##### Table of Contents



FORM 10-Q
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 OR
 o
    
    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.
  Delaware
    
    13-3159796(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)41 Pinelawn Road, Melville, New York
    
    11747(Address of principal executive offices)
    
    (Zip Code)
  
  
  þ o
  Large Accelerated Filer þ
    
    Accelerated Filer o
    
    Non-Accelerated Filer o
    
    Smaller reporting Company o(Do not check if a smaller reporting company)
 o þ




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##### 



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
 TABLE OF CONTENTS
 Page No.PART I. FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Consolidated Balance Sheets
- September 30, 2008 (Unaudited) and December 31, 2007
    
    
    1Consolidated Statements of Operations
- Three and Nine Months Ended September 30, 2008 and 2007 (Unaudited)
    
    
    2Consolidated Statements of Cash Flows
- Nine Months Ended September 30, 2008 and 2007 (Unaudited)
    
    
    3Notes to Consolidated Financial Statements (Unaudited)
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    40Item 4. Controls and Procedures
    
    
    41PART II. OTHER INFORMATION
    
    
    42Item 1. Legal Proceedings
    
    
    42Item 1A. Risk Factors
    
    
    43Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    43Item 3. Defaults Upon Senior Securities
    
    
    44Item 4. Submission of Matters to a Vote of Security Holders
    
    
    44Item 5. Other Information
    
    
    44Item 6. Exhibits
    
    
    44SIGNATURES
    
    
    45INDEX TO EXHIBITS
    
    
    46EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION
  i




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands except per share data)
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    234,755
    
    
    $
    162,737Investment securities
    
    
    251,492
    
    
    
    137,439Restricted investment securities
    
    
    2,222
    
    
    
    4,922Accounts receivable  net
    
    
    95,588
    
    
    
    87,523Inventory  net
    
    
    20,454
    
    
    
    21,064Interest receivable
    
    
    1,455
    
    
    
    1,116Prepaid expenses and other current assets
    
    
    6,540
    
    
    
    9,882Assets related to discontinued operations
    
    
    783
    
    
    
    25,442Total current assets
    
    
    613,289
    
    
    
    450,125Property, equipment and leasehold improvements  net
    
    
    44,531
    
    
    
    46,694Debt issuance costs  net
    
    
    7,627
    
    
    
    3,047Goodwill
    
    
    39,114
    
    
    
    39,411Other intangible assets  net
    
    
    10,017
    
    
    
    4,966Other assets
    
    
    15,225
    
    
    
    14,137$
    729,803
    
    
    $
    558,380LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    44,854
    
    
    $
    45,843Unearned revenue  current
    
    
    9,597
    
    
    
    10,912Liabilities related to discontinued operations
    
    
    4,856
    
    
    
    45,739Convertible senior subordinated notes
    
    
    
    
    
    
    150,000Total current liabilities
    
    
    59,307
    
    
    
    252,494Other liabilities:Rent obligations and deferred rent expenses
    
    
    8,631
    
    
    
    10,812Unearned revenue  long-term
    
    
    34,138
    
    
    
    37,075Convertible senior subordinated notes
    
    
    414,950
    
    
    
    115,000Accrued post-retirement benefit cost and other
    
    
    4,371
    
    
    
    4,043Total liabilities
    
    
    521,397
    
    
    
    419,424Commitments and contingenciesStockholders equity:Preferred stock, $.01 par value; 5,000 shares authorized; no shares issued at
September 30, 2008 and December 31, 2007
    
    
    
    
    
    
    Common stock, $.01 par value; 200,000 shares authorized, 60,959 and 60,352
shares issued at September 30, 2008 and December 31, 2007, respectively
    
    
    610
    
    
    
    604Additional paid-in capital
    
    
    1,688,300
    
    
    
    1,658,737Accumulated deficit
    
    
    (1,378,325
    )
    
    
    (1,487,686
    )Accumulated other comprehensive income
    
    
    40
    
    
    
    4,522310,625
    
    
    
    176,177Less: treasury stock, at cost; 3,396 and 1,943 shares at September 30, 2008 and
December 31, 2007, respectively
    
    
    (102,219
    )
    
    
    (37,221
    )Total stockholders equity
    
    
    208,406
    
    
    
    138,956$
    729,803
    
    
    $
    558,380
  1




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 (In thousands except per share data)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Revenues:Net revenue from unconsolidated joint business
    
