returns prior to the adoption of SFAS No. 123(R) on
January 1, 2006. In addition, as of December 31, 2008,
we have an additional $10 million of SFAS No. 123(R)
post-adoption benefits which relate to equity-based compensation
deductions that have been, or will be recorded on our
U.S. income tax returns for calendar years 2006 through
2008 for which no deferred tax asset has been recorded. The tax
benefit for these post-adoption deductions will also be recorded
to additional paid-in capital, if and when realized.
86
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The decrease in the valuation allowance of approximately
$465 million is principally attributable to the partial
reversal of the valuation allowance based on our recent history
of profitability in the United States for the past three years
and a review of internal financial forecasts demonstrating our
expected utilization of NOLs prior to expiration. Other changes
in the valuation allowance include the re-measurement of our
qualified R&D tax credit carry forwards, the reversal of
other temporary differences, the impact of foreign currency
translation adjustments, a change in the statutory tax rate in
the U.K., and the reversal of certain deferred tax assets
related to FIN 48 and equity-based compensation.
The valuation allowance as of December 31, 2008 consists
principally of the NOLs and R&D tax credit carry forwards
related to equity-based compensation incurred prior to our
adoption of SFAS No. 123(R) and the U.K. NOLs. In the event
that deferred taxes associated with approximately
$23 million of U.K. NOLs related to our Prosidion
subsidiary were to be realized in the future, there could be an
offsetting U.S. income tax because the Prosidion subsidiary
is currently treated as a branch for U.S. income tax
purposes.
|
|
|
|
(13)
|
Convertible
Senior Subordinated Notes
|
The following is a summary of the outstanding indebtedness under
our convertible senior subordinated notes as of
December 31, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
2038 Notes(a)
|
|
$
|
200,000
|
|
|
$
|
—
|
|
|
2025 Notes(b)
|
|
|
115,000
|
|
|
|
115,000
|
|
|
2023 Notes(c)
|
|
|
99,950
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
414,950
|
|
|
$
|
265,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
3.0% Convertible
Senior Subordinated Notes
|
On January 9, 2008, we issued $200.0 million aggregate
principal amount of 2038 Notes in a private placement resulting
in net proceeds to us of approximately $193.0 million. We
used a portion of the proceeds to repurchase of approximately
1.5 million shares of our common stock concurrently with
the offering for an aggregate price of $65.0 million. The
2038 Notes bear interest semi-annually in arrears through
maturity at an annual rate of 3% and mature on January 15,
2038. We may redeem for cash, all or part of the 2038 Notes at
any time on or after January 15, 2013, at a price equal to
100% of the principal amount of the 2038 Notes, plus accrued and
unpaid interest. Holders of the 2038 Notes have the right to
require us to purchase, for cash, all or any portion of their
2038 Notes on January 15, 2013, 2018, 2023, 2028 and 2033
at a price equal to 100% of the principal amount of the 2038
Notes to be purchased, plus accrued and unpaid interest.
The 2038 Notes will be convertible only under certain
circumstances, as described below. If, at the time of
conversion, the daily volume-weighted average price per share
for a 20 trading day period, or VWAP, of our common stock is
less than or equal to approximately $73.82 per share, which is
referred to as the base conversion price, the 2038 Notes will be
convertible into 13.5463 shares of our common stock per
$1,000 principal amount of 2038 Notes, which is referred to as
the base conversion rate, subject to adjustment upon the
occurrence of certain events, as set forth in the indenture. If,
at the time of conversion, the VWAP of the common stock exceeds
the base conversion price of $73.82 per share, the conversion
rate will be determined pursuant to a formula resulting in the
holders’ receipt of up to a maximum of 20.9968 shares
of our common stock per $1,000 principal amount of 2038 Notes,
subject to adjustment upon the occurrence of certain events.
From and after January 15, 2013, the conversion rate for
the 2038 Notes will be fixed.
The 2038 Notes are convertible until the close of business on
the business day immediately preceding the maturity date, in
multiples of $1,000 in principal amount, at the option of the
holder only under the following
87
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
circumstances: (1) during any fiscal quarter beginning
after March 31, 2008, and only during such fiscal quarter,
if the closing sale price of our common stock for at least 20
trading days in the 30 consecutive trading days ending on the
last trading day of the immediately preceding fiscal quarter is
more than 130% of the base conversion price per share;
(2) during the five business day period after any period of
five consecutive trading days in which the trading price per
$1,000 principal amount of 2038 Notes for each trading day of
that period was less than 97% of the product of the closing sale
price of our common stock on such day and the applicable daily
conversion rate for such day; (3) if we call the 2038 Notes
for redemption, at any time prior to the close of business on
the business day prior to the redemption date; (4) if
specified distributions to holders of our common stock are made;
(5) if a fundamental change occurs; or (6) beginning
on December 15, 2037 and ending at the close of business on
the business day immediately preceding the maturity date. Upon
conversion, we will have the right to deliver, in lieu of shares
of common stock, cash or a combination of cash and shares of
common stock.
A holder will receive in respect of each $1,000 principal amount
of the 2038 Notes converted, a number of shares of our common
stock equal to the sum of the “daily share amounts”
for each of the 20 consecutive trading days in the applicable
conversion reference period. With respect to trading days prior
to January 15, 2013, the daily share amount for a given
trading day in the applicable conversion reference period is an
amount equal to the fraction of (i) the VWAP for such
trading day multiplied by the “applicable daily conversion
rate,” divided by (ii) the VWAP on such trading day
multiplied by 20. If the VWAP is less than or equal to the base
conversion price, then the applicable daily conversion rate will
be equal to the base conversion rate. If the VWAP is greater
than the base conversion price, then the applicable daily
conversion rate will be equal to the sum of the base conversion
rate plus the product of: (i) 55% of the base conversion
rate, multiplied by (ii) a fraction equal to the VWAP less
the base conversion price, divided by the VWAP for the pertinent
trading day. We will have the right to deliver cash in lieu of
all or a portion of such shares, subject to certain limitations.
If a fundamental change transaction occurs before
January 15, 2013, and a holder elects to convert 2038 Notes
in connection with the transaction, we may be required to pay a
“make whole premium” by delivering additional shares
of stock (or cash in lieu of such shares) based on an increase
in the applicable base conversion rate for the 2038 Notes
determined by the effective date of the fundamental change and
the stock price paid per share in such transaction.
Notwithstanding the foregoing, in no event will the conversion
rate under the 2038 Notes exceed 22.3513 shares of our
common stock per $1,000 principal amount of the 2038 Notes,
subject to certain proportional adjustments applicable to the
base conversion rate.
The 2038 Notes are unsecured obligations and are subordinate to
all of our existing and future senior indebtedness. The 2038
Notes rank equally with all of our existing and future senior
subordinated indebtedness, and are effectively subordinated to
all of our existing and future secured indebtedness to the
extent of the security therefor.
As of January 1, 2009, the 2038 Notes were not eligible for
conversion as our common stock did not close at or above $73.82
per share for twenty trading days within the thirty trading day
period ending on December 31, 2008.
|
|
|
|
(b)
|
2.0% Convertible
Senior Subordinated Notes
|
On December 21, 2005, we issued $100.0 million
aggregate principal amount of 2025 Notes in a private placement
for net proceeds to us of $96.5 million. On
December 28, 2005, the bankers associated with this
convertible debt offering exercised an option to purchase an
additional $15.0 million of the 2025 Notes, for additional
net proceeds to us of $14.6 million. The 2025 Notes bear
interest at 2.0% per annum, payable semi-annually, and mature on
December 15, 2025. The 2025 Notes are convertible into
cash, shares of our common stock or a combination of cash and
shares of our common stock based on an initial conversion rate,
subject to adjustment, of 33.9847 shares per $1,000
principal amount of notes (which represents an initial
conversion price of $29.43 per share), only in the following
circumstances and to the following extent: (i) prior to
December 15, 2020, during any fiscal quarter after the
fiscal quarter ending March 31, 2006, if the closing sale
price of our common stock for 20 or more trading days in a
period of 30 consecutive trading days ending on the last trading
day of the immediately
88
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
preceding fiscal quarter exceeds 120% of the conversion price in
effect on the last trading day of the immediately preceding
fiscal quarter; (ii) prior to December 15, 2020,
during the five business day period after any five consecutive
trading day period, or the note measurement period, in which the
average trading price per $1,000 principal amount of notes was
equal to or less than 97% of the average conversion value of the
notes during the note measurement period; (iii) upon the
occurrence of specified corporate transactions, as described in
the indenture for the 2025 Notes; (iv) if we call the 2025
Notes for redemption; or (v) any time on or after
December 15, 2020. Upon conversion, we will have the right
to deliver, in lieu of shares of common stock, cash or a
combination of cash and shares of common stock.
At any time before the maturity date, we may irrevocably elect,
in our sole discretion, to satisfy our conversion obligation in
cash up to 100% of the principal amount of the notes converted,
with any remaining amount to be satisfied in shares of our
common stock. If certain fundamental changes occur before
December 15, 2010, the conversion rate may increase, or
under certain circumstances, we may elect to change our
conversion obligations to provide for conversion of the notes
into the acquiring company’s common stock. We may redeem
the 2025 Notes, in whole or in part, for cash, at any time on or
after December 15, 2010 for a price equal to 100% of the
principal amount of the 2025 Notes to be redeemed, plus any
accrued and unpaid interest. The holders of the 2025 Notes have
the right to require us to purchase, for cash, all of the 2025
Notes, or a portion thereof, on December 15, 2010,
December 15, 2015, on December 15, 2020 and under
certain other circumstances as set out in the indenture, for a
price equal to 100% of the principal amount of the 2025 Notes
plus any accrued and unpaid interest. The related debt issuance
costs of $3.9 million were deferred and are being amortized
on a straight-line basis over a five-year term, which represents
the earliest date that we may redeem the 2025 Notes.
Concurrent with the sale of the 2025 Notes, we used
$11.8 million of the net proceeds for the purchase of
500,000 shares of our common stock and we purchased a call
spread overlay transaction from UBS, AG at a cost of
$12.2 million. The call spread is a European-type option
with a lower strike price of $29.425 and an upper strike price
of $40.00 and involves an aggregate of 3.4 million shares
of our common stock and expires on December 15, 2010. The
call spread overlay agreement has the effect of increasing the
effective conversion price of the 2025 Notes from our
perspective to $40.00 per share on the intended sale of
$100.0 million (excluding the sale of $15.0 million of
2025 Notes related to the exercise of the overallotment). The
agreement calls for settlement using net shares. Under the
agreement, bankers associated with the debt offering will
deliver to us the aggregate number of shares we are required to
deliver to a holder of 2025 Notes that presents such notes for
conversion. If the market price per share of our common stock is
above $40.00 per share, we will be required to deliver shares of
our common stock representing the value in excess of the strike
price. In accordance with EITF
No. 00-19,
“Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own
Stock,” and SFAS No. 150, “Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity,” we recorded the purchase of the
call spread overlay option agreement as a reduction in
additional paid — in capital, and will not recognize
subsequent changes in fair value of the agreement.
