##### Table of Contents



FORM 10-Q
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the quarterly period
ended September 30,
2006
 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
  þ o o
 o þ




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##### 



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
  Page No.PART I. FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Consolidated Balance Sheets
- September 30, 2006 (Unaudited) and December 31, 2005
    
    
    1Consolidated Statements of Operations (Unaudited)
- Three Months Ended September 30, 2006 and September 30, 2005
    
    
    2Consolidated Statements of Operations (Unaudited)
- Nine Months Ended September 30, 2006 and September 30, 2005
    
    
    3Consolidated Statements of Cash Flows (Unaudited)
-Nine Months Ended September 30, 2006 and September 30, 2005
    
    
    4Notes to Consolidated Financial Statements (Unaudited)
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risks
    
    
    37Item 4. Controls and Procedures
    
    
    37PART II. OTHER INFORMATION
    
    
    39Item 1. Legal Proceedings
    
    
    39Item 1A. Risk Factors
    
    
    39Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    42Item 3. Defaults Upon Senior Securities
    
    
    42Item 4. Submission of Matters to a Vote of Security Holders
    
    
    42Item 5. Other Information
    
    
    42Item 6. Exhibits
    
    
    42SIGNATURES
    
    
    44INDEX TO EXHIBITS
    
    
    45EX-10.1: 1999 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLANEX-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 31,2006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    60,231
    
    
    $
    164,084Investment securities
    
    
    140,457
    
    
    
    5,061Restricted investment securities
    
    
    9,479
    
    
    
    10,461Accounts receivables  net
    
    
    89,558
    
    
    
    152,482Inventory  net
    
    
    63,224
    
    
    
    75,715Interest receivable
    
    
    563
    
    
    
    78Prepaid expenses and other current assets
    
    
    8,580
    
    
    
    10,618Total current assets
    
    
    372,092
    
    
    
    418,499Property, equipment and leasehold improvements  net
    
    
    58,303
    
    
    
    61,947Debt issuance costs  net
    
    
    5,376
    
    
    
    6,667Goodwill
    
    
    39,248
    
    
    
    359,035Other intangible assets  net
    
    
    192,583
    
    
    
    207,194Other assets
    
    
    9,324
    
    
    
    5,240$
    676,926
    
    
    $
    1,058,582LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    66,768
    
    
    $
    80,467Collaboration profit share payable
    
    
    10,932
    
    
    
    49,869Unearned revenue  current
    
    
    13,050
    
    
    
    10,737Other liabilities
    
    
    38
    
    
    
    1,255Total current liabilities
    
    
    90,788
    
    
    
    142,328Other liabilities:Rent obligations and deferred rent expenses
    
    
    5,536
    
    
    
    6,337Unearned revenue  long-term
    
    
    67,722
    
    
    
    39,051Convertible senior subordinated notes
    
    
    265,000
    
    
    
    265,000Contingent value rights
    
    
    
    
    
    
    22,047Accrued postretirement benefit cost
    
    
    6,404
    
    
    
    5,353Total liabilities
    
    
    435,450
    
    
    
    480,116Stockholders equity:Preferred stock, $.01 par value; 5,000 shares authorized; no shares issued at
September 30, 2006 and December 31, 2005, respectively
    
    
    
    
    
    
    Common stock, $.01 par value; 200,000 shares authorized, 58,958 and 58,728 shares issued
at September 30, 2006 and December 31, 2005, respectively
    
    
    590
    
    
    
    587Additional paid-in capital
    
    
    1,605,631
    
    
    
    1,592,155Deferred compensation
    
    
    
    
    
    
    (7,341
    )Accumulated deficit
    
    
    (1,330,510
    )
    
    
    (971,469
    )Accumulated other comprehensive income
    
    
    2,986
    
    
    
    1,755278,697
    
    
    
    615,687Less: treasury stock, at cost; 1,943 shares at September 30, 2006 and December 31, 2005
    
    
    (37,221
    )
    