    $
    45,501
    
    
    $
    41,747
    
    
    $
    147,237
    
    
    $
    123,868Royalties on product licenses
    
    
    34,228
    
    
    
    25,413
    
    
    
    100,831
    
    
    
    67,252License, milestone and other revenues
    
    
    14,843
    
    
    
    33,210
    
    
    
    32,893
    
    
    
    65,60294,572
    
    
    
    100,370
    
    
    
    280,961
    
    
    
    256,722Expenses:Cost of goods sold
    
    
    2,517
    
    
    
    2,142
    
    
    
    6,748
    
    
    
    6,093Research and development
    
    
    33,054
    
    
    
    29,489
    
    
    
    94,009
    
    
    
    87,384Acquired in-process research and development
    
    
    
    
    
    
    7,500
    
    
    
    
    
    
    
    7,500Selling, general and administrative
    
    
    22,262
    
    
    
    24,816
    
    
    
    69,985
    
    
    
    73,983Amortization of intangibles
    
    
    646
    
    
    
    461
    
    
    
    1,884
    
    
    
    1,37858,479
    
    
    
    64,408
    
    
    
    172,626
    
    
    
    176,338Operating income from continuing operations
    
    
    36,093
    
    
    
    35,962
    
    
    
    108,335
    
    
    
    80,384Other income (expense):Investment income  net
    
    
    2,976
    
    
    
    3,157
    
    
    
    9,670
    
    
    
    9,247Interest expense
    
    
    (2,894
    )
    
    
    (1,811
    )
    
    
    (9,040
    )
    
    
    (5,423
    )Other (expense) income  net
    
    
    (643
    )
    
    
    (497
    )
    
    
    (2,779
    )
    
    
    2,582Income from continuing operations before income taxes
    
    
    35,532
    
    
    
    36,811
    
    
    
    106,186
    
    
    
    86,790Income tax provision
    
    
    987
    
    
    
    907
    
    
    
    2,761
    
    
    
    1,915Net income from continuing operations
    
    
    34,545
    
    
    
    35,904
    
    
    
    103,425
    
    
    
    84,875Income (loss) from discontinued operations
    
    
    20,281
    
    
    
    (6,276
    )
    
    
    5,936
    
    
    
    (28,984
    )Net income
    
    $
    54,826
    
    
    $
    29,628
    
    
    $
    109,361
    
    
    $
    55,891Basic and diluted income (loss) per common share:Basic earnings (loss):Income from continuing operations
    
    $
    0.60
    
    
    $
    0.62
    
    
    $
    1.81
    
    
    $
    1.48Income (loss) from discontinued operations
    
    $
    0.35
    
    
    $
    (0.11
    )
    
    $
    0.10
    
    
    $
    (0.50
    )Net income
    
    $
    0.95
    
    
    $
    0.51
    
    
    $
    1.91
    
    
    $
    0.97Diluted earnings (loss):Income from continuing operations
    
    $
    0.56
    
    
    $
    0.59
    
    
    $
    1.70
    
    
    $
    1.41Income (loss) from discontinued operations
    
    $
    0.31
    
    
    $
    (0.10
    )
    
    $
    0.09
    
    
    $
    (0.46
    )Net income
    
    $
    0.88
    
    
    $
    0.49
    
    
    $
    1.79
    
    
    $
    0.95Weighted average shares of common stock outstanding:Basic
    
    
    57,437
    
    
    
    57,756
    
    
    
    57,218
    
    
    
    57,536Diluted
    
    
    64,571
    
    
    
    65,201
    
    
    
    64,355
    
    
    
    63,041
  2




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 (In thousands)
 Nine Months EndedSeptember 30,2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    109,361
    
    
    $
    55,891Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization
    
    
    9,218
    
    
    
    7,535Loss on sale of eye disease business and non-cash impairment charges
    
    
    14,107
    
    
    
    5,685Non-cash compensation charges
    
    
    14,892
    
    
    
    13,003Gain on sale of eye disease business intellectual property
    
    
    
    
    
    
    (6,012
    )Loss on disposal of equipment
    
    
    
    
    
    
    1,412Impact of inventory step-up related to inventory sold
    
    
    51
    
    
    
    2,298Changes in assets and liabilities (including assets and liabilities related to
discontinued operations):Receivables
    
    
    3,481
    
    
    
    (15,034
    )Inventory
    
    
    220
    
    
    
