-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VK//qns1xbAmQqG0/kPQp4qWsNXwimP+n8j4/Zm3oPn8K9FFgnfin4C78U2fJSHs BtqXvCTz3P9Yy4W9JrYdUg== 0000950123-00-000448.txt : 20000203 0000950123-00-000448.hdr.sgml : 20000203 ACCESSION NUMBER: 0000950123-00-000448 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 20000125 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OSI PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000729922 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 133159796 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-15190 FILM NUMBER: 512135 BUSINESS ADDRESS: STREET 1: 106 CHARLES LINDBERGH BLVD CITY: UNIONDALE STATE: NY ZIP: 11553 BUSINESS PHONE: 5162220023 MAIL ADDRESS: STREET 1: 106 CHARLES LINDBERGH BLVD CITY: UNIONDALE STATE: NY ZIP: 11553-3649 FORMER COMPANY: FORMER CONFORMED NAME: ONCOGENE SCIENCE INC DATE OF NAME CHANGE: 19920703 10-K/A 1 AMENDMENT TO FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999 OR [] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 0-15190 OSI PHARMACEUTICALS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3159796 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 106 CHARLES LINDBERGH BLVD., UNIONDALE, N.Y. 11553 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (516) 222-0023 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED --------------- ------------------------------------- NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER SHARE (TITLE OF CLASS) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [] As of November 30, 1999, the aggregate market value of the Registrant's voting stock held by non-affiliates was $91,026,970. For purposes of this calculation, shares of common stock held by directors, officers and stockholders whose ownership exceeds five percent of the common stock outstanding at November 30, 1999 were excluded. Exclusion of shares held by any person should not be construed to indicate that the person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that the person is controlled by or under common control with the Registrant. As of November 30, 1999, there were 21,557,110 shares of the Registrant's common stock, par value $.01 per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive proxy statement for its 2000 annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K. This Form 10-K/A is being filed to amend the aggregate market value of the Registrant's voting stock as of November 30, 1999 as presented on this cover page, and to amend certain information regarding the patents described under the caption "Intellectual Property" in Part I, Item 1, of the annual report on Form 10-K of OSI Pharmaceuticals, Inc. for the fiscal year ended September 30, 1999, which was filed with the Securities and Exchange Commission on December 29, 1999 (the "Form 10-K"). This Form 10-K/A is also being filed to make certain typographical, technical and grammatical changes in Part I, Item 1 of the Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS OSI Pharmaceuticals, Inc. (OSI or the Company) is a Pharmaceutical Research and Development Organization (PRDO) that utilizes a comprehensive drug discovery and development capability to rapidly and cost effectively discover and develop novel, small-molecule drug candidates for commercialization by major pharmaceutical companies. OSI conducts its drug discovery and product development programs independently and in collaboration with major pharmaceutical companies. The Company derives revenues from funded collaborative alliances, milestone and success payments and, upon the successful development and marketing of out-licensed drug candidates, royalties on sales of these products. Using this business model, OSI is able to leverage the research, development and financial resources of its corporate partners to help build and sustain a large pipeline of product opportunities. OSI's major corporate partners include Pfizer Inc., Tanabe Seiyaku Co. Ltd., Sankyo Company, Ltd., Solvay Pharmaceuticals, B.V., Novartis Pharma AG, and Hoechst Marion Roussel, Inc. Independently and in collaboration with its various partners, OSI is involved in the discovery and development of drugs for 45 targets. The Company has drug candidates in clinical trials and pre-clinical development. These drug discovery efforts are primarily focused in the areas of cancer, diabetes, cosmeceuticals, and G-protein coupled receptor, or GPCR, directed drug discovery. OSI believes its research and development capabilities together with its ongoing drug discovery and development programs have positioned it as a leader in the field of drug discovery and development. OSI was incorporated in 1983. Its NASDAQ stock symbol is OSIP. BACKGROUND Drug discovery is an expensive and high risk process involving significant attrition. Only about 1-in-16 research and development, or R&D, programs actually results in a successful drug, and the process from concept to market typically takes over a decade. On average, it costs more than $400 million in research and development (including failures) to bring a drug from initial lead identification to market. During the 1990s, the rising cost of health care and changes in health care management policies have fundamentally altered the pharmaceutical landscape, putting increasing competitive pressure on the pharmaceutical industry. As organizations strive to enhance market share and improve profit margins, major pharmaceutical company mergers have occurred. These mergers are expected to continue. These organizations face the challenge of consolidating and efficiently managing large research and development organizations while striving to meet aggressive new product requirements. In addition, many of the major pharmaceutical companies are also facing the expiration of patent protection on significant drug products in the next few years. These new pressures have led to a growing emphasis on product pipeline enhancement through the cost-effective discovery and development of novel classes of pharmaceuticals that will meet large, unmet medical needs, can more rapidly be brought to the marketplace, and have the potential to command premium prices. This, in turn, has created an increased need for pharmaceutical companies to look outside their organizations for new product candidates. Advances in molecular biology, automation, and computing and the understanding of the human genome have revolutionized the ways in which drug discovery is conducted, creating the potential for accelerated discovery and development of new generations of drugs. OSI believes that the deployment and integration of these technologies in smaller and more nimble pharmaceutical research and development organizations offers a rapid and cost effective vehicle for the discovery and early development of high quality drug candidates to meet the growing needs of the pharmaceutical industry. Pharmaceutical companies have typically formed collaborations with biotechnology companies in order to access new types of technologies in the pursuit of novel drug development. OSI believes that the competitive pressures described above have caused pharmaceutical companies to greatly reduce the royalty rates they are willing to pay to biotechnology companies for technological contributions to their own product development efforts. On the other hand, OSI believes that these pressures are making pharmaceutical companies more 1 3 willing to pay premiums for high quality drug candidate products that have already undergone optimization and have proven activity in development. OSI believes that, as a prototypical PRDO, it is well-positioned to compete for this emerging opportunity. STRATEGY OSI's mission is the discovery and early development of novel pharmaceutical products that improve the human condition. Its strategy is to build and sustain a pipeline of pharmaceutical product opportunities for commercialization by the pharmaceutical industry thereby diversifying risk while maintaining significant potential upside and fully capitalizing on the Company's strengths in drug discovery. OSI's plan for accomplishing this goal consists of the following elements: Exploitation of the Full Range of Discovery and Early Development Capabilities in Selected Disease Areas. OSI has built a fully integrated drug discovery platform. This platform includes every major aspect of drug discovery and development, from the identification of a validated drug discovery target to the emergence of a clinically proven drug candidate. The integrated management of these technologies is designed to accelerate the process of identifying and optimizing high quality, small molecule drug candidates for clinical development and then to progress these candidates through Phase II clinical trials. In order to more independently progress product candidates to advanced pre-clinical and clinical development, OSI intends to focus its own R&D investments on a smaller number of targets in fewer disease areas to provide the critical mass and expertise to effectively move these programs forward. OSI is focused primarily on the areas of cancer, diabetes, cosmeceuticals and GPCR-directed drug discovery. It believes that these areas represent large market opportunities with significant, unmet medical needs and fully leverage OSI's strengths and R&D assets. To further focus on its core drug discovery and development programs, OSI recently completed the sale of its diagnostics business in November 1999, including the assets of its wholly-owned subsidiary, Oncogene Science Diagnostics, Inc., or OSDI, to Bayer Corporation. OSI's decision to sell its diagnostics business was based on its belief that the development of diagnostic products would require significant continued investment that could otherwise be directed to the development of therapeutic products. Commercialization Strategy. In order for OSI to sustain its critical mass and manage its cash resources through to the time when significant royalty and milestone revenues are able to drive the growth and profitability of the business, OSI has developed a three-pronged strategy. This strategy will provide for a sustained revenue stream and allow OSI to retain sufficient ownership of selected drug discovery and development assets to ultimately effect a substantial return. - Pharmaceutical partner-funded discovery programs. These fully-funded, royalty bearing discovery alliances with major pharmaceutical partners significantly support OSI's strategy. These collaborations provide risk diversification and revenue streams that allow OSI to both sustain critical mass and also anchor its discovery and development efforts in the focused disease areas. In addition to funded research at OSI, the collaborators provide significant R&D resources to support the development of products in these programs and will, generally, fund and manage clinical development, manufacturing and launch of successfully developed drug candidates. - Out-Licensing of Early Development Candidates. OSI intends to create a business of selling drug candidate compounds as opposed to selling its R&D capability. Over the next several years, however, OSI believes that it is likely to create more opportunities at the IND-track stage than it can progress into the clinical stage. OSI may license early drug candidates that it chooses not to develop independently to third parties (out-licensing), by exploring cash/milestone rich deal structures with the intent of providing near-term revenue growth. - Further Clinical Development of Selected Candidates. OSI intends to develop selected candidates through clinical development. By focusing on selected candidates, OSI expects to maximize the commercial value of the resulting products. If successful, OSI intends to partner these products with pharmaceutical companies prior to marketing in order to maximize their full commercial potential. 