    
    (37,221
    )Total stockholders equity
    
    
    241,476
    
    
    
    578,466Commitments and contingencies$
    676,926
    
    
    $
    1,058,582




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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 September 30,2006
    
    
    2005Revenues:Net revenue from unconsolidated joint business
    
    $
    39,833
    
    
    $
    21,464Product sales
    
    
    9,078
    
    
    
    (51
    )Royalties on product sales
    
    
    14,647
    
    
    
    1,453Sales commissions
    
    
    1,639
    
    
    
    7,610License, milestone and other revenues
    
    
    2,575
    
    
    
    3,512Collaborative agreement revenues
    
    
    6,221
    
    
    
    73,993
    
    
    
    33,988Expenses:Cost of goods sold
    
    
    6,660
    
    
    
    1,464Collaborative profit share
    
    
    3,007
    
    
    
    Research and development
    
    
    43,080
    
    
    
    28,698Selling, general and administrative
    
    
    36,599
    
    
    
    21,363Goodwill impairment
    
    
    870
    
    
    
    Amortization of intangibles
    
    
    4,979
    
    
    
    3,83195,195
    
    
    
    55,356Loss from operations
    
    
    (21,202
    )
    
    
    (21,368
    )Other income (expense):Investment income  net
    
    
    2,503
    
    
    
    2,393Interest expense
    
    
    (1,906
    )
    
    
    (1,219
    )Other (expense) income  net
    
    
    (652
    )
    
    
    157Net loss
    
    $
    (21,257
    )
    
    $
    (20,037
    )Basic and diluted net loss per common share:Net loss
    
    $
    (0.37
    )
    
    $
    (0.39
    )Weighted average shares of common stock outstanding
    
    
    56,974
    
    
    
    51,439
  2




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except per share data)
 Nine Months Ended September 30,2006
    
    
    2005Revenues:Net revenue from unconsolidated joint business
    
    $
    114,699
    
    
    $
    54,892Product sales
    
    
    96,972
    
    
    
    525Royalties on product sales
    
    
    33,671
    
    
    
    1,952Sales commissions
    
    
    11,058
    
    
    
    21,578License, milestone and other revenues
    
    
    16,716
    
    
    
    8,737Collaborative agreement revenues
    
    
    19,294
    
    
    
    292,410
    
    
    
    87,684Expenses:Cost of goods sold
    
    
    45,883
    
    
    
    3,636Collaborative profit share
    
    
    39,190
    
    
    
    Research and development
    
    
    133,065
    
    
    
    86,007Acquired in-process R&D
    
    
    
    
    
    
    3,542Selling, general and administrative
    
    
    117,934
    
    
    
    65,765Goodwill Impairment
    
    
    320,261
    
    
    
    Amortization of intangibles
    
    
    14,930
    
    
    
    11,435671,263
    
    
    
    170,385Loss from operations
    
    
    (378,853
    )
    
    
    (82,701
    )Other income (expense):Investment income  net
    
    
    5,902
    
    
    
    10,563Interest expense
    
    
    (5,672
    )
    
    
    (3,657
    )Other (expense) income  net
    
    
    (2,464
    )
    
    
    (1,283
    )Net loss before extraordinary gain
    
    
    (381,087
    )
    
    
    (77,078
    )Extraordinary gain
    
    
    22,046
    
    
    
    Net loss
    
    $
    (359,041
    )
    
    $
    (77,078
    )Basic and diluted net loss per common share:Loss before extraordinary item
    
    $
    (6.70
    )
    
    $
    (1.50
    )Extraordinary gain
    
    
    0.39
    
    
    
    Net loss
    
    $
    (6.31
    )
    
    $
    (1.50
    )Weighted average shares of common stock outstanding
    
    
    56,918
    
    
    
    51,284
  3




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
 Nine Months EndedSeptember 30,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (359,041
    )
    
    $
    (77,078
    )Adjustments to reconcile net loss to net cash
used in operating activities:Extraordinary gain from reversal of contingent consideration
    