    (2,322
    )Prepaid expenses and other current assets
    
    
    3,446
    
    
    
    3,091Other assets
    
    
    (1,163
    )
    
    
    (93
    )Accounts payable and accrued expenses
    
    
    (15,180
    )
    
    
    (123
    )Unearned revenue
    
    
    (33,826
    )
    
    
    (1,686
    )Accrued postretirement benefit cost
    
    
    10
    
    
    
    (4,084
    )Net cash provided by operating activities
    
    
    104,617
    
    
    
    59,561Cash flows from investing activities:Purchases of investments (restricted and unrestricted)
    
    
    (273,933
    )
    
    
    (177,617
    )Maturities and sales of investments (restricted and unrestricted)
    
    
    162,190
    
    
    
    162,758Purchase of patent rights
    
    
    (8,000
    )
    
    
    Net additions to property, equipment and leasehold improvements
    
    
    (3,304
    )
    
    
    (2,469
    )Proceeds from sale of intellectual property
    
    
    
    
    
    
    4,000Proceeds from sale of equipment and other
    
    
    
    
    
    
    328Purchase of compound asset library and other
    
    
    (175
    )
    
    
    Payments made in connection with disposal of eye disease business
    
    
    (1,240
    )
    
    
    Net cash used by investing activities
    
    
    (124,462
    )
    
    
    (13,000
    )Cash flows from financing activities:Proceeds from the exercise of stock options and employee purchase plan
    
    
    15,468
    
    
    
    9,932Employee taxes paid related to equity awards
    
    
    (784
    )
    
    
    Proceeds from the issuance of 2038 Notes
    
    
    200,000
    
    
    
    Purchase of treasury shares
    
    
    (64,998
    )
    
    
    Debt issuance costs
    
    
    (6,730
    )
    
    
    Repurchase of a portion of the 2023 Notes
    
    
    (50,050
    )
    
    
    Net cash provided by financing activities
    
    
    92,906
    
    
    
    9,932Net increase in cash and cash equivalents
    
    
    73,061
    
    
    
    56,493Effect of exchange rate changes on cash and cash equivalents
    
    
    (1,043
    )
    
    
    733Cash and cash equivalents at beginning of period
    
    
    162,737
    
    
    
    42,028Cash and cash equivalents at end of period
    
    $
    234,755
    
    
    $
    99,254Cash paid for taxes
    
    $
    1,738
    
    
    $
    905Cash paid for interest
    
    $
    8,520
    
    
    $
    6,025Preferred stock received from sale of intellectual property
    
    $
    
    
    
    $
    2,012
  3




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
(Unaudited)
 ® ®
 Basis of Presentation
  Revenue Recognition
 Net revenue from unconsolidated joint business
   4




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Co-promotion profit and reimbursement
of sales force and marketing related costs
    
    $
    42,859
    
    
    $
    39,101
    
    
    $
    139,695
    
    
    $
    116,511Reimbursement of manufacturing costs
    
    
    2,642
    
    
    
    2,646
    
    
    
    7,542
    
    
    
    7,357Net revenue from unconsolidated joint
business
    
    $
    45,501
    
    
    $
    41,747
    
    
    $
    147,237
    
    
    $
    123,868
 Royalties on Product Licenses
  5




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
  Licenses, Milestones and Other Revenues
    Earnings Per Share
  6




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Net income from continuing operations  basic
    
    $
    34,545
    
    
    $
    35,904
    
    
    $
    103,425
    
    
    $
    84,875Add: Interest and issuance cost related to dilutive
convertible debt
    
    
    1,667
    
    
    
    2,260
    
    
    
    5,829
    
    
    
    3,811Net income from continuing operations  diluted
    
    $
    36,212
    
    
    $
    38,164
    
    
    $
    109,254
    
    
    $
    88,686Weighted-average common shares outstanding  basic
    
    
    57,437
    
    
    
    57,756
    
    
    
    57,218
    
    
    
    57,536Dilutive effect of options and restricted equity
    
    
    1,227
    
    
    
    538
    
    
    
    821
    
    
    
    597Dilutive effect of 2025 Notes
    
    
    3,908
    
    
    
    3,908
    
    
    
    3,908
    
    
    
    3,908Dilutive effect of 2023 Notes
    
    
    1,999
    
    
    
    2,999
    
    
    
    2,408
    
    
    
    1,000Weighted-average common shares and dilutive
potential common shares  diluted
    
    
    64,571
    
    
    
