FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
June 30, 2009
OR
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o
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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
.
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, New York
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11747
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(Address of principal executive offices)
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(Zip Code)
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631-962-2000
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o
No
o
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
þ
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
o
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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
o
No
þ
APPLICABLE ONLY TO CORPORATE ISSUERS:
At August 3, 2009, the registrant had outstanding 58,025,961 shares of common stock, $.01 par
value.
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands except per share data)
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June 30,
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December 31,
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2009
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2008
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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154,615
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$
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272,936
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Investment securities
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399,179
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240,328
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Restricted investment securities
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2,297
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2,247
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Accounts receivable
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104,827
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100,242
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Inventory
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18,518
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20,139
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Interest receivable
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1,870
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1,428
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Prepaid expenses and other current assets
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9,894
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6,719
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Assets related to discontinued operations
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917
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Deferred tax assets net
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24,730
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45,425
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Total current assets
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715,930
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690,381
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Property, equipment and leasehold improvements net
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66,852
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43,443
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Debt issuance costs net
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4,788
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5,632
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Goodwill
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38,919
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38,648
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Other intangible assets net
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8,241
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7,711
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Other assets
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15,125
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14,591
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Deferred tax assets net
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273,797
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273,797
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$
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1,123,652
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$
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1,074,203
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable and accrued expenses
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$
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40,759
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$
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49,052
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Unearned revenue current
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10,027
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10,547
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Liabilities related to discontinued operations
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2,428
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1,522
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Total current liabilities
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53,214
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61,121
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Other liabilities:
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Rent obligations and deferred rent expenses
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4,867
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8,154
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Unearned revenue long-term
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31,316
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33,398
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Convertible senior subordinated notes net
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375,991
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369,095
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Accrued post-retirement benefit cost and other
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4,406
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3,890
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Total liabilities
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469,794
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475,658
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Commitments and contingencies
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Stockholders equity:
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Preferred stock, $.01 par value; 5,000 shares authorized; no shares issued at
June 30, 2009 and December 31, 2008
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Common stock, $.01 par value; 200,000 shares authorized, 61,330 and 61,124
shares issued at June 30, 2009 and December 31, 2008, respectively
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613
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611
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Additional paid-in capital
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1,777,988
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1,761,179
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Accumulated deficit
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(1,024,187
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)
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(1,057,118
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)
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Accumulated other comprehensive income (loss)
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1,663
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(3,908
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)
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756,077
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700,764
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Less: treasury stock, at cost; 3,396 shares at June 30, 2009 and December
31, 2008
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(102,219
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)
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(102,219
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)
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Total stockholders equity
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653,858
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598,545
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$
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1,123,652
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$
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1,074,203
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See accompanying notes to consolidated financial statements.
1
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except per share data)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2009
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2008
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2009
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2008
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Revenues:
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Tarceva-related revenues
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$
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85,323
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$
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87,940
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$
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169,179
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$
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170,298
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Other revenues
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13,743
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7,714
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23,564
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16,091
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Total revenues
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99,066
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95,654
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192,743
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186,389
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Operating expenses:
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Cost of goods sold
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2,659
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2,061
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4,853
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4,231
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Research and development
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37,147
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30,406
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72,583
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60,955
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Selling, general and administrative
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25,187
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23,192
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49,388
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47,723
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Amortization of intangibles
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236
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636
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464
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1,238
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Total operating expenses
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65,229
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56,295
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127,288
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114,147
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Operating income from continuing operations
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33,837
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39,359
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65,455
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72,242
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Other income (expense):
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Investment income net
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1,957
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2,960
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4,171
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6,694
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Interest expense
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(6,392
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)
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(6,189
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)
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(12,785
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)
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(12,494
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)
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Other (expense) income net
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(2,338
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)
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(1,006
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)
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(2,722
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)
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(1,906
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)
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Income from continuing operations before income taxes
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27,064
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35,124
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54,119
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64,536
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Income tax provision
|
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|
10,556
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|
|
958
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21,107
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1,774
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|
|
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Net income from continuing operations
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16,508
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34,166
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33,012
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62,762
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Income (loss) from discontinued operations net of tax
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23
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(11,919
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)
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(81
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)
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(14,345
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)
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Net income
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$
|
16,531
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$
|
22,247
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$
|
32,931
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|
|
$
|
48,417
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Basic and diluted income (loss) per common share:
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Basic income (loss):
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|
|
|
|
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|
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|
|
|
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Continuing operations
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$
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0.29
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|
$
|
0.60
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|
|
$
|
0.57
|
|
|
$
|
1.10
|
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Discontinued operations
|
|
|
0.00
|
|
|
|
(0.21
|
)
|
|
|
(0.00
|
)
|
|
|
(0.25
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)
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Net income
|
|
$
|
0.29
|
|
|
$
|
0.39
|
|
|
$
|
0.57
|
|
|
$
|
0.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Diluted income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Continuing operations
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|
$
|
0.28
|
|
|
$
|
0.59
|
|
|
$
|
0.56
|
|
|
$
|
1.08
|
|
Discontinued operations
|
|
|
0.00
|
|
|
|
(0.20
|
)
|
|
|
(0.00
|
)
|
|
|
(0.24
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)
|
Net income
|
|
$
|
0.28
|
|
|
$
|
0.39
|
|
|
$
|
0.56
|
|
|
$
|
0.85
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|
|
|
|
|
|
|
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|
|
|
|
|
|
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Weighted average shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic shares
|
|
|
57,906
|
|
|
|
57,083
|
|
|
|
57,862
|
|
|
|
57,107
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|
Diluted shares
|
|
|
60,333
|
|
|
|
59,932
|
|
|
|
60,481
|
|
|
|
60,340
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|
See accompanying notes to consolidated financial statements.
2
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
32,931
|
|
|
$
|
48,417
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,875
|
|
|
|
5,612
|
|
Impairment of assets
|
|
|
559
|
|
|
|
6,078
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|
Impact of inventory step-up related to inventory sold
|
|
|
|
|
|
|
47
|
|
Amortization of FSP APB 14-1 discount and debt issuance costs
|
|
|
7,739
|
|
|
|
7,600
|
|
Amortization of premiums and discounts on investments
|
|
|
(370
|
)
|
|
|
(174
|
)
|
Non-cash compensation charge
|
|
|
12,480
|
|
|
|
9,916
|
|
Deferred tax provision
|
|
|
20,695
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,432
|
)
|
|
|
(142
|
)
|
Inventory
|
|
|
1,621
|
|
|
|
(426
|
)
|
Prepaid expenses and other current assets
|
|
|
(2,993
|
)
|
|
|
2,666
|
|
Other assets
|
|
|
(1,013
|
)
|
|
|
(1,093
|
)
|
Accounts payable and accrued expenses
|
|
|
(7,071
|
)
|
|
|
(14,546
|
)
|
Unearned revenue
|
|
|
(2,602
|
)
|
|
|
(4,391
|
)
|
Accrued post-retirement benefit cost and other
|
|
|
(5
|
)
|
|
|
10
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
62,414
|
|
|
|
59,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of investments (restricted and unrestricted)
|
|
|
(336,486
|
)
|
|
|
(80,664
|
)
|
Maturities and sales of investments (restricted and unrestricted)
|
|
|
179,582
|
|
|
|
135,379
|
|
Additions to property, equipment and leasehold improvements
|
|
|
(27,621
|
)
|
|
|
(2,573
|
)
|
Purchase of intangible assets
|
|
|
|
|
|
|
(8,000
|
)
|
Other
|
|
|
(123
|
)
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(184,648
|
)
|
|
|
44,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options,
employee purchase plan, and other
|
|
|
4,362
|
|
|
|
3,711
|
|
Employee taxes paid related to equity awards
|
|
|
(31
|
)
|
|
|
(693
|
)
|
Proceeds from the issuance of convertible senior subordinated notes
|
|
|
|
|
|
|
200,000
|
|
Debt issuance costs
|
|
|
|
|
|
|
(6,704
|
)
|
Purchase of treasury stock
|
|
|
|
|
|
|
(64,998
|
)
|
Repurchase of a portion of the 2023 Notes
|
|
|
|
|
|
|
(50,000
|
)
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
4,331
|
|
|
|
81,316
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(117,903
|
)
|
|
|
184,964
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(418
|
)
|
|
|
(1
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
272,936
|
|
|
|
162,737
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
154,615
|
|
|
$
|
347,700
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
1,032
|
|
|
$
|
1,488
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
5,774
|
|
|
$
|
3,795
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
3
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
In this Quarterly Report on Form 10-Q, OSI, our company, we, us, and our refer
to OSI Pharmaceuticals, Inc. and its subsidiaries. We own or have rights to use various
copyrights, trademarks and trade names used in our business, including Tarceva
®
(erlotinib) and Novantrone
®
(mitoxantrone for injection
concentrate). This Form 10-Q also includes trademarks, service marks and trade names of other
companies. As a result of our decision to divest the eye disease business previously held by our
wholly-owned subsidiary, Oldtech, Inc. (formerly (OSI) Eyetech, Inc.), or (OSI) Eyetech, the
operating results for (OSI) Eyetech are shown as discontinued operations for all periods presented
in the accompanying consolidated statement of operations. We completed the divestiture of the
remaining assets of our eye disease business to Eyetech Inc. in August 2008. The
(OSI) Eyetech-related assets and liabilities which, as a result of the divestiture, were sold or
are in the process of being wound down, have been classified as assets and liabilities related to
discontinued operations in our June 30, 2009 and December 31, 2008 consolidated balance sheets.
(1)
Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial statements
have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for
interim financial information and with the instructions to Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments considered necessary for a
fair presentation have been included. Operating results for the three and six months ended June
30, 2009 are not necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2009. For further information, refer to the consolidated financial statements
and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2008.
Certain reclassifications have been made to the consolidated statements of operations for the
three and six months ended June 30, 2008 to conform to the presentation for the three and six
months ended June 30, 2009. These reclassifications include a reclassification of revenue
categories within total revenues to conform to the presentation for the three and six months ended
June 30, 2009.
In accordance with the Financial Accounting Standards Board, or FASB, Staff Position, or FSP,
APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement), or FSP APB 14-1, we have retrospectively adopted FSP APB 14-1
and restated the accompanying unaudited consolidated financial statements for the three and six
months ended June 30, 2008, and also restated the accompanying December 31, 2008 consolidated
balance sheet for the cumulative impact of the adoption. See Notes 15 and 16 below for further
explanation of the impact of this FSP.
Effective this quarter, we implemented Statement of Financial Accounting Standards, or SFAS, No. 165,
Subsequent Events, or SFAS 165. This standard establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before financial statements are
issued. The adoption of SFAS 165 did not impact our financial position or results of operations.
We evaluated all events or transactions that occurred after June
4
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
30, 2009 up through the filing of
this Form 10-Q on August 7, 2009. During this period we did not have any material recognized subsequent events. However, we did have nonrecognized
subsequent events as discussed in Note 18.
(2)
Revenue Recognition
Tarceva-related revenues include net revenue from unconsolidated joint business and
Tarceva-related milestones and royalties. Other revenues include license, milestone, royalties and
commissions from sources other than Tarceva. Our revenue recognition policies with respect to
these revenue sources are described below.
(a)
Net Revenue from Unconsolidated Joint Business
Net revenue from unconsolidated joint business is related to our co-promotion and
manufacturing agreements with Genentech, Inc., a wholly-owned subsidiary of Roche and 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 are recognized by Genentech. Genentech is
also responsible for estimating reserves for anticipated returns, rebates and allowances of Tarceva
and monitoring the adequacy of these reserves.
For the three months ended June 30, 2009 and 2008, Genentech recorded approximately
$113 million and $119 million, respectively, in net sales of Tarceva in the United States and its
territories. For the six months ended June 30, 2009 and 2008, Genentech recorded approximately
$224 million and $230 million, respectively, 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 Genentechs, 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 $5.8 million and $6.6 million as of June 30, 2009 and December 31, 2008,
respectively, and is included in unearned revenue-current in the accompanying consolidated balance
sheets.