As of January 1, 2009, the 2025 Notes were not eligible for
conversion as our common stock did not close at or above $35.32
per share for twenty trading days within the thirty trading day
period ending on December 31, 2008.
|
|
|
|
(c)
|
3.25% Convertible
Senior Subordinated Notes
|
On September 8, 2003, we issued $135.0 million
aggregate principal amount of 2023 Notes in a private placement
for net proceeds to us of $130.3 million. On
September 17, 2003, the bankers associated with this
convertible debt offering exercised an option to purchase an
additional $15.0 million of the 2023 Notes, for additional
net proceeds to us of $14.5 million. The 2023 Notes bear
interest at 3.25% per annum, payable semi-annually, and mature
on September 8, 2023. The 2023 Notes are convertible into
shares of our common stock at a conversion price of $50.02 per
share, subject to normal and customary adjustments such as stock
dividends or other dilutive transactions. The holders of the
Notes had the right to require us to purchase all of the 2023
Notes, or a
89
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
portion thereof, on September 8, 2008. As discussed below,
a significant portion of the holders did not exercise their
right.
We may redeem the 2023 Notes, in whole or in part, for cash, at
any time after September 8, 2008 for a price equal to 100%
of the principal amount of the 2023 Notes to be redeemed, plus
any accrued and unpaid interest. The holders of the 2023 Notes
have the right to require us to purchase all of the 2023 Notes,
or a portion thereof, on September 8, 2013 and
September 8, 2018 for a price equal to 100% of the
principal amount of the 2023 Notes plus any accrued and unpaid
interest. If the holders of the 2023 Notes make this election,
we can pay the purchase price in cash or by issuing our common
stock. Upon a change in control, as defined in the indenture
governing the 2023 Notes, the holders of the 2023 Notes will
have the right to require us to purchase all of the 2023 Notes,
or a portion thereof, not previously called for redemption at a
purchase price equal to 100% of the principal amount of the 2023
Notes purchased, plus accrued and unpaid interest.
Upon the exercise by the holders of the right to require us to
purchase the 2023 Notes or upon a change of control, we may
elect to pay the purchase price in common stock instead of cash.
The number of shares of common stock a holder will receive will
equal the purchase price divided by 95% of the average of the
closing prices of our common stock for the five-trading day
period ending on the third business day prior to the purchase
date.
The debt issuance costs of $5.2 million related to the 2023
Notes were deferred and are being amortized on a straight-line
basis over a five-year term, which represents the earliest date
that we may redeem the 2023 Notes. In connection with the
issuance of the 2023 Notes, we used $19.0 million of the
net proceeds for the purchase of 503,800 shares of our
common stock. Since the beginning of the 2008 fiscal year, we
have repurchased an aggregate of $50.05 million of our 2023
Notes, reducing the outstanding balance of our 2023 Notes to
$99.95 million. The 2023 Notes had been classified as a
short-term liability on the December 31, 2007 balance sheet
since the holders had the right to require us to purchase all of
the 2023 Notes, or a portion thereof, in September 2008. This
purchase right expired on September 8, 2008. Prior to this
expiration date, holders of an aggregate of $50,000 principal
amount of our 2023 Notes exercised their right to require us to
repurchase their notes. The remaining holders of the 2023 Notes
do not have the right to require us to purchase the 2023 Notes
again until September 2013, except under certain other
circumstances set forth in the indenture for the 2023 Notes.
Therefore, we have reclassified the 2023 Notes as a long-term
liability on the December 31, 2008 balance sheet. In
connection with the repurchase of a portion of the 2023 Notes,
during the year ended December 31, 2008, we recognized
$602,000 of costs relating to the premium paid over par for the
2023 Notes and the acceleration of unamortized issuance costs.
The charge is included in other (expense)
income-net
in the accompanying statement of operations for the periods then
ended.
|
|
|
|
(14)
|
Employee
Savings and Investment Plans
|
We sponsor an Employee Savings and Investment Plan under
Section 401(k) of the Internal Revenue Code. The plan
allows our U.S. employees to defer from 2% to 70% of their
income on a pre-tax basis through contributions into designated
investment funds provided the total contribution does not exceed
the Internal Revenue Code’s mandatory limits. We match each
employee’s contribution to the plan on a
dollar-for-dollar
basis up to 4% of such employee’s salary, and then match
50% of such employee’s contribution from 4% to 6% of his or
her salary. Prior to January 1, 2007, we matched 50% of the
employees contributions up to 6% of his or her earnings. During
the years ended December 31, 2008, 2007 and 2006, our
expenses related to the plan were $2.0 million,
$2.0 million and $1.4 million, respectively.
We also sponsor four pension plans covering the employees of OSI
U.K. and Prosidion. The Group Personal Pension Plan allows
employees to contribute a portion of their income on a post-tax
basis into designated investment funds. The tax paid on the
contribution is then recovered from the Inland Revenue. We
generally contribute from 4% to 9% depending on the
employees’ contributions. The British Biotechnology Limited
Pension Scheme covers employees retained from the acquisition of
certain assets from British Biotechnology Limited, as well as
certain former employees of British Biotechnology hired by us
subsequent to the acquisition. The plan allows the employees to
defer up to 15% of their income on a pre-tax basis through
contributions into designated
90
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
pension funds. For each period the employee invests, we will
contribute up to 9% into the funds. For the year ended
December 31, 2008, 2007 and 2006, our expenses related to
the plans were $754,000, $704,000 and $673,000, respectively.
In addition, effective July 2007, we adopted a nonqualified
deferred compensation plan which permits certain employees to
elect annually to defer a portion of their compensation, and as
of December 31, 2008, we had recorded a $682,000 liability
related to this plan. The employees select among various
investment alternatives, with the investments held in a separate
trust.
|
|
|
|
(15)
|
Employee
Post-retirement Plan and Other
|
|
|
|
|
(a)
|
Employee
Post-retirement Plan
|
Prior to April 18, 2007, we provided post-retirement
medical and life insurance benefits to eligible employees, board
members and qualified dependents. Eligibility was determined
based on age and service requirements. These benefits are
subject to deductibles, co-payment provisions and other
limitations. On April 18, 2007, we curtailed our
post-retirement medical and life insurance plan and
grandfathered those employees, board members and qualified
dependants who were eligible to participate in the plan on that
date. As a result of the curtailment, we reduced our liability
for this plan by $5.5 million and recognized a gain of
$4.3 million and recorded an adjustment to accumulated
other comprehensive income of $1.3 million. The curtailment
had the effect of decreasing the accumulated benefit obligation
at April 18, 2007 to $3.0 million. Only those
grandfathered participants will continue to be entitled to
receive benefits under the plan. These benefits are subject to
deductibles, co-payments and other limitations. We follow
SFAS No. 106, “Employers’ Accounting for
Post-Retirement Benefits Other Than Pensions,” as amended
by SFAS No. 132(R), “Employers’ Disclosures
About Pensions and Other Post-Retirement Benefits,” to
account for and disclose 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.
Effective December 31, 2006, we adopted the recognition and
disclosure provisions of SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and
Other Post-retirement Plans, an amendment of FASB statements
No. 87, 88, 106, and 132(R).” SFAS No. 158
requires employers to recognize in their balance sheets the
overfunded or underfunded status of defined benefit
post-retirement plans, measured as the difference between the
fair value of plan assets and the benefit obligation (the
projected benefit obligation for pension plans and the
accumulated post-retirement benefit obligation for other
post-retirement plans). Upon the adoption of
SFAS No. 158, we recognized an accumulated
post-retirement benefit obligation of $8.1 million. The
adoption of SFAS No. 158 resulted in an increase in
our liability of $1.3 million, with offsetting charge to
stockholders’ equity as a component of accumulated other
comprehensive income. As discussed above, the subsequent
curtailment of the plan in 2007 resulted in a $1.3 million
adjustment to accumulated other comprehensive income.
Net post-retirement benefit cost (excluding the
$4.3 million curtailment gain recognized in 2007) for
the years ended December 31, 2008, 2007 and 2006 included
the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Service cost for benefits earned during the period
|
|
$
|
—
|
|
|
$
|
337
|
|
|
$
|
1,054
|
|
|
Interest cost on accumulated post-retirement benefit obligation
|
|
|
176
|
|
|
|
252
|
|
|
|
409
|
|
|
Amortization of initial benefits attributed to past service
|
|
|
—
|
|
|
|
2
|
|
|
|
6
|
|
|
Amortization of loss
|
|
|
—
|
|
|
|
6
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net post-retirement benefit cost
|
|
$
|
176
|
|
|
$
|
597
|
|
|
$
|
1,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accrued post-retirement benefit cost at December 31,
2008 and 2007 totaled $2.7 million and $3.2 million,
respectively.
91
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The changes in the accumulated post-retirement benefit
obligation during years ended December 31, 2008 and 2007
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Balance at beginning of year
|
|
$
|
3,163
|
|
|
$
|
8,070
|
|
|
Benefit payments
|
|
|
(182
|
)
|
|
|
(118
|
)
|
|
Loss experience
|
|
|
(506
|
)
|
|
|
128
|
|
|
Service cost
|
|
|
—
|
|
|
|
337
|
|
|
Curtailment gain
|
|
|
—
|
|
|
|
(5,506
|
)
|
|
Interest cost
|
|
|
176
|
|
|
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
2,651
|
|
|
$
|
3,163
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008, the health care cost
trend assumption remained at an initial level of 9%, decreasing
to an ultimate estimated rate of 5% by 2013 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 post-retirement benefit
obligation as of December 31, 2008 by $271,000 and the
fiscal 2008 net post-retirement service and interest cost
by $14,000. Decreasing the assumed health care cost trend rate
by one percentage point in each year and holding all other
assumptions constant would decrease the accumulated
post-retirement benefit obligation as of December 31, 2008
by $231,000 and the fiscal 2008 net post-retirement service
and interest cost by $12,000. Benefits paid in the years ended
December 31, 2008, 2007 and 2006 were $182,000, $118,000
and $134,000, respectively.
The weighted average assumptions used in determining benefit
obligations and net periodic benefits costs are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Discount rate
|
|
|
5.25
|
%
|
|
|
5.72
|
%
|
|
|
5.75
|
%
|
|
Expected long-term rate of return on plan assets
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
The discount rate was computed using Moodys Aa Corporate Bond
Index and Merrill Lynch 10+ Bond Index as of December 31,
2008.