2 4 OSI is, and will remain, dependent on its collaborative partners and third parties for the manufacture, marketing and sales of all pharmaceutical products. RESEARCH AND DEVELOPMENT PROGRAMS OSI utilizes its broad-based drug discovery capability in multiple drug discovery programs encompassing a variety of major human diseases. OSI's major programs in R&D are as follows: Cancer During the 1980s, cancer researchers developed a sophisticated understanding of the role played by certain genes in the transformation of normal cells into a cancerous state, and thus were able to identify novel targets for drug intervention. As the decade of the 1990s comes to a close, this new knowledge of the molecular basis of cancer has started to move from the laboratory into the clinical arena, promising new hope for patients with many types of cancers, including breast, colon, head and neck, and ovarian. In the next decade, novel anticancer therapies are expected to be commercialized, creating a new paradigm for cancer treatment, with the potential that cancer can either be cured or managed safely over the long term. OSI believes that it is positioned at the forefront of this unfolding revolution in the treatment of cancer. With Pfizer, OSI has focused since 1986 on the discovery and development of novel classes of orally active, molecularly targeted, small molecule anticancer drugs based on oncogenes and tumor suppressor genes and the fundamental mechanisms underlying tumor growth. The first of these programs has yielded a clinical candidate CP-358,774 which is a potent, selective and orally active inhibitor of the epidermal growth factor receptor, or EGFR, a key oncogene in a variety of cancers including ovarian, pancreatic, non-small cell lung, breast and head and neck. Following a successful Phase I program which demonstrated that the drug could be safely administered to patients over extended (6 month) periods at doses that achieved the blood concentration of drug required for anti-tumor activity in animal models, the Company entered large-scale, multi-center Phase II clinical trials in the United States in the spring of 1999. The program includes trials in ovarian, head and neck and non-small cell lung cancer. There are over a million new cases of solid tumors in the U.S. every year, approximately 30% of which have a aberrant EGFR gene. The program is designed to assess CP-358,774 both as a single agent and in combination with existing chemotherapy regimens. CP-358,774 is representative of an emerging new class of anti-cancer drugs that target the underlying molecular changes involving oncogenes and tumor suppressor genes that play critical roles in the conversion of normal cells into a cancerous state. The OSI/Pfizer alliance has identified two other compounds, CP-609,754 and CP-663,427, as orally active inhibitors of an enzyme termed farnesyl transferase. CP-609,754 has advanced to Phase I clinical trials in the United States and CP-663-427 is in advanced pre-clinical development. These compounds may target the ras oncogene, an important target in many tumors including colon and bladder. In addition, another compound, CP-547,632, is in advanced pre-clinical development and is being developed as an orally available, potent and selective inhibitor of a key protein tyrosine kinase receptor involved in angiogenesis. Angiogenesis is the process of blood vessel growth and is induced by solid tumors which require nutrients that will enable growth. OSI believes that the ability to safely and effectively inhibit this process represents one of the most exciting areas of cancer drug development. An additional 12 targets are in active research and development in the OSI/Pfizer collaboration. The types of novel anticancer drugs being developed in the OSI/Pfizer collaboration are expected to be safer and more effective than standard chemotherapeutic agents. OSI has also begun lead seeking activities in an OSI-funded cancer research program. Diabetes Diabetes mellitus is a chronic, progressively debilitating disease affecting more than 143 million people worldwide. Approximately 90-95% of the people affected have Type II diabetes which usually develops in adults over age 40 and is most common among adults over age 55. The prevalence of diabetes is likely to continue to grow as this age group continues to increase in size. 3 5 Effective October 1, 1999, OSI entered into a fully-funded collaboration, including milestone and success payment and royalties, with Tanabe to discover and develop small molecule drugs for the treatment of Type II diabetes. OSI also received an upfront fee upon initiation of this program. The Company is also independently researching selected targets in this area. This collaboration is built upon the comprehensive drug discovery alliance between OSI and Vanderbilt University Diabetes Center, with which OSI has been collaborating since April, 1998. The targets of this collaboration will focus on the normalization of the elevated plasma glucose levels seen in Type II diabetes. Cosmeceuticals Every year, consumers in the United States, Europe and Asia spend billions of dollars on cosmetic products and services that promise to provide a youthful, healthy or culturally desirable appearance. Some of these products are marketed on the basis of ostensible pharmaceutical effects, such as the reduction of skin wrinkles and pigmentation or the promotion of hair growth. OSI believes that most of these products are not optimally effective and may have undesirable side effects. In 1996, OSI entered into a joint venture with Pfizer (the majority owner) and New York University to form Anaderm Research Corporation, a company dedicated to the application of modern tools for the discovery and development of safe, effective, pharmacologically active agents for certain cosmetic and quality-of-life indications, such as skin pigmentation, hair loss and skin wrinkling. Pfizer recently financed an extensive renewal and expansion of the Anaderm venture effective April, 1999. Under this new agreement, Anaderm will provide up to $50 million in R&D funding to OSI over the next four to six years. OSI will remain the sole drug discovery arm of Anaderm during this period providing discovery biology, medicinal chemistry and pharmaceutical development resources. GPCR -- Directed Drug Discovery In August, 1999, OSI purchased certain assets of Cadus Pharmaceutical Corporation. In this acquisition, OSI acquired Cadus' drug discovery programs focused on G-protein coupled receptors or GPCRs. These receptors are one of the most important families of targets for drug discovery in the pharmaceutical industry. Approximately, forty percent of the currently marketed pharmaceutical products target GPCRs. The acquired programs include Cadus' discovery program in adenosine receptors, an important family of GPCR's. These programs will form the core of OSI-owned and funded candidate development programs in the coming year. The improved understanding of the physiology, pharmacology and molecular biology of adenosine and adenosine receptors in recent years has provided a solid foundation for active research and development in this field. Currently, four adenosine receptor subtypes, A(1), A(2A), A(2B) and A(3), have been characterized and R&D efforts have led to high quality proprietary lead compounds for each. Several adenosine receptor compounds are under development by OSI. Promising adenosine A(1) and adenosine A(2B) receptor targeted compounds will undergo evaluation as candidates for asthma, with the dual goals of identifying an IND-track candidate against both targets and simultaneously assessing and executing the best commercialization strategy. The A(1) compound is targeted for the treatment of the bronchoconstriction associated with the acute phase of an asthma attack while the A(2B) compound is directed toward blocking the inflammatory components produced by mast cells and associated with the longer term damage caused by the disease. OSI also has potent and selective A(2A) targeted compounds that have potential for development as both anti-angiogenesis agents and for the treatment of Parkinson's disease. Additionally, OSI has a selective adenosine A(3) targeted compound that is undergoing extensive evaluation in animal models for glaucoma. The targets of Parkinson's disease and glaucoma are examples of programs outside OSI's disease area focus and may be out-licensed or earlier partnered in the development process. In addition, an A(1) targeted compound, CDS-096370, has potential for use in the treatment of congestive heart failure and renal failure. This candidate has been licensed to Solvay for advanced pre-clinical and clinical development. 4 6 Cholesterol Lowering As part of OSI's long-term alliance with Hoechst Marion Roussel, or HMRI, in gene transcription drug discovery, the parties have focused on cholesterol lowering. The cholesterol lowering market is dominated by a class of drugs including Lipitor and Zocor which target a key enzyme involved in the body's metabolism of fats and cholesterol (HMG-CoA reductose inhibitors), which sell, in total, over $12 billion a year worldwide. Three to five percent of patients on these drugs have an elevation of certain liver enzymes which indicates some low level of liver damage as a side effect. The OSI/HMRI program was designed to target a new class of compounds that would avoid these complications. A compound is in advanced pre-clinical development that operates through a novel mechanism. This compound enhances the expression of the Low Density Lipoprotein Receptor (LDLR), the principal mechanism by which liver cells bind LDL-cholesterol (so-called bad cholesterol) for clearance by the body. In pre-clinical models, this candidate is very efficacious in lowering LDL-cholesterol and are apparently well tolerated in pre-clinical safety studies. Psoriasis During the last year, OSI executed an in-license agreement with Pfizer that enabled OSI to take advantage of the extensive joint technology for protein-tyrosine kinases that exist in the OSI/Pfizer cancer alliance and to apply this to the treatment of mild-to-moderate psoriasis. Mild-to-moderate psoriasis is an autoimmune disease affecting 3-6 million Americans. The disease manifests itself in the form of scaly, thickened and reddened skin lesions. These lesions arise as a result of hyper-proliferation of the skin and local angiogenesis. OSI licensed a family of compounds from Pfizer that are co-inhibitors of both EGFR, which is a key regulator of skin cell growth, and vascular endothelial growth factor receptor, or VEGFR, which is the key mediator of angiogenesis. OSI is currently attempting to identify a candidate for development of a topically applied formulation for this indication. As part of the license agreement, Pfizer has an option to recover full development and marketing rights for this program past Phase II trials. If Pfizer executes its option, it will reimburse OSI's clinical development costs, and pay milestone and royalty payments on successful product development and marketing. 5 7 The progress of these and other drug candidates as of December 1, 1999 is summarized in the following table: TABLE I. CURRENT PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS This table is qualified in its entirety by reference to the more detailed descriptions elsewhere in this report.
DISEASE FIELD DESCRIPTION - ------------------------------------------------------------------------------------------------ CANCER OSI/PFIZER FUNDED COLLABORATION WITH ROYALTIES: CLINICAL CANDIDATES/TARGETS: - CP 358,774 -- EGFR -- Phase II - CP 609,754 -- Farnesylation -- Phase I ADVANCED PRE-CLINICAL CANDIDATES/TARGETS: - CP 663,427 -- Farnesylation -- IND Track - CP 547,632 -- Angiogenesis -- IND Track PRE-CLINICAL: - 4 targets in Lead Optimization - 8 targets in Lead Seeking OSI OWNED: - 1 target in Lead Seeking - ------------------------------------------------------------------------------------------------ DIABETES & OBESITY OSI/TANABE FUNDED COLLABORATION WITH MILESTONES & ROYALTIES: - 4 targets in Lead Seeking OSI OWNED: - 1 target in Lead Seeking - ------------------------------------------------------------------------------------------------ COSMECEUTICALS OSI/PFIZER/ANADERM FUNDED COLLABORATION WITH ROYALTIES: - 1 target in IND track - 2 targets in Lead Optimization - 3 targets in Lead Seeking - ------------------------------------------------------------------------------------------------ GPCR DIRECTED OSI OWNED: (ADENOSINE RECEPTORS): - 1 target in IND track - Heart Disease - 3 targets in Lead Optimization - Asthma/Inflammation - Glaucoma OSI/SOLVAY FUNDED COLLABORATION WITH MILESTONES & ROYALTIES: - Parkinson's Disease - 1 target in IND track (licensed to Solvay with milestones & royalties) - multiple targets in Lead Seeking - ------------------------------------------------------------------------------------------------ HYPERCHOLESTEROLEMIA/ OSI/HMRI FUNDED COLLABORATION WITH ROYALTIES: TRANSCRIPTION - 1 candidate on IND track - 2 targets in Lead Optimization - 4 targets in Lead Seeking - ------------------------------------------------------------------------------------------------ PSORIASIS OSI OWNED WITH PFIZER OPTION: - 1 target in Lead Optimization - ------------------------------------------------------------------------------------------------ WOUND HEALING (TGF-BETA3): OSI OWNED: - Anti-Scarring CLINICAL: - Bone & Cartilage Repair - 1 target at the end of Phase I OSI/NOVARTIS FUNDED COLLABORATION WITH MILESTONES & ROYALTIES: - 1 candidate on IND track - ------------------------------------------------------------------------------------------------ INFLUENZA OSI/SANKYO FUNDED COLLABORATION WITH MILESTONES & ROYALTIES: - 2 targets in Lead Optimization - ------------------------------------------------------------------------------------------------