For the three months ended June 30, 2009 and 2008, 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
$46.3 million and $49.5 million, respectively, and revenues from the
5
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
reimbursement of our
manufacturing costs were $2.4 million and $2.5 million,
respectively. For the six months ended June 30, 2009 and 2008,
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
$92.8 million and $96.8 million, respectively, and revenues from the reimbursement of our
manufacturing costs were $4.8 million and $4.9 million, respectively.
(b)
Royalties
We estimate royalty revenue and royalty receivables in the periods these royalties are earned,
in advance of collection, when collections are reasonably assured. Our estimate of royalty revenue
and receivables is based upon communication with our collaborators. Differences between actual
royalty revenues 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 Roches 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 the local
currencies in which Tarceva is sold, will impact our royalty revenue.
(c)
License 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. 104, Revenue Recognition. In addition, we
adopted the provisions of Emerging Issues Task Force Issue, or EITF Issue, 00-21, Revenue
Arrangements with Multiple Deliverables, for multiple element revenue arrangements entered into or
materially amended after June 15, 2003, with respect to upfront and milestone payments received
under collaborative research agreements.
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 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 $26.2 million as of June 30, 2009, of
which $2.3 million was classified as short-term and the balance of $23.9 million was classified as
long-term in the accompanying consolidated balance sheets. 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 sheets. Milestone
payments received from Roche are recorded as unearned revenue and recognized over the expected term
of the research
6
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
collaboration, on a straight-line basis, which approximates the expected level of
performance under the development plan. The unearned revenue related to the milestones we received
from Roche was $9.0 million as of June 30, 2009, of which $1.4 million was classified as short-term
and the balance of $7.6 million was classified as long-term in the accompanying consolidated
balance sheets. 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 sheets.
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 royalties of
(i) $13.3 million and $7.6 million for the three months ended June 30, 2009 and 2008, respectively,
and (ii) $22.8 million and $14.0 million for the six months ended June 30, 2009 and 2008,
respectively.
(3)
Product Development and Commercialization Agreements
As part of our business strategy we periodically enter into collaboration agreements that
provide either us or our collaborators with rights to develop, manufacture and sell drug products
using certain know-how, technology and patent rights. The terms of these collaboration agreements
may entitle us to receive or make milestone payments upon the achievement of certain product
research and development, or R&D, objectives and receive or pay royalties on future sales of
commercial products resulting from the collaboration.
Effective January 1, 2009, we implemented EITF Issue No. 07-1, Accounting for Collaborative
Arrangements, or EITF Issue 07-1, which provides for enhanced disclosure of collaborative
relationships and requires that certain transactions between collaborators be recorded in the
income statement on either a gross or net basis, depending on the characteristics of the
collaboration relationship. In accordance with EITF Issue 07-1, we evaluated our collaborative
agreements for proper income statement classification based on the nature of the underlying
activity. If payments to and from our collaborative partners are not within the scope of other
authoritative accounting literature, the income statement classification for the payments is based
on a reasonable, rational analogy to authoritative accounting literature that is applied in a
consistent manner. Amounts due from our collaborative partners related to development activities
are generally reflected as a reduction of R&D expense because the performance of contract
development services is not central to our operations. For collaborations for commercialized
products, if we are the principal, as defined in EITF Issue No. 99-19, Reporting Revenue as a
Principal versus Net as an Agent, or EITF Issue 99-19, we record revenue and the corresponding
operating costs in their respective line items within our consolidated statement of operations. If
we are not the principal, we record operating costs as a reduction of revenue. Under EITF Issue
99-19, the principal is the party that is responsible for delivering the product or service to the
customer, has latitude with respect to establishing price, and bears the risks and rewards of
providing product or service to the customer, including
7
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
inventory and credit risk. The adoption of
EITF Issue 07-1 did not affect our financial position or results of operations for the three and
six months ended June 30, 2009, however it resulted in enhanced disclosures for our collaboration
activities.
For the three and six months ended June 30, 2009, we recorded $5.0 million and $10.6 million,
respectively, of reimbursed costs from our collaborators as a reduction in R&D expenses, compared
to $2.5 million and $4.9 million, respectively, for the three and six months ended June 30, 2008.
(a)
Genentech and Roche
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 partys 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 certain countries around 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 U.S. Food and Drug
Administration, or 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
8
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 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 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 partys 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
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
9
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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.
(b)
AVEO
On September 28, 2007, we entered into a small molecule drug discovery and translational
research collaboration with AVEO Pharmaceuticals, Inc., or AVEO. The purpose of this collaboration
is the development of 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 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 original 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.
$7.5 million of the upfront payment was recognized as an in-process R&D charge. The $2.5 million
of first year research funding was recognized as a prepaid asset and was amortized over one year,
the period AVEO delivered research services under the collaboration. The acquired preferred stock
is recorded as a cost based investment in other assets in the accompanying consolidated balance
sheets.
As noted in Note 18, on July 21, 2009, we announced our expansion of our drug discovery and
translational research collaboration with AVEO in an effort to validate cancer targets and deploy
key elements of AVEOs proprietary translational research platform in support of our clinical
development programs.
10
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(4)
Income Per Share
Basic income per share is computed by dividing net income by the weighted-average number of
common shares outstanding during the reporting period. Diluted income per common share is computed
by dividing net income plus interest on dilutive convertible debt 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 the common stock underlying in-the-money 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 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 June 30, 2009, our outstanding convertible senior debt consisted
of our 3.25% Convertible Senior Subordinated Notes due 2023, or our 2023 Notes, our 2% Convertible
Senior Subordinated Notes due 2025, or our 2025 Notes, and our 3% Convertible Senior Subordinated
Notes due 2038, or our 2038 Notes.
As discussed in Notes 15 and 16 below, our retrospective adoption of FSP APB 14-1 resulted in
our recognition of additional interest expense, decreasing our net income for the three and six
months ended June 30, 2009 and 2008. FSP APB 14-1 also caused us to resequence our senior
subordinated convertible notes for dilutive calculation purposes under the if-converted method
for the three and six months ended June 30, 2008.
11
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The computations for basic and diluted income per share from continuing operations were as
follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
Net income from continuing operations basic
|
|
$
|
16,508
|
|
|
$
|
34,166
|
|
|
$
|
33,012
|
|
|
$
|
62,762
|
|
Add: Interest and issuance costs related to convertible notes
net of tax
|
|
|
495
|
|
|
|
1,186
|
|
|
|
991
|
|
|
|
2,647
|
|
|
|
|
|
|
Net income from continuing operations diluted
|
|
$
|
17,003
|
|
|
$
|
35,352
|
|
|
$
|
34,003
|
|
|
$
|
65,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
57,906
|
|
|
|
57,083
|
|
|
|
57,862
|
|
|
|
57,107
|
|
Dilutive effect of options and restricted stock
|
|
|
429
|
|
|
|
554
|
|
|
|
621
|
|
|
|
618
|
|
Dilutive effect of 2023 Notes
|
|
|
1,998
|
|
|
|
2,295
|
|
|
|
1,998
|
|
|
|
2,615
|
|
Dilutive effect of 2025 Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of 2038 Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and dilutive potential
common shares diluted
|
|
|
60,333
|
|
|
|
59,932
|
|
|
|
60,481
|
|
|
|
60,340
|
|
|
|
|
|
|
Net income per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
|
$
|
0.60
|
|
|
$
|
0.57
|
|
|
$
|
1.10
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.28
|
|
|
$
|
0.59
|
|
|
$
|
0.56
|
|
|
$
|
1.08
|
|
|
|
|
|
|
Under the if-converted method, 3,908,241 common share equivalents related to our 2025
Notes, and 2,709,260 common share equivalents related to our 2038 Notes, were not included in
diluted earnings per share for the three and six months ended June 30, 2009 because their effect
would be anti-dilutive. For the three and six months ended June 30, 2008, the 2025 Notes and the
2038 Notes were not included in diluted earnings per share because their effect
would be anti-dilutive. The table below sets forth (in thousands) the common share
equivalents related to convertible notes and equity plans and the interest expense related to the
convertible notes not included in dilutive shares because their effect would be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
Common share
equivalents convertible notes
|
|
|
6,617
|
|
|
|
6,617
|
|
|
|
6,617
|
|
|
|
6,509
|
|
Common share
equivalents equity plans
|
|
|
3,032
|
|
|
|
3,520
|
|
|
|
2,632
|
|
|
|
3,327
|
|
Convertible note interest and issuance expense not
added back under the if-converted method
|
|
$
|
3,627
|
|
|
$
|
5,602
|
|
|
$
|
7,252
|
|
|
$
|
11,013
|
|
12
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(5)
Comprehensive Income
Comprehensive income, which includes foreign currency translation adjustments, post-retirement
adjustments, unrealized gains or losses on our available-for-sale securities and unrealized gains
or losses on our qualified derivative instruments, for the three and six months ended June 30, 2009
and 2008, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
Net income
|
|
$
|
16,531
|
|
|
$
|
22,247
|
|
|
$
|
32,931
|
|
|
$
|
48,417
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
4,917
|
|
|
|
77
|
|
|
|
4,391
|
|
|
|
110
|
|
Post-retirement plan
|
|
|
(8
|
)
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
Unrealized holding gains (losses) arising during period
|
|
|
720
|
|
|
|
(597
|
)
|
|
|
1,205
|
|
|
|
(196
|
)
|
Unrealized losses on derivative instruments
|
|
|
(9
|
)
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
22,151
|
|
|
$
|
21,727
|
|
|
$
|
38,502
|
|
|
$
|
48,331
|
|
|
|
|
|
|
The components of accumulated other comprehensive income (losses) were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
|
|
Cumulative foreign currency translation adjustment
|
|
$
|
652
|
|
|
$
|
(3,739
|
)
|
Post-retirement plan
|
|
|
362
|
|
|
|
378
|
|
Unrealized gain (losses) on available-for-sale securities
|
|
|
658
|
|
|
|
(547
|
)
|
Unrealized losses on derivative instruments
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (losses)
|
|
$
|
1,663
|
|
|
$
|
(3,908
|
)
|
|
|
|
(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 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.
Effective this quarter, we implemented FSP FAS 157-4, Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying
Transactions that Are Not Orderly, or FSP FAS 157-4. FSP FAS 157-4 provides guidelines for making
fair value measurements more consistent with the principles presented in SFAS 157. FSP FAS 157-4
also provides additional authoritative guidance in determining whether a market is active or
inactive, and whether a transaction is distressed, is applicable to all assets and liabilities
(i.e., financial and nonfinancial) or will require enhanced disclosures. The adoption of FSP
FAS 157-4 did not have a material impact on our operations, financial position, results of
operations or cash flows for the three and six months ended June 30, 2009.
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;
|
13
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
|
(ii)
Level 2
observable inputs other than quoted prices in non-active markets for identical
assets and liabilities or quoted prices for similar assets or liabilities in active markets; and
|
|
|
(iii)
|
|
Level 3
unobservable inputs for which little or no market data exists, requiring
management to develop its own assumptions.
|
Except for our cash equivalents, our financial assets and liabilities have been classified as
Level 2. These assets and liabilities have been initially valued at the transaction price and
subsequently valued typically utilizing third party pricing services. The pricing services use many
inputs to determine value, including reportable trades, benchmark yields, credit spreads,
broker/dealer quotes, bids, offers, current spot rates and other industry and economic events. We
validate the prices provided by our third party pricing services by reviewing their pricing methods
and matrices, obtaining market values from other pricing sources and analyzing pricing data in
certain instances.