    65,201
    
    
    
    64,355
    
    
    
    63,041Income per share from continuing operations:Basic
    
    $
    0.60
    
    
    $
    0.62
    
    
    $
    1.81
    
    
    $
    1.48Diluted
    
    $
    0.56
    
    
    $
    0.59
    
    
    $
    1.70
    
    
    $
    1.41
  7




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Common share equivalents  convertible debt
    
    
    2,709
    
    
    
    
    
    
    
    2,628
    
    
    
    1,999Common share equivalents  equity plans
    
    
    1,451
    
    
    
    3,595
    
    
    
    2,702
    
    
    
    3,677Convertible note interest and issuance
expense not added back under the
if-converted method
    
    $
    1,800
    
    
    $
    
    
    
    $
    5,188
    
    
    $
    
 Comprehensive Income
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Net income
    
    $
    54,826
    
    
    $
    29,628
    
    
    $
    109,361
    
    
    $
    55,891Other comprehensive income:Foreign currency translation adjustments
    
    
    (3,010
    )
    
    
    580
    
    
    
    (2,900
    )
    
    
    1,108Post retirement curtailment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,316Unrealized holding
(losses) gains arising
during period
    
    
    (1,385
    )
    
    
    764
    
    
    
    (1,582
    )
    
    
    785Total comprehensive income
    
    $
    50,431
    
    
    $
    30,972
    
    
    $
    104,879
    
    
    $
    59,100
  September 30,
    
    December 31,2008
    
    2007Cumulative foreign currency translation adjustment
    
    $
    1,442
    
    
    $
    4,342Unrealized (loss) gain on available-for-sale securities
    
    
    (1,402
    )
    
    
    180Accumulated other comprehensive income
    
    $
    40
    
    
    $
    4,522
 Fair Value Measurements
  8




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
   (i)
    
    Level 1 quoted prices in active markets for identical assets and liabilities;(ii)
    
    Level 2 observable inputs other than quoted prices in active markets for
identical assets and liabilities; and(iii)
    
    Level 3 unobservable inputs for which little or no market data exists,
requiring management to develop its own assumptions.
   At September 30, 2008Quoted Pricesin Active
    
    SignificantMarket for
    
    Other
    
    SignificantAs Reflected
    
    Identical
    
    Observable
    
    Unobservableon the
    
    Assets
    
    Inputs
    
    InputsAssets:
    
    Balance Sheet
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Investment securities
    
    $
    251,492
    
    
    $
    
    
    
    $
    251,492
    
    
    $
    Restricted investments
    
    
    2,222
    
    
    
    
    
    
    
    2,222
    
    
    
    Total Investments
    
    $
    253,714
    
    
    $
    
    
    
    $
    253,714
    
    
    $
    
  9




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
 Accounting for Stock-Based Compensation
   Stock Options
    Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    49.62
    %
    
    
    45.07
    %
    
    
    48.68
    %
    
    
    45.69
    %Risk-free interest rate
    
    
    3.73
    %
    
    
    5.11
    %
    
    
    3.67
    %
    
    
    5.06
    %Expected term (years)
    
    
    4.67
    
    
    
    4.57
    
    
    
    4.67
    
    
    
    4.57
 10




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
 Inventory
   September 30,
    
    December 31,2008
    
    2007Raw materials
    
    $
    501
    
    
    $
    1,704Work-in-process
    
    
    9,284
    
    
    
    8,595Finished goods on hand, net
    
    
    5,451
    
    
    
    4,614Inventory subject to return
    
    
    5,218
    
    
    
    6,151Total inventory
    
    $
    20,454
    
    
    $
    21,064
  Intangible Assets
  September 30, 2008
    
    December 31, 2007Carrying
    
    Accumulated
    
    Net Book
    
    Carrying
    
    Accumulated
    
    Net BookAmount
    
    Amortization
    
    Value
    
    Amount
    
    Amortization
    
    ValueNovantrone
    
    $
    46,009
    
    
    $
    (45,646
    )
    
    $
    363
    
    
    $
    46,009
    
    
    $
    (44,558
    )
    
    $
    1,451Acquired patent estate
    
    
    7,878
    
    
    
    (657
    )
    
    
    7,221
    
    
    
    770
    
    
    
    (198
    )
    
    
    572Acquired licenses
issued to other
companies
    
    
    3,574
    
    
    
    (1,141
    )
    
    
    2,433
    
    
    