6 8 OSI'S DRUG DISCOVERY PLATFORM OSI's drug discovery platform constitutes an integrated set of technologies and capabilities covering every aspect of pre-clinical drug development. The drug discovery approach pursued by OSI is focused on the discovery and development of small molecule pharmaceutical products which, typically, would be taken orally by a patient as a pill, capsule or suspension. The process begins with a lead seeking phase. In this phase, which can take up to two years, a combination of modern molecular biology, robotics and computational science is used to build "assay" or test systems in which large libraries of diverse small molecules and natural products are tested to see if any possess activity against a drug target. Drug targets are usually genes or gene products that are shown to be relevant to various disease states. After this initial testing, active compounds are tested in a variety of secondary assays designed to determine their potency and selectivity and to obtain early information on their toxicity and mechanism of action. Active compounds surviving this selection process are considered leads and progressed into lead optimization. During lead optimization, which can also take up to two years, medicinal chemists synthesize new molecules and combinatorial libraries which are structurally related to the lead compound. These are tested extensively in order to produce a drug candidate which has greatly improved drug like qualities, is active and well tolerated in animal models and can be patented as a novel pharmaceutical. Having identified a suitable drug candidate the molecule is advanced toward clinical trials, the so-called "IND-track" phase, in which toxicological, scale-up synthesis and clinical trial design issues are addressed. This phase usually takes one to one and one-half years. Upon entering clinical trials (usually with an Investigational New Drug (IND) approval from the Food and Drug Administration, or FDA) a drug is first assessed for its safety, usually in healthy volunteers (except for life-threatening diseases such as cancer where patient volunteers are used). After these Phase I trials, drugs are tested in efficacy studies (Phase II) to demonstrate activity in humans prior to extensive Phase III trials designed to collect the data necessary to support a New Drug Application (NDA) filing with the FDA. The entire process typically takes over a decade and is subject to significant risk and attrition. Only approximately 1 in 16 drug discovery projects results in a successful product and approximately seven million compounds are tested for every successful product. The Company has, therefore, adopted a research strategy that manages a portfolio of product opportunities and has integrated a platform of technologies designed to rapidly and cost-effectively enhance the overall process. OSI's platform includes a variety of cell-free and live-cell assays, molecular biology capabilities, high throughput robotic screening, diverse compound libraries and combinatorial, medicinal and natural products chemistry capabilities, together with significant pre-clinical expertise in pharmaceutics, and pharmacokinetics. OSI's technologies are designed to accelerate the process of identifying and optimizing high quality, small molecule drug candidates for clinical development. OSI pioneered the development of (i) genetically engineered live-cell assays targeting gene transcription and (ii) robotic high throughput screening. OSI has, through acquisition and internal technology development, added extensively to these core capabilities including, via its Cadus asset acquisition, significant expertise in GPCR discovery and information technology tools to support research and development. The addition of large diverse libraries of small molecules and a broadened expertise in assay biology and medicinal, combinatorial and pharmaceutical chemistry capabilities have created a comprehensive drug discovery platform enabling OSI to progress leads all the way through the discovery and pre-clinical development stages. OSI's drug discovery platform is widely applicable to the identification and optimization of small molecule drug candidates to treat many different diseases. Utilizing this platform, OSI has been able to identify and optimize lead compounds that are potent and selective, possess minimal or no cellular toxicity, have activity in live-cells and animal models, and have progressed to clinical trials in humans. Assay Biology OSI specializes in the development of a variety of drug screens that capitalize on recent advances in understanding the human genome and its correlation to disease. Various assay biology techniques are used to target selected and validated gene products for drug discovery. The Company pioneered the use of genetically engineered human cells to identify compounds that affect transcription of target genes. These assay systems, which employ reporter gene technology, can be utilized to discover drugs that affect the expression of proteins 7 9 encoded by the target genes. There are multiple sites within a cell where a drug can act to exert a specific effect. This broadly enabling technology allows OSI to discover compounds that exert their effects on signal transduction proteins, transcription factors and other sites. This technology has resulted in the issuance of five patents in its gene transcription patent estate. These patents cover methods of modulating transcription in-vivo, the use of reporter genes in many cell-based transcription assays used for drug discovery and the modulation of genes associated with cardiovascular disease. OSI anticipates that future issuances will further broaden its patent estate in this area. This technology has been widely adopted in the biotechnology and pharmaceutical industry, and OSI believes that the claims covered by this patent estate can be licensed for certain monetary and technology considerations. Over the last several years OSI broadened its assay expertise extensively. Currently, OSI is able to conduct screens on a wide variety of different assay platforms, including enzyme assays, immunoassays, scintillation proximity assays, protein-protein interaction assays and receptor-ligand screens. OSI believes that this breadth of expertise enables it to select the most appropriate assay with which to pursue drug discovery against a novel biological target. OSI has 74 scientists involved in assay biology as support for both drug discovery and development programs. High Throughput Robotic Screening OSI has been a pioneer and remains a leader in high throughput screening. The Company has developed software and automation that enables it to manage large compound libraries and prepare test substances for screening. OSI has developed proprietary hardware and software systems to automate the entire drug screening process, from the addition of the test substances to assay systems to the analysis of the data generated from the tests. The technology has been developed to accommodate a high degree of flexibility allowing the Company to conduct a wide variety of assay formats in screening. In its proprietary robotic screening facility, OSI can analyze up to 300,000 different test samples each week, depending on the complexity of the assays. OSI's robotic systems are not limited to any particular assay format and can be rapidly reconfigured to run a wide variety of assays. Diverse Compound Libraries Access to large libraries of diverse, small molecule compounds is a key asset in OSI's drug discovery efforts. Leads discovered from these libraries become the proprietary starting materials from which drugs are optimized. OSI manages over 1.5 million compounds in its compound libraries facility from its own and several of its partners' compound libraries for high throughput screening. OSI's proprietary libraries include its focused libraries of small molecule compounds derived from its high-speed combinatorial analoging, libraries of diverse, high quality small-molecule compounds that it has acquired and its natural products library derived from its unique collection of over 70,000 fungal organisms. As part of the acquisition of assets from Cadus in July, 1999, OSI obtained a library of 150,000 diverse, high quality small molecule compounds directed toward GPCR discovery. In March, 1997, OSI acquired from the Dow Chemical an exclusive worldwide license to a library of 140,000 compounds for the purposes of discovery and development of small molecular weight pharmaceuticals and cosmeceuticals. In addition, certain collaborative partners have made their compound libraries available for additional research and development by OSI outside of their existing collaborative programs. For any compound from OSI's collaborative partners' libraries that emerges as a lead in a proprietary program, the partner typically will have the right of first refusal to develop the compound or terminate its further development or to allow OSI to commercialize the compound independently or with a third party in exchange for royalty payments from OSI on product sales. OSI also continues to expand its libraries through OSI high speed combinatorial analoging activities. OSI employs approximately 20 scientists and research associates in its combined screening and library management operations. Chemistry and Lead Optimization The pharmaceutical properties of a lead compound must be optimized before clinical development of that compound begins. In 1996 OSI acquired Aston Molecules Ltd., a private British company with expertise in medicinal and combinatorial chemistry and pharmaceutical development, which are critical elements in the lead optimization and development process. With subsequent investments in combinatorial chemistry, an 8 10 expansion of the Aston facility and the addition of the Cadus chemistry team in Tarrytown, New York, this group has grown to a high quality medicinal chemistry team of over 35 medicinal, combinatorial, computational and natural product chemists. The group has integrated various computational techniques for molecular modeling and diversity analysis into its lead optimization and development activities to further enhance the speed and quality of drug discovery at OSI. Pre-Clinical Development The Aston group has expertise in pharmacokinetics and pharmaceutical chemistry and the management and generation of good laboratory practices, or GLP, accredited data required for regulatory dossier submissions to agencies such as the FDA. Thus, OSI is able to support the development of a drug candidate for clinical testing. OSI has invested significant resources in expanding this capability and in technological enhancements in this area. In addition, OSI is implementing approaches that allow it to generate information on the metabolic liability of lead compounds together with their physical and chemical properties. OSI is in the process of establishing this integrated platform of automated and semi-automated technologies in an effort to support decision making regarding the quality of lead candidates earlier in the drug discovery process. Through the Cadus asset acquisition and quality hires, OSI has added to its depth in expanding its pre-clinical development capabilities. These include the characterization of lead compounds with respect to pharmacokinetics, potency, efficiency and selectivity. This combined group manages the necessary studies, including toxicology, that ultimately lead to IND applications and clinical trials. OSI believes that its drug discovery and lead optimization capabilities will continue to generate high quality pre-clinical candidates. Additionally, OSI will seek quality pre-clinical candidates to license-in for further development. OSI has over 24 pharmaceutical chemists and pharmacologists employed in this area. MAJOR COLLABORATIVE PROGRAMS OSI pursues collaborations with pharmaceutical companies to combine its drug discovery and development capabilities with the collaborators' development and financial resources. The collaborations provide for OSI's partners to fund its collaborative research and development programs which are jointly managed and pay for clinical development, manufacturing, marketing and launch costs for any product developed. OSI receives royalties, generally in the five to eight percent range, on sales of any resulting products. Certain collaborative programs involve milestone payments by the partners. The collaborative partners generally retain manufacturing and marketing rights worldwide. Generally, each collaborative research agreement prohibits OSI from pursuing with any third party drug discovery research relating to the drug targets being covered by research under the collaboration, but do not block research activity in the fields. Pfizer Inc. In April, 1986, Pfizer and OSI entered into a collaborative research agreement and several other related agreements. During the first five years of the collaboration, OSI and Pfizer focused principally on understanding the molecular biology of oncogenes. In 1991, Pfizer and OSI renewed the collaboration for a second five-year term and expanded the resources and scope of the collaboration to focus on the discovery and development of cancer therapeutic products based on mechanisms-of-action that target oncogenes and anti-oncogenes and fundamental mechanisms underlying tumor growth. Oncogenes play a key role in the conversion of normal cells to a cancerous state and can cause cancer when they mutate or over express. Anti-oncogenes, or tumor suppressor genes, encode proteins that generally function to block the proliferative growth of particular cell types. A loss of function of certain tumor suppressor genes can result in uncontrolled cell growth. Tumor induced angiogenesis is a process whereby solid tumors develop the blood supply necessary to sustain tumor growth. Effective April 1, 1996, OSI and Pfizer renewed their collaboration for a new five-year term by entering into new collaborative research and license agreements. All patent rights and patentable inventions derived from the research under this collaboration are owned jointly by OSI and Pfizer. OSI has granted Pfizer an exclusive, worldwide license to make, use, and sell the therapeutic products resulting from 9 11 this collaboration in exchange for royalty payments. This license terminates on the date of the last to expire of OSI's relevant patent rights. Pfizer is responsible for the clinical development, regulatory approval, manufacturing and marketing of any products derived from the collaborative research program. Generally, OSI and Pfizer are prohibited during the term of the contract from independently pursuing or sponsoring research aimed at the compounds or products against specific targets in the program. The collaborative research agreement will expire on April 1, 2001. It may be terminated earlier by either party only upon the occurrence of certain defaults by the other party. Any