Investment securities at June 30, 2009 consisted primarily of U.S. government agency
securities and debt securities of financial institutions and corporations. The following table
summarizes the fair value at June 30, 2009 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, derivatives and convertible senior subordinated notes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
As
|
|
Active
|
|
Significant
|
|
|
|
|
|
|
Reflected
|
|
Market for
|
|
Other
|
|
Significant
|
|
|
|
|
on the
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
|
|
Balance
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
|
|
|
Sheet
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
145,131
|
|
|
$
|
145,131
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
145,131
|
|
Investment securities
|
|
|
399,179
|
|
|
|
|
|
|
|
399,179
|
|
|
|
|
|
|
|
399,179
|
|
Restricted investments
|
|
|
2,297
|
|
|
|
|
|
|
|
2,297
|
|
|
|
|
|
|
|
2,297
|
|
Other assets
|
|
|
1,362
|
|
|
|
|
|
|
|
1,362
|
|
|
|
|
|
|
|
1,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives (see Note 8)
|
|
|
22
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
22
|
|
2038 Notes (Face value
$200,000)
|
|
|
172,684
|
|
|
|
|
|
|
|
160,500
|
|
|
|
|
|
|
|
160,500
|
|
2025 Notes (Face value
$115,000)
|
|
|
103,357
|
|
|
|
|
|
|
|
124,700
|
|
|
|
|
|
|
|
124,700
|
|
2023 Notes
(Face value $99,950)
|
|
|
99,950
|
|
|
|
|
|
|
|
81,300
|
|
|
|
|
|
|
|
81,300
|
|
The $154.6 million of cash and cash equivalents at June 30, 2009 included $145.1 million
of cash equivalents consisting of money market funds and commercial paper with original maturities
at the date of purchase 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.
14
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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
|
|
|
|
|
|
|
|
|
As
|
|
Active
|
|
Significant
|
|
|
|
|
|
|
Reflected
|
|
Market 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
(Face value $200,000)
|
|
|
169,326
|
|
|
|
|
|
|
|
161,220
|
|
|
|
|
|
|
|
161,220
|
|
2025 Notes
(Face value $115,000)
|
|
|
99,819
|
|
|
|
|
|
|
|
157,010
|
|
|
|
|
|
|
|
157,010
|
|
2023 Notes
(Face value $99,950)
|
|
|
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 as of June 30, 2009 and
December 31, 2008 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, net of amortized discount.
Included in other assets in the accompanying consolidated balance sheets as of June 30, 2009
and December 31, 2008 was $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 June 30, 2009.
15
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The carrying amounts reflected in the accompanying consolidated balance sheets for cash,
accounts receivable, due from unconsolidated joint business, other current assets, accounts payable
and accrued expenses approximate fair value due to their short-term nature.
(7)
Investments
Effective this quarter, we implemented FSP FAS 107-1 and APB 28-1, Interim Disclosures about
Fair Value of Financial Instruments, or FSP FAS 107-1. This pronouncement amends FASB Statement No.107, Disclosures
about Fair Value of Financial Instruments, to require disclosures about fair value of financial
instruments in interim as well as in annual financial
statements. This pronouncement also amends APB Opinion No. 28, Interim Financial Reporting,
to require those disclosures in all interim financial statements. The adoption of FSP FAS 107-1 did
not have a material impact on our operations, financial position, results of operations or cash
flows for the three and six months ended June 30, 2009, however, it resulted in enhanced
disclosures.
As of June 30, 2009, approximately 59% 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+/Aa2 as of
June 30, 2009. 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.
The following is a summary of available-for-sale securities as of June 30, 2009 and
December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
Costs
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and U.S. government agency
securities
|
|
$
|
64,855
|
|
|
$
|
339
|
|
|
$
|
|
|
|
$
|
65,194
|
|
Corporate and financial institutions debt
|
|
|
329,043
|
|
|
|
1,157
|
|
|
|
(415
|
)
|
|
|
329,785
|
|
Municipal securities
|
|
|
4,200
|
|
|
|
|
|
|
|
|
|
|
|
4,200
|
|
|
|
|
Total investment securities
|
|
|
398,098
|
|
|
|
1,496
|
|
|
|
(415
|
)
|
|
|
399,179
|
|
Restricted investments
|
|
|
2,297
|
|
|
|
|
|
|
|
|
|
|
|
2,297
|
|
|
|
|
Total
|
|
$
|
400,395
|
|
|
$
|
1,496
|
|
|
$
|
(415
|
)
|
|
$
|
401,476
|
|
|
|
|
16
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
Costs
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
U.S. government and U.S. government agency
securities
|
|
$
|
66,007
|
|
|
$
|
607
|
|
|
$
|
|
|
|
$
|
66,614
|
|
Corporate and financial institutions debt
|
|
|
170,634
|
|
|
|
74
|
|
|
|
(1,247
|
)
|
|
|
169,461
|
|
Municipal securities
|
|
|
4,237
|
|
|
|
16
|
|
|
|
|
|
|
|
4,253
|
|
|
|
|
Total investment securities
|
|
|
240,878
|
|
|
|
697
|
|
|
|
(1,247
|
)
|
|
|
240,328
|
|
Restricted investments
|
|
|
2,244
|
|
|
|
3
|
|
|
|
|
|
|
|
2,247
|
|
|
|
|
Total
|
|
$
|
243,122
|
|
|
$
|
700
|
|
|
$
|
(1,247
|
)
|
|
$
|
242,575
|
|
|
|
|
Net realized gains (losses) on sales of investment securities during the three and six
months ended June 30, 2009 were $159,000 and $217,000, respectively, compared to $400 and $5,600
for the three and six months ended June 30, 2008, respectively.
The gross unrealized losses on our investments were $415,000 as of June 30, 2009, all of which
occurred during 2009. For available-for-sale debt securities with
unrealized losses, management performs an analysis to assess whether we intend to sell or whether we would more likely than not be required to sell the security before the expected recovery of the amortized cost basis. Where we intend to sell a security, or may be required to do so, the securitys decline in fair value is deemed to be other-than-temporary and the full amount of the unrealized loss is
recorded within earnings as an impairment loss.
Regardless of our intent to sell a security, we perform additional analysis on all securities with unrealized losses to evaluate losses associated with the creditworthiness of the security. Credit lossses are identified where we do not expect to receive cash flows sufficient to recover the amortized cost basis of a security.
Maturities of investment securities classified as available-for-sale were as follows at
June 30, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Fair Value
|
|
|
|
2009
|
|
$
|
107,551
|
|
|
$
|
107,639
|
|
2010
|
|
|
227,314
|
|
|
|
227,917
|
|
2011
|
|
|
56,177
|
|
|
|
56,526
|
|
2012
|
|
|
7,056
|
|
|
|
7,097
|
|
|
|
|
|
|
$
|
398,098
|
|
|
$
|
399,179
|
|
|
|
|
(8)
Derivatives
Our business is subject to foreign exchange rate risk resulting primarily from our operations
in the United Kingdom and the U.S. dollar royalties we receive from Roche which are derived from
local country sales of Tarceva outside of the United States. In the second quarter of 2009, we
initiated a foreign currency hedging program with a risk management objective to reduce volatility
to earnings and cash flows due to changes in foreign exchange rates, primarily through the use of
foreign currency forwards and collars. We do not use derivatives for speculative trading purposes
and are not a party to leveraged derivatives.
We recognize our derivative instruments as either assets or liabilities at fair value in the
accompanying consolidated balance sheets. As discussed further in Note 6 to the consolidated
financial statements, fair value is determined in accordance with SFAS No. 157. The accounting for
changes in the fair value of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For
derivatives designated as hedges under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, we formally assess, both at inception and
17
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
periodically thereafter, whether the
hedging derivatives are highly effective in offsetting changes in either the fair value or cash
flows of the hedged item.
We enter into foreign currency forwards and collars to protect against possible changes in
value of certain anticipated foreign currency cash flows resulting from changes in foreign currency
exchange rates, primarily associated with royalties received from Euro-denominated sales or
non-functional currency royalty revenues earned by our international operations. We hedge a portion
of our projected international royalties over a short-term period, generally less than one year. As
of June 30, 2009, we had $8.3 million notional equivalent of outstanding foreign currency collars.
Our foreign exchange contracts are designated as cash flow hedges, and accordingly, the
effective portion of gains and losses on these contracts are reported in accumulated other
comprehensive income (loss), or, AOCI, in the accompanying consolidated balance sheets and
reclassified to earnings in the same periods during which the hedged transactions affect earnings.
At that time, the effective portion of fair value of these foreign currency forwards are included
in royalty revenue in the accompanying consolidated statement of operations. As of June
30, 2009 the amount expected to be reclassified into earnings over the next 12 months is
approximately $9,000 of losses.
The fair values of our derivative financial instruments designated as hedging instruments and
included in the accompanying consolidated balance sheet as of June 30, 2009 are presented as
follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
Foreign currency contracts
|
|
Other current assets
|
|
$
|
|
|
Other current liabilities
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts of the gains and losses related to our derivative financial instruments
designated as hedging instruments are presented as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain or
|
|
|
|
|
|
|
|
(Loss) Reclassified
|
|
|
|
|
Amount of Gain or (Loss)
|
|
|
from Accumulated
|
|
|
Amount of Gain or (Loss) Reclassified from
|
|
Recognized in OCI on Derivatives
|
|
|
OCI into Earnings
|
|
|
Accumulated OCI into Earnings (Effective
|
|
(Effective Portion)
|
|
|
(Effective Portion)
|
|
|
Portion
(a)
|
|
Three months ended
|
|
Six months ended
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
June 30, 2009
|
|
June 30, 2009
|
|
|
|
|
|
June 30, 2009
|
|
|
June 30, 2009
|
|
$
|
(9
|
)
|
$
|
(9
|
)
|
|
Royalty revenue
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
There were $6,000 of losses recognized in earnings related to the ineffective portion of
the hedging relationship for the three and six months ended June 30, 2009. There were no
amounts excluded from the assessment of hedge effectiveness for both the three and six months
ended June 30, 2009.
|
18
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
risk. The counterparties to these contracts are major financial institutions. We do not have
significant exposure to any one counterparty. Our exposure to credit loss in the event of
nonperformance by any of the counterparties is limited to only the recognized, but not realized,
gain attributable to the contracts. Management believes risk of default under these hedging
contracts is remote and in any event would not be material to the consolidated financial results.
Our foreign exchange contracts are also subject to certain financial and default based termination
provisions as outlined within the counterparty agreements. If these events were to occur without
satisfactory and timely remediation, the counterparties would have the right, but not the
obligation, to close the contracts under early termination provisions. In such circumstances, the
counterparties could request immediate settlement for amounts that approximate the then current
fair values of the contracts.
(9)
Accounting for Equity Based Compensation
Total net equity-based compensation expense is attributable to the amortization of the fair
value of stock options, restricted stock, restricted stock units and deferred stock units granted.
Compensation expense related to continuing operations and attributable to equity-based compensation
for the three months ended June 30, 2009 and 2008 was $6.3 million and $4.4 million, respectively.
Compensation expense related to continuing operations and attributable to equity-based compensation
for the six months ended June 30, 2009 and 2008 was $12.5 million and $9.8 million, respectively.
Stock Options
We estimate the fair value of stock-based awards 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 values of our granted stock
options. 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 previously unissued shares.
For the three and six months ended June 30, 2009, we granted options to purchase 103,050 and
339,710 shares of common stock, respectively.
19
The per share weighted average fair value of stock options granted during the three months
ended June 30, 2009 and 2008 was $13.67 and $17.30, respectively. The per share weighted average
fair value of stock options granted during the six months ended June 30, 2009 and 2008 was $16.95
and $17.49, respectively. In addition to the exercise and grant date prices of the awards, certain
weighted average assumptions that were used to estimate the fair value of stock option grants in
the respective periods are listed in the table below:
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
50.58
|
%
|
|
|
49.62
|
%
|
|
|
50.17
|
%
|
|
|
48.53
|
%
|
Risk-free interest rate
|
|
|
1.70
|
%
|
|
|
3.73
|
%
|
|
|
1.95
|
%
|
|
|
3.66
|
%
|
Expected term (years)
|
|
|
4.97
|
|
|
|
4.67
|
|
|
|
5.45
|
|
|
|
4.67
|
|
(10)
Inventory
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, 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 June 30, 2009 and December 31, 2008 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
|
|
|
|
Raw materials
|
|
$
|
533
|
|
|
$
|
676
|
|
Work-in-process
|
|
|
9,385
|
|
|
|
8,532
|
|
Finished goods on hand
|
|
|
3,265
|
|
|
|
4,897
|
|
Inventory subject to return
|
|
|
5,335
|
|
|
|
6,034
|
|
|
|
|
|
|
Total inventory
|
|
$
|
18,518
|
|
|
$
|
20,139
|
|
|
|
|
|
|
Inventory subject to return represents the amount of Tarceva shipped to Genentech which
has not been recognized as revenue.