    
    (22,046
    )
    
    
    Gain on sale of investment
    
    
    
    
    
    
    114Gain on sale and disposals of equipment
    
    
    5
    
    
    
    753Depreciation and amortization
    
    
    26,359
    
    
    
    19,851Acquired in-process R&D
    
    
    
    
    
    
    3,542Non-cash compensation charges
    
    
    12,827
    
    
    
    1,288Other non-cash charges-net
    
    
    1,049
    
    
    
    Impact of inventory step-up related to inventory sold
    
    
    18,621
    
    
    
    Goodwill Impairment
    
    
    320,261
    
    
    
    Changes in assets and liabilities:Receivables
    
    
    62,813
    
    
    
    (24,572
    )Inventory
    
    
    (8,204
    )
    
    
    (14,868
    )Prepaid expenses and other current assets
    
    
    2,175
    
    
    
    (104
    )Other assets
    
    
    (4,029
    )
    
    
    123Accounts payable and accrued expenses
    
    
    (47,996
    )
    
    
    (7,242
    )Unearned revenue
    
    
    30,985
    
    
    
    15,915Accrued postretirement benefit cost
    
    
    1,051
    
    
    
    862Net cash provided by (used in) operating activities
    
    
    34,830
    
    
    
    (81,416
    )Cash flows from investing activities:Payments for acquisitions
    
    
    
    
    
    
    (1,794
    )Purchases of investments (restricted and unrestricted)
    
    
    (169,791
    )
    
    
    (357,351
    )Maturities and sales of investments (restricted and unrestricted)
    
    
    35,545
    
    
    
    285,039Net additions to property, equipment and leasehold improvements
    
    
    (8,713
    )
    
    
    (21,512
    )Proceeds from sale of assets
    
    
    786
    
    
    
    Additions to compound library assets
    
    
    (16
    )
    
    
    (377
    )Investments in privately-owned companies
    
    
    
    
    
    
    (344
    )Net cash used in investing activities
    
    
    (142,189
    )
    
    
    (96,339
    )Cash flows from financing activities:Payment of expense relating to public offering
    
    
    
    
    
    
    (116
    )Proceeds from the exercise of stock options, stock warrants, employee purchase plan and other
    
    
    3,705
    
    
    
    10,503Other
    
    
    (102
    )
    
    
    Payments on capital leases obligation
    
    
    (603
    )
    
    
    (3
    )Net cash provided by financing activities
    
    
    3,000
    
    
    
    10,384Net decrease in cash and cash equivalents
    
    
    (104,359
    )
    
    
    (167,371
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    506
    
    
    
    670Cash and cash equivalents at beginning of period
    
    
    164,084
    
    
    
    329,556Cash and cash equivalents at end of period
    
    $
    60,231
    
    
    $
    162,855Cash paid for interest
    
    $
    6,025
    
    
    $
    4,875Non-cash activities:Issuance of common stock to employees
    
    $
    
    
    
    $
    614Issuance of common stock to directors
    
    $
    
    
    
    $
    527Issuance of common stock in connection with acquisitions
    
    $
    
    
    
    $
    4,158Purchase accounting adjustments
    
    $
    3,505
    
    
    $
    Acceleration of options
    
    $
    
    
    
    $
    816
  4




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
(Unaudited)
 ® ® ®
 Basis of Presentation
  Use of Estimates
   Revenue Recognition
 Net revenue from unconsolidated joint business
  5




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Co-promotion profit and reimbursement of
sales force and marketing related costs
    
    $
    36,708
    
    
    $
    18,851
    
    
    $
    106,060
    
    
    $
    47,894Reimbursement of manufacturing costs
    
    
    3,125
    
    
    
    2,613
    
    
    
    8,639
    
    
    
    6,998Net revenue from unconsolidated joint business
    
    $
    39,833
    
    
    $
    21,464
    
    
    $
    114,699
    
    
    $
    54,892
 Product Sales
   6




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
   Royalties on Product Sales
  Sales Commissions
  Licenses, Milestones and Other Revenues
  7