termination of the collaboration resulting from a Pfizer default will cause a termination of Pfizer's license rights. Pfizer will retain its license rights if it terminates the agreement in response to a default by OSI. Under this collaborative research agreement, Pfizer has committed to provide research funding to OSI in an aggregate amount of approximately $18.8 million. Pursuant to a schedule set forth in the collaborative research agreement, Pfizer will make annual research funding payments to OSI, which gradually increases from a maximum of approximately $3.5 million in the first year of the five-year term to approximately $4 million in the fifth year. Effective as of April 1, 1999, OSI entered into a Development Agreement with Pfizer for the development of certain compounds derived from the collaborative research agreement described above for the treatment of psoriasis. Under the development agreement, OSI will conduct a development program which includes pre-clinical and clinical research and development through and including Phase II clinical trials for compounds to assess their safety and efficacy to be developed as therapeutic agents for the treatment of psoriasis and other related dermal pathologies. Pursuant to the terms of the development agreement, Pfizer has granted to OSI an exclusive, with the exception of Pfizer, license to make and use the compounds for all research and development purposes in the development program other than the sale or manufacture for sale of products or processes. At the end of the development program, Pfizer must notify OSI of its intention to continue development and commercialization of a compound within three months following receipt of the data package from the clinical studies. If Pfizer notifies OSI of such intention, it will have an exclusive, worldwide license, with the right to grant sublicenses, to make, use, sell, offer for sale and import products developed in the course of the development program subject to the reimbursement of clinical development costs. If Pfizer fails to notify OSI of such intention, OSI will receive an exclusive, worldwide, royalty-bearing license, including the right to grant sublicenses, to manufacture, use, sell, offer for sale and import products developed in the course of the development program. OSI, however, has the right to refuse to accept this license. The party receiving the license must pay milestone and royalty payments as consideration therefor. The duration of the licenses is coextensive with the lives of patents related to the licensed compounds. Each of the parties has rights and obligations to prosecute and maintain patent rights related to specified areas of the research under the development agreement. The development agreement is subject to early termination in the event of certain defaults by the parties. From 1986 to September 30, 1999, Pfizer paid an aggregate amount of $44.1 million to OSI in research funding. In 1986, Pfizer purchased 587,500 shares of OSI's common stock, which constitutes approximately 2.7% of OSI's outstanding common stock, for an aggregate purchase price of $3,525,000. Anaderm Research Corporation On April 23, 1996, in connection with the formation of Anaderm, OSI entered into a Stockholders' Agreement with Pfizer, Anaderm, NYU and certain NYU faculty members, and a Collaborative Research Agreement with Pfizer and Anaderm for the discovery and development of novel compounds to treat conditions such as baldness, wrinkles and pigmentation disorders. Anaderm issued common stock to Pfizer and OSI and options to purchase common stock to NYU and the faculty members. NYU and the faculty members exercised their options fully. In exchange for its 14% of the outstanding shares of Anaderm's common stock, OSI provided formatting for high throughput screens and conducted compound screening for 18 months at its own expense under the research agreement. The term of the research agreement was three years. During the initial phase of the agreement (the first 18 months), OSI was required to provide at its own cost formatting for high throughput screens and perform 10 12 screening of its own compounds and those compounds provided by Pfizer. Upon the termination of the initial phase, the board of directors of Anaderm made a determination that the initial phase was successfully completed. With Pfizer's approval, the funded phase commenced as of October 1, 1997. During this phase, Anaderm made payments to OSI equal to its research costs, including overhead, plus 10%. Anaderm or Pfizer will pay royalties to OSI on the sales of products resulting from this collaboration. In December, 1997, OSI and Pfizer entered into an agreement for a second round of equity financing for Anaderm. The agreement called for an equity contribution of $14 million by OSI and Pfizer, of which OSI was to contribute $2 million in drug discovery resources, including assay biology, high throughput screening, lead optimization and chemistry, through 1999. The amount to be contributed by Pfizer included amounts which were to be used to support OSI in its ongoing drug discovery activities under this program. In April, 1999, OSI, Pfizer and Anaderm amended the research agreement to expand the collaborative program. The new research agreement is for a term of three years. Pfizer may terminate the new research agreement, however, after the first or second year of the term in its sole discretion after consultation with Anaderm and OSI to determine whether satisfactory progress has been made in the research program during the previous year. The new research agreement provides for funding by Pfizer of up to $35 million in total payments to Anaderm to fund OSI's research and development activities during the three-year term and up to $15 million in phase-down funding following expiration of the three-year term or earlier termination by Pfizer. In the expanded program, OSI will continue to provide a full range of capabilities including assay biology, high throughput screening, compound libraries, combinatorial, medicinal, and natural product chemistry, as well as pharmaceutics, pharmacokinetics and molecular biology. OSI anticipates a significant increase in its staffing of the program to conduct its drug discovery efforts during the term of the new research agreement. Anaderm or Pfizer will pay royalties to OSI on the sales of products resulting from the collaboration. In April, 1999, the parties also amended the stockholders' agreement. The amendment provided for the addition of a right on the part of each of OSI, NYU and each of the faculty members, exercisable at any time prior to December 31, 1999, to require Anaderm or Pfizer to purchase all, but not less than all, of the shares of common stock of Anaderm held by each such stockholder for a fixed price. The stockholders continue to have the right, exercisable at any time subsequent to April 23, 2000, to require Anaderm or Pfizer to purchase all, but not less than all, of the shares of common stock of Anaderm held by each such stockholder at a defined value. In addition, Anaderm or Pfizer had the right, exercisable at any time subsequent to April 23, 2002, to require OSI, NYU or any faculty member to sell to Anaderm all, but not less than all, of the shares of common stock of Anaderm held by such stockholder at a defined value of such shares. In the prior stockholders' agreement, this call right was exercisable by Anaderm only with respect to the shares owned by NYU and the faculty members. On September 23, 1999, by letter to Pfizer, OSI exercised its right to require Anaderm or Pfizer to purchase all of the shares of common stock of Anaderm held by it. On November 10, 1999, Pfizer purchased such shares from OSI for an agreed upon purchase price and OSI's obligations under the stockholder agreement terminated. Tanabe Seiyaku Co., Ltd. Effective as of October 1, 1999, OSI entered into a Collaborative Research and License Agreement with Tanabe. The collaboration is focused on discovering and developing novel pharmaceutical products to treat diabetes. Under the agreement, OSI is responsible for identification of targets (subject to Tanabe's approval), assay development, screening of compounds from OSI's library and Tanabe's library against identified targets, identification of seed compounds meeting certain criteria specified in the agreement, optimization of such seed compounds, and identification of lead compounds meeting certain criteria specified in the agreement. Tanabe maintains responsibility for further development and marketing of a lead compound in exchange for milestone and royalty payments to OSI. If Tanabe determines to initiate further development of lead compounds identified by OSI, OSI will grant to Tanabe exclusive, worldwide licenses to, among other things, use, manufacture and sell all products containing such lead compounds directed to the identified targets. In exchange for these licenses, Tanabe will 11 13 pay OSI license fees and royalties on product sales. The duration of the licenses is coextensive with the lives of the patents related to the licensed compound or ten years from the first commercial sale, whichever is longer. If Tanabe determines not to initiate further development of a lead compound or if Tanabe discontinues development of candidate compounds, OSI will have the sole and exclusive right to develop, use, manufacture and sell all products resulting from the collaboration, and it will pay royalties to Tanabe. Each of the parties has rights and obligations to prosecute and maintain patent rights related to specified areas of the research and development under the agreement. Generally, OSI is prohibited during the term of the contract from pursuing independently or having sponsored or sponsoring research and development of compounds and products in the diabetes area relating to the identified targets in the agreement. Tanabe is prohibited from sponsoring research relating to the identified targets and from being sponsored by another pharmaceutical company with respect to research relating to the identified targets. The agreement is for a term of four years, with the option to extend for an additional two year period. Tanabe, however, has the right to terminate the agreement after two years under certain circumstances. On the effective date of the agreement, Tanabe was required to pay OSI a technology access fee of $3.5 million. Such payment was advanced on September 28, 1999. Tanabe has committed to provide research funding to OSI in an aggregate amount up to approximately $16 million. Vanderbilt University Effective as of April 28, 1998, OSI entered into a Collaborative Research, Option and Alliance Agreement with Vanderbilt University to conduct a collaborative research program and seek a corporate partner to fund a technology collaboration for the discovery and development of drugs to treat diabetes. The collaborative research was funded by OSI in exchange for which OSI received an option to negotiate a commercially reasonable, worldwide, exclusive license from Vanderbilt to develop, make, use, and sell products derived from the research program. OSI and Vanderbilt committed equal resources to the program, including, among other things, access to all their respective laboratory facilities and dedicated teams of research scientists. OSI had certain rights and obligations to prosecute and maintain patent rights related to specified areas of the research under the agreement. The agreement was for a term of one year, and was extended until the execution of a third-party research collaboration agreement by OSI -- i.e., the agreement with Tanabe. Concurrently with the execution of the Tanabe agreement, OSI and Tanabe entered into an Amended and Restated Collaborative Research, License and Alliance Agreement with Vanderbilt with an effective date of August 31, 1999. This agreement amends and restates the agreement from April, 1998 to add Tanabe as a party to the agreement with respect to certain sections and to amend certain other provisions to clarify Vanderbilt's role in the OSI/Tanabe research program. The term of the research program conducted by OSI and Vanderbilt commenced on April 28, 1998 and will end upon termination of the contract period under the Tanabe Agreement unless mutually extended by OSI and Vanderbilt. The OSI/Vanderbilt research program is comprised of two parts: research directed toward the targets identified in the Tanabe agreement and research directed toward additional targets which are not targets under the Tanabe agreement. OSI may offer to Tanabe any of the additional targets for inclusion in the OSI/Tanabe research program. As part of the OSI/Vanderbilt research program, Vanderbilt will assist OSI in fulfilling its obligations under the Tanabe/OSI research program by providing access to Vanderbilt's drug discovery resources, including laboratories and assays. OSI will provide funding to Vanderbilt to conduct the OSI/Vanderbilt research program. A portion of such funding will come from Tanabe's funding of the OSI/Tanabe research program. OSI will also pay to Vanderbilt a percentage of the revenues (milestone and royalty payments) it receives from Tanabe and any other third party which is commercializing products resulting from the OSI/Vanderbilt research program. The percentage received by Vanderbilt will vary in accordance with the extent to which Vanderbilt technology and patents contributed to the product giving rise to such revenue. OSI also paid Vanderbilt a one-time success fee of $500,000 in October, 1999 in respect of OSI entering into the Tanabe agreement. 