(11)
Other Intangible Assets Net
The components of other intangible assets-net were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
December 31, 2008
|
|
|
Carrying
|
|
Accumulated
|
|
Net Book
|
|
Carrying
|
|
Accumulated
|
|
Net Book
|
|
|
Amount
|
|
Amortization
|
|
Value
|
|
Amount
|
|
Amortization
|
|
Value
|
|
|
|
Acquired intangibles
|
|
$
|
10,586
|
|
|
$
|
(2,345
|
)
|
|
$
|
8,241
|
|
|
$
|
9,386
|
|
|
$
|
(1,675
|
)
|
|
$
|
7,711
|
|
|
|
|
|
|
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 expiration date of 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.
20
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Our intangible assets are recorded on the books of Prosidion Limited, our U.K. subsidiary, and
denominated in British pounds sterling. As a result, the balance reported fluctuates based upon
the changes in exchange rates.
Amortization expense relating to continuing operations for our intangible assets was $236,000
and $464,000, respectively, for the three and six months ended June 30, 2009 compared to $636,000
and $1.2 million, respectively, for the three and six months ended June 30, 2008. Amortization
expense is estimated to be $459,000 for the remaining six months of 2009 and $917,000 for each of
the years 2010 through 2014.
(12)
Consolidation of Facilities
(a)
Oxford, England
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.
In the first quarter of 2009, we completed the purchase of the previously leased research
facilities for $3.8 million. As a result of this transaction, refurbishment costs of $1.7 million
that were previously accrued have been applied against the acquisition cost of the building.
The activity for the three and six months ended June 30, 2009 and 2008 was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
Opening liability
|
|
$
|
|
|
|
$
|
2,510
|
|
|
$
|
1,899
|
|
|
$
|
2,882
|
|
Cash paid for rent
|
|
|
|
|
|
|
(153
|
)
|
|
|
|
|
|
|
(626
|
)
|
Refurbishment adjustment
|
|
|
|
|
|
|
|
|
|
|
(1,674
|
)
|
|
|
|
|
Other
|
|
|
|
|
|
|
9
|
|
|
|
(225
|
)
|
|
|
110
|
|
|
|
|
|
|
Ending liability
|
|
$
|
|
|
|
$
|
2,366
|
|
|
$
|
|
|
|
$
|
2,366
|
|
|
|
|
|
|
(b)
Eyetech Acquired Facilities
In connection with the acquisition of Eyetech Pharmaceuticals, Inc., or Eyetech, in
November 2005, we consolidated facilities in Massachusetts, New York City and Colorado and
recognized a liability for the present value of the future lease payments for each facility offset
by sublease income. The outstanding liabilities as of December 31, 2008 and June 30, 2009 are not
included in the liabilities related to discontinued operations since the obligations were not
transferred in the divestiture of the eye disease business. The liabilities are included in the
accompanying consolidated balance sheets.
21
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The activity for the three and six months ended June 30, 2009 and 2008 was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
Opening liability
|
|
$
|
2,310
|
|
|
$
|
3,506
|
|
|
$
|
2,295
|
|
|
$
|
3,282
|
|
Accretion expense
|
|
|
38
|
|
|
|
40
|
|
|
|
77
|
|
|
|
80
|
|
Cash paid for rent
|
|
|
(1,295
|
)
|
|
|
(2,115
|
)
|
|
|
(2,593
|
)
|
|
|
(3,305
|
)
|
Sublease income
|
|
|
1,180
|
|
|
|
1,138
|
|
|
|
2,454
|
|
|
|
2,512
|
|
|
|
|
|
|
Ending liability
|
|
$
|
2,233
|
|
|
$
|
2,569
|
|
|
$
|
2,233
|
|
|
$
|
2,569
|
|
|
|
|
|
|
(13)
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 dependents who were eligible to
participate in the plan on that date. 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. The accrued post-retirement benefit cost at June 30,
2009 and December 31, 2008 totaled $2.6 million and $2.7 million, respectively.
Net post-retirement benefit cost for the three and six months ended June 30, 2009 and 2008
included the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
Interest costs on accumulated post-retirement
benefits obligation
|
|
$
|
34
|
|
|
$
|
44
|
|
|
$
|
68
|
|
|
$
|
88
|
|
Amortization of loss
|
|
|
(8
|
)
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
Net post-retirement benefit cost
|
|
$
|
26
|
|
|
$
|
44
|
|
|
$
|
52
|
|
|
$
|
88
|
|
|
|
|
|
|
(b)
Sabbatical Leave Accrual
Effective January 1, 2007, we adopted EITF Issue 06-02, Accounting for Sabbatical Leave and
Other Similar Benefits Pursuant to SFAS No. 43. Sabbatical leave is generally defined as an
employees entitlement to paid time off after working for an entity for a specified
22
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 June 30, 2009 and December 31, 2008 was $514,000 and $468,000, respectively, of accrued
sabbatical leave.
(c)
Nonqualified Deferred Compensation Plan
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 June 30,
2009 and December 31, 2008, we had accrued $1,247,000 and $682,000 related to this plan,
respectively. The employees select among various investment alternatives, with the investments
held in a separate trust.
(14)
Income Taxes
For the three and six months ended June 30, 2009, we recorded a provision for income taxes of
$10.6 million and $21.1 million, respectively, related to income from continuing operations, of
which $9.8 million and $19.7 million, respectively, represent a deferred or non-cash tax expense
and the remainder represents the estimated current cash tax expense, which is principally related
to U.S. alternative minimum tax. For the three and six months ended June 30, 2008, we recorded a
provision for income taxes of $958,000 and $1.8 million, respectively, related to income from
continuing operations, which represented our estimated cash tax expense, principally related to the
U.S. alternative minimum tax.
The $298.5 million of net deferred tax assets reflected on the accompanying consolidated
balance sheet as of June 30, 2009 reflects managements assessment that it is more likely than not
that we will be able to generate sufficient future taxable income in the United States to utilize
those deferred tax assets, based on our current estimates and assumptions. If these estimates and
assumptions change in the future, we may be required to record additional valuation allowances
against our deferred tax assets resulting in additional income tax expense in our consolidated
statements of operations. These deferred tax assets consist principally of (i) U.S. net operating
losses, or NOLs, (ii) research tax credit carry forwards related to equity-based compensation
incurred prior to our adoption of SFAS No. 123(R), Accounting for Stock-Based Compensation, and
(iii) NOLs generated in the United Kingdom. As of June 30, 2009, we had
recorded approximately $97 million of valuation allowance against our deferred tax assets.
In the event that the deferred taxes associated with approximately $23 million of the U.K. NOLs
related to our Prosidion subsidiary were to be realized in the future, there could be an offsetting
U.S. income tax expense because the Prosidion subsidiary is currently treated as a branch for
U.S. income tax purposes. On a quarterly basis, management evaluates the realizability of the
deferred tax assets and assesses the need for additional valuation allowances.
23
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(15)
Convertible Debt
The principal amount of our convertible senior subordinated notes totaled approximately
$415 million at June 30, 2009 and December 31, 2008, and was comprised of our 2023 Notes, our 2025
Notes and our 2038 Notes.
FASB issued FSP APB 14-1 effective for financial statements issued for fiscal years beginning
after December 15, 2008. FSP APB 14-1 requires an issuer of certain convertible debt instruments
that have a net settlement feature and may be settled in cash upon conversion to separately account
for the liability (debt) and equity (conversion option) components of the instrument in a manner
that reflects the issuers nonconvertible debt borrowing rate. The issuer must determine the
carrying amount of the liability component of any outstanding debt instruments by estimating the
fair value of a similar liability without the conversion option. The amount of the equity
component is then calculated by deducting the fair value of the liability component from the
principal amount of the convertible debt instrument.
The adoption of FSP APB 14-1 impacted the carrying value of our 2025 Notes and 2038 Notes, and
we retrospectively recognized this impact from the date that the notes were originally issued.
The following is a summary of the outstanding indebtedness under our convertible senior
subordinated notes as of June 30, 2009 and December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
Net Carrying
|
|
|
|
|
|
|
|
|
|
Net Carrying
|
Long-term
|
|
Principal
|
|
Discount
|
|
Value
|
|
Principal
|
|
Discount
|
|
Value
|
|
|
|
|
|
2023 Notes 3.25%
|
|
$
|
99,950
|
|
|
$
|
|
|
|
$
|
99,950
|
|
|
$
|
99,950
|
|
|
$
|
|
|
|
$
|
99,950
|
|
2025 Notes 2.00%
|
|
|
115,000
|
|
|
|
11,643
|
|
|
|
103,357
|
|
|
|
115,000
|
|
|
|
15,181
|
|
|
|
99,819
|
|
2038 Notes 3.00%
|
|
|
200,000
|
|
|
|
27,316
|
|
|
|
172,684
|
|
|
|
200,000
|
|
|
|
30,674
|
|
|
|
169,326
|
|
|
|
|
|
|
|
|
$
|
414,950
|
|
|
$
|
38,959
|
|
|
$
|
375,991
|
|
|
$
|
414,950
|
|
|
$
|
45,855
|
|
|
$
|
369,095
|
|
|
|
|
|
|
The effective interest rate used in determining the liability component of our 2038 Notes
and 2025 Notes was 7.51% and 9.39%, respectively. The adoption of FSP APB 14-1 effective as of the
issuance date of the 2025 Notes and 2038 Notes resulted in the recording of $33.3 million and $37.0
million as a debt discount with a corresponding increase to paid-in capital for the 2025 Notes and
2038 Notes, respectively. The related discount on the 2025 Notes and 2038 Notes will be amortized
on a straight-line basis through December 2010 and January 2013, respectively. The cash interest
expense for the three and six months ended June 30, 2009 for our 2025 Notes was $575,000 and $1.1
million, respectively, relating to the 2% stated coupon rate. The cash interest expense for the
three and six months ended June 30, 2009 for our 2038 Notes was $1.5 million and $3.0 million,
respectively, relating to the 3.0% stated coupon rate. The non-cash interest expense relating to
the amortization of the discount for our 2025 Notes for the three and six months ended June 30,
2009 was $1.8 million and $3.5 million, respectively, compared to $1.6 million and $3.2 million for
the three and six months ended June 30, 2008, respectively. The non-cash interest expense relating to the
amortization of the discount for our 2038 Notes for the three and six months ended June 30, 2009
was $1.7 million and $3.4 million, respectively, compared to $1.6 million and $3.1 million for the
three and six months ended June 30, 2008, respectively.
24
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(16)
Change in Accounting Principle
On January 1, 2009, we adopted the provisions of FSP APB 14-1 as a change in accounting
principle. We have retrospectively adopted FSP APB 14-1 and restated the accompanying consolidated
statement of operations and statement of cash flows for the three and six months ended June 30,
2008, and also restated the accompanying December 31, 2008 consolidated balance sheet for the
cumulative impact of adopting this FSP.
The adoption of FSP APB 14-1 resulted in our recognition of additional interest expense,
decreasing our net income for the three and six months ended June 30, 2008. FSP APB 14-1 also
required us to resequence our senior subordinated convertible notes for dilutive calculation
purposes under the if-converted method.