For the years ended 2009 through 2013, we anticipate paying
benefits of $146,000, $161,000, $178,000, $180,000, and
$192,000, respectively. We anticipate paying aggregate benefits
of $878,000 for the years of 2014 through 2018.
|
|
|
|
(b)
|
Sabbatical
Leave Accrual
|
Effective January 1, 2007, we adopted
EITF 06-02,
“Accounting for Sabbatical Leave and Other Similar Benefits
Pursuant to SFAS No. 43.” Sabbatical leave is
generally defined as an employee’s entitlement to paid time
off after working for an entity for a specified period of time.
The employee continues to be a compensated employee and is not
required to perform any duties for the entity during the
sabbatical leave. We provide a sabbatical leave of four weeks
for employees who have achieved 15 years of service.
Included in accrued post-retirement benefit costs and other as
of December 31, 2008 and 2007 was $468,000 and $425,000,
respectively, of accrued sabbatical leave.
|
|
|
|
(16)
|
Stockholders’
Equity
|
We have nine equity plans pursuant to which there are
outstanding grants issued to our employees, officers, directors
and consultants. Two of these plans still have shares available
for future grant, the 1999 Incentive and Non-Qualified Stock
Option Plan and the Amended and Restated Stock Incentive Plan.
The plans are administered by the
92
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Compensation Committee of the Board of Directors, which may
grant stock options and, in the case of the Amended and Restated
Stock Incentive Plan, restricted stock, restricted stock units
and deferred stock units. The Compensation Committee determines
the terms of all equity grants under the plans. Our equity
grants vest over various periods and expire no later than
10 years from date of grant. The total authorized shares
under these plans are 21,388,777, of which 4,683,035 shares
were available for future grant as of December 31, 2008.
On March 17, 2004, at our 2004 annual meeting of
stockholders, our stockholders approved an amendment and
restatement of the 2001 Stock Option Plan in the form of the
Amended and Restated Stock Incentive Plan, or the Plan, which
was adopted by the Board of Directors on January 23, 2004.
On March 16, 2005, at our 2005 annual meeting of
stockholders, our stockholders approved an amendment to the Plan
to increase the number of equity awards issuable under the Plan
from 4 million shares to 6.8 million shares. On
June 13, 2007, our stockholders approved an amendment to
the Plan to increase the number of equity awards issuable under
the Plan from 6.8 million to 13.8 million.
Participation in the Plan is limited to our directors, officers,
employees and consultants of our parent or subsidiaries.
We have an employee stock purchase plan under which eligible
employees may contribute up to 10% of their base earnings toward
the quarterly purchase of our common stock. The employee’s
purchase price is derived from a formula based on the fair
market value of the common stock. During the years ended
December 31, 2008, 2007 and 2006, approximately 20,000,
24,000 and 38,000 shares, respectively, were issued with
approximately 140, 150 and 214 employees participating in
the plan, respectively. At December 31, 2008, we had
275,917 shares of our authorized common stock available for
future grant in connection with these plans.
We sponsor a stock purchase plan for our U.K.-based employees.
Under the terms of the plan, eligible employees may contribute
between £5 and £250 of their base earnings, in
36 monthly installments, towards the purchase of our common
stock. The employee purchase price is determined at the
beginning of the
36-month
period and compensation expense is recorded over the
36-month
period. As a result of our decision in the fourth quarter of
fiscal 2004 to consolidate all of our U.K.-based oncology
R&D activities into our New York locations, we did not
offer this plan to U.K. employees for fiscal 2004. As a result
of the minority interest buyout of Prosidion in the second
quarter of 2005, we offered this plan to our U.K. employees
beginning in 2005 and continued to offer the plan in 2006, 2007
and 2008. During fiscal 2003, the maximum shares that could be
issued under this plan were increased from 100,000 shares
to 200,000 shares. There were 30 employees,
13 employees, and 47 employees that participated in
the 2008, 2007 and 2006 plans, respectively. At
December 31, 2008, we had 77,013 shares of our common
stock available for future grant in connection with these plans.
Effective January 1, 2006, we adopted the provisions of
SFAS No. 123(R), which establishes the accounting for
employee stock-based awards. Under the provisions of
SFAS No. 123(R), stock-based compensation is measured
at the grant date, based on the calculated fair value of the
award, and is recognized as an expense over the requisite
employee service period (generally the vesting period of the
grant). We adopted SFAS No. 123(R) using the modified
prospective method.
Compensation expense related to continuing operations for the
years ended December 31, 2008, 2007 and 2006 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Cost of sales
|
|
$
|
620
|
|
|
$
|
338
|
|
|
$
|
251
|
|
|
Research and development expenses
|
|
|
7,373
|
|
|
|
4,683
|
|
|
|
2,973
|
|
|
Selling, general and administrative expenses
|
|
|
12,789
|
|
|
|
10,406
|
|
|
|
9,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
20,782
|
|
|
$
|
15,427
|
|
|
$
|
13,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense related to discontinued operations for the
year ended December 31, 2008 was $(193,000), primarily
related to forfeiture activity in 2008. Compensation expense
related to discontinued
93
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
operations for the year ended December 31, 2007 and 2006
was $2.2 million and $9.2 million, respectively.
Compensation expense related to continuing operations
attributable to net stock-based compensation for the years ended
December 31, 2008, 2007, and 2006 was $20.8 million,
or $0.31 diluted earnings per share, $15.4 million, or
$0.25 diluted earnings per share and $13.2 million, or
$0.23 diluted earnings per share, respectively. At
December 31, 2008, the total remaining unrecognized
compensation cost related to unvested stock-based payment awards
was $68.9 million. This cost is expected to be recognized
over a weighted average period of approximately 2.77 years.
We estimate the fair value of stock options using the
Black-Scholes option-pricing model. We believe that the
valuation technique and the approach utilized to develop the
underlying assumptions are appropriate in calculating the fair
value of our stock options granted. Estimates of fair value are
not intended to predict actual future events or the value
ultimately realized by the employees who receive equity awards.
Historically, we have satisfied the exercise of options by
issuing new shares. We estimate expected volatility based upon a
combination of historical, implied and adjusted historical stock
prices. The risk-free interest rate is based on the
U.S. treasury yield curve in effect at the time of grant.
We assumed an expected dividend yield of zero since we have not
historically paid dividends and do not expect to pay dividends
in the foreseeable future. The expected option term is
determined using a Monte Carlo simulation model that
incorporates historical employee exercise behavior and
post-vesting employee termination rates. The fair values of the
options was estimated at the date of grant using a Black-Scholes
option-pricing model with the following assumptions, and are
based upon the weighted average for the periods reflected below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Expected volatility
|
|
|
50.20
|
%
|
|
|
46.40
|
%
|
|
|
54.53
|
%
|
|
Risk-free interest rate
|
|
|
2.32
|
%
|
|
|
3.83
|
%
|
|
|
4.53
|
%
|
|
Expected term (years)
|
|
|
5.36
|
|
|
|
4.65
|
|
|
|
4.51
|
|
|
Per share weighted average fair value of stock options grants
|
|
$
|
15.81
|
|
|
$
|
19.26
|
|
|
$
|
16.21
|
|
94
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A summary of our stock option programs at December 31,
2008, 2007, 2006 and 2005 and changes during the year is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Weighted
|
|
Intrinsic
|
|
Weighted Average
|
|
|
|
No. Shares
|
|
Average Exercise
|
|
Value(1)
|
|
Contractual Life
|
|
|
|
(In thousands)
|
|
Price
|
|
(In millions)
|
|
Remaining in Years
|
|
|
|
Outstanding at December 31, 2005
|
|
|
6,964
|
|
|
$
|
35.29
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
777
|
|
|
$
|
32.87
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(391
|
)
|
|
$
|
20.22
|
|
|
|
|
|
|
|
|
|
|
Forfeitures
|
|
|
(621
|
)
|
|
$
|
31.15
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(2
|
)
|
|
$
|
15.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
6,727
|
|
|
$
|
36.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
665
|
|
|
$
|
44.25
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,042
|
)
|
|
$
|
24.65
|
|
|
|
|
|
|
|
|
|
|
Forfeitures
|
|
|
(765
|
)
|
|
$
|
39.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
5,585
|
|
|
$
|
38.69
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
956
|
|
|
$
|
34.90
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(569
|
)
|
|
$
|
27.69
|
|
|
|
|
|
|
|
|
|
|
Forfeitures
|
|
|
(259
|
)
|
|
$
|
41.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
5,713
|
|
|
$
|
39.07
|
|
|
$
|
28.4
|
|
|
|
4.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
3,806
|
|
|
$
|
40.61
|
|
|
$
|
19.3
|
|
|
|
4.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2008
|
|
|
1,907
|
|
|
$
|
36.00
|
|
|
$
|
9.1
|
|
|
|
5.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The intrinsic value of a stock option is the amount by which the
current market value of the underlying stock exceeds the
exercise price of the option.
|
The total intrinsic value of stock options exercised during the
years ended December 31, 2008, 2007 and 2006 was
$10.7 million, $15.9 million, $6.1 million,
respectively.
Options granted prior to June 1, 2005 have exercise prices
equal to the fair market value of the stock on the date of
grant, a contractual term of 10 years and a vesting period
of three years. Options granted subsequent to May 31, 2005
have exercise prices equal to the fair market value of the stock
on the date of grant, a contractual term of seven years and a
vesting period ranging from four to five years. For the years
ended December 31, 2008 and 2007, the historical forfeiture
rate was 9% and 21.84%, respectively, for non-executive
employees and no forfeitures for executive employees was assumed
for purposes of recognizing compensation expense based upon
adjusted historical experience.
|
|
|
|
(c)
|
Restricted
Stock, Restricted Stock Units, and Deferred Stock
Units
|
Our outstanding shares of restricted stock, restricted stock
units, and deferred stock units generally vest annually over a
four-year period depending on the award, are valued at the stock
price on date of grant and are subject to certain additional
terms and conditions, including but not limited to the continued
service of the employee or director. An aggregate of 1,106,535
restricted shares and units were outstanding as of
December 31, 2008, representing $40.4 million of
unrecognized compensation expense which is expected to be
recognized over a weighted average period of 3.2 years. The
aggregate intrinsic value was $43.9 million as of
December 31, 2008.