    3,984
    
    
    
    (1,041
    )
    
    
    2,943Total
    
    $
    57,461
    
    
    $
    (47,444
    )
    
    $
    10,017
    
    
    $
    50,763
    
    
    $
    (45,797
    )
    
    $
    4,966
   11




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
  Consolidation of Facilities
 Restructuring Plan
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Opening liability
    
    $
    
    
    
    $
    1,740
    
    
    $
    1,557
    
    
    $
    1,897Accrual for severance payments
    
    
    
    
    
    
    74
    
    
    
    
    
    
    
    1,292Accrual for lease payments
    
    
    
    
    
    
    317
    
    
    
    367
    
    
    
    703Cash paid for severance
    
    
    
    
    
    
    
    
    
    
    (411
    )
    
    
    (1,517
    )Cash paid for rent
    
    
    
    
    
    
    (271
    )
    
    
    (1,513
    )
    
    
    (515
    )Ending liability
    
    $
    
    
    
    $
    1,860
    
    
    $
    
    
    
    $
    1,860
 Oxford, England
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Opening liability
    
    $
    2,366
    
    
    $
    3,854
    
    
    $
    2,882
    
    
    $
    4,062Cash paid for rent
    
    
    (154
    )
    
    
    (944
    )
    
    
    (780
    )
    
    
    (1,251
    )
 12




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Other (including accretion)
    
    
    (234
    )
    
    
    63
    
    
    
    (124
    )
    
    
    162Ending liability
    
    $
    1,978
    
    
    $
    2,973
    
    
    $
    1,978
    
    
    $
    2,973
 (OSI) Eyetech Acquired Facilities
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Opening liability
    
    $
    2,569
    
    
    $
    4,752
    
    
    $
    3,282
    
    
    $
    2,053Accrual for lease termination costs
    
    
    
    
    
    
    225
    
    
    
    
    
    
    
    3,709Accretion expense
    
    
    40
    
    
    
    66
    
    
    
    120
    
    
    
    186Cash paid for rent
    
    
    (1,193
    )
    
    
    (1,297
    )
    
    
    (4,498
    )
    
    
    (2,202
    )Sublease income
    
    
    1,140
    
    
    
    
    
    
    
    3,652
    
    
    
    Ending liability
    
    $
    2,556
    
    
    $
    3,746
    
    
    $
    2,556
    
    
    $
    3,746
 Employee Post-Retirement Plan and Other
 Post-Retirement Plan
  13




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Service costs for benefits earned during
the period
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    383Interest costs on accumulated post-
retirement benefits obligation
    
    
    44
    
    
    
    23
    
    
    
    132
    
    
    
    176Amortization of initial benefits
attributed to past services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Amortization of loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7Net post-retirement benefit cost
    
    $
    44
    
    
    $
    23
    
    
    $
    132
    
    
    $
    568
 Sabbatical Leave Accrual
  Nonqualified Deferred Compensation Plan
  14




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
  Income Taxes
    15




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
  Discontinued Operations
 Divestiture of Eye Disease Business
 ®
  (OSI) Eyetech Milestone Revenue and Expense
  16




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
  (OSI) Eyetech Operating Results
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Net revenue
    
    $
    30,594
    
    
    $
    7,665
    
    
    $
    43,212
    
    
    $
    28,083Gain on sale of PDGF aptamer
research program
    
    
    
    
    
    
    6,012
    
    
    
    
    
    
    
    6,012Loss on sale of eye disease business
    
    $
    (4,662
    )
    
    $
    
    
    
    $
    (14,107
    )
    
    $
    Operating income (loss)
    
    $
    24,131
    
    
    $
    (6,466
    )
    
    $
    18,856
    
    
    $
    (29,650
    )Pretax income (loss)
    
    $
    19,469
    
    
    $
    (6,466
    )
    
    $
    4,749
    
    
    $
    (29,650
    )Income (loss) from discontinued
operations
    
    $
    20,281
    
    
    $
    (6,276
    )
    
    $
    5,936
    
    
    $
    (28,984
    )
  17




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
   September 30,
    
    December 31,2008
    
    2007Assets:Accounts receivable
    
    $
    783
    
    
    $
    18,411Prepaid expenses and other assets
    
    
    
    
    
    
    470Assets held for sale
    
    
    
    
    