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
     Collaborative Program Revenues
   Accounting for Stock-Based Compensation
  8




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
      Stockbased
    
    Compensationcompensation as a
    
    expense relatedresult of the
    
    to restricted stock
    
    Total stock-basedadoption
    
    and restricted
    
    compensationof SFAS 123(R)
    
    options
    
    expenseThree months ended September 30, 2006Cost of sales
    
    $
    54
    
    
    $
    35
    
    
    $
    89Research and development expenses
    
    
    773
    
    
    
    433
    
    
    
    1,206Selling, general and administrative expenses
    
    
    2,276
    
    
    
    970
    
    
    
    3,246Stock-based compensation expense
    
    $
    3,103
    
    
    $
    1,438
    
    
    $
    4,541Nine months ended September 30, 2006Cost of sales
    
    $
    201
    
    
    $
    297
    
    
    $
    498Research and development expenses
    
    
    2,365
    
    
    
    1,319
    
    
    
    3,684Selling, general and administrative expenses
    
    
    8,318
    
    
    
    3,608
    
    
    
    11,926Stock-based compensation expense
    
    $
    10,884
    
    
    $
    5,224
    
    
    $
    16,108
 9




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
     Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30,
    
    September 30,2005
    
    2005Net loss
    
    $
    (20,037
    )
    
    $
    (77,078
    )Add: stock-based compensation included in net loss
    
    
    193
    
    
    
    2,667Compensation cost determined under fair value method
    
    
    (6,625
    )
    
    
    (19,855
    )Pro forma net loss
    
    $
    (26,469
    )
    
    $
    (94,266
    )Basic and diluted net loss per common share:Net loss  as reported
    
    $
    (0.39
    )
    
    $
    (1.50
    )Net loss  pro forma
    
    $
    (0.51
    )
    
    $
    (1.84
    )
  10




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    53.39
    %
    
    
    48.06
    %
    
    
    56.81
    %
    
    
    56.86
    %Risk-free interest rate
    
    
    4.77
    %
    
    
    3.94
    %
    
    
    4.50
    %
    
    
    3.92
    %Expected term (years)
    
    
    4.57
    
    
    
    4.25
    
    
    
    4.33
    
    
    
    4.06
  Aggregate Intrinsic
    
    Weighted AverageNo. Shares
    
    Weighted Average
    
    Value (1)
    
    Contractual Life(in thousands)
    
    Exercise Price
    
    (in millions)
    
    Remaining in YearsOutstanding at December 31,
2005
    
    
    6,921
    
    
    $
    35.26Granted at fair value
    
    
    445
    
    
    $
    29.40Exercised at fair value
    
    
    91
    
    
    $
    14.93Expired
    
    
    77
    
    
    $
    45.67Forfeited
    
    
    233
    
    
    $
    28.37Outstanding at June 30, 2006
    
    
    6,965
    
    
    $
    35.01Granted at fair value
    
    
    17
    
    
    $
    33.48Exercised at fair value
    
    
    102
    
    
    $
    16.21Expired
    
    
    61
    
    
    $
    46.94Forfeited
    
    
    123
    
    
    $
    23.13Outstanding at September
30, 2006
    
    
    6,696
    
    
    $
    35.41
    
    
    $
    48.3
    
    
    
    6.22Exercisable at September
30, 2006
    
    
    4,401
    
    
    $
    39.34
    
    
    $
    23.9
    
    
    
    6.08
 
 (1)
    
    The intrinsic value of a stock option is the amount by which the current market value of
the underlying stock exceeds the exercise price of the option.  11




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
     Restricted Stock
  12




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
  Weighted AverageNo. Shares
    
    Grant Date Fair(in thousands)
    
    ValueBalance at December 31, 2005
    
    
    16
    
    
    $
    37.88Granted at fair value
    
    
    191
    
    
    $
    30.79Vested at fair value
    
    
    3
    
    
    $
    37.06Forfeited
    
    
    8
    
    
    $
    31.37Balance at September 30, 2006
    
    
    196
    
    
    $
    31.25
 Restricted Assets
   Inventory
  13




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
     September 30,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    6,793
    