95
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following is a summary of the status of our restricted
stock, restricted stock units and deferred stock units for the
years ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
No. Shares
|
|
Average Grant
|
|
|
|
(In thousands)
|
|
Date Fair Value
|
|
|
|
Outstanding at December 31, 2005
|
|
|
16
|
|
|
$
|
37.88
|
|
|
Granted
|
|
|
623
|
|
|
$
|
35.58
|
|
|
Vested
|
|
|
(4
|
)
|
|
$
|
40.22
|
|
|
Forfeited
|
|
|
(12
|
)
|
|
$
|
31.29
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
623
|
|
|
$
|
35.69
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
498
|
|
|
$
|
46.77
|
|
|
Vested
|
|
|
(127
|
)
|
|
$
|
36.22
|
|
|
Forfeited
|
|
|
(97
|
)
|
|
$
|
35.59
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
897
|
|
|
$
|
41.90
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
538
|
|
|
$
|
33.96
|
|
|
Vested
|
|
|
(276
|
)
|
|
$
|
40.26
|
|
|
Forfeited
|
|
|
(52
|
)
|
|
$
|
43.12
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
1,107
|
|
|
$
|
38.46
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of restricted stock, restricted stock
units and deferred stock units that vested during the years
ended December 31, 2008, 2007 and 2006 was
$11.1 million, $4.6 million and $169,000, respectively.
|
|
|
|
(d)
|
Shareholder
Rights Plan
|
We have a shareholder rights plan, commonly referred to as a
“poison pill.” The purpose of the shareholder rights
plan is to protect stockholders against unsolicited attempts to
acquire control of us that do not offer a fair price to our
stockholders as determined by our Board of Directors. On
September 27, 2000, our Board of Directors adopted a
shareholder rights plan, declared a dividend distribution of one
Series SRPA Junior Participating Preferred Stock Purchase
Right on each outstanding share of its common stock, and
authorized the redemption of the rights issued pursuant to our
then current shareholder rights plan. We distributed rights to
all shareholders of record at the close of business on
September 27, 2000, the record date. These rights entitle
the holder to buy one one-thousandth of a share of
Series SRPA Junior Participating Preferred Stock upon a
triggering event as discussed below.
Upon the actual acquisition of 17.5% or more of our outstanding
common stock by a person or group, the rights held by all
holders other than the acquiring person or group will be
modified automatically to be rights to purchase shares of common
stock (instead of rights to purchase preferred stock) at 50% of
the then-market value of such common stock. Furthermore, such
rightholders will have the further right to purchase shares of
common stock at the same discount if we merge with, or sell 50%
or more of our assets or earning power to, the acquiring person
or group or any person acting for or with the acquiring person
or group. If the transaction takes the form of a merger of us
into another corporation, these rightholders will have the right
to acquire at the same percentage discount shares of common
stock of the acquiring person or other ultimate parent of such
merger party.
We can redeem the rights at any time before (but not after) a
person has acquired 17.5% or more of our common stock, with
certain exceptions. The rights will expire on August 31,
2010 if not redeemed prior to such date.
96
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
(e)
|
Authorized
Common and Preferred Stock
|
We have 200 million shares of authorized common stock, with
a par value of $.01 per share, and five million 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 our Board of Directors.
|
|
|
|
(17)
|
Commitments
and Contingencies
|
We lease office, operating and laboratory space under various
lease agreements. Rent expense for continuing and discontinued
operations was approximately $6 million, $6 million
and $10 million for the years ended December 31, 2008,
2007 and 2006, respectively. Rent expense for fiscal 2008
includes the Oxford, England facility leases, Boulder, Colorado
facility leases, Cedar Knolls, the New Jersey facility lease and
the Farmingdale, NY facility lease. As discussed in
Note 11(b), we accrued the net remaining lease rental
payments and refurbishment costs for a portion of the Oxford,
England facility in fiscal 2005.
The following is a schedule of future minimum rental payments
for the next five fiscal years and thereafter required as of
December 31, 2008. In addition to the facilities noted
above, the schedule includes subleased facilities in New York
City and Lexington Massachusetts, exclusive of
sub-rental
income from these subleased facilities. Also included in the
amounts below are commitments for equipment under various
operating leases (in thousands).
|
|
|
|
|
|
|
2009
|
|
$
|
11,074
|
|
|
2010
|
|
|
10,792
|
|
|
2011
|
|
|
10,751
|
|
|
2012
|
|
|
10,181
|
|
|
2013
|
|
|
10,122
|
|
|
2014 and thereafter
|
|
|
66,619
|
|
|
|
|
|
|
|
|
|
|
$
|
119,539
|
|
|
|
|
|
|
|
Rental obligations and deferred rent in the accompanying
consolidated balance sheet reflects the rent expense recognized
on a straight-line basis in excess of the required lease
payments in connection with our facility leases and the present
value of net operating lease payments for exited facilities.
Included in rent and deferred rent as of December 31, 2008
is $2.4 million related to deferred rental payments and
$4.5 million of accruals related to exited facilities and
refurbishment costs.
Under certain license and collaboration agreements with
pharmaceutical companies and educational institutions, we are
required to pay royalties, milestones
and/or
other
fees upon the successful development and commercialization of
products.
From time to time, we have received letters from companies and
universities advising us that various products under R&D by
us may be infringing existing patents of such entities. These
matters are reviewed by management, and if necessary, by our
outside counsel. Where valid patents of other parties are found
by us to be in place, management will consider entering into
licensing arrangements with the universities
and/or
companies or modify the conduct of its research. Our future
royalties, if any, may be reduced if our licensees or
collaborative partners are required to obtain licenses from
third parties whose patent rights are infringed by our products,
technology or operations. In addition, should any infringement
claims result in a patent infringement lawsuit, we could incur
substantial costs in defense of such a suit, which could have a
material adverse effect on our business, financial condition and
results of operations, regardless of whether we were successful
in the defense.
97
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
(18)
|
Related
Party Transactions
|
One member of our Board of Directors is a partner in a law firm
which represents us on certain of our patent matters. Fees paid
to this firm during the years ended December 31, 2008, 2007
and 2006 were approximately $412,000, $170,000 and $115,000,
respectively. In addition, we have compensated other directors
for services performed pursuant to consultant arrangements.
During the years ended December 31, 2008, 2007 and 2006,
consulting fees in the amounts of $257,000, $75,000 and $75,000,
respectively, were paid to such directors pursuant to these
arrangements.
In the fourth quarter of 2008, Prosidion acquired intellectual
property and other assets from 7TM Pharma A/S for
$4.0 million. The $4.0 million was recorded as an
in-process R&D charge, since it was associated with the
intellectual property which was deemed early stage with no
alternative use.
|
|
|
|
(b)
|
Acquisition
of AdipoGenix Assets
|
In the fourth quarter of 2007, Prosidion acquired intellectual
property and other laboratory equipment assets from AdipoGenix
Inc. for $2.3 million. Of the $2.3 million purchase
price, $2.2 million was recorded as an in-process R&D
charge, since it was associated with the intellectual property
which was deemed early stage and to have no alternative use. The
remainder of the cost was allocated to the laboratory equipment
acquired, based upon its fair value, and capitalized.
|
|
|
|
(20)
|
Eyetech
Discontinued Operations
|
|
|
|
|
(a)
|
Divestiture
of Eye Disease Business
|
On November 6, 2006, we announced our intention to divest
our eye disease business, a process which we completed in August
2008. Our eye disease business consisted principally of Macugen,
a marketed product for the treatment of neovascular age-related
macular degeneration, or wet AMD, as well as research assets in
the eye disease area.
We finalized our exit plan during the first quarter of 2007 and
began to actively market our eye disease business. In order to
facilitate the divestiture of our eye disease business, on
April 20, 2007, we terminated our existing collaboration
agreement with Pfizer, Inc. Prior to the April 2007 amendment,
we shared sales and marketing responsibility for sales of
Macugen in the United States and reported product revenue on a
gross basis for these sales. We determined that we qualified as
a principal under the criteria set forth in EITF
No. 99-19
based on our responsibilities under our original contracts with
Pfizer, which included manufacture of product for sale in the
United States, distribution, ownership of product inventory and
credit risk from customers. After April 20, 2007, we no
longer shared the gross profits of U.S. sales with Pfizer
and no longer received royalties from Pfizer from rest of the
world sales.
In July 2007, we entered into an agreement with Ophthotech
Corporation to divest our anti-platelet derived growth factor,
or PDGF, aptamer program for an upfront cash payment, shares of
Ophthotech preferred stock and potential future milestones and
royalties. Included in the loss from discontinued operations for
the year ended December 31, 2007 was a gain of
approximately $6 million, recognized as a result of the
agreement.
On August 1, 2008, we completed the sale of the remaining
assets of our eye disease business to Eyetech, Inc., a newly
formed corporation whose shareholders consisted primarily of
members of the Macugen sales team. Under the terms of the
transaction, the principal assets we transferred to Eyetech Inc.
consisted of Macugen-related intellectual property and
inventory, as well as $5.8 million in working capital
primarily in the form of Macugen trade receivables, in exchange
for potential future milestone and royalty payments. Our
consideration for the
98
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
transaction also included payments in the event of any
subsequent
change-of-control
affecting Eyetech Inc., as well as Eyetech Inc.’s agreement
to assume certain obligations of (OSI) Eyetech. We also agreed
to provide certain transition services to Eyetech Inc. for the
period commencing with the closing through December 31,
2009. Michael G. Atieh, our former Executive Vice President,
Chief Financial Officer and Treasurer, agreed to join Eyetech
Inc. in a part-time executive chairman role upon his retirement
from OSI. Mr. Atieh also holds stock in Eyetech Inc. that
became voting and participating with respect to dividends and
distribution following his retirement from our company.
|
|
|
|
(b)
|
(OSI)
Eyetech Milestone Revenue and Expense
|
In the second quarter of 2006, we received a $35.0 million
milestone payment from Pfizer upon the launch of Macugen in
select European countries. In accordance with
EITF 00-21,
the milestone payment was recorded as unearned revenue and was
being recognized as revenue on a straight-line basis over the
expected term of our collaboration and license agreements with
Pfizer, which approximates the expected level of performance
under these agreements with Pfizer. In April 2007, we terminated
our collaboration and license agreements with Pfizer and entered
into an amended and restated license agreement. Under the terms
of the amended and restated license agreement, Pfizer returned
to us all rights to develop and commercialize Macugen in the
United States, and we granted to Pfizer an exclusive right to
develop and commercialize Macugen in the rest of the world. We
also agreed with Pfizer to provide each other with certain
transitional services related to Macugen. These ongoing
obligations to Pfizer required us to amortize the
$35.0 million milestone payment over the term of the
original agreement and include this unearned revenue in loss
from discontinued operations. In connection with the sale of the
remaining assets of our eye disease business to Eyetech Inc. on
August 1, 2008, we assigned certain of our obligations
under our amended and restated license agreement with Pfizer to
Eyetech Inc. Accordingly, we believe that the earnings process
with respect to the milestone payment is now complete. As a
result, we have recognized $27.9 million, the remaining
unamortized balance of the $35.0 million milestone payment
from Pfizer, in net revenue from discontinued operations in
2008. We also recognized a $2.0 million expense in the
third quarter of 2008 related to a third-party milestone
obligation for Macugen.
|
|
|
|
(c)
|
(OSI)
Eyetech Operating Results
|
As a result of our decision to divest the eye disease business,
in accordance with the provision of SFAS No. 144, the
results of operations of (OSI) Eyetech for the current and prior
periods were reported as discontinued operations. In addition,
assets and liabilities of (OSI) Eyetech were classified as
assets and liabilities related to discontinued operations,
including those held for sale. In the third and fourth quarters
of 2007, we assessed the net realizable carrying amount or fair
value of the assets held for sale and recognized impairment
charges of $5.6 million and $5.1 million,
respectively. Second quarter of 2008 results reflected an
additional $9.4 million impairment charge related to the
adjustment of the assets held for sale down to their net
realizable value. In the third quarter of 2008, as a result of
our completion of the sale of the remaining assets of our eye
disease business, we adjusted the remaining assets classified as
held for sale to their final net realizable value, resulting in
an additional charge of $1.4 million. We also incurred
expenses of $3.3 million associated with the divestiture.