    
    6,561Assets related to discontinued operations
    
    $
    783
    
    
    $
    25,442Liabilities:Accounts payable and accrued expenses
    
    $
    4,856
    
    
    $
    13,382Collaboration profit share
    
    
    
    
    
    
    2,783Unearned revenue
    
    
    
    
    
    
    29,574Liabilities related to discontinued operations
    
    $
    4,856
    
    
    $
    45,739
 Variable Interest Entities
   18




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
 (OSI) Eyetech Divestiture  Severance Costs
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Opening liability
    
    $
    1,981
    
    
    $
    2,553
    
    
    $
    800
    
    
    $
    2,584Accrual for severance and retention
bonuses
    
    
    313
    
    
    
    1,166
    
    
    
    1,678
    
    
    
    5,017Cash paid for severance and
retention
bonuses
    
    
    (1,775
    )
    
    
    (2,750
    )
    
    
    (1,959
    )
    
    
    (6,632
    )Ending liability
    
    $
    519
    
    
    $
    969
    
    
    $
    519
    
    
    $
    969
 Convertible Debt
  19




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
    20




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
 Subsequent Events
  ®
 
 21




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 Overview
  ®
   22




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1A
  Quarterly Update
  23




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®
 Subsequent Events
  ®
 24




---



##### Table of Contents



Critical Accounting Policies
  Revenue Recognition
 Net Revenue from Unconsolidated Joint Business
  25




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##### Table of Contents



License Fees and Milestones
   Inventory
   26




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##### Table of Contents



Stock-Based Compensation
   Accruals for Clinical Research Organization and Clinical Site Costs
  Income Taxes
   27




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Investments and Other-than-Temporary Impairments of Available-for-Sale Marketable Securities
   28




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Goodwill and Other Long-Lived Assets
     Discontinued Operations
   29




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(OSI) Eyetech Milestone Revenue and Expense
  30




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##### Table of Contents



Revenues
 Three Months Ended
    
    Nine Months Ended(in thousands)
    
    September 30,
    
    September 30,2008
    
    2007
    
    $ Change
    
    2008
    
    2007
    
    $ ChangeNet revenue from unconsolidated
joint business
    
    $
    45,501
    
    
    $
    41,747
    
    
    $
    3,754
    
    
    $
    147,237
    
    
    $
    123,868
    
    
    $
    23,369Royalties on product licenses
    
    
    34,228
    
    
    
    25,413
    
    
    
    8,815
    
    
    
    100,831
    
    
    
    67,252
    
    
    
    33,579License, milestone and other
revenues
    
    
    14,843
    
    
    
    33,210
    
    
    
    (18,367
    )
    
    
    32,893
    
    
    
    65,602
    
    
    
    (32,709
    )Total revenues
    
    $
    94,572
    
    
    $
    100,370
    
    
    $
    (5,798
    )
    
    $
    280,961
    
    
    $
    256,722
    
    
    $
    24,239
 Net Revenue from Unconsolidated Joint Business
  Royalties on Product Licenses
  31




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License, Milestone and Other Revenues
    ®
  32




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Expenses
 Three Months Ended
    
    Nine Months Ended(in thousands)
    
    September 30,
    
    September 30,2008
    
    2007
    
    $ Change
    
    2008
    
    2007
    
    $ ChangeCost of goods sold
    
    $
    2,517
    
    
    $
    2,142
    
    
    $
    375
    
    
    $
    6,748
    
    
    $
    6,093
    
    
    $
    655Research and development
    
    
    33,054
    
    
    
    29,489
    
    
    
    3,565
    
    
    
    94,009
    
    
    
    87,384
    
    
    
    6,625Acquired in-process research
and development
    
    
    
    
    
    
    7,500
    
    
    
    (7,500
    )
    
    
    
    
    
    
    7,500
    
    
    
    (7,500
    )Selling, general and
administrative
    
    
    22,262
    
    
    
    24,816
    
    
    
    (2,554
    )
    
    
    69,985
    
    
    
    73,983
    
    
    
    (3,998
    )Amortization of intangibles
    
    
    646
    
    
    
    461
    
    
    
    185
    
    
    
    1,884
    
    
    
    1,378
    
    
    
    506$
    58,479
    
    
    $
    64,408
    
    
    $
    (5,929
    )
    
    $
    172,626
    
    
    $
    176,338
    
    
    $
    (3,712
    )
 Cost of Goods Sold
  Research and Development
  33




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Acquired In-process Research and Development
  34