The impact of retrospectively adopting FSP APB 14-1 on our statement of operations for the
three months ended June 30, 2008 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended June
|
|
As Adjusted
|
|
|
|
|
30, 2008 as
|
|
and
|
|
|
|
|
Originally
|
|
Currently
|
|
Effect of
|
|
|
Reported
|
|
Reported
|
|
Change
|
|
|
|
Revenues
|
|
$
|
95,654
|
|
|
$
|
95,654
|
|
|
$
|
|
|
Operating expenses
|
|
|
56,295
|
|
|
|
56,295
|
|
|
|
|
|
|
|
|
Operating income from continuing operations
|
|
|
39,359
|
|
|
|
39,359
|
|
|
|
|
|
Interest expense
|
|
|
(3,015
|
)
|
|
|
(6,189
|
)
|
|
|
(3,174
|
)
|
Investment income & other expense
|
|
|
1,831
|
|
|
|
1,954
|
|
|
|
123
|
|
|
|
|
Income from continuing operations before
income taxes
|
|
|
38,175
|
|
|
|
35,124
|
|
|
|
(3,051
|
)
|
Income tax provision
|
|
|
958
|
|
|
|
958
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
37,217
|
|
|
|
34,166
|
|
|
|
(3,051
|
)
|
Loss from discontinued operations
|
|
|
(11,919
|
)
|
|
|
(11,919
|
)
|
|
|
|
|
|
|
|
Net income
|
|
$
|
25,298
|
|
|
$
|
22,247
|
|
|
$
|
(3,051
|
)
|
|
|
|
25
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The following table reflects the impact of the adoption of FSP APB 14-1 on our diluted
income per share as originally reported for the three months ended June 30, 2008 (in thousands except
per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended June
|
|
As Adjusted
|
|
|
|
|
30, 2008 as
|
|
and
|
|
|
|
|
Originally
|
|
Currently
|
|
Effect of
|
|
|
Reported
|
|
Reported
|
|
Change
|
|
|
|
Net income from continuing operations basic
|
|
$
|
37,217
|
|
|
$
|
34,166
|
|
|
$
|
(3,051
|
)
|
Add: Interest and issuance costs related to
convertible debt net of tax
|
|
|
1,943
|
|
|
|
1,186
|
|
|
|
(757
|
)
|
|
|
|
Net income from continuing operations diluted
|
|
$
|
39,160
|
|
|
$
|
35,352
|
|
|
$
|
(3,808
|
)
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
57,083
|
|
|
|
57,083
|
|
|
|
|
|
Dilutive effect of options and restricted stock
|
|
|
554
|
|
|
|
554
|
|
|
|
|
|
Dilutive effect of 2023 Notes
|
|
|
2,295
|
|
|
|
2,295
|
|
|
|
|
|
Dilutive effect of 2025 Notes
|
|
|
3,908
|
|
|
|
|
|
|
|
(3,908
|
)
|
Dilutive effect of 2038 Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and dilutive
potential common shares diluted
|
|
|
63,840
|
|
|
|
59,932
|
|
|
|
(3,908
|
)
|
|
|
|
Net income per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.65
|
|
|
$
|
0.60
|
|
|
$
|
(0.05
|
)
|
Diluted
|
|
$
|
0.61
|
|
|
$
|
0.59
|
|
|
$
|
(0.02
|
)
|
The impact of retrospectively adopting FSP APB 14-1 on our statement of operations for
the six months ended June 30, 2008 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Ended June
|
|
As Adjusted
|
|
|
|
|
30, 2008 as
|
|
and
|
|
|
|
|
Originally
|
|
Currently
|
|
Effect of
|
|
|
Reported
|
|
Reported
|
|
Change
|
|
|
|
Revenues
|
|
$
|
186,389
|
|
|
$
|
186,389
|
|
|
$
|
|
|
Operating expenses
|
|
|
114,147
|
|
|
|
114,147
|
|
|
|
|
|
|
|
|
Operating income from continuing operations
|
|
|
72,242
|
|
|
|
72,242
|
|
|
|
|
|
Interest expense
|
|
|
(6,146
|
)
|
|
|
(12,494
|
)
|
|
|
(6,348
|
)
|
Investment income & other expense
|
|
|
4,558
|
|
|
|
4,788
|
|
|
|
230
|
|
|
|
|
Income from continuing operations before
income taxes
|
|
|
70,654
|
|
|
|
64,536
|
|
|
|
(6,118
|
)
|
Income tax provision
|
|
|
1,774
|
|
|
|
1,774
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
68,880
|
|
|
|
62,762
|
|
|
|
(6,118
|
)
|
Loss from discontinued operations
|
|
|
(14,345
|
)
|
|
|
(14,345
|
)
|
|
|
|
|
|
|
|
Net income
|
|
$
|
54,535
|
|
|
$
|
48,417
|
|
|
$
|
(6,118
|
)
|
|
|
|
26
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The following table reflects the impact of the adoption of FSP APB 14-1 on our diluted
income per share as originally reported for the six months ended June 30, 2008 (in thousands except
per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Ended June
|
|
As Adjusted
|
|
|
|
|
30, 2008 as
|
|
and
|
|
|
|
|
Originally
|
|
Currently
|
|
Effect of
|
|
|
Reported
|
|
Reported
|
|
Change
|
|
|
|
Net income from continuing operations basic
|
|
$
|
68,880
|
|
|
$
|
62,762
|
|
|
$
|
(6,118
|
)
|
Add: Interest and issuance costs related to
convertible debt net of tax
|
|
|
4,162
|
|
|
|
2,647
|
|
|
|
(1,515
|
)
|
|
|
|
Net income from continuing operations diluted
|
|
$
|
73,042
|
|
|
$
|
65,409
|
|
|
$
|
(7,633
|
)
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
57,107
|
|
|
|
57,107
|
|
|
|
|
|
Dilutive effect of options and restricted stock
|
|
|
618
|
|
|
|
618
|
|
|
|
|
|
Dilutive effect of 2023 Notes
|
|
|
2,615
|
|
|
|
2,615
|
|
|
|
|
|
Dilutive effect of 2025 Notes
|
|
|
3,908
|
|
|
|
|
|
|
|
(3,908
|
)
|
Dilutive effect of 2038 Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and dilutive
potential common shares diluted
|
|
|
64,248
|
|
|
|
60,340
|
|
|
|
(3,908
|
)
|
|
|
|
Net income per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.21
|
|
|
$
|
1.10
|
|
|
$
|
(0.11
|
)
|
Diluted
|
|
$
|
1.14
|
|
|
$
|
1.08
|
|
|
$
|
(0.06
|
)
|
The impact of retrospectively adopting FSP APB 14-1 on our consolidated balance sheet as
of December 31, 2008 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Adjusted
|
|
|
|
|
December 31,
|
|
and
|
|
|
|
|
2008 As
|
|
Currently
|
|
Effect of
|
|
|
Reported
|
|
Reported
|
|
Change
|
|
|
|
Current assets
|
|
$
|
690,381
|
|
|
$
|
690,381
|
|
|
$
|
|
|
Deferred tax assets net
|
|
|
291,205
|
|
|
|
273,797
|
|
|
|
(17,408
|
)
|
Debt issuance costs net
|
|
|
7,080
|
|
|
|
5,632
|
|
|
|
(1,448
|
)
|
Other Assets non current
|
|
|
104,393
|
|
|
|
104,393
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,093,059
|
|
|
$
|
1,074,203
|
|
|
$
|
(18,856
|
)
|
|
|
|
Current liabilities
|
|
$
|
61,121
|
|
|
$
|
61,121
|
|
|
$
|
|
|
Non-current liabilities
|
|
|
45,442
|
|
|
|
45,442
|
|
|
|
|
|
Convertible senior subordinated notes non-
current
|
|
|
414,950
|
|
|
|
369,095
|
|
|
|
(45,855
|
)
|
|
|
|
Total liabilities
|
|
|
521,513
|
|
|
|
475,658
|
|
|
|
(45,855
|
)
|
|
|
|
Common and preferred stock, net of treasury
stock
|
|
|
(101,608
|
)
|
|
|
(101,608
|
)
|
|
|
|
|
Additional paid-in-capital
|
|
|
1,693,263
|
|
|
|
1,761,179
|
|
|
|
67,916
|
|
Accumulated deficit
|
|
|
(1,016,201
|
)
|
|
|
(1,057,118
|
)
|
|
|
(40,917
|
)
|
Accumulated other comprehensive income
|
|
|
(3,908
|
)
|
|
|
(3,908
|
)
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
571,546
|
|
|
|
598,545
|
|
|
|
26,999
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,093,059
|
|
|
$
|
1,074,203
|
|
|
$
|
(18,856
|
)
|
|
|
|
(17)
Eyetech Discontinued Operations
As a result of our decision to divest the eye disease business, in accordance with the
provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
27
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Assets, the results of operations of (OSI) Eyetech for the current and prior period 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.
Operating results of (OSI) Eyetech for the three and six months ended June 30, 2009 and 2008
are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
Net revenue
|
|
$
|
362
|
|
|
$
|
6,789
|
|
|
$
|
670
|
|
|
$
|
12,618
|
|
Pretax income (loss)
|
|
$
|
36
|
|
|
$
|
(12,228
|
)
|
|
$
|
(133
|
)
|
|
$
|
(14,721
|
)
|
Income (loss) from discontinued operations
|
|
$
|
23
|
|
|
$
|
(11,919
|
)
|
|
$
|
(81
|
)
|
|
$
|
(14,345
|
)
|
As of June 30, 2009, certain assets and liabilities related to the eye disease business
were classified as assets or liabilities related to discontinued operations.
The summary of the assets and liabilities related to discontinued operations as of
June 30, 2009 and December 31, 2008 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
|
|
|
$
|
917
|
|
|
|
|
Assets related to discontinued operations
|
|
$
|
|
|
|
$
|
917
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
2,428
|
|
|
$
|
1,522
|
|
|
|
|
Liabilities related to discontinued operations
|
|
$
|
2,428
|
|
|
$
|
1,522
|
|
|
|
|
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 the
Macugen
®
(pegaptinib sodium injection) sales team. We have determined that, under FASB
Interpretation, or FIN, No. 46(R), Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51, 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, 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 Michael G. Atieh, our former
Executive Vice President, Chief Financial Officer and Treasurer, was a stockholder in Eyetech Inc.
at the time of the acquisition, 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.
28
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 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) OSIs ongoing interest in
this entity is limited to OSIs contingent right to receive future royalties and milestones, and
(iii) OSI does not have liability for future losses.
(OSI) Eyetech
Divestiture Severance Costs
As a result of our decision to exit the 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 three and six months ended June 30, 2009 and 2008 was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
Opening liability, January 1
|
|
$
|
258
|
|
|
$
|
1,797
|
|
|
$
|
387
|
|
|
$
|
800
|
|
Accrual for severance and retention bonuses
|
|
|
|
|
|
|
278
|
|
|
|
27
|
|
|
|
1,365
|
|
Cash paid for severance and retention bonuses
|
|
|
(5
|
)
|
|
|
(94
|
)
|
|
|
(161
|
)
|
|
|
(184
|
)
|
|
|
|
|
|
Ending liability
|
|
$
|
253
|
|
|
$
|
1,981
|
|
|
$
|
253
|
|
|
$
|
1,981
|
|
|
|
|
|
|
(18)
Subsequent Events
On July 7, 2009, we announced our plans to consolidate our U.S. operations onto a single
campus located in Ardsley, New York in Westchester County. On July 20, 2009, we completed the
purchase of the 43-acre site, which consists of approximately 400,000 square feet of existing
office and laboratory space, for $27 million and expect to incur approximately $60 million of
capital-related renovation costs over the next 18 months. In addition, we expect to incur
approximately $25 million in restructuring-related cost over the next two years, which primarily
relates to one time labor-related and facility costs. We will continue to operate our
diabetes/obesity franchise in Oxford, England.