As a result of competitive developments relating to Macugen and
the wet AMD marketplace, including competition from two
Genentech products —
Lucentis
®
(ranibizumab injection) and the widespread off-label use of
Avastin in 2006 — we were required to assess the value
of the $320.3 million of goodwill recorded in connection
with the acquisition of Eyetech Pharmaceuticals, Inc. In our
assessment, we considered the declining Macugen revenues and our
decision to suspend or curtail research activities in the eye
disease area, which further limits the potential for future
revenues from new products. We determined the amount of the
charge based on present value techniques using discounted cash
flows in accordance SFAS No. 142. Based on this
assessment, we recorded an impairment charge of
$320.3 million during fiscal 2006, reflecting the full
value of the goodwill.
99
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
(e)
|
Macugen
Intangibles Impairment
|
In accordance with SFAS No. 144, we were required to
assess the recoverability of the long-lived assets relating to
our eye disease business that existed on December 31, 2006,
principally the amortizable intangible assets acquired in the
acquisition of Eyetech Pharmaceuticals, Inc. This assessment
included developing various estimates of probability-adjusted
future cash flows relating to Macugen and weighing additional
factors that could impact these future cash flows. Two critical
factors were given significant weight in our assessment: the
current sales level of Macugen; and our level of certainty
regarding the ultimate structure of a transaction to exit the
eye disease business. After considering all of the
aforementioned factors, we concluded that the Macugen
intangibles were impaired and reduced their value to zero at
December 31, 2006 and recorded a $185.7 million charge
in the fourth quarter of 2006.
Operating results of (OSI) Eyetech for the years ended
December 31, 2008, 2007 and 2006 are summarized as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
Net revenue
|
|
$
|
44,314
|
|
|
$
|
37,435
|
|
|
$
|
134,659
|
|
|
Gain on sale of PDGF aptamer research program
|
|
|
—
|
|
|
|
6,012
|
|
|
|
—
|
|
|
Loss on sale of eye disease business
|
|
|
(14,135
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Impairment loss
|
|
|
—
|
|
|
|
—
|
|
|
|
(505,985
|
)
|
|
Operating income (loss)
|
|
|
18,267
|
|
|
|
(35,797
|
)
|
|
|
(104,580
|
)
|
|
Pretax income (loss)
|
|
|
3,582
|
|
|
|
(36,930
|
)
|
|
|
(610,930
|
)
|
|
Net income (loss) from discontinued operations
|
|
$
|
4,884
|
|
|
$
|
(36,288
|
)
|
|
$
|
(610,930
|
)
|
At December 31, 2008 and 2007, certain assets and
liabilities related to the eye disease business were classified
as assets or liabilities related to discontinued operations
except for certain lease obligations that we continue to retain.
The summary of the assets and liabilities related to
discontinued operations as of December 31, 2008 and 2007 is
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
917
|
|
|
$
|
18,411
|
|
|
Prepaid expenses and other assets
|
|
|
—
|
|
|
|
470
|
|
|
Assets held for sale
|
|
|
—
|
|
|
|
6,561
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets related to discontinued operations
|
|
$
|
917
|
|
|
$
|
25,442
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,522
|
|
|
$
|
13,382
|
|
|
Collaboration profit share
|
|
|
—
|
|
|
|
2,783
|
|
|
Unearned revenue
|
|
|
—
|
|
|
|
29,574
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities related to discontinued operations
|
|
$
|
1,522
|
|
|
$
|
45,739
|
|
|
|
|
|
|
|
|
|
|
|
100
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
(f)
|
Variable
Interest Entities
|
We have determined that, under FASB Interpretation
No. 46(R), “Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51,” issued in
January 2003, Eyetech Inc. qualifies as a variable interest
entity, or VIE, but as we are not its primary beneficiary,
consolidation is not required. FIN 46(R) requires an entity
to be classified as a VIE where (i) the reporting company,
or its related parties, participated significantly in the design
of the entity, or where substantially all of the activities of
the entity either involve or are conducted on behalf of the
reporting company or its related parties and (ii) its
equity investors do not have a controlling financial interest or
where the entity is unable to finance its activities without
additional financial support from other parties. Based on this
test, Eyetech Inc. qualifies as a VIE due to its inability at
the time of its acquisition of the remaining assets of our eye
disease business to finance its activities without additional
financial support from third parties, and due to the fact that
Mr. Atieh, our former Executive Vice President, Chief
Financial Officer and Treasurer, a stockholder in Eyetech Inc.,
participated in the design of the entity and agreed to serve as
its part-time executive chairman following his retirement from
OSI in January 2009.
FIN 46(R) further requires the consolidation of entities
which are determined to be VIEs when the reporting company
determines itself to be the primary beneficiary — in
other words, the entity that will absorb a majority of the
VIE’s expected losses or receive a majority of the
VIE’s expected residual returns. We have determined that
OSI is not the primary beneficiary of Eyetech Inc. as
(i) OSI does not hold an equity position in Eyetech Inc.,
(ii) OSI’s ongoing interest in this entity is limited
to OSI’s contingent right to receive future royalties and
milestones and (iii) OSI does not have liability for the
future losses.
|
|
|
|
(g)
|
(OSI)
Eyetech Divestiture — Severance Costs
|
As a result of our decision to exit our eye disease business in
November 2006, we committed to a plan to re-scale the eye
disease business. The plan included the consolidation of
facilities as well as a reduction in the workforce for
transitional employees throughout 2007 and 2008. The remaining
liability is expected to be paid during 2009.
The activity for the years ended December 31, 2008 and 2007
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Opening liability
|
|
$
|
800
|
|
|
$
|
3,284
|
|
|
Accrual for severance, relocation and retention bonuses
|
|
|
1,376
|
|
|
|
5,206
|
|
|
Cash paid for severance
|
|
|
(1,789
|
)
|
|
|
(7,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Ending liability
|
|
$
|
387
|
|
|
$
|
800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21)
|
Accounting
Pronouncements
|
In May 2008, FASB issued FASB Staff Position, or FSP,
No. APB
14-1,
“Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement).” This FSP clarifies that convertible debt
instruments that may be settled in cash upon conversion
(including partial cash settlement) are not addressed by
paragraph 12 of APB Opinion No. 14, “Accounting
for Convertible Debt and Debt Issued with Stock Purchase
Warrants.” Additionally, this FSP specifies that issuers of
such instruments should separately account for the liability and
equity components in a manner that will reflect the
entity’s nonconvertible debt borrowing rate when interest
cost is recognized in subsequent periods. This FSP will be
effective beginning with our financial statements issued for the
first quarter of 2009. We are currently evaluating the impact
this FSP will have on our financial position or results of
operations and anticipate the adoption of this FSP will have a
material impact on the carrying value and the interest expense
associated with our 2025 Notes and 2038 Notes.
101
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In April 2008, the FASB issued FSP
No. FAS 142-3,
“Determination of the Useful Life of Intangible
Assets.” FSP
FAS 142-3
removes the requirement within SFAS No. 142 for an
entity to consider, when determining the useful life of a
recognized intangible asset, whether an intangible asset can be
renewed without substantial cost or material modifications to
the existing terms and conditions. FSP
FAS 142-3
requires an entity to consider its own historical experience in
developing renewal or extension assumptions. In the absence of
entity specific experience, FSP
FAS 142-3
requires an entity to consider assumptions that a marketplace
participant would use about renewal or extension that are
consistent with the highest and best use of the asset by a
marketplace participant. FSP
FAS 142-3
is effective prospectively for all intangible assets acquired
after its effective date, for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal
years, with additional disclosures required for all recognized
intangible assets as of the effective date. We do not expect the
adoption of FSP
FAS 142-3
will have a material impact on our financial position, results
of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities.” SFAS No. 159 permits entities to
choose to measure many financial instruments and certain items
at fair value that are not currently required to be measured at
fair value. Effective January 1, 2008, we elected to adopt
the provisions of SFAS No. 159 for our fiscal year
ending December 31, 2008. The adoption of
SFAS No. 159 did not have a material impact on our
financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements,” to clarify the definition
of fair value, establish a framework for measuring fair value
and expand the disclosures on fair value measurements.
SFAS No. 157 defines fair value as the price that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date. SFAS No. 157 also stipulates
that, as a market-based measurement, fair value measurement
should be determined based on the assumptions that market
participants would use in pricing the asset or liability, and
establishes a fair value hierarchy that distinguishes between:
(a) market participant assumptions developed based on
market data obtained from sources independent of the reporting
entity, or observable inputs; and (b) the reporting
entity’s own assumptions about market participant
assumptions developed based on the best information available in
the circumstances, or unobservable inputs. Except for the
deferral for the implementation of SFAS No. 157 for
specified other non-financial assets and liabilities,
SFAS No. 157 is effective for our fiscal year ended
December 31, 2008. The adoption of SFAS No. 157
did not have a material impact on our financial position,
results of operations or cash flows.
In February 2008, the FASB issued
FSP 157-2,
“Effective Date of FASB Statement No. 157,” which
delays the effective date of SFAS No. 157 for non-financial
assets and non-financial liabilities. The delay is intended to
allow FASB and constituents additional time to consider the
effect of various implementation issues that have arisen, or
that may arise, from the application of SFAS No. 157.
For items within the scope of
FSP 157-2,
this FSP defers the effective date of SFAS No. 157 to
fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years. We currently do not believe
that the adoption of the deferred portion of SFAS No. 157
will have a material impact on our financial condition, results
of operations or cash flows.
On June 27, 2007, EITF Issue
07-03,
“Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities,” was issued. EITF Issue
07-03
provides that nonrefundable advance payments made for goods or
services to be used in future R&D activities are deferred
and capitalized until such time as the related goods or services
are delivered or are performed, at which point the amounts will
be recognized as an expense. EITF Issue
07-03
is
effective for new contracts entered into after January 1,
2008. The adoption of EITF Issue
07-03
did
not have a material impact on our financial position, results of
operations or cash flows in 2008.