    
    $
    5,905Work in process
    
    
    30,860
    
    
    
    44,961Finished goods on hand, net
    
    
    19,905
    
    
    
    19,533Inventory subject to return
    
    
    5,666
    
    
    
    5,316Total inventory
    
    $
    63,224
    
    
    $
    75,715
  Comprehensive Income (Loss)
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Net loss
    
    $
    (21,257
    )
    
    $
    (20,037
    )
    
    $
    (359,041
    )
    
    $
    (77,078
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    290
    
    
    
    (201
    )
    
    
    1,289
    
    
    
    (2,126
    )Unrealized holding gains (losses) arising
during period
    
    
    112
    
    
    
    (332
    )
    
    
    (58
    )
    
    
    (1,100
    )Less: Reclassification adjustment for
gains realized in net loss
    
    
    
    
    
    
    2,189
    
    
    
    
    
    
    
    2,127402
    
    
    
    1,656
    
    
    
    1,231
    
    
    
    (1,099
    )Total comprehensive income (loss)
    
    $
    (20,855
    )
    
    $
    (18,381
    )
    
    $
    (357,810
    )
    
    $
    (78,177
    )
 14




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
  September 30,
    
    December 31,2006
    
    2005Cumulative foreign currency translation adjustment
    
    $
    3,117
    
    
    $
    1,828Unrealized loss on available-for-sale securities
    
    
    (131
    )
    
    
    (73
    )Accumulated other comprehensive income
    
    $
    2,986
    
    
    $
    1,755
 Net Loss per Common Share
   Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Common share equivalent
    
    
    7,959
    
    
    
    3,732
    
    
    
    7,651
    
    
    
    4,164Contingent shares
    
    
    1,585
    
    
    
    1,585
    
    
    
    1,585
    
    
    
    1,585
 Intangible Assets
  September 30, 2006
    
    
    December 31, 2005Carrying
    
    
    Accumulated
    
    
    Net Book
    
    
    Carrying
    
    
    Accumulated
    
    
    Net BookAmount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    ValueNovantrone
    
    $
    46,009
    
    
    $
    (42,745
    )
    
    $
    3,264
    
    
    $
    46,009
    
    
    $
    (41,657
    )
    
    $
    4,352Macugen technology
    
    
    201,400
    
    
    
    (15,840
    )
    
    
    185,560
    
    
    
    201,400
    
    
    
    (2,263
    )
    
    
    199,137Acquired patent estate
    
    
    726
    
    
    
    (165
    )
    
    
    561
    
    
    
    668
    
    
    
    (65
    )
    
    
    603Acquired licenses
issued to other
companies
    
    
    3,758
    
    
    
    (560
    )
    
    
    3,198
    
    
    
    3,458
    
    
    
    (356
    )
    
    
    3,102Total
    
    $
    251,893
    
    
    $
    (59,310
    )
    
    $
    192,583
    
    
    $
    251,535
    
    
    $
    (44,341
    )
    
    $
    207,194
  15




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
  Consolidation of Facilities
   Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30,
    
    September 30,2006
    
    2006Opening liability
    
    $
    2,179
    
    
    $
    2,734Accrual for rental payments
    
    
    
    
    
    
    240Accretion expense
    
    
    45
    
    
    
    103Cash paid for rent and other
    
    
    (173
    )
    
    
    (1,026
    )Ending liability
    
    $
    2,051
    
    
    $
    2,051
   16




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
  Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30, 2006
    
    September 30, 2006Opening liability
    
    $
    8,603
    
    
    $
    10,262Accrual for severance, relocation and retention bonus
    
    
    1,033
    
    
    
    5,280Accretion expense
    
    
    26
    
    
    
    26Cash paid for severance
    
    
    (2,322
    )
    