On July 21, 2009, we, together with AVEO, announced that we had expanded our existing drug
discovery and translational research collaboration. As part of the expanded collaboration, we are
obligated to make a $5 million upfront payment to AVEO and to purchase an additional $15 million of
AVEO preferred equity. The alliance is anchored around developing molecular targeted therapies to
target the underlying mechanisms of EMT in cancer and to develop proprietary datasets of associated
patient selection biomarkers to support our targeted medicine pipeline. Together, we and AVEO are
expanding our efforts to validate cancer targets and to deploy key elements of AVEOs proprietary
translational research platform in support of our clinical development programs.
29
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
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, 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 August 1, 2009, was approved for sale in 102 countries for advanced NSCLC after failure of
chemotherapy and 76 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., a wholly-owned subsidiary
of our international collaborator, Roche. We share profits equally in the U.S. and receive
royalties on sales outside of the United States.
Prosidion Limited, our U.K. subsidiary which conducts our research and development, or R&D,
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 2 diabetes and related indications. As of August 1, 2009, twelve
pharmaceutical companies have non-exclusive licenses to these patents, which provide us
30
with upfront payments as well as potential milestones and royalties. Our royalty revenues
from this patent estate for the six months ended June 30, 2009, were approximately $22.8 million.
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 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 Tarcevas long-term potential, including a number of large, randomized
clinical trials designed to expand Tarcevas use in NSCLC. 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 an emerging 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 most 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 pre-clinical
development. In addition, we have two anti-angiogenesis agents, OSI-930 and OSI-632, for which we
are seeking development partners. Each of these MTTs, as well as Tarceva, are small molecules
designed to be administered orally rather than by the less convenient intravenous infusion methods
characteristic of most anti-cancer drugs. The focus of our proprietary oncology research efforts
is the discovery and development of novel therapeutic agents that target tumor growth by inhibiting
the biological process of EMT, a process 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 R&D 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.
31
Quarterly Update
On April 24, 2009, Roche issued a press release concerning Roches initiation of a Phase III
trial together with the Spanish Lung Cancer Group to investigate Tarceva in lung cancer patients
with a genetically mutated version of EGFR. According to Roche, this trial will evaluate whether
Tarceva is a superior option for the initial treatment of lung cancer patients with an EGFR
mutation than chemotherapy.
On May 11, 2009, we provided an update on the progress of PSN821 and PSN602. Phase I clinical
trial data on both PSN821 and PSN602 showed positive evidence of clinical activity. PSN821 and
PSN602 were discovered by our diabetes and obesity R&D team and are wholly owned by us.
On May 14, 2009, we announced detailed results from the Phase III study of Tarceva as a single
agent, first-line maintenance therapy for patients with advanced NSCLC who did not progress
following first-line treatment with platinum-based chemotherapy, referred to as the SATURN study.
The SATURN study met both of its co-primary endpoints by demonstrating a statistically significant
41% improvement in the time patients live without their disease worsening (as measured by
progression free survival, or PFS) compared with placebo and a 45% increase in the time patients
live without their disease worsening compared with placebo in the sub-set of patients who were
determined to have tumors expressing the EGFR gene by immunohistochemistry.
On May 15, 2009, we announced preliminary data from two Phase I dose escalation studies of
OSI-906 in patients with advanced solid tumors. The studies, along with a third on-going Phase I
trial assessing OSI-906 in combination with Tarceva, comprise part of our principal oncology
development program targeting IGF-1R. The program also includes translational research and
biomarker development activities around this target. In an intermittent oral dosing study,
OSI-906 was well-tolerated up to doses of 450 mg and has shown preliminary evidence of anti-tumor
activity. Both Phase I studies continue to accrue patients at higher doses to determine the
maximum tolerated dose for both intermittent and continuous dosing of OSI-906, and to establish a
recommended dose and dosing schedule for a Phase II clinical trial of OSI-906.
On May 28, 2009, we, together with Bayer HealthCare LLC., Onyx Pharmaceuticals, Inc., and
Roche, announced the initiation of a Phase III trial examining Nexavar
®
(sorafenib) in
combination with Tarceva as a potential new treatment option for patients with advanced
hepatocellular carcinoma or primary liver cancer. The international multicenter randomized
placebo-controlled Phase III study is expected to enroll approximately 700 patients with advanced
liver cancer. The study will examine whether Nexavar in combination with Tarceva prolongs survival
as compared to Nexavar alone. The primary endpoint of the study is overall survival and the
secondary endpoints are safety, time to radiographic progression, disease control rate and
patient-reported outcome.
On May 30, 2009, we announced that Genentech informed us of detailed results from a Genentech
conducted Phase III study known as ATLAS. The study met its primary endpoint by demonstrating that
patients with advanced NSCLC who received Tarceva in combination with
32
Avastin
®
(bevacizumab) as first-line maintenance treatment had a 39% improvement in
PFS compared with those who received Avastin plus placebo as an active control. Adverse events were
consistent with previous Avastin or Tarceva NSCLC studies, or trials evaluating the two medicines
together.
On June 18, 2009, we received a second, non-final office action notice from the U.S. Patent
and Trademark Office, or U.S. PTO, regarding our application for a reissue of the composition of
matter patent for Tarceva, U.S. Patent No. 5,747,498, or the 498 patent. Other than the rejection
of two claims as being indefinite due to the improper formatting of the claims (i.e., unmatched
brackets), there were no patentability rejections of the claimed subject matter over prior art. The
office action also set forth a rejection of all claims based upon a defective oath or declaration.
We filed a response with the U.S. PTO on July 7, 2009 and are optimistic that we will have the
reissue process substantially completed by the end of the third quarter of 2009.
Subsequent Events
On July 7, 2009, we announced our plans to consolidate our U.S. operations onto a single
campus located in Ardsley, New York in Westchester County. On July 20, 2009, we completed the
purchase of the 43-acre site, which consists of approximately 400,000 square feet of existing
office and laboratory space, for $27 million and expect to incur approximately $60 million of
capital-related renovation costs over the next 18 months. In addition, we expect to incur
approximately $25 million in restructuring-related cost over the next two years, which primarily
relates to one time labor-related and facility costs. We will continue to operate our
diabetes/obesity franchise in Oxford, England.
On July 13, 2009, we, along with Genentech, announced that the SATURN study met a key
secondary endpoint of extending overall survival in patients with advanced NSCLC when Tarceva was
used as single agent, maintenance therapy in patients who did not progress following first-line
treatment with platinum-based chemotherapy. On August 1, 2009, we announced further results from
the SATURN study, as presented at the 13th World Conference on Lung Cancer held in San Francisco.
The study showed that patients with NSCLC treated with Tarceva had a 23% improvement in overall
survival compared with patients who received placebo (hazard ratio=0.81; p-value=0.0088; a hazard
ratio of less than one for survival indicates a reduced risk of death). The hazard ratio, which
assesses risk in the overall trial population, is widely recognized as the best measure of overall
benefit in large randomized clinical trials. The medial survival (a single point estimate of
benefit) for patients receiving Tarceva was 12 months versus a median survival of 11 months for
patients receiving placebo. The study confirmed that a broad spectrum of patients with advanced
NSCLC experienced a survival benefit from Tarceva. Specific analysis of patients in the study whose
tumors were confirmed to be EGFR wild-type i.e., not having a EGFR genetic mutation
experienced a 30% improvement in survival (hazard ratio=0.77; p-value=0.0243). The majority of
patients with NSCLC are EGFR wild-type. Overall survival for the patient sub-group with EGFR
mutations is still immature with the median survival not yet being reached in patients with EGFR
mutations receiving Tarceva. Determination of overall survival in this sub-group has been
confounded by the fact that two-thirds of the patients with EGFR mutations who received placebo
rather than Tarceva then crossed over to receive Tarceva or another EGFR therapy. (The EURTAC
study, an ongoing
33
Phase III study which is a collaboration between our partner, Roche, and the Spanish Lung
Cancer Group and which is evaluating how Tarceva compares to traditional chemotherapy for
first-line treatment in patients whose tumors have an EGFR mutation, is expected to provide us with
more insight into the benefits of Tarceva for those patients with an EGFR mutation.) We believe
that, assuming it is approved for use as maintenance therapy following initial chemotherapy,
Tarceva will provide a new, convenient, non-chemotherapy treatment option for patients without
exposing them to the continuous burden and lifestyle constraints of long-term chemotherapy.
On July 21, 2009, we, together with AVEO, announced that we had expanded our existing drug
discovery and translational research collaboration. As part of the expanded collaboration, we are
obligated to make a $5 million upfront payment to AVEO and to purchase an additional $15 million of
AVEO preferred equity. The alliance is anchored around developing molecular targeted therapies to
target the underlying mechanisms of EMT in cancer and to develop proprietary datasets of associated
patient selection biomarkers to support our targeted medicine pipeline. Together, we and AVEO are
expanding our efforts to validate cancer targets and to deploy key elements of AVEOs proprietary
translational research platform in support of our clinical development programs.
Critical Accounting Policies
For a discussion of our critical accounting policies, see Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for
the fiscal year ended December 31, 2008. There have been no material changes to our critical
accounting policies for the six month period ended June 30, 2009.
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
|
|
|
In thousands
|
|
2009
|
|
2008
|
|
$ Change
|
|
2009
|
|
2008
|
|
$ Change
|
|
|
|
|
|
Tarceva-related revenues
|
|
$
|
85,323
|
|
|
$
|
87,940
|
|
|
$
|
(2,617
|
)
|
|
$
|
169,179
|
|
|
$
|
170,298
|
|
|
$
|
(1,119
|
)
|
Other revenues
|
|
|
13,743
|
|
|
|
7,714
|
|
|
|
6,029
|
|
|
|
23,564
|
|
|
|
16,091
|
|
|
|
7,473
|
|
|
|
|
|
|
Total revenues
|
|
$
|
99,066
|
|
|
$
|
95,654
|
|
|
$
|
3,412
|
|
|
$
|
192,743
|
|
|
$
|
186,389
|
|
|
$
|
6,354
|
|
|
|
|
|
|
Tarceva-Related Revenues
Tarceva-related revenues for the three and six months ended June 30, 2009 were $85.3 million
and $169.2 million, respectively, compared to Tarceva-related revenues for the three and six months
ended June 30, 2008 which were $87.9 million and $170.3 million, respectively. Tarceva-related
revenues include 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 three and six months ended
June 30, 2009, Genentech recorded net sales of Tarceva in the United States and its territories of
34
approximately $113 million and $224 million, respectively, compared to approximately $119
million and $230 million for the three and six months ended June 30, 2008, respectively. Sales for
the three and six months ended June 30, 2009 were negatively impacted by a $7.4 million allowance
recorded by Genentech in the second quarter for rebates related to the U.S. Department of Defenses
TRICARE Retail Pharmacy Program. Of the $7.4 million total allowance, $6.3 million represents a
retroactive rebate assessment for sales made during 2008 and the three months ended March 31, 2009,
and $1.1 million represents rebates recorded by Genentech during the second quarter of 2009. These
rebates result from the implementation of a final rule concerning mandatory rebate obligations for
the TRICARE Retail Pharmacy Program. The final rule is being challenged by a coalition of
companies, including pharmaceutical companies, in a pending litigation. On a sequential
quarter-over-quarter basis, sales of Tarceva for the three months ended June 30, 2009 increased
$1.2 million from approximately $111 million for the three months ended March 31, 2009, primarily
as a result of higher unit volumes and a price increase which took effect in February 2009, offset
in part by the $7.4 million allowance recorded by Genentech for rebates.
Our share of these net sales is reduced by the costs incurred for cost of goods sold and for
the sales and marketing of the product. For the three and six months ended June 30, 2009, we
reported net revenues from our unconsolidated joint business for Tarceva of $48.7 million and $97.7
million, respectively, compared to $51.9 million and $101.7 million for the three and six months
ended June 30, 2008, respectively. The decrease in net revenue from unconsolidated joint business for the three
months ended June 30, 2009 was primarily due to the impact of our 50% share of the $7.4 million
rebate allowance recorded by Genentech. The decrease in net revenue from unconsolidated joint
business for the six months ended June 30, 2009 was primarily due to the impact of our 50% share of
the $7.4 million rebate allowance as well as higher sales and marketing expenses incurred by
Genentech relative to the same period in 2008.