In November 2007, EITF Issue
07-01,
“Accounting for Collaborative Arrangements,” was
issued. EITF Issue
07-01
requires collaborators to present the results of activities for
which they act as the principal on a gross basis and report any
payments received from (made to) other collaborators based on
other applicable generally accepted accounting principles or, in
the absence of other applicable generally accepted accounting
principles, based on
102
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
analogy to authoritative accounting literature or a reasonable,
rational and consistently applied accounting policy election.
EITF Issue
07-01
is
effective for fiscal years beginning after December 15,
2008. We currently do not believe that this EITF will have a
material impact on the results of our operations, financial
position or cash flows.
In December 2007, the FASB issued SFAS No. 141R,
“Business Combinations.” SFAS No. 141R
replaces SFAS No. 141 and establishes principles and
requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. SFAS No. 141R also provides
guidance on how the acquirer should recognize and measure the
goodwill acquired in the business combination and determine what
information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141R is effective for
us in our fiscal year beginning January 1, 2009. Most of
the requirements of SFAS No. 141R are only to be
applied prospectively to business combinations entered into on
or after January 1, 2009.
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51.”
SFAS No. 160 states that accounting and reporting
for minority interests will be recharacterized as noncontrolling
interests and classified as a component of equity.
SFAS No. 160 also establishes reporting requirements
that provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160
applies to all entities that prepare consolidated financial
statements, except
not-for-profit
organizations, but will affect only those entities that have an
outstanding noncontrolling interest in one or more subsidiaries
or that deconsolidate a subsidiary. SFAS No. 160 is
effective for fiscal years beginning after December 15,
2008. We currently do not believe that the adoption of
SFAS No. 160 will have a material impact on the
results of our operations, financial position or cash flows.
On February 2, 2009, Genentech, informed us that a
Genentech-conducted Phase III study, ATLAS, was stopped
early on the recommendation of an independent data safety
monitoring board. A pre-planned interim analysis showed that
combining Tarceva and
Avastin
®
(bevacizumab) significantly extended the time that patients with
locally advanced, recurrent or metastatic non-small cell lung
cancer lived without their disease advancing, as defined as
progression-free survival, compared with Avastin plus placebo.
We are currently reviewing certification letters received in
February 2009 from Teva Pharmaceuticals U.S.A., Inc. and Mylan
Pharmaceuticals, Inc. alleging that the three patents listed in
the FDA’s Orange Book for Tarceva are invalid,
unenforceable, or will not be infringed by generic versions of
erlotinib for which these generic pharmaceutical companies have
sought FDA approval to commercialize in the United States. We,
together with Genentech, are currently reviewing these
certifications, which are commonly referred to as
Paragraph IV certifications, and expect to commence patent
infringement lawsuits within the
45-day
period triggered by our receipt of these certifications.
103
OSI
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
(23)
|
Quarterly
Financial Data (unaudited)
|
The tables below summarize our unaudited quarterly operating
results for the years ended December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
(In thousands, except per share data)
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2008
|
|
2008
|
|
2008
|
|
|
|
Revenues from continuing operations
|
|
$
|
90,735
|
|
|
$
|
95,654
|
|
|
$
|
94,572
|
|
|
$
|
98,427
|
|
|
Net income from continuing operations
|
|
$
|
31,663
|
|
|
$
|
37,217
|
|
|
$
|
34,545
|
|
|
$
|
363,176
|
|
|
Net income
|
|
$
|
29,237
|
|
|
$
|
25,298
|
|
|
$
|
54,826
|
|
|
$
|
362,124
|
|
|
Basic earnings per share from continuing operations
|
|
$
|
0.55
|
|
|
$
|
0.65
|
|
|
$
|
0.60
|
|
|
$
|
6.30
|
|
|
Diluted earnings per share from continuing operations
|
|
$
|
0.52
|
|
|
$
|
0.61
|
|
|
$
|
0.56
|
|
|
$
|
5.50
|
|
|
Basic net income per share
|
|
$
|
0.51
|
|
|
$
|
0.44
|
|
|
$
|
0.95
|
|
|
$
|
6.29
|
|
|
Diluted net income per share
|
|
$
|
0.49
|
|
|
$
|
0.43
|
|
|
$
|
0.88
|
|
|
$
|
5.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
(In thousands, except per share data)
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
|
2007
|
|
2007
|
|
2007
|
|
2007
|
|
|
|
Revenues from continuing operations
|
|
$
|
77,469
|
|
|
$
|
78,883
|
|
|
$
|
100,370
|
|
|
$
|
84,308
|
|
|
Net income from continuing operations
|
|
$
|
19,695
|
|
|
$
|
29,276
|
|
|
$
|
35,904
|
|
|
$
|
17,732
|
|
|
Net income
|
|
$
|
6,641
|
|
|
$
|
19,622
|
|
|
$
|
29,628
|
|
|
$
|
10,428
|
|
|
Basic earnings per share from continuing operations
|
|
$
|
0.34
|
|
|
$
|
0.51
|
|
|
$
|
0.62
|
|
|
$
|
0.31
|
|
|
Diluted earnings per share from continuing operations
|
|
$
|
0.33
|
|
|
$
|
0.48
|
|
|
$
|
0.59
|
|
|
$
|
0.29
|
|
|
Basic net income per share
|
|
$
|
0.12
|
|
|
$
|
0.34
|
|
|
$
|
0.51
|
|
|
$
|
0.18
|
|
|
Diluted net income per share
|
|
$
|
0.12
|
|
|
$
|
0.33
|
|
|
$
|
0.49
|
|
|
$
|
0.18
|
|
The basic and diluted net income per common share calculation
for each of the quarters are based on the weighted average
number of shares outstanding and the effect of common stock
equivalents in each period. Therefore, the sum of the quarters
in a fiscal year does not necessarily equal the basic and
diluted net income per common share for the fiscal year.
104
|
|
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
Not Applicable.
|
|
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
CEO/CFO
CERTIFICATIONS
Attached to this Annual Report on
Form 10-K
as Exhibits 31.1 and 31.2, there are two certifications, or
the Section 302 Certifications, one by each of our Chief
Executive Officer, or CEO, and our Chief Financial Officer, or
CFO. This Item 9A contains information concerning the
evaluation of our disclosure controls and procedures and
internal control over financial reporting that is referred to in
the Section 302 Certifications and this information should
be read in conjunction with the Section 302 Certifications
for a more complete understanding of the topics presented.
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
Evaluation of Our Disclosure Controls and
Procedures.
The Securities and Exchange
Commission requires that as of the end of the period covered by
this Annual Report on
Form 10-K,
the CEO and the CFO evaluate the effectiveness of the design and
operation of our disclosure controls and procedures (as defined
in
Rule 13a-15(e))
under the Securities Exchange Act of 1934, or the Exchange Act,
and report on the effectiveness of the design and operation of
our disclosure controls and procedures. Accordingly, under the
supervision and with the participation of our management,
including our CEO and CFO, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures
as of the end of the period covered by this Annual Report on
Form 10-K.
CEO/CFO Conclusions about the Effectiveness of the Disclosure
Controls and Procedures.
Based upon their
evaluation of the disclosure controls and procedures, our CEO
and CFO have concluded that our disclosure controls and
procedures are at the reasonable assurance level to ensure that
material information relating to OSI and our consolidated
subsidiaries is made known to management, including the CEO and
CFO, on a timely basis and during the period in which this
Annual Report on
Form 10-K
was being prepared.
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rules 13a-15(f)
of the Exchange Act).
Under the supervision of and with the participation of our CEO
and our CFO, our management conducted an assessment of the
effectiveness of our internal control over financial reporting
based on the framework and criteria established in
Internal
Control — Integrated Framework,
issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, our management has
concluded that, as of December 31, 2008, our internal
control over financial reporting was effective. The
effectiveness of our internal control over financial reporting
as of December 31, 2008 has been audited by KPMG LLP, our
independent registered public accounting firm, as stated in its
report which is included in this Annual Report on
Form 10-K.
CHANGES
IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There were no changes in our internal control over financial
reporting (as defined in
Rule 13a-15(f)
of the Exchange Act), identified in connection with the
evaluation of such internal control over financial reporting
that occurred during the fourth quarter of fiscal 2008 that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
105
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
OSI Pharmaceuticals, Inc.:
We have audited OSI Pharmaceuticals, Inc. and subsidiaries’
internal control over financial reporting as of
December 31, 2008, based on criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). OSI Pharmaceuticals, Inc. and
subsidiaries’ management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Management’s Report on Internal Control. Our responsibility
is to express an opinion on the Company’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, OSI Pharmaceuticals, Inc. and subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2008, based on
criteria established in
Internal Control —
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of OSI Pharmaceuticals, Inc. and
subsidiaries as of December 31, 2008 and 2007, and the
related consolidated statements of operations,
stockholders’ equity and cash flows for each of the years
in the three-year period ended December 31, 2008, and our
report dated February 27, 2009 expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG LLP
Melville, NY
February 27, 2009
106
|
|
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
Not applicable.
PART III
|
|
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by this item is incorporated by
reference to the similarly named section of our Proxy Statement
for our 2009 Annual Meeting to be filed with the Securities and
Exchange Commission not later than 120 days after
December 31, 2008.
|
|
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by this item is incorporated by
reference to the similarly named section of our Proxy Statement
for our 2009 Annual Meeting to be filed with the Securities and
Exchange Commission not later than 120 days after
December 31, 2008.
|
|
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required by this item is incorporated by
reference to the similarly named section of our Proxy Statement
for our 2009 Annual Meeting to be filed with the Securities and
Exchange Commission not later than 120 days after
December 31, 2008.
|
|
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
The information required by this item is incorporated by
reference to the similarly named section of our Proxy Statement
for our 2009 Annual Meeting to be filed with the Securities and
Exchange Commission not later than 120 days after
December 31, 2008.
|
|
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The information required by this item is incorporated by
reference to the similarly named section of our Proxy Statement
for our 2009 Annual Meeting to be filed with the Securities and
Exchange Commission not later than 120 days after
December 31, 2008.
107
PART IV
|
|
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENTS AND SCHEDULES
|
(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 and incorporated herein by reference and filed as a
part of this report.
108
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OSI PHARMACEUTICALS, INC.
|
|
|
|
|
|
By:
|
/s/ COLIN
GODDARD, Ph.D
|
Colin Goddard, Ph.D.
Chief Executive Officer
Date: February 27, 2009
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 Registrant and in the
capacities and on the days indicated.
|
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
/s/ ROBERT
A. INGRAM
Robert
A. Ingram
|
|
Chairman of the Board
|
|
February 27, 2009
|
|
|
|
|
|
|
|
/s/ COLIN
GODDARD, Ph.D.