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Selling, General and Administrative
  Other Income and Expense
 Three Months Ended
    
    Nine Months Ended(in thousands)
    
    September 30,
    
    September 30,2008
    
    2007
    
    $ Change
    
    2008
    
    2007
    
    $ ChangeInvestment income-net
    
    $
    2,976
    
    
    $
    3,157
    
    
    $
    (181
    )
    
    $
    9,670
    
    
    $
    9,247
    
    
    $
    423Interest expense
    
    
    (2,894
    )
    
    
    (1,811
    )
    
    
    (1,083
    )
    
    
    (9,040
    )
    
    
    (5,423
    )
    
    
    (3,617
    )Other income (expense)  net
    
    
    (643
    )
    
    
    (497
    )
    
    
    (146
    )
    
    
    (2,779
    )
    
    
    2,582
    
    
    
    (5,361
    )Total other income (expense)
    
    $
    (561
    )
    
    $
    849
    
    
    $
    (1,410
    )
    
    $
    (2,149
    )
    
    $
    6,406
    
    
    $
    (8,555
    )
    Discontinued Operations
  35




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Liquidity and Capital Resources
   Commitments and Contingencies
  2009-
    
    2011-
    
    2013 &2008
    
    2010
    
    2012
    
    ThereafterContractual Obligations:Senior convertible debt (a)
    
    $
    1,150
    
    
    $
    23,100
    
    
    $
    23,100
    
    
    $
    633,582Operating leases
    
    
    2,850
    
    
    
    22,142
    
    
    
    21,402
    
    
    
    80,178Purchase obligations (b)
    
    
    15,500
    
    
    
    50,300
    
    
    
    8,700
    
    
    
    8,700Obligations related to exit
activities (c)
    
    
    520
    
    
    
    1,884
    
    
    
    
    
    
    
    1,456Total contractual obligations
    
    $
    20,020
    
    
    $
    97,426
    
    
    $
    53,202
    
    
    $
    723,916
 36




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##### Table of Contents



(a)
    
    All senior convertible notes assume the payment of interest through their respective maturity
dates and the payment of their outstanding principal balance at their respective maturity
dates. This includes interest payments at a rate of (i) 3.25% per annum relating to the
$99.95 million principal amount of the 2023 Notes, (ii) 2% per annum relating to the
$115.0 million principal amount of the 2% Convertible Senior Subordinated Notes due 2025, or
the 2025 Notes, and (iii) 3% per annum relating to the $200.0 million principal amount of the
2038 Notes. The holders of the 2023 Notes have the right to require us to purchase, for cash,
all of the 2023 Notes, or a portion thereof, in September 2013. In the event that the holders
of the 2023 Notes exercise this right, we will have the option of delivering to the holders a
specified number of shares of our common stock in lieu of cash as set forth in the indenture
for the 2023 Notes. Holders of the 2025 Notes have the right to require us to purchase, for
cash, all of the 2025 Notes, or a portion thereof, in December 2010. Holders of the 2038 Notes
have the right to require us to purchase, for cash, all of the 2038 Notes, or a portion
thereof, in January 2013.(b)
    
    Includes inventory commitments, commercial and research commitments and other significant
purchase commitments. Also includes our share of the remaining future commitment related to
the Tarceva global development costs of approximately $78 million.(c)
    
    Includes payments for termination benefits and facility refurbishments.Other significant commitments and contingencies not in the table above include the
following: 
    
    We are committed to share certain commercialization costs relating to Tarceva with
Genentech. Under the terms of our agreement, there are no contractually determined
amounts for future commercial costs.
    
    Under agreements with external CROs, we will continue to incur expenses relating to
clinical trials of Tarceva and other clinical candidates. The timing and amount of
these disbursements can be based upon the achievement of certain milestones, patient
enrollment, services rendered or as expenses are incurred by the CROs; therefore, we
cannot reasonably estimate the potential timing of these payments.
    
    We have outstanding letters of credit of $1.9 million, which primarily serve as
security for performance under various lease obligations.
    
    We have a retirement plan which provides post-retirement medical and life insurance
benefits to eligible employees, board members and qualified dependents. We curtailed
this plan in 2007, however, certain employees, board members and qualified dependents
remain eligible for these benefits. Eligibility is determined based on age and years
of service. We had accrued liability for post-retirement benefit costs of $3.2 million
at September 30, 2008.
 37




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##### Table of Contents




    
    Under certain license and collaboration agreements with pharmaceutical companies and
educational institutions, we are required to pay royalties and/or milestone payments
upon the successful development and commercialization of products. However, successful
research and development of pharmaceutical products is high risk, and most products
fail to reach the market. Therefore, at this time, the amount and timing of the
payments, if any, are not known.
    