12 14 Sankyo Company, Ltd. Effective as of February 12, 1997, OSI entered into a Collaborative Research and License Agreement with Sankyo to be conducted in partnership with MRC Collaborative Center, London, U.K. The collaboration is focused on discovering and developing novel pharmaceutical products to treat influenza. OSI is responsible for conducting research as directed by the research committee, including, without limitation, compound screening in exchange for research funding from Sankyo. Sankyo has the responsibility and the exclusive right to conduct pre-clinical and clinical development of all candidate compounds in exchange for milestone payments to OSI. OSI and MRC CC have granted to Sankyo exclusive, worldwide licenses to, among other things, use, manufacture and sell all products resulting from the collaboration. In exchange for these licenses, Sankyo will pay to OSI and MRC CC license fees and royalties on product sales. The duration of the licenses is coextensive with the lives of the patents related to the licensed compound. If Sankyo discontinues development of all candidate compounds, OSI will have the sole and exclusive right to develop, use, manufacture and sell all products resulting from the collaboration, and it will pay royalties to Sankyo. Each of the parties has rights and obligations to prosecute and maintain patent rights related to specified areas of the research under the agreement. Generally, OSI, Sankyo and MRC CC are prohibited during the term of the agreement from pursuing or sponsoring research and development of compounds and products in the anti-influenza area other than pursuant to the agreement. The agreement is for a term of three years, with the option to extend for an additional one or two year period upon conditions and terms acceptable to OSI, Sankyo and MRC CC. The agreement is subject to early termination in the event of certain defaults by the parties. In November, 1999, OSI and Sankyo renewed the collaboration for an additional two years. Hoechst Marion Roussel, Inc. (HMRI) Pursuant to the Amended Collaborative Research and License Agreement effective April 1, 1997, OSI and HMRI are conducting joint research and development activities, which focus specifically on OSI's expertise in live-cell assay technology. OSI conducts the lead seeking (screening) phase of the drug discovery process against a variety of targets in various disease areas. HMRI is responsible for all lead optimization and development activities. OSI has identified several compounds, which HMRI is optimizing for further development. The most advanced of these compounds are in lead optimization for individual targets in atherosclerosis and arthritis. Under this collaboration, OSI is responsible for achieving objectives outlined in the annual research plans. HMRI is responsible for assisting OSI in the pursuit of such objectives, including advancing the pharmacological assessment of compounds identified by OSI, determining the chemical structure of the selected compounds, identifying and selecting development candidates, pursuing clinical development and regulatory approval, and developing manufacturing methods and pharmaceutical formulations for the selected candidates. HMRI is responsible for funding the costs of OSI's discovery efforts. As of September 30, 1999, OSI had recognized an aggregate of $22.8 million in research funding from HMRI and its predecessors. OSI has granted to HMRI an exclusive, worldwide license (and rights to acquire additional licenses) with respect to, among other things, the use, manufacture and sale of products resulting from OSI's lead seeking efforts against these individual drug targets. In exchange for these licenses, HMRI will pay royalties to OSI on sales of such products. OSI and HMRI have mutually exclusive rights and obligations to prosecute and maintain certain patent rights related to various specified areas of the research. Generally, OSI is prohibited during the term of the collaboration from pursuing or sponsoring research independent of HMRI if it relates to the identified targets in the areas of collaboration with HMRI without the approval of the research committee. HMRI is generally prohibited from using the gene transcription method independent of OSI to discover novel human therapeutic products without the approval of the research committee. The agreement expires on the later of March 31, 2002 or the last to expire of any obligations of HMRI to pay royalties. The agreement may be terminated early by either party upon the 13 15 occurrence of certain defaults by the other party. Any termination by OSI resulting from an HMRI default will cause a termination of certain of HMRI's license rights. HMRI will retain its license rights if it terminates the agreement in response to a default by OSI. As of September 30, 1999 HMRI held 1,590,909 shares of common stock of OSI. This included a warrant to purchase 500,000 shares of OSI's common stock for $5.50 per share which expired on December 10, 1999. Effective as of January 1, 1997, OSI entered into a Collaborative Research and License Agreement with HMRI to develop orally active, small molecule inducers of erythropoietin gene expression for the treatment of anemia due to chronic renal failure and anemia associated with chemotherapy for AIDS and cancer. This collaboration identified active lead compounds that were advanced to a pre-clinical development stage. This research effort, however, did not achieve sufficient data to warrant further development. Consequently, in October 1998, this program was terminated. Solvay Pharmaceuticals, B.V. With the acquisition of the assets of Cadus, OSI assumed a Collaborative Research and License Agreement effective as of November 1, 1995 which Cadus had with Solvay. The collaboration is directed toward GPCR drug discovery in differing fields of use. OSI's fields of use include cancer, asthma and inflammatory diseases. Solvay's fields of use include cardiovascular, central nervous system disorders and gastrointestinal diseases. Under the agreement, the parties are to develop and manufacture screens that incorporate targets which are the subject of the agreement. The screens are to enable Solvay and OSI to test compounds for biological activity as part of their respective drug discovery efforts in their respective fields. The parties are responsible for the identification of targets and OSI undertakes assay development using funds from Solvay. In exchange for milestone and royalty payments, Solvay maintains sole responsibility for pre-clinical and clinical development as well as marketing and commercialization of any lead compound it discovers from its use of the screens developed as part of the collaboration. Under the agreement, Cadus granted to Solvay a worldwide license in Solvay's fields of use to, among other things, use and practice the screens to identify and confirm potential human therapeutics. The license is exclusive for the term of the research program, or longer if Solvay has identified or confirmed a potential product during the exclusive period, and non-exclusive for five years following the research program. In exchange for these licenses, Solvay will pay OSI, as Cadus' successor, license fees and royalties on product sales. If Solvay discontinues the development of candidate compounds, OSI, as Cadus' successor, will have the sole and exclusive right to develop, use, manufacture and sell all products resulting from the collaboration, and OSI will pay milestones and royalties to Solvay. Each of the parties has rights and obligations to prosecute and maintain patent rights related to specified areas of the research under the agreement. The term of the research program is until December 31, 2000. Novartis Pharma AG OSI entered into an agreement with Novartis in April 1995 for the development of TGF-Beta 3 for various indications. TGF-Beta 3 is a naturally occurring human growth factor, first isolated by OSI, that exerts either stimulatory or inhibitory effects depending upon the particular cell type to which it is applied. This agreement granted to Novartis an exclusive, worldwide license to use and sell TGF-Beta 3 products for wound healing and oral mucositis, as well as certain other indications, in exchange for royalty payments to OSI on the sale of TGF-Beta 3 products. During 1998, Phase II clinical trials being conducted by Novartis for both wound healing and oral mucositis failed to achieve their primary clinical end points. Consequently, no further clinical development of TGF-Beta 3 by Novartis for either wound healing or oral mucositis has been anticipated. On May 31, 1999, the parties amended their agreement. The parties changed certain terms of the agreement including the definition of licensed indications, the supply of TGF-Betas, the amount of royalty payments, and the schedules of OSI's patents and applications and Novartis' patents. Specifically, oral mucositis and the healing of soft wound tissue were removed from the licensed indications. Novartis 14 16 acknowledged in the amendment that it has discontinued development of products for the indications of oral mucositis and healing of soft wound tissue. The parties agreed that all licenses which were granted to Novartis with respect to the discontinued indications are terminated and that OSI is free to continue development work and to grant licenses to third parties with respect to the discontinued indications. OSI is also free to use the results of any development work with respect to the discontinued indications carried out by Novartis prior to the date of the amendment provided that OSI pays to Novartis royalties and/or certain other agreed-upon amounts with respect to sales of products resulting from any continued development work by OSI or its licensee. Under the amendment, the new licensed indications are bone, cartilage and tendon repair. Novartis' option was changed in the amendment from an option to include in the definition of licensed indications all indications not already included to (a) an exclusive option to include in licensed indications the treatment of transplant patients (e.g., graft protection), the treatment of ischemia (e.g., angina pectoris and peripheral vascular disease), the treatment of stroke patients, and the treatment of inflammatory bowel disease, and (b) a non-exclusive option to include any other additional indications relating to TGF-Betas (other than the discontinued indications). The payment terms for the option were also amended and the time period to exercise the option was extended until May 31, 2003. Helicon Therapeutics, Inc. In July 1997, OSI, Cold Spring Harbor Laboratory and Hoffman-La Roche Inc. formed Helicon, a new Delaware corporation. In exchange for approximately 30% of Helicon's outstanding capital stock, OSI contributed to Helicon molecular screening services and a nonexclusive license with respect to certain screening technology. Cold Spring Harbor Laboratory contributed a royalty-free license to commercialize certain technology relating to genes associated with long-term memory in exchange for a portion of Helicon's outstanding capital stock. Hoffman-La Roche contributed cash for a portion of Helicon's outstanding capital stock. The parties entered into various collaborative research and license agreements pursuant to which they were to jointly pursue the discovery, development and commercialization of novel drugs for the treatment of long-term memory disorders and other central nervous system dysfunctions. The initial term of the collaborative program was three years, commencing as of July 1, 1997. As of July 1, 1999, Hoffman-La Roche terminated its participation in the program, the terms of which termination are currently being negotiated. Helicon received funding from Hoffman-La Roche for the first two years of the program. OSI may provide to Helicon OSI personnel to conduct screening and services and a license to use OSI's compound library for research purposes. OSI is currently contributing funds to Helicon on an as-needed basis in amounts tied to the costs of conducting research activities. BioChem Pharma, Inc. Pursuant to an agreement, dated March 19, 1999, OSI and BioChem (formerly BioChem Pharma (International) Inc.) amended their Collaborative Research, Development and Commercialization Agreement, effective as of May 1, 1996, terminating certain provisions contained therein, including, without limitation, provisions establishing the research program. Under the amended agreement, OSI granted BioChem a worldwide, irrevocable, exclusive license, and right to grant sublicenses, in a certain anti-viral target for a license fee of $2 million which is included in license fee income in the accompanying consolidated statement of operations for the year ended September 30, 1999. In addition, each party will be free to independently pursue the discovery of new compounds in the Hepatitis B and HIV areas without incurring any responsibility to the other party. To the extent BioChem completes any clinical trials or pursues any regulatory approvals for any products covered by the license it will pay milestones to OSI. In addition, to the extent BioChem commercializes certain compounds arising out of the joint venture, it will pay royalties to OSI. INTELLECTUAL PROPERTY OSI believes that patents and other proprietary rights are vital to its business. OSI's policy is to protect its intellectual property rights in technology developed by its scientific staff by a variety of means, including applying for patents in