Colin
Goddard, Ph.D.
|
|
Director and Chief Executive Officer (principal executive
officer)
|
|
February 27, 2009
|
|
|
|
|
|
|
|
/s/ PIERRE
LEGAULT
Pierre
Legault
|
|
Executive Vice President, Chief Financial Officer and Treasurer
(principal financial and accounting officer)
|
|
February 27, 2009
|
|
|
|
|
|
|
|
/s/ SANTO
J. COSTA
Santo
J. Costa
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
|
|
/s/ DARYL
K. GRANNER, M.D.
Daryl
K. Granner, M.D.
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
|
|
/s/ JOSEPH
KLEIN, III
Joseph
Klein, III
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
|
|
/s/ KENNETH
B. LEE, Jr.
Kenneth
B. Lee, Jr.
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
|
|
/s/ VIREN
MEHTA
Viren
Mehta
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
|
|
/s/ DAVID
W. NIEMIEC
David
W. Niemiec
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
|
|
/s/ HERBERT
PINEDO, M.D., Ph.D.
Herbert
Pinedo, M.D., Ph.D.
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
|
|
/s/ KATHARINE
B. STEVENSON
Katharine
B. Stevenson
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
|
|
/s/ JOHN
P. WHITE, ESQUIRE
John
P. White, Esquire
|
|
Director
|
|
February 27, 2009
|
109
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
|
2
|
.1†+
|
|
Asset Purchase Agreement, dated as of June 17, 2004, by and
between Probiodrug AG, Halle and Prosidion Limited, filed by the
Company as an exhibit to the
Form 8-K
filed on July 6, 2004 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
2
|
.2+
|
|
Agreement and Plan of Merger, dated August 21, 2005, among
OSI Pharmaceuticals, Inc., Merger EP Corporation and Eyetech
Pharmaceuticals, Inc., filed by the Company as an exhibit to the
Form 8-K
filed on August 22, 2005 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
3
|
.1
|
|
Restated Certificate of Incorporation of OSI Pharmaceuticals,
Inc., filed by the Company as an exhibit to the
Form 10-K
for the fiscal year ended September 30, 2001 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
3
|
.2
|
|
Second Amended and Restated Bylaws of OSI Pharmaceuticals, Inc.
(Filed herewith).
|
|
|
4
|
.1
|
|
Rights Agreement, dated September 27, 2000, between OSI
Pharmaceuticals, Inc. and The Bank of New York as Rights Agent,
including Terms of Series SRP Junior Participating
Preferred Stock, Summary of Rights to Purchase Preferred Stock
and Form of Right Certificate, filed by the Company as an
exhibit to the
Form 8-A
filed on September 27, 2000 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
4
|
.2
|
|
Form of Contingent Value Rights Agreement by and between OSI
Pharmaceuticals, Inc. and the Bank of New York, filed by the
Company as an exhibit to the registration statement on
Form S-4
(file
no. 333-103644),
and incorporated herein by reference.
|
|
|
4
|
.3
|
|
Indenture, dated September 8, 2003, by and between OSI
Pharmaceuticals, Inc. and The Bank of New York, filed by the
Company as an exhibit to the
Form 10-K
for the fiscal year ended September 30, 2003 (file
no. 000-15190)
and incorporated herein by reference.
|
|
|
4
|
.4
|
|
Form of
3
1
/
4
% Convertible
Senior Subordinated Note Due 2023 (included in
Exhibit 4.3), filed by the Company as an exhibit to the
Form 10-K
for the fiscal year ended September 30, 2003 (file
no. 000-15190)
and incorporated herein by reference.
|
|
|
4
|
.5
|
|
Registration Rights Agreements, dated September 8, 2003, by
and among OSI Pharmaceuticals, Inc., Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith,
Incorporated, and Morgan Stanley & Co., Incorporated,
filed by the Company as an exhibit to the
Form 10-K
for the fiscal year ended September 30, 2003 (file
no. 000-15190)
and incorporated herein by reference.
|
|
|
4
|
.6
|
|
Indenture, dated December 21, 2005, by and between OSI
Pharmaceuticals, Inc. and The Bank of New York, filed by the
Company as an exhibit to the
Form 8-K
filed on December 28, 2005 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
4
|
.7
|
|
Form of 2% Convertible Senior Subordinated Note Due 2025
(included in Exhibit 4.6), filed by the Company as an
exhibit to the
Form 8-K
filed on December 28, 2005 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
4
|
.8
|
|
Registration Rights Agreement, dated December 21, 2005, by
and between OSI Pharmaceuticals, Inc. and UBS Securities LLC,
filed by the Company as an exhibit to the
Form 8-K
filed on December 28, 2005 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
4
|
.9
|
|
Indenture, dated January 9, 2008, by and between OSI
Pharmaceuticals, Inc. and The Bank of New York, filed by the
Company as an exhibit to the
Form 8-K
filed on January 15, 2008 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
4
|
.10
|
|
Form of 3% Convertible Senior Subordinated Note Due 2038
(included in Exhibit 4.9), filed by the Company as an
exhibit to the
Form 8-K
filed on January 15, 2008 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
4
|
.11
|
|
Registration Rights Agreement, dated January 9, 2008, by
and between OSI Pharmaceuticals, Inc. and Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and J.P. Morgan Securities Inc., filed
by the Company as an exhibit to the
Form 8-K
filed on January 15, 2008 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.1*
|
|
1989 Incentive and Non-Qualified Stock Option Plan, filed by the
Company as an exhibit to the registration statement on
Form S-8
(file
no. 33-38443),
and incorporated herein by reference.
|
|
|
10
|
.2*
|
|
1995 Employee Stock Purchase Plan, filed by the Company as an
exhibit to the registration statement on
Form S-8,
filed on December 4, 1995 (file
no. 333-06861),
and incorporated herein by reference.
|
110
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
|
10
|
.3*
|
|
1997 Incentive and Non-Qualified Stock Option Plan, filed by the
Company as an exhibit to the registration statement on
Form S-8,
filed on November 4, 1997 (file
no. 333-39509),
and incorporated herein by reference.
|
|
|
10
|
.4*
|
|
1999 Incentive and Non-Qualified Stock Option Plan, as amended,
filed by the Company as an exhibit to the
Form 10-Q
for the quarter ended September 30, 2006 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.5*
|
|
Amended and Restated Stock Incentive Plan, as amended, filed by
the Company as an exhibit to the
Form 10-Q
for the quarter ended September 30, 2007 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.6*
|
|
Form of Non-Qualified Stock Option Agreement issued under the
Amended and Restated Stock Incentive Plan for employees of OSI
Pharmaceuticals, Inc., filed by the Company as an exhibit to the
Form 10-Q
for the quarter ended June 30, 2005 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.7*
|
|
Form of Non-Qualified Stock Option Agreement issued under the
Amended and Restated Stock Incentive Plan for employees of
Prosidion Limited and OSI Pharmaceuticals (UK) Limited filed by
the Company as an exhibit to the
Form 10-Q
for the quarter ended March 31, 2005 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.8
|
|
OSI Pharmaceuticals, Inc. Non-Qualified Stock Option Plan for
Former Employees of Cadus Pharmaceutical Corporation, filed by
the Company as an exhibit to the
Form 10-Q
for the quarter ended June 30, 1999 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.9
|
|
OSI Pharmaceuticals, Inc. Non-Qualified Stock Option Plan for
Former Employees of Gilead Sciences, Inc. filed by the Company
as an exhibit to the
Form 8-K
filed on January 7, 2002 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.10
|
|
OSI Pharmaceuticals, Inc. Stock Incentive Plan for Pre-Merger
Employees of Eyetech Pharmaceuticals, Inc., filed by the Company
as an exhibit to the
Form 8-K
filed on November 16, 2005 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.11
|
|
OSI Pharmaceuticals, Inc. Stock Plan for Assumed Options of
Pre-Merger Employees of Eyetech Pharmaceuticals, Inc. filed by
the Company as an exhibit to the
Form 8-K
filed on November 16, 2005 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.12*
|
|
Form of Non-Qualified Stock Option Agreement, issued under the
Amended and Restated Stock Incentive Plan, as amended, for
option grants made in December 2008 for
U.S.-Based
Executive Officers of OSI Pharmaceuticals, Inc. (Filed herewith).
|
|
|
10
|
.13*
|
|
Form of Non-Qualified Stock Option Agreement, issued under the
Amended and Restated Stock Incentive Plan, as amended, for
option grants made in December 2008 for U.K.-Based Executive
Officers of OSI Pharmaceuticals, Inc. (Filed herewith).
|
|
|
10
|
.14*
|
|
Form of Non-Qualified Stock Option Agreement for
U.S.-Based
Executive Officers of OSI Pharmaceuticals, Inc., filed by the
Company as an exhibit to the
Form 8-K
filed on June 22, 2006, and incorporated herein by
reference.
|
|
|
10
|
.15*
|
|
Form of Non-Qualified Stock Option Agreement for U.K.-Based
Employees of OSI Pharmaceuticals, Inc., filed by the Company as
an exhibit to the
Form 8-K
filed on June 22, 2006, and incorporated herein by
reference.
|
|
|
10
|
.16*
|
|
Form of Non-Qualified Stock Option Agreement for Non-Management
Directors of OSI Pharmaceuticals, Inc., filed by the Company as
an exhibit to the
Form 8-K
filed on June 22, 2006, and incorporated herein by
reference.
|
|
|
10
|
.17*
|
|
Form of Restricted Stock Agreement for Executive Officers of OSI
Pharmaceuticals, Inc., filed by the Company as an exhibit to the
Form 8-K
filed on July 12, 2006, and incorporated herein by
reference.
|
|
|
10
|
.18*
|
|
Form of Restricted Stock Agreement for Non-Management Directors
of OSI Pharmaceuticals, Inc., filed by the Company as an exhibit
to the
Form 8-K
filed on July 12, 2006, and incorporated herein by
reference.
|
|
|
10
|
.19*
|
|
Form of Restricted Stock Unit Agreement for U.S.-Based Executive
Officers of OSI Pharmaceuticals, Inc., filed by the Company as
an exhibit to the
Form 8-K
filed on July 12, 2006, and incorporated herein by
reference.
|
111
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
|
10
|
.20*
|
|
Form of Restricted Stock Unit Agreement for U.K.-Based Executive
Officers of OSI Pharmaceuticals, Inc. (Filed herewith).
|
|
|
10
|
.21*
|
|
Form of Restricted Stock Unit Agreement for Non-Management
Directors of OSI Pharmaceuticals, Inc., filed by the Company as
an exhibit to the
Form 8-K
filed on July 12, 2006, and incorporated herein by
reference.