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 Roches 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 the local currencies in which Tarceva is sold
will impact our earnings. For the three and six months ended June 30, 2009, Roche reported
U.S. dollar equivalent rest of world sales of approximately $177 million and $345 million,
respectively, compared to approximately $173 million and $329 million in the same periods last
year, respectively. For the three and six months ended June 30, 2009, we recorded $35.7 million
and $69.7 million in royalty revenue from these sales, respectively, compared to $35.0 million and
$66.6 million in the same periods last year, respectively. The increase in royalty revenue was
primarily due to increased sales volume outside the United States, partially offset by the negative
impact of net unfavorable foreign exchange rates.
Tarceva-Related Milestones
Milestone revenue from Tarceva includes the recognition of the ratable portion of upfront fees
from Genentech and milestone payments received from Genentech and Roche to date in
35
connection with various regulatory acceptances and approvals for Tarceva in the United States,
Europe and Japan. These payments were initially deferred in accordance with the Emerging Issues
Task Force Issue, or EITF Issue, 00-21, Revenue Arrangements with Multiple Deliverables, and are
being recognized as revenue ratably over the term of the agreement. The ratable portions of the
upfront fee and milestone payments recognized as revenue for the three and six months ended June
30, 2009 were $863,000 and $1.8 million, respectively, compared to $979,000 and $1.9 million for
the same periods last year, respectively. The unrecognized deferred revenue related to these
upfront fees and milestone payments received was $35.2 million and $37.1 million as of June 30,
2009 and December 31, 2008, respectively. We also will be entitled to additional milestone
payments from Genentech and Roche upon the occurrence of certain regulatory approvals and filings
with respect to Tarceva. Additional milestone payments will be due from Genentech and Roche upon
approval of adjuvant indications in the United States and Europe. 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 three and six months ended June 30, 2009 were $13.7 million and
$23.6 million, respectively, compared to $7.7 million and $16.1 million for the same periods last
year, respectively, and include non-Tarceva related license, milestone, royalty and commission
revenues.
We recognized $13.3 million and $22.8 million of royalty revenue for the three and six months
ended June 30, 2009, respectively, from previously granted worldwide non-exclusive license
agreements entered into by Prosidion under our DPIV patent estate covering the use of DPIV
inhibitors for treatment of type 2 diabetes and related indications. Our royalty revenue for the
three and six months ended June, 2009 and 2008 was principally derived from sales of Mercks DPIV
inhibitor product, Januvia
®
(sitagliptin), and its combination product,
Janumet
®
(sitagliptin/metformin). We also derived royalty revenue from sales of Novartis
AGs DPIV inhibitor product, Galvus
®
(vildagliptin), and its combination
product Eucreas
®
(vildagliptin/metformin).
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, approximately
$350,000 of the amount we received was paid to Novartis.
36
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
|
|
|
In thousands
|
|
2009
|
|
2008
|
|
$ Change
|
|
2009
|
|
2008
|
|
$ Change
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
2,659
|
|
|
$
|
2,061
|
|
|
$
|
598
|
|
|
$
|
4,853
|
|
|
$
|
4,231
|
|
|
$
|
622
|
|
Research and development
|
|
|
37,147
|
|
|
|
30,406
|
|
|
|
6,741
|
|
|
|
72,583
|
|
|
|
60,955
|
|
|
|
11,628
|
|
Selling, general and administrative
|
|
|
25,187
|
|
|
|
23,192
|
|
|
|
1,995
|
|
|
|
49,388
|
|
|
|
47,723
|
|
|
|
1,665
|
|
Amortization of intangibles
|
|
|
236
|
|
|
|
636
|
|
|
|
(400
|
)
|
|
|
464
|
|
|
|
1,238
|
|
|
|
(774
|
)
|
|
|
|
|
|
|
|
$
|
65,229
|
|
|
$
|
56,295
|
|
|
$
|
8,934
|
|
|
$
|
127,288
|
|
|
$
|
114,147
|
|
|
$
|
13,141
|
|
|
|
|
|
|
Cost of Goods Sold
Total cost of goods sold for the three and six months ended June 30, 2009 was $2.7 million and
$4.9 million, respectively, compared to $2.1 million and $4.2 million for the three and six months
ended June 30, 2008, and represent the cost of goods sold related to Tarceva.
Research and Development
R&D expenses increased by $6.7 million for the three months ended June 30, 2009 compared to
the same period last year. The increase was primarily due to an increase in R&D expenses related
to non-Tarceva oncology programs, diabetes and obesity programs and equity-based compensation. R&D
expenses increased by $11.6 million for the six months ended June 30, 2009 compared to the same
period last year. The increase was primarily due to an increase in R&D expenses related to
non-Tarceva oncology programs, and in particular, OSI-906, our IGF-1R inhibitor candidate, our
diabetes and obesity programs and equity-based compensation, partially offset by a decline in R&D
expenses for Tarceva.
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, we and our collaborators have committed an aggregate of approximately $900 million to
the global development plan to be shared by the three parties. As of June 30, 2009, we had
invested in excess of $259 million in the development of Tarceva, representing our share of the
costs incurred through June 30, 2009 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
37
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 three and six months ended June 30, 2009, we invested a total of $13.5 million
and $25.9 million, respectively, in research and $23.6 million and $46.7 million, respectively, in
pre-clinical and clinical development. For the three and six months ended June 30, 2008, we
invested a total of $13.4 million and $25.4 million, respectively, in research and $17.0 million
and $35.6 million, respectively, in pre-clinical and clinical 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.
Selling, General and Administrative
Selling, general and administrative expenses increased by $2.0 million for the three months
ended June 30, 2009 compared to the same period last year. The increase was primarily due to an
increase in equity based compensation, general corporate expenses and legal costs. Selling, general
and administrative expenses increased by $1.7 million for the six months ended June 30, 2009
compared to the same period last year. The increase was primarily due to an increase in equity
based compensation, general corporate expenses and legal costs, partially offset by a decline in
consulting expenses.
Other Income and Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
|
|
|
In thousands
|
|
2009
|
|
2008
|
|
$ Change
|
|
2009
|
|
2008
|
|
$ Change
|
|
|
|
|
|
Investment income-net
|
|
$
|
1,957
|
|
|
$
|
2,960
|
|
|
$
|
(1,003
|
)
|
|
$
|
4,171
|
|
|
$
|
6,694
|
|
|
$
|
(2,523
|
)
|
Interest expense
|
|
|
(6,392
|
)
|
|
|
(6,189
|
)
|
|
|
(203
|
)
|
|
|
(12,785
|
)
|
|
|
(12,494
|
)
|
|
|
(291
|
)
|
Other income
(expense) net
|
|
|
(2,338
|
)
|
|
|
(1,006
|
)
|
|
|
(1,332
|
)
|
|
|
(2,722
|
)
|
|
|
(1,906
|
)
|
|
|
(816
|
)
|
|
|
|
|
|
Total other income (expense)
|
|
$
|
(6,773
|
)
|
|
$
|
(4,235
|
)
|
|
$
|
(2,538
|
)
|
|
$
|
(11,336
|
)
|
|
$
|
(7,706
|
)
|
|
$
|
(3,630
|
)
|
|
|
|
|
|
Investment income for the three and six months ended June 30, 2009 decreased by $1.0
million and $2.5 million, respectively, compared to the same periods last year, primarily due to
lower rates of return on our investments, despite an increase in the funds available for
investment.
Interest expense for the three and six months ended June 30, 2009 and 2008 remained relatively
constant and relates to the interest on our 3.25% Convertible Senior Subordinated Notes due 2023,
or our 2023 Notes, our 2% Convertible Senior Subordinated Notes due 2025, or our 2025 Notes, and
our 3% Convertible Senior Subordinated Notes due 2038, or our 2038 Notes. Included in interest
expense is non-cash imputed interest expense of $3.4 million and $6.9 million for the three and six
months ended June 30, 2009, respectively, compared to $3.2 million and $6.3 million for the same
periods last year, respectively, related to our retrospective adoption of the Financial Accounting Standards Board, or FASB, Staff Position, or
FSP, APB 14-1, Accounting for Convertible Debt Instruments That May be Settled in Cash Upon
Conversion (including partial cash settlement), or FSP APB 14-1. See Notes 15 and 16 to the
consolidated financial statements for additional information on the impact of this FSP.
38
Other income (expense)-net for the periods include the amortization of debt issuance costs
related to our senior subordinated convertible notes, and other miscellaneous income and expense
items. The increase in other income (expense)-net for the three and six months ended June 30, 2009
is primarily related to realized foreign exchange losses, partially offset by lower amortization
costs associated with our 2023 Notes and costs associated with the repurchase of a portion of our
2023 Notes in 2008.
Income taxes
For the three and six months ended June 30, 2009, we recorded a provision for income taxes of
$10.6 million and $21.1 million, respectively, related to income from continuing operations. Of
these $10.6 million and $21.1 million provisions, approximately $9.8 million and $19.7 million,
respectively, represent a deferred or non-cash tax expense and the remainder represents the current
or cash tax expense, which consists principally of our estimated expense related to the U.S.
alternative minimum tax. For the three and six months ended June 30, 2008, we recorded a provision
for income taxes of $958,000 and $1.8 million, respectively, related to income from continuing
operations, which represented our estimated cash tax expense principally related to the U.S.
alternative minimum tax.
Discontinued Operations
The three and six months ended June 30, 2009 includes income from discontinued operations of
$23,000 and a loss from discontinued operations of $81,000, respectively, related to the operations
of our discontinued eye disease business, compared to $11.9 million and $14.3 million of losses for
the same periods last year, respectively. The decline in losses is primarily related to the sale
of the remaining assets of our eye disease business in 2008.
Liquidity and Capital Resources
At June 30, 2009, cash and investments, including restricted securities, were $556.1 million
compared to $515.5 million at December 31, 2008. The increase of $40.6 million was primarily due
to cash flow from operations, partially offset by the use of funds to purchase property, plant and
equipment.
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, costs associated with our
recently announced facility consolidation, capital requirements and the potential redemption of our
2025 Notes in December 2010 could be funded from our current cash and investment balances and 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.
39
Commitments and Contingencies
During the six months ended June 30, 2009, we believe that there have been no material changes
in our payments due under contractual obligations, as previously reported in our Annual Report on
Form 10-K for the year ended December 31, 2008.
New Accounting Standards
Recently Adopted Standards
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments. This pronouncement amends FASB Statement No.107, Disclosures
about Fair Value of Financial Instruments, to require disclosures about fair value of financial
instruments in interim as well as in annual financial statements. This pronouncement also amends
APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in all interim
financial statements. The adoption of FSP FAS 107-1 did not have a material impact on our
operations, financial position, results of operations or cash flows for the three and six months
ended June 30, 2009.
In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability have Significantly Decreased and Identifying
Transactions that Are Not Orderly, or FSP FAS 157-4. FSP FAS 157-4 provides guidelines for making
fair value measurements more consistent with the principles presented in Statement of Financial Accouting Standards, or SFAS, No. 157. FSP FAS 157-4
also provides additional authoritative guidance in determining whether a market is active or
inactive, and whether a transaction is distressed, is applicable to all assets and liabilities
(i.e. financial and nonfinancial) or will require enhanced disclosures. FSP FAS 157-4 is effective
for periods ending after June 15, 2009. The adoption of FSP FAS 157-4 did not have a material
impact on our operations, financial position, results of operations or cash flows for the three and
six months ended June 30, 2009.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, or FSP FAS 115/124. FSP FAS 115/124 requires we provide greater
clarity about the credit and noncredit components of an other-than-temporary impairment event and
to more effectively communicate when an other-than-temporary impairment event has occurred. This
FSP applies to debt securities. FSP FAS 115/124 is effective for periods ending after June 15,
2009. The adoption of FSP FAS 115/124 did not have a material impact on our financial position,
results of operations or cash flows for the three and six months ended June 30, 2009.