the United States and other major industrialized countries. The Company also relies 15 17 upon trade secrets and improvements, unpatented proprietary know-how and continuing technological innovations to develop and maintain its competitive position. In this regard, OSI seeks restrictions in its agreements with third parties, including research institutions, with respect to the use and disclosure of OSI's proprietary technology. OSI also has confidentiality agreements with its employees, consultants and scientific advisors. OSI currently owns 13 U.S. patents and 43 foreign patents. In addition, OSI currently has 24 pending applications for U.S. patents, 1 of which has been allowed, and 32 applications for foreign patents, 1 of which have been allowed. Further, other institutions have granted exclusive rights under their United States and foreign patents and patent applications to OSI. Included in the above, OSI has 6 applications for U.S. patents and 6 applications for foreign patents pending which contain composition of matter and method of use claims for its receptor-subtype specific adenosine receptor antagonist compounds. The Company intends to aggressively seek patent protection for all lead compounds discovered or developed in OSI owned development programs. OSI has assembled a strong gene transcription patent position. OSI currently has six U.S. issued patents and two foreign issued patents in this expanding patent estate. These include U.S. Patent Nos. 5,863,733, 5,665,543 and 5,976,793 which cover the use of reporter genes in many cell-based transcription assays used for drug discovery. U.S. Patent No. 5,776,502 covers methods of modulating gene transcription in-vivo using any low molecular weight compound. Also U.S. Patent Nos. 5,580,722 and 5,846,720 cover modulation of genes associated with cardiovascular disease. OSI has additional patent applications pending which should further enhance OSI's patent position in the area of gene transcription. The Company believes that this technology is in widespread use throughout the pharmaceutical and biotechnology sectors. OSI is conducting a non-exclusive out-licensing program for this patent estate. Currently OSI has licensed this technology to Aurora Biosciences Corporation and Pharmacia & UpJohn SpA. Under these agreements, OSI receives annual fees together with milestones and royalty payments from small-molecule gene transcription modulators developed and marketed as pharmaceutical products. OSI expects to execute similar additional license agreements with third parties that use this technology. There can be no assurance that patents will be issued based upon OSI's pending patent applications or any applications which it may file in the future, that any patent issued will adequately protect a commercially marketable product or process, or that any patent issued will not be circumvented or infringed by others or declared invalid or unenforceable. Moreover, there can be no assurance that others may not independently develop the same or similar technology or obtain access to OSI's proprietary technology. OSI is aware of patents issued to other entities with respect to technology potentially useful to it and, in some cases, related to products and processes being used or developed by OSI. OSI currently cannot assess the effect, if any, that these patents may have on its operations in the future. The extent to which efforts by other researchers resulted or will result in patents and the extent to which the issuance of patents to other entities would have a material adverse effect on OSI or would force OSI to seek licenses from such other entities currently is unknown as is the availability to OSI of licenses from such other entities, and whether, if available, licenses from other entities can be obtained on terms acceptable to OSI. COMPETITION The pharmaceutical and biotechnology industries are intensely competitive. OSI faces, and will continue to face, intense competition from organizations such as large pharmaceutical companies, biotechnology companies, academic and research institutions and government agencies. OSI faces significant competition from industry participants who are pursuing the same or similar technologies as those which constitute OSI's technology platform and from organizations that are pursuing pharmaceutical products or therapies that are competitive with OSI's potential products. Most of the major pharmaceutical organizations competing with OSI have greater capital resources, greater R&D staffs and facilities, and greater experience in drug development, obtaining regulatory approval and pharmaceutical product manufacturing and marketing. OSI's major competitors include fully integrated pharmaceutical companies, such as Merck & Co., Inc., Glaxo 16 18 Wellcome Inc. and SmithKline Beecham plc, that conduct extensive drug discovery efforts and are developing novel small molecule pharmaceuticals, as well as numerous smaller companies. With respect to OSI's small molecule drug discovery programs, other companies have potential drugs in clinical trials to treat disease areas for which OSI is seeking to discover and develop drug candidates. These competing drug candidates may be further advanced in clinical development than are any of OSI's potential products in its small molecule programs and may result in effective, commercially successful products. Even if OSI and its collaborative partners are successful in developing effective drugs, there can be no assurance that OSI's products may be able to compete effectively with these products. Furthermore, OSI cannot be certain that its competitors will not succeed in developing and marketing products that either are more effective than those that may be developed by OSI and its collaborative partners or are marketed prior to any products developed by OSI or its collaborative partners. In the cancer field, OSI's lead drug candidates are being developed by its partner Pfizer. CP-358,774, an EGFR inhibitor and the most advanced drug candidate, is currently in Phase II trials. At least two competitors, Astra-Zeneca and Imclone also have compounds in clinical testing for this target. CP-609,754, currently in Phase I trials, is being developed as a farnesyl transferase inhibitor and has recently entered Phase I clinical trials. This target is also the subject of active research and development at several other companies including Merck & Co., Inc. and Johnson & Johnson. The OSI/Pfizer alliance has a major effort in the area of angiogenesis. Several other biotechnology and pharmaceutical companies are pursuing novel therapeutics for angiogenesis including Bristol-Myers Squibb Co., Entremed, Inc. and Sugen, Inc. (Pharmacia & UpJohn, Inc.). Companies pursuing different but related fields also present significant competition for OSI. For example, research efforts with respect to gene sequencing and mapping are identifying new and possibly superior target genes. In addition, alternative drug discovery strategies, such as rational drug design, may prove more effective than those pursued by OSI. Furthermore, competing entities may have access to more diverse compounds for testing by virtue of larger compound libraries or through combinatorial chemistry skills or other means. These include Pharmacopeia, Inc., CombiChem, Inc., ArQule, Inc. and AxyS Pharmaceuticals, Inc., all of which have major collaborations with leading pharmaceutical companies. OSI cannot be sure that competitors will not succeed in developing technologies or products that are more effective than those of OSI or that would render OSI's products or technologies obsolete or noncompetitive. OSI's technology platform consists of a variety of cell free and live-cell assay systems, gene transcription technologies, high throughput drug screening, and medicinal, combinatorial and natural product chemistry. Pharmaceutical and biotechnology companies and others are active in all of these areas. Ligand Pharmaceuticals Inc. and Aurora Biosciences, publicly owned companies, employ live-cell assays, gene transcription, and high throughput robotics in their drug discovery operations. Numerous other companies use one or more of these technologies. Several companies, including Tularik Inc., Signal Pharmaceuticals Inc. and Scriptgen Pharmaceuticals, Inc., pursue drug discovery using gene transcription methods. Other organizations may acquire or develop technology superior to that of OSI. OSI believes that its ability to compete successfully will be based on, among other things, its ability to create and maintain scientifically advanced technology, attract and retain scientific personnel with a broad range of expertise, obtain patent protection or otherwise develop proprietary products or processes, enter into collaborative arrangements, and, independently or with its collaborative partners, conduct clinical trials, obtain required government approvals on a timely basis, and commercialize its products. GOVERNMENT REGULATION OSI and its collaborative partners are subject to, and any potential products discovered and developed must comply with, comprehensive regulation by the FDA in the United States and by comparable authorities in other countries. These national agencies and other federal, state, and local entities regulate, among other things, the pre-clinical and clinical testing, safety, effectiveness, approval, manufacture, labeling, marketing, export, storage, record keeping, advertising, and promotion of pharmaceutical and diagnostic products. 17 19 The process required by the FDA before pharmaceutical products may be approved for marketing in the United States generally involves: (i) pre-clinical laboratory and animal tests, (ii) submission to FDA of an investigational new drug application (IND), which must become effective before clinical trials may begin, (iii) adequate and well controlled human clinical trials to establish the safety and efficacy of the drug for its intended indication, (iv) submission to the FDA of a new drug application (NDA) or, in the case of biological products, such as TGF-Beta 3, a product license application (PLA), and (v) FDA review of the NDA or PLA in order to determine, among other things, whether the drug is safe and effective for its intended uses. There is no assurance that FDA review process will result in product approval on a timely basis, if at all. Pre-clinical tests include laboratory evaluation of product chemistry and formulation, as well as animal studies, to assess the potential safety and efficacy of the product. Certain pre-clinical tests must comply with FDA regulations regarding current GLP. The results of the pre-clinical tests are submitted to the FDA as part of an IND and are reviewed by the FDA prior to the commencement of clinical trials. Clinical trials are conducted under protocols that detail matters such as the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Clinical trials are typically conducted in three sequential phases, which may overlap. During Phase I, when the drug is initially given to human subjects, the product is tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. Phase II involves studies in a limited patient population to: (i) evaluate preliminarily the efficacy of the product for specific, targeted indications, (ii) determine dosage tolerance and optimal dosage, and (iii) identify possible adverse effects and safety risks. Pivotal or Phase III trials are undertaken in order to further evaluate clinical efficacy and to further test for safety within an expanded patient population. The FDA may suspend or terminate clinical trials at any point in this process if it concludes that clinical subjects are being exposed to an unacceptable health risk. FDA approval of OSI's and its collaborators' products, including a review of the manufacturing processes and facilities used to produce these products, will be required before they may be marketed in the United States. The process of obtaining approvals from the FDA can be costly, time consuming and may be affected by unanticipated delays. There can be no assurance that approvals of OSI's proposed products, processes or facilities will be granted on a timely basis, if at all. Any failure to obtain or delay in obtaining such approvals would have a material adverse effect on OSI's business, financial condition and results of operations. Moreover, even if regulatory approval is granted, the approval may include significant limitations on indicated uses for which a product could be marketed. Among the conditions for NDA approval is the requirement that the prospective manufacturer's manufacturing procedures conform to good manufacturing practices, or GMP, requirements, which must be followed at all times. In complying with those requirements, manufacturers (including a drug sponsor's third-party contract manufacturers) must continue to expend time, money and effort in the area of production and quality control to ensure compliance. Domestic manufacturing establishments are subject to periodic inspections by the FDA in order to assess, among other things, GMP compliance. To supply products for use in the United States, foreign manufacturing establishments must comply with GMP and are subject to periodic inspection by the FDA or by regulatory authorities in some countries under reciprocal agreements with the FDA. Both before and after approval is obtained, a product, its manufacturer and the holder of the NDA for the product are subject to comprehensive regulatory oversight. Violations of regulatory requirements at any stage, including the pre-clinical and clinical testing process, the approval process, or thereafter (including after approval) may result in various adverse consequences, including the FDA's delay in approving or refusal to approve a product, withdrawal of an approved product from the market, and the imposition of criminal penalties against the manufacturer and NDA holder. In addition, later discovery of previously unknown problems may result in restrictions on the product, manufacturer or NDA holder, including withdrawal of the product from the market. Furthermore, new government requirements may be established that could delay or prevent regulatory approval of OSI's products under development. 