|
|
|
10
|
.22*
|
|
OSI Pharmaceuticals, Inc. Nonqualified Deferred Compensation
Plan, effective July 1, 2007, filed by the Company as an
exhibit to the
Form 10-Q
for the quarter ended June 30, 2007 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.23*
|
|
Form of Deferred Stock Unit Agreement for the Non-Employee
Directors of OSI Pharmaceuticals, Inc., filed by the Company as
an exhibit to the
Form 10-Q
for the quarter ended June 30, 2007 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.24†
|
|
Collaborative Research Agreement, dated April 1, 1996,
between OSI Pharmaceuticals, Inc. and Pfizer Inc., filed by the
Company as an exhibit to the
Form 10-Q
for the quarter ended March 31, 1996, as amended (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.25†
|
|
License Agreement, dated April 1, 1996, between OSI
Pharmaceuticals, Inc. and Pfizer Inc., filed by the Company as
an exhibit to the
Form 10-Q
for the quarter ended March 31, 1996, as amended (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.26†
|
|
Amended and Restated License Agreement, dated April 20,
2007, by and between OSI Pharmaceuticals, Inc. and Pfizer, Inc.,
filed by the Company as an exhibit to the
Form 10-Q
for the quarter ended March 31, 2007 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.27
|
|
Agreement, dated May 23, 2000, by and between OSI
Pharmaceuticals, Inc. and Pfizer Inc., filed by the Company as
an exhibit to the
Form 8-K
filed on June 20, 2000 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.28†
|
|
Development and Marketing Collaboration Agreement, dated
January 8, 2001, between OSI Pharmaceuticals, Inc. and
Genentech, Inc., filed by the Company as an exhibit to the
Form 8-K
filed on February 14, 2001 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.29†
|
|
Amendment No. 1 to Development and Marketing Collaboration
Agreement, dated as of June 4, 2004, between OSI
Pharmaceuticals, Inc. and Genentech, Inc., filed by the Company
as an exhibit to the
Form 8-K
filed on June 28, 2004 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.30†
|
|
Manufacturing and Supply Agreement, dated as of June 4,
2004, by and between OSI Pharmaceuticals, Inc. and Genentech,
Inc., filed by the Company as an exhibit to the
Form 8-K
filed on June 28, 2004 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.31†
|
|
Development Collaboration and Licensing Agreement, dated
January 8, 2001, between OSI Pharmaceuticals, Inc. and F.
Hoffman — La Roche Ltd., filed by the Company as
an exhibit to the
Form 8-K
filed on February 14, 2001 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.32†
|
|
Tripartite Agreement, dated January 8, 2001, by and among
OSI Pharmaceuticals, Inc., Genentech, Inc., and F. Hoffman
La Roche Ltd., filed by the Company as an exhibit to the
Form 8-K
filed on February 14, 2001 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.33†
|
|
Supply Agreement, dated February 2, 2005, by and between
Schwarz Pharma Manufacturing, Inc. and OSI Pharmaceuticals, Inc.
filed by the Company as an exhibit to the
Form 10-Q
for the quarter ended March 31, 2005 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.34
|
|
Agreement of Sale and Purchase, dated March 15, 2005, by
and between Swissair, Swiss Air Transport Co., Ltd. and OSI
Pharmaceuticals, Inc. filed by the Company as an exhibit to the
Form 10-Q
for the quarter ended March 31, 2005 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.35†
|
|
Exclusive License Agreement, effective as of January 4,
2007, between Eli Lilly and Company and Prosidion Limited, filed
by the Company as an exhibit to the
Form 10-K
for the fiscal year ended December 31, 2006 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.36*
|
|
Letter Agreement, dated November 15, 2001, by and between
OSI Pharmaceuticals, Inc. and Mr. Robert L. Simon filed by
the Company as an exhibit to the
Form 10-Q
for the quarter ended March 31, 2005 (file
no. 000-15190),
and incorporated herein by reference.
|
112
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
|
10
|
.37*
|
|
Amended Letter Agreement, dated September 20, 2005, by and
between OSI Pharmaceuticals, Inc. and Robert L. Simon, filed by
the Company as an exhibit to the
Form 8-K
filed on September 26, 2005 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.38*
|
|
Amendment to Letter Agreement, dated December 19, 2008, by
and between OSI Pharmaceuticals, Inc. and Robert L. Simon (Filed
herewith).
|
|
|
10
|
.39*
|
|
Change of Control Arrangement, dated October 4, 2001, by
and between OSI Pharmaceuticals, Inc. and Barbara A.
Wood, Esq., filed by the Company as an exhibit to the
Form 10-Q
for the quarter ended March 31, 2005 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.40*
|
|
Amended Change in Control Arrangement, dated September 20,
2005, by and between OSI Pharmaceuticals, Inc. and Barbara A.
Wood, Esq. filed by the Company as an exhibit to the
Form 8-K
filed on September 26, 2005 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.41*
|
|
Amendment to Change of Control Arrangement, dated
December 18, 2008, by and between OSI Pharmaceuticals, Inc.
and Barbara A. Wood, Esq. (Filed herewith).
|
|
|
10
|
.42*
|
|
Amended and Restated Employment Agreement, dated May 31,
2005, by and between OSI Pharmaceuticals, Inc. and Michael G.
Atieh, filed by the Company as an exhibit to the
Form 10-Q
for the quarter ended June 30, 2005 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.43*
|
|
Amendment to Amended and Restated Employment Agreement, dated
December 19, 2008, by and between OSI Pharmaceuticals, Inc.
and Michael G. Atieh (Filed herewith).
|
|
|
10
|
.44*
|
|
Employment Agreement, dated May 16, 2003, by and between
OSI Pharmaceuticals, Inc. and Gabriel Leung, filed by the
Company as an exhibit to the
Form 10-K
for the fiscal year ended September 30, 2003 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.45*
|
|
Addendum to Employment Agreement, dated January 5, 2004,
between by and between OSI Pharmaceuticals, Inc. and Gabriel
Leung, filed by the Company as an exhibit to the
Form 10-QT
for the transition period ended December 31, 2004 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.46*
|
|
Amendment to Employment Agreement, dated December 16, 2008,
by and between OSI Pharmaceuticals, Inc. and Gabriel Leung
(Filed herewith).
|
|
|
10
|
.47*
|
|
Service Contract, dated September 20, 2005, by and between
OSI Pharmaceuticals, Inc. and Dr. Anker Lundemose, filed by
the Company as an exhibit to the
Form 8-K
filed on September 26, 2005 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.48*
|
|
Employment Agreement between OSI Pharmaceuticals, Inc. and Colin
Goddard, Ph.D., as amended on June 21, 2006, filed by
the Company as an exhibit to the
Form 8-K
filed on June 22, 2006, and incorporated herein by
reference.
|
|
|
10
|
.49*
|
|
Amendment to Employment Agreement, dated December 18, 2008,
between OSI Pharmaceuticals, Inc. and Colin Goddard, Ph.D.
(Filed herewith).
|
|
|
10
|
.50*
|
|
Change in Control Arrangement, dated December 4, 2007, by
and between OSI Pharmaceuticals, Inc. and Linda E. Amper, filed
by the Company as an exhibit to the
Form 10-K
for the fiscal year ended December 31, 2007 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.51*
|
|
Amendment to Change in Control Arrangement, dated
December 17, 2008, by and between OSI Pharmaceuticals, Inc.
and Linda E. Amper. (Filed herewith).
|
|
|
10
|
.52*
|
|
Employment Agreement, dated December 16, 2008, by and
between OSI Pharmaceuticals, Inc. and Pierre Legault, filed by
the Company as an exhibit to the
Form 8-K
filed on December 16, 2008 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.53*
|
|
Consulting Agreement, dated January 28, 2008, by and
between OSI Pharmaceuticals, Inc. and Herbert M.
Pinedo, M.D., Ph.D., filed by the Company as an
Exhibit to the
Form 10-K
for the fiscal year ended December 31, 2007 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.54*
|
|
Consulting Agreement, dated November 20, 2008 between OSI
Pharmaceuticals, Inc., and Mehta Partners, LLC, filed by the
Company as an Exhibit to the
Form 8-K
filed on November 21, 2008 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.55*
|
|
Letter Agreement, dated January 25, 2007, by and between
Dr. Daryl Granner and OSI Pharmaceuticals, Inc., filed by
the Company as an exhibit to the
Form 8-K,
filed on January 29, 2007 (file
no. 000-15190),
and incorporated herein by reference.
|
113
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
|
10
|
.56*
|
|
Letter Agreement, dated January 1, 2008, by and between
Dr. Daryl Granner and OSI Pharmaceuticals, Inc., filed by
the Company as an exhibit to the
Form 10-K
for the fiscal year ended December 31, 2007 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.57*
|
|
Scientific Advisory Board and Consulting Agreement, dated
January 1, 2009, between Prosidion Limited and
Dr. Daryl Granner. (Filed herewith).
|
|
|
10
|
.58*
|
|
Consulting Agreement dated August 23, 2007, by and between
OSI Pharmaceuticals, Inc. and Walter M. Lovenberg, Ph.D.,
filed by the Company as an exhibit to the
Form 10-K
for the fiscal year ended December 31, 2007 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.59*
|
|
Share Purchase Deed relating to Shares of Prosidion Limited,
dated April 14, 2005, between OSI Pharmaceuticals, Inc. and
Dr. Daryl Granner, filed by the Company as an exhibit to
the
Form 8-K,
filed on April 20, 2005 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.60*
|
|
Amended and Restated Stock Incentive Plan Stock Award Agreement,
dated April 14, 2005, between OSI Pharmaceuticals, Inc. and
Dr. Daryl Granner, filed by the Company as an exhibit to
the
Form 8-K
filed on April 20, 2005 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.61*
|
|
Restricted Stock Agreement, dated May 31, 2005, by and
between OSI Pharmaceuticals, Inc. and Michael G. Atieh, filed by
the Company as an exhibit to the
Form 10-Q
for the quarter ended June 30, 2005 (file
no. 000-15190),
and incorporated herein by reference.
|
|
|
10
|
.62*
|
|
Compensatory Arrangements for Non-Employee Directors. (Filed
herewith).
|
|
|
10
|
.63*
|
|
Compensatory Arrangements of Executive Officers. (Filed
herewith).
|
|
|
21
|
|
|
Significant Subsidiaries of OSI Pharmaceuticals, Inc. (Filed
herewith).
|
|
|
23
|
|
|
Consent of KPMG LLP, independent registered public accounting
firm. (Filed herewith).
|
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)
or 15(d)-14(a). (Filed herewith).
|
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)
or 15d-14(a). (Filed herewith).
|
|
|
32
|
.1
|
|
Certification of Chief Executive Officer pursuant to
18 U.S.C. § 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (Filed
herewith).
|
|
|
32
|
.2
|
|
Certification of Chief Financial Officer pursuant to
18 U.S.C. § 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (Filed
herewith).
|
|
|
|
|
|
*
|
|
Indicates a management contract or compensatory plan, contract
or arrangement in which directors or executive officers
participates.
|
|
|
|
†
|
|
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.
|
|
|
|
+
|
|
The schedules to this exhibit have been omitted pursuant to
Item 601(b)(2) of
Regulation S-K
promulgated by the Securities and Exchange Commission. The
omitted schedules from this filing will be provided upon request.
|
114
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