    Under certain license and other agreements, we are required to pay license fees for
the use of technologies and products in our research and development activities or
milestone payments upon the achievement of certain predetermined conditions. These
license fees are not deemed material to our consolidated financial statements and the
amount and timing of the milestone payments, if any, are not known due to the
uncertainty surrounding the successful research, development and commercialization of
the products.
 Accounting Pronouncements
    38




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39




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##### Table of Contents



Forward-Looking Statements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   40




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##### Table of Contents



Item 4. Controls and Procedures
  Evaluation of Our Disclosure Controls and Procedures
 41




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##### Table of Contents



CEO/CFO Conclusions about the Effectiveness of the Disclosure Controls and Procedures
 Changes in Internal Control Over Financial Reporting.
 
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  42




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Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Total Number ofShares (or Units)
    
    Maximum Number (orPurchased as Part
    
    Approximate Dollar Value)Total Number
    
    
    
    
    
    of Publicly
    
    Shares (or Units) that MayShares (or Units)
    
    Average Price Paid
    
    Announced Plans or
    
    Yet Be Purchased Under thePeriod
    
    Purchased
    
    per Share (or Unit)
    
    Programs
    
    Plans or ProgramsJuly 1, 2008 -
July 31, 2008
    
    
    2,060
    (1)
    
    $
    44.72
    
    
    
    N/A
    
    
    
    N/AAugust 1, 2008 -
August 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    September 1, 2008 -
September 30, 2008
    
    
    999
    (2)
    
    $
    50.02
    
    
    
    N/A
    
    
    
    N/A
 
 (1)
    
    Consists of shares of common stock withheld from officers to satisfy their tax withholding
obligations arising upon the vesting of restricted stock awards granted under our Amended and
Restated Stock Incentive Plan.(2)
    
    In September 2008, we repurchased an aggregate of $50,000 principal amount of our 2023 Notes
upon exercise of the holders of their right to require us to repurchase these notes under the
terms of the Indenture. The repurchased 2023 Notes were subsequently cancelled. The table
reflects the number of shares of common stock into which the cancelled notes would have been
convertible if the holders of such notes exercised their right to convert the notes at the
conversion price of $50.02 prior to the maturity of the 2023 Notes in accordance with the
terms of the Indenture for the 2023 Notes. 43




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##### Table of Contents



Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 3.1
    
    Restated Certificate of Incorporation of OSI Pharmaceuticals, Inc., filed by
the Company as an exhibit to the Form 10-K for the fiscal year ended September 30, 2001
(file no. 000-15190), and incorporated herein by reference.3.2
    
    Second Amended and Restated Bylaws of OSI Pharmaceuticals, Inc., filed by the
Company as an exhibit to the Form 8-K, filed on December 17, 2007 (file no. 000-15190),
and incorporated herein by reference.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-14(a). (Filed herewith)31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or
15d-14(a). (Filed herewith)32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350. (Filed
herewith)32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350. (Filed
herewith)
 
 44




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##### Table of Contents



SIGNATURES
  OSI PHARMACEUTICALS, INC.(Registrant)Date:
November 10, 2008
    
    
    
    /s/ Colin Goddard, Ph.D.Colin Goddard, Ph.D.Chief Executive OfficerDate:
November 10, 2008
    
    
    
    /s/ Michael G. AtiehMichael G. AtiehExecutive Vice President, ChiefFinancial Officer and Treasurer(Principal Financial Officer)
 45




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INDEX TO EXHIBITS
 Exhibit
 3.1
    
    Restated Certificate of Incorporation of OSI Pharmaceuticals, Inc., filed by
the Company as an exhibit to the Form 10-K for the fiscal year ended September 30, 2001
(file no. 000-15190), and incorporated herein by reference.3.2
    
    Second Amended and Restated Bylaws of OSI Pharmaceuticals, Inc., filed by the
Company as an exhibit to the Form 8-K, filed on December 17, 2007 (file no. 000-15190),
and incorporated herein by reference.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-14(a). (Filed herewith)31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or
15d-14(a). (Filed herewith)32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350. (Filed
herewith)32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350. (Filed
herewith)
 
 46