18 20 For marketing outside the United States, OSI and its collaborators and the drugs developed by them, if any, will be subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country. In addition, before a new drug may be exported from the United States, it must be the subject of an approved NDA or comply with FDA regulations pertaining to INDs. In addition to regulations enforced by the FDA, OSI must also comply with regulations under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and future federal, state or local regulations. OSI's R&D activities involve the controlled use of hazardous materials, chemicals and various radioactive compounds. Although OSI believes that its safety procedures for handling and disposing of hazardous materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, OSI could be held liable for any damages, which could exceed OSI's resources. EMPLOYEES OSI believes that its success is largely dependent upon its ability to attract and retain qualified personnel in scientific and technical fields. As of November 30, 1999, OSI employed 195 persons worldwide (144 in the United States), of whom 158 were primarily involved in R&D activities, with the remainder engaged in executive and administrative capacities. Although OSI believes that it has been successful to date in attracting skilled and experienced scientific personnel, competition for personnel is intense and there can be no assurance that OSI will continue to be able to attract and retain personnel of high scientific caliber. OSI considers its employee relations to be good. 19 21 CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS (Cautionary Statements under the Private Securities Litigation Reform Act of 1995, as amended) This report contains forward-looking statements that do not convey historical information, but relate to predicted or potential future events, such as statements of OSI's plans, strategies and intentions, or its future performance or goals for OSI's product development programs. These statements can often be identified by the use of forward-looking terminology such as "believes," "expects," "intends," "may," "will," "should" or "anticipates" or similar terminology. The statements involve risks and uncertainties and are based on various assumptions. Investors and prospective investors are cautioned that these statements are only projections. In addition, any forward-looking statement that OSI makes is intended to speak only as of the date on which OSI made the statement. OSI will not update any forward-looking statement to reflect events or circumstances that occur after the date on which the statement is made. The following risks and uncertainties, among others, may cause OSI's actual results to differ materially from those described in forward-looking statements made in this report or presented elsewhere by management from time to time. Although OSI has potential products that appear to be promising at early stages of development, all of OSI's products will require significant research and development and may not reach the market for a number of reasons, conditions which would limit OSI's revenue potential. Potential products may be found ineffective or cause harmful side effects during pre-clinical testing or clinical trials, fail to receive necessary regulatory approvals, be difficult to manufacture on a large scale, be uneconomical to produce, fail to achieve market acceptance or be precluded from commercialization by proprietary rights of third parties. There is no guarantee that OSI's or its collaborative partners' product development efforts will be successfully completed, that required regulatory approvals will be obtained or that any products, if introduced, will be successfully marketed or achieve customer acceptance. To date, OSI has generated no revenue from the sale of pharmaceutical products. Except for CP-358,774, with respect to which Pfizer has completed Phase I safety and toxicity studies and has initiated Phase II clinical trials, and CP-609,754 for which Pfizer has opened an IND for Phase I clinical trials, all of the lead compounds in OSI's small molecule drug discovery programs are in either a discovery or pre-clinical evaluation phase. Any products resulting from OSI's development programs are not expected to be commercially available for several years, if at all. OSI's live-cell assays are novel as a drug discovery method and have not yet been shown to be successful in the development of any commercialized drug. Furthermore, OSI's drug discovery assays are focused on several target genes and other molecular targets, the functions of many of which have not yet been fully determined. OSI's live-cell assay technology may not result in lead compounds that will be safe and useful. Development of new pharmaceutical products is highly uncertain. Consequently, OSI's drug discovery technology may not result in any commercially successful products. Failure to obtain required governmental approvals will delay or preclude OSI's partners from marketing drugs discovered or developed by OSI or limit the commercial use of these products. Prior to marketing by a collaborative partner, any new drug discovered by OSI must undergo an extensive regulatory approval process in the United States and other countries. This regulatory process, which includes pre-clinical testing and clinical trials of each compound to establish its safety and efficacy, can take many years and require the expenditure of substantial resources. Moreover, data obtained from pre-clinical and clinical activities are susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Even if OSI obtains regulatory approval, a marketed product and its manufacturer are subject to continuing review, including post-marketing surveillance. Discovery of previously unknown problems with a product of OSI or its manufacturer may have adverse effects on OSI's business, financial condition and results of operations, including the withdrawal of the product from the market. Violations of regulatory requirements at any stage may result in various unfavorable consequences to OSI, including the FDA's delay in approving or its refusal to approve a product, withdrawal of an approved product from the market and the imposition of 20 22 criminal penalties against the manufacturer and the new drug application holder. Although Pfizer submitted an investigational new drug application, or IND, to the FDA with respect to the epidermal growth factor receptor inhibitor CP-358,774 and CP-609,754 for farnesylation, OSI has not submitted an IND for any product candidate, and no product candidate has been approved for commercialization in the United States or elsewhere. OSI intends to file INDs for product candidates in its internal proprietary programs, but to rely on its partners to file INDs in its collaborative programs. No assurance can be given that OSI or any of its collaborative partners will be able to conduct clinical testing or obtain the necessary approvals from the FDA or other regulatory authorities for any products. If OSI or its collaborative partners do not successfully develop, commercialize, manufacture and market product candidates, OSI may never achieve product revenues or profitability. OSI has had net operating losses since its inception in 1983. At September 30, 1999, OSI's accumulated deficit was approximately $65.6 million. OSI's losses have resulted principally from costs incurred in R&D, and from general and administrative costs associated with OSI's operations. These costs have exceeded OSI's revenues, which to date have been generated principally from collaborative research agreements. OSI expects to incur substantial additional operating expenses over the next several years as a result of increases in its expenses for R&D, including enhancements in its drug discovery technologies and with respect to its internal proprietary projects. If OSI does not obtain additional third party funding for these expenses, OSI expects that the expenses will result in increased losses from operations. OSI does not expect to generate revenues from the sale of its small molecule products for several years. OSI's future profitability depends, in part, on: - OSI's collaborative partners obtaining regulatory approval for products derived from its collaborative research efforts; - OSI's collaborative partners successfully producing and marketing products derived from technology or rights licensed from OSI; and - OSI's entering into agreements for the development, commercialization, manufacture and marketing of any products derived from OSI's internal proprietary programs. OSI's future capital requirements will depend on many factors, which include: - Continued scientific progress in its R&D programs; - Size and complexity of its R&D programs; - Progress of pre-clinical testing and early stage clinical trials; - Time and costs involved in obtaining regulatory approvals for its product candidates; - Costs involved in filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; - Competing technological and market developments; - Establishment of additional collaborative arrangements; - Costs of manufacturing arrangements; - Costs of commercialization activities; and - Costs of product in-licensing and strategic acquisitions, if any. OSI intends to seek additional funding through arrangements with corporate collaborators and may seek additional funding through public or private sales of OSI's securities, including equity securities. Additional funding may not be available on reasonable or acceptable terms, if at all. Furthermore, any additional equity financings would be dilutive to OSI's stockholders. If adequate funds are not available, OSI may be required to curtail significantly one or more of its R&D programs or obtain funds through arrangements with collaborative partners or others that may require OSI to relinquish its rights to a number of its technologies or product candidates. If funding from one or more of its collaborative programs were reduced or terminated, OSI would be forced to devote additional internal resources to product development, scale back or terminate selected development programs or seek alternative collaborative partners. 21 23 OSI's products may be subject to delays in manufacture if collaborative partners or outside contractors give other products greater priority than OSI's products. The manufacture of OSI's candidate products for clinical trials and the manufacture of resulting products for commercialization purposes are subject to current good manufacturing practices regulations promulgated by the FDA. OSI relies on collaborative partners or outside contractors to manufacture its products in their FDA approved manufacturing facilities. OSI's collaborative agreements allow its collaborative partners significant discretion in electing to pursue or not to pursue the activities upon which it relies. The Company cannot control the amount and timing of resources its collaborative partners devote to its programs or potential products. OSI's products may be in competition with other products for priority of access to these facilities. For this and other reasons, there can be no assurance that OSI's collaborative partners will manufacture OSI's products in an effective or timely manner. If not performed in a timely manner, the clinical trial development of OSI's product candidates or their submission for regulatory approval could be delayed, and OSI's ability to deliver products on a timely basis could be impaired or precluded. OSI may not be able to enter into any necessary third party manufacturing arrangements on acceptable terms if at all. OSI's current dependence upon others for the manufacture of its products could adversely affect its future profit margin, if any, and its ability to commercialize products on a timely and competitive basis. OSI's limited experience in conducting clinical trials and reliance on the pharmaceutical companies with which it collaborates for clinical development and regulatory approvals may cause delays, terminations or setbacks in OSI's business. To date, only two product candidates have entered clinical trials in OSI's small molecule drug discovery operations. Only one of the compounds discovered using OSI's small molecule discovery technology has been proven safe in humans and none have yet demonstrated efficacy. The failure of OSI to increase the number of product candidates eligible for clinical trials and unsuccessful completion of clinical trials in the future could adversely affect OSI's business, condition and results of operation. If OSI is unable to protect its intellectual property rights, its ability to develop and commercialize its technology and products will be severely limited. OSI's success depends, in part, on its or its collaborative partners' ability to: - Obtain patent protection for product candidates; - Maintain