In June 2008, EITF Issue 07-05, Determining Whether an Instrument (or Embedded Feature) Is
Indexed to an Entitys Own Stock, was issued. EITF Issue 07-05 addresses the determination of
whether an instrument (or an embedded feature) is indexed to an entitys own stock and establishes
a two-step approach with which to make the determination. The adoption of EITF 07-05 did not have
an impact on our financial position, results of operations or cash flows.
40
In May 2008, FASB issued FSP APB 14-1. 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 of convertible debt instruments in a
manner that will reflect the entitys nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. We retrospectively adopted this FSP on January 1, 2009. The
accompanying consolidated balance sheets as of March 31, 2009 and December 31, 2008 reflect the
impact of the adoption. The consolidated statement of operations and cash flows for the three and
six months ended June 30, 2009 and 2008 reflect the impact of the adoption. See Notes 15 and 16 to
the accompanying consolidated financial statements for additional information on the impact of this
FSP.
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. The adoption of EITF
Issue 07-01 did not have a material impact on our financial position, results of operations or cash
flows.
Recently Issued Standards (Not Yet Adopted)
In June 2009,
the FASB issued FAS 167, Amendments to FASB Interpretation No. 46(R), which
amends the consolidation guidance applicable to variable interest entities. The amendments will
significantly affect the overall consolidation analysis under FASB Interpretation No. 46(R). This
statement is effective as of the beginning of the first fiscal year that begins after November 15,
2009. This statement will be effective for us beginning in fiscal year 2010. We are still assessing
the potential impact of adoption.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No.
162, or FAS 168, which identifies the sources of accounting principles and the framework for
selecting the principles used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting principles, or
GAAP, in the United States, or GAAP hierarchy. FAS 168 will be effective for our interim and annual
financial periods ending after September 15, 2009. This pronouncement will not have a material
impact on our consolidated financial statements.
Forward Looking Statements
A number of the matters and subject areas discussed in this Item 2, Managements Discussion
and Analysis of Financial Condition and Results of Operations, and elsewhere in this report that
are not historical or current facts deal with potential future circumstances and developments. The
discussion of these matters and subject areas is qualified by the inherent
41
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 below. These forward looking statements are also subject
generally to the other risks and uncertainties that are described in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2008 and herein under Part II, Item 1A.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our cash flow and earnings are subject to fluctuations due to changes in interest rates in our
investment portfolio of debt securities and to foreign currency exchange rates. We maintain an
investment portfolio of various issuers, types and maturities. These securities are generally
classified as available-for-sale as defined by SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities, and consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a component of accumulated other comprehensive income (loss)
included in stockholders equity. We consider our restricted investment securities to be
held-to-maturity as defined by SFAS No. 115. These securities are reported at their amortized
cost, which includes the direct costs to acquire the securities, plus the amortization of any
discount or premium, and accrued interest earned on the securities. We do not use or hold
derivative financial instruments in our investment portfolio.
At June 30, 2009, we maintained a portion of our cash and cash equivalents in financial
instruments with original maturities of three months or less. We also maintained an investment
portfolio principally comprised of government and government agency obligations and corporate
obligations that are subject to interest rate risk and will decline in value if interest rates
increase.
A hypothetical 10% change in interest rates would have resulted in a $120,000 and $254,000
change, respectively, in our net income for the three and six months ended June 30, 2009.
Our limited investments in certain biotechnology companies are carried on the 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 is calculated by converting the Tarceva sales for
each country in their respective local currency to Roches 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 exchange rates would have resulted in approximately
$2.2 million and $4.3 million change, respectively, to our net income for the three and six months
ended June 30, 2009.
The principal amount of our convertible senior subordinated notes totaled $415 million at June
30, 2009, and was 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
42
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.
Item 4. Controls and Procedures
Attached to this Quarterly Report on Form 10-Q 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 4 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 Our Disclosure Controls and Procedures
. Our disclosure and control procedures
are designed to provide reasonable assurance that the controls and procedures will meet their
objectives. The Securities and Exchange Commission requires that as of the end of the period
covered by this Quarterly Report on Form 10-Q, the CEO and the CFO evaluate the effectiveness of
the design and operation of our disclosure controls and procedures (as defined in Rule 13(a)-15(e))
under the Securities Exchange Act of 1934, as amended, and report on the effectiveness of the
design and operation of our disclosure controls and procedures. Accordingly, under the supervision
and with the participation of our management, including our CEO and CFO, we evaluated the
effectiveness of the design and operation of our disclosure controls and procedures as of the end
of the period covered by this Quarterly Report on Form 10-Q.
CEO/CFO Conclusions about the Effectiveness of the Disclosure Controls and Procedures
. Based
upon their evaluation of the disclosure controls and procedures, our CEO and CFO have concluded
that our disclosure controls and procedures are effective 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
Quarterly Report on Form 10-Q was being prepared.
Changes in Internal Control Over Financial Reporting.
There were no changes in our internal
control over financial reporting (as defined in Rule 13(a)-15(f)) under the Exchange Act identified
in connection with the evaluation of such internal control over financial reporting that occurred
during the period covered by this Quarterly Report on Form 10-Q, that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.
43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In March 2009, we filed lawsuits in the U.S. District Court in Delaware against Teva
Pharmaceuticals, U.S.A., Inc., or Teva U.S.A., and Mylan Pharmaceuticals, Inc. for infringement of
three patents associated with Tarceva: U.S. Patent Nos. 5,747,498, 6,900,221 and 7,087,613. The
lawsuits are based on abbreviated new drug applications, or ANDAs, filed by Teva U.S.A. and Mylan
seeking permission to manufacture and market a generic version of Tarceva before the expiration of
the three patents. The filing of these lawsuits restricts the U.S. Food and Drug Administration
from approving the ANDAs for either of these generic pharmaceutical companies until seven and
one-half years have elapsed from the date of Tarcevas 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.
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 this decision was affirmed on appeal in April 2009. On August 3, 2009, a special leave
petition against this decision was filed in the Supreme Court of India. The infringement trial in
India is currently ongoing.
Item 1A. Risk Factors
There have been no material changes to the risk factors as previously disclosed in our Form
10-K for the year ended December 31, 2008, except as set forth below.
We may incur risk in connection with the consolidation of our U.S. operations to Ardsley, New York.
In July 2009, we announced plans to consolidate our U.S. operations onto a single campus
located in Ardsley, New York in Westchester County. We anticipate that this consolidation will be
completed in the fourth quarter of 2010. While we anticipate that the consolidation will result in
annual cash savings beginning in fiscal year 2011, the ultimate savings that we will realize may be
highly variable and uncertain. In addition, as a consequence of the consolidation, we face several
risks including the disruption of our ongoing business, the distraction of employees, increased
employee turnover and possible loss of key employees.
44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Our annual meeting of stockholders was held on June 17, 2009. The following directors were
elected:
|
|
|
|
|
|
|
|
|
|
|
Votes For
|
|
Votes
Withheld
|
Robert A. Ingram
|
|
|
41,222,533
|
|
|
|
7,066,261
|
|
Colin Goddard, Ph.D.
|
|
|
43,993,019
|
|
|
|
4,295,775
|
|
Santo J. Costa
|
|
|
41,063,190
|
|
|
|
7,225,604
|
|
Joseph Klein, III
|
|
|
42,937,429
|
|
|
|
5,351,365
|
|
Kenneth B. Lee, Jr.
|
|
|
44,038,249
|
|
|
|
4,250,545
|
|
Viren Mehta
|
|
|
34,174,019
|
|
|
|
14,114,775
|
|
David W. Niemiec
|
|
|
44,022,511
|
|
|
|
4,266,283
|
|
Herbert M. Pinedo, M.D., Ph.D.
|
|
|
41,919,113
|
|
|
|
6,369,681
|
|
Katharine B. Stevenson
|
|
|
44,038,426
|
|
|
|
4,250,368
|
|
John P. White
|
|
|
41,750,959
|
|
|
|
6,537,835
|
|
In addition, the appointment of KPMG LLP as independent registered public accounting firm
for fiscal year ending December 31, 2009 was ratified (47,916,497 shares voted in favor, 349,157
shares voted against, 23,140 shares abstained, and there were no broker non-votes).
Item 5. Other Information
On May 29, 2009, we, through Oxford Real Estate Owner No. 2 Limited, our wholly-owned
subsidiary, or OREO-2, executed a sale agreement relating to Windrush Court, Oxford, or the
Windrush Agreement, with Matrix Portfolio No. 1 Limited, or Matrix, for the purchase of certain
real property located at Windrush Court, Watlington Road, Oxford, Oxfordshire, or Windrush Court.
Windrush Court consists of land and buildings formerly leased to OSI Pharmaceuticals (UK) Limited,
also our wholly-owned subsidiary, for the operation of our diabetes/obesity franchise. The Windrush
Agreement provides for the sale of Windrush Court by Matrix to OREO-2 for total consideration of
£13,700,000. The closing of the acquisition occurred on May 29, 2009 and we continue to operate our
diabetes/obesity franchise at Windrush Court.
Item 6. Exhibits
|
|
|
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.
|
45
|
|
|
3.2
|
|
Second Amended and Restated Bylaws of OSI Pharmaceuticals, Inc., filed by the
Company as an exhibit to the Form 10-K for the fiscal year ended December 31, 2008
(file no. 000-15190), and incorporated herein by reference.
|
|
|
|
10.1
|
|
Purchase and Sale Agreement, dated July 6, 2009, between OSI Pharmaceuticals,
Inc. and Millsaw Realty L.P. (Filed herewith)
|
|
|
|
10.2*
|
|
Consulting and Confidential Disclosure Agreement, dated June 30, 2009, between
OSI Pharmaceuticals, Inc. and Dr. Daryl Granner. (Filed herewith).
|
|
|
|
10.3
|
|
Agreement relating to Windrush Court, Oxford, dated May 29, 2009, between
Matrix Portfolio No. 1 Limited and Oxford Real Estate Owner No. 2 Limited. (Filed
herewith)
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-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. (Filed
herewith)
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350. (Filed
herewith)
|
|
|
|
*
|
|
Indicates a management contract or compensatory plan, contract or arrangement in which
directors or executive officers participate.
|
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
OSI PHARMACEUTICALS, INC.
|
|
|
(Registrant)
|
|
|
|
|
|
|
Date: August 7, 2009
|
/s/ Colin Goddard, Ph.D.
|
|
|
Colin Goddard, Ph.D.
|
|
|
Chief Executive Officer
|
|
|
|
|
|
Date: August 7, 2009
|
/s/ Pierre Legault
|
|
|
Pierre Legault
|
|
|
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
|
|
47
INDEX TO EXHIBITS
|
|
|
Exhibit
|
|
|
|
|
|
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 by the
Company as an exhibit to the Form 10-K for the fiscal year ended December 31, 2008
(file no. 000-15190), and incorporated herein by reference.
|
|
|
|
10.1
|
|
Purchase and Sale Agreement, dated July 6, 2009, between OSI Pharmaceuticals,
Inc. and Millsaw Realty L.P. (Filed herewith)
|
|
|
|
10.2
|
*
|
Consulting and Confidential Disclosure Agreement, dated June 30, 2009, between
OSI Pharmaceuticals, Inc. and Dr. Daryl Granner. (Filed herewith).
|
|
|
|
10.3
|
|
Agreement relating to Windrush Court, Oxford, dated May 29, 2009, between
Matrix Portfolio No. 1 Limited and Oxford Real Estate Owner No. 2 Limited. (Filed
herewith)
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-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. (Filed
herewith)
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350. (Filed
herewith)
|
48
Osi Pharmaceuticals (NASDAQ:OSIP)
Historical Stock Chart
From Jun 2024 to Jul 2024
Osi Pharmaceuticals (NASDAQ:OSIP)
Historical Stock Chart
From Jul 2023 to Jul 2024