trade secret protection; and - Operate without infringing on the proprietary rights of third parties. The degree of future protection for OSI's proprietary rights will remain uncertain if: - OSI's pending patent applications are not approved for any reason; - OSI is unable to develop additional proprietary technologies that are patentable; or - Patents issued do not provide OSI with a competitive advantage. Furthermore, OSI cannot be sure that third parties: - Will not independently develop similar or alternative technologies; - Duplicate any of OSI's technologies; - If patents are issued to OSI, design around OSI's patented technologies; or - Will not challenge issued patents. OSI may incur substantial costs protecting its proprietary rights or defending against charges of infringement of other's proprietary rights. OSI is seeking to license to other companies rights to practice under OSI's gene transcription patent estate. OSI believes technology and practices covered by these patents are in widespread use in the pharmaceutical and biotechnology industries. To date, OSI has granted two licenses to use its gene transcription patent. If other pharmaceutical and biotechnology firms which use OSI's patented technology are not willing to negotiate license arrangements with OSI on reasonable terms, OSI may have to choose between (i) abandoning its licensing strategy, or (ii) initiating legal proceedings against those firms. Legal 22 24 action, including patent infringement litigation, would be extremely costly. Consequently, OSI's strategy to commercialize its gene transcription patent estate through licensing may not be successful. If OSI is unable to maintain or enter into arrangements with collaborative partners, its ability to proceed with R&D programs, manufacturing and the sale of its product candidates will be severely limited. OSI's limited resources and business strategy require it to enter into collaborative arrangements with various research partners. OSI is largely dependent on its collaborative partners for: - Pre-clinical testing; - Clinical development; - Regulatory approval; - Manufacturing and marketing products; - Compound libraries; - Patent protection and proprietary technology; and - Funding. Like many small biopharmaceutical companies, OSI's business strategy includes funding from larger pharmaceutical companies to collaborate with to support its R&D programs and the commercialization of OSI's product candidates. In trying to attract partners to collaborate with, OSI faces serious competition from other small biopharmaceutical companies and even in-house R&D staffs of larger pharmaceutical companies. Failure to enter into collaborative agreements on acceptable terms could have material adverse effects on OSI's business, financial condition and results of operation. If any of OSI's collaborative partners breach or terminate their agreements with OSI or otherwise fail to conduct its collaborative activities successfully in a timely manner, OSI's pre-clinical or clinical development, commercialization of product candidates or research programs would be delayed or terminated. OSI faces potential problems with its collaborative partners which could affect its success including: - Competition with its collaborators; - Potential disputes with collaborators concerning ownership rights to developed technology; - Short term of collaborative agreements which may require their renewal; - Delays; and - Consolidations of pharmaceutical companies. OSI's success depends, in large part, on the efforts of its collaborative partners. Potential disagreements between collaborators and OSI, such as disputes over ownership rights to any technology developed together, could lead to delays in the collaborative R&D programs, or the commercialization of product candidates. If OSI is confronted with disputes with its collaborative partners, it may face costly delays to its research and development programs and even litigation. Because OSI generally agrees not to conduct independently, or with any third party, any research that is competitive with the research conducted under its collaborative programs, its collaborative relationships may have the effect of limiting the areas of research OSI may pursue. Under its collaborative research agreements with most of its partners, OSI is prohibited, during the terms of the agreements, from pursuing or sponsoring research aimed at the discovery of drugs which are the subject of the collaborations. OSI's collaborative partners, however, may develop, either alone or with others, products that are similar to or competitive with the products or potential products that are the subject of OSI's collaborations with their partners. Competing products, either developed by the collaborative partners or to which the collaborative partners have rights, may mean their withdrawal of support for OSI's product candidates, which may result in the impairment of OSI's business, financial condition and results of operations. Because all of OSI's collaborative programs with pharmaceutical companies have terms of six or fewer years, which is generally less than the period required for the discovery, clinical development and commerciali- 23 25 zation of most drugs, the continuation of any of OSI's drug discovery and development programs may be dependent on the periodic renewal of OSI's collaborative arrangements. All of OSI's collaborative research agreements may be terminated under various circumstances. Some of OSI's collaborative research agreements provide that, upon expiration of a specified period after commencement of the agreement, its collaborative partners have the right to terminate the agreement on short notice without cause. The termination or non-renewal of any collaborative relationship could set back OSI's efforts in R&D. Consolidations among companies with which OSI is engaged in collaborative research can result in the diminution or termination of, or delays in, one or more of OSI's collaborative programs. In 1995, the pharmaceutical operations of three companies with which OSI had collaborative research agreements, Hoechst AG, Hoechst Roussel Pharmaceuticals, Inc. and Marion Merrell Dow Inc. were combined into one entity, HMRI. This combination resulted in delays in OSI's collaborative programs with each of the constituent companies and a reduction in the aggregate funding received by OSI. Continued consolidations among large pharmaceutical companies could produce similar problems. Failure to attract, retain and motivate skilled personnel and cultivate key academic collaborations will delay OSI's product development programs and adversely affect its research and development efforts. OSI is a small company with approximately 195 employees, and its success depends on its continued ability to attract, retain and motivate highly qualified management and scientific personnel and on its ability to develop and maintain important relationships with leading academic institutions and scientists. In particular, OSI's product development programs depend on its ability to attract and retain highly skilled chemists and clinical development personnel. Competition for personnel and relationships is intense. If OSI loses the services of any of these personnel, it could impede significantly the achievement of its research and development objectives. In particular, the loss of Colin Goddard, OSI's Chief Executive Officer, would be detrimental to OSI. OSI does not know if it will be able to attract, retain or motivate personnel. If the continuing efforts of government and third-party payors to contain or reduce the costs of health care succeed, the price that OSI or any of its collaborative partners or other licensees receives for any drugs it may discover or develop it may develop in the future may decrease significantly. In foreign markets, pricing and profitability of prescription pharmaceuticals are subject to government control. In the United States, OSI expects that there will continue to be a number of federal and state proposals to implement similar government control. In addition, increasing emphasis on managed care in the United States will continue to put pressure on the pricing of pharmaceutical products. To the extent that cost control initiatives have an adverse effect on OSI's collaborative partners, OSI's ability to commercialize its products and to realize royalties may also be adversely affected. If OSI's licensees or collaborative partners are required to obtain licenses from others, OSI's royalties on any commercialized products could be reduced by up to 50 percent. The extent to which efforts by other researchers have resulted or will result in patents and the extent to which the issuance of patents to others would have a material adverse effect on OSI or would force OSI or its collaborative partners or other licensees to obtain licenses from others, if available, is currently unknown. OSI's products, operations or technology may infringe upon the rights of any third party. OSI relies on trade secrets to protect technology where patent protection is not believed to be appropriate or obtainable. OSI has entered, and will continue to enter, into confidentiality agreements with its employees, consultants, licensors and collaborative partners. Without patent protection, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to OSI's trade secrets. Furthermore, obligations of confidentiality may not be honored and OSI may not be able to effectively protect its rights to proprietary information. 24 26 The use of any of OSI's potential products in clinical trials and the sale of any approved products may expose OSI to liability claims resulting from the use of products or product candidates. Potential product liability claims might be made directly by consumers, pharmaceutical companies, including OSI's collaborative partners, or others. OSI does not independently maintain product liability insurance coverage for claims arising from the use of its products in clinical trials. Insurance coverage is becoming increasingly expensive, and no assurance can be given that OSI will be a named insured with respect to trials underway by its collaborative partners or others or obtain insurance in the future at a reasonable cost or in sufficient amounts to protect OSI. OSI's inability to obtain adequate liability insurance could have a material adverse effect on OSI's business, financial condition and results of operations. A successful product liability claim or series of claims brought against OSI could have a material adverse effect on its business, financial condition and results of operations. If OSI's competitors succeed in developing technologies or products that are more effective than its own, OSI's products or technologies may be rendered obsolete or noncompetitive. OSI faces significant competition from industry participants who are pursuing the same technologies as OSI and from organizations that are pursuing pharmaceutical products that are competitive with OSI's potential products. Most of the organizations competing with OSI have more (1) capital resources, (2) R&D staffs and facilities, (3) experience in drug discovery and development, (4) experience obtaining regulatory approval and (5) experience in pharmaceutical product manufacturing and marketing than OSI. OSI's major competitors include fully integrated pharmaceutical companies, such as Merck & Co., Inc., Glaxo Wellcome Inc. and SmithKline Beecham plc, that have extensive drug discovery efforts and are developing novel small molecule pharmaceuticals, as well as numerous smaller companies. Companies pursuing different but related fields also present significant competition for OSI. For example, research efforts with respect to gene sequencing and mapping are identifying new and potentially superior target genes. Biotechnology and related pharmaceutical technology have undergone rapid and significant change. OSI expects the technology associated with OSI's R&D will continue to develop rapidly. OSI's future success will depend in large part on its ability to maintain a competitive position with respect to this technology. Rapid technological development by OSI or others may result in compounds, products or processes becoming obsolete before OSI recovers any expenses incurred to develop a compound, product or process. If OSI is unable to remedy Y2K problems, its operations, including OSI's R&D programs and basic business enterprise, may be substantially disrupted. OSI has worked to resolve the potential impact of the Y2K problem on the processing of date-sensitive information by OSI's computerized information system. OSI cannot be sure that it has identified, replaced or corrected all of its internal computer systems successfully. OSI would then be at a competitive disadvantage relative to companies that have successfully corrected their Y2K problems. Other than making inquiries to third parties, OSI is not in a position to independently verify the Y2K compliance of third parties, such as its suppliers, vendors and collaborators. Difficulties and failure of suppliers, vendors or collaborators to be Y2K compliant could result in risks and uncertainties that may have a material adverse effect on OSI's business, financial condition and results of operation. 25 27 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OSI PHARMACEUTICALS, INC. By: /s/ ROBERT L. VAN NOSTRAND ------------------------------------ Robert L. Van Nostrand Vice President and Chief Financial Officer Date: January 24, 2000 66
-----END PRIVACY-ENHANCED MESSAGE-----