    
    (6,906
    )Cash paid for rent
    
    
    (542
    )
    
    
    (1,864
    )Reversals
    
    
    (2,800
    )
    
    
    (2,800
    )Ending liability
    
    $
    3,998
    
    
    $
    3,998
    Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Opening liability
    
    $
    4,090
    
    
    $
    3,686
    
    
    $
    4,210
    
    
    $
    4,302Provision for rental adjustments
    
    
    
    
    
    
    
    
    
    
    (403
    )
    
    
    761Provision for facility refurbishment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,019Cash paid for severance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,286
    )Cash paid for facility reimbursement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (350
    )Cash paid for rent
    
    
    (147
    )
    
    
    (269
    )
    
    
    (147
    )
    
    
    (829
    )Other
    
    
    53
    
    
    
    (26
    )
    
    
    336
    
    
    
    (226
    )Ending liability
    
    $
    3,996
    
    
    $
    3,391
    
    
    $
    3,996
    
    
    $
    3,391
   17




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
  Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Opening liability
    
    $
    928
    
    
    $
    1,420
    
    
    $
    1,160
    
    
    $
    1,678Cash paid for rent less sublease income
received
    
    
    (116
    )
    
    
    (121
    )
    
    
    (348
    )
    
    
    (379
    )Ending liability
    
    $
    812
    
    
    $
    1,299
    
    
    $
    812
    
    
    $
    1,299
 Employee
Post-Retirement Plan
    Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Service costs for benefits earned during the period
    
    $
    264
    
    
    $
    210
    
    
    $
    791
    
    
    $
    629Interest costs on accumulated post-retirement benefits
obligation
    
    
    102
    
    
    
    88
    
    
    
    307
    
    
    
    264Amortization of initial benefits attributed to past services
    
    
    1
    
    
    
    1
    
    
    
    4
    
    
    
    4Amortization of loss
    
    
    17
    
    
    
    16
    
    
    
    50
    
    
    
    48Net post-retirement benefit cost
    
    $
    384
    
    
    $
    315
    
    
    $
    1,152
    
    
    $
    945
 Litigation
  18




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
  Acquisition of Eyetech and Goodwill Impairment
    Cash and investments
    
    $
    271,934Accounts receivable
    
    
    92,165Inventory
    
    
    62,587Fixed assets
    
    
    12,518Prepaid expenses and other assets
    
    
    7,955Amortizable intangibles
    
    
    201,400Goodwill
    
    
    320,261In-process research and development (R&D)
    
    
    60,900Total assets and in-process R&D acquired
    
    
    1,029,720Less liabilities assumed
    
    
    120,327Purchase price
    
    $
    909,393
 19




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 ®
 Convertible Debt
   Subsequent Events
  20




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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, 2006 AND 2005
 Overview
    Quarterly Update
  21




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Subsequent Events
    Critical Accounting Policies
  22




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Net revenues from unconsolidated joint business
  23




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##### Table of Contents



License fees and milestones
  Product Sales
   Collaborative revenue
   24




---



##### Table of Contents



Sales commissions
  Inventory
      25




---



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26




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Revenues
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    $ Change
    
    2006
    
    2005
    
    $ ChangeNet revenue from unconsolidated joint business
    
    $
    39,833
    
    
    $
    21,464
    
    
    $
    18,369
    
    
    $
    114,699
    
    
    $
    54,892
    
    
    $
    59,807Product sales
    
    
    9,078
    
    
    
    (51
    )
    
    
    9,129
    
    
    
    96,972
    
    
    
    525
    
    
    
    96,447Royalties on product sales
    
    
    14,647
    
    
    
    1,453
    
    
    
    13,194
    
    
    
    33,671
    
    
    
    1,952
    
    
    
    31,719Sales commissions
    
    
    1,639
    
    
    
    7,610
    
    
    
    (5,971
    )
    
    
    11,058
    
    
    
    21,578
    
    
    
    (10,520
    )License and milestone revenues and other revenues
    
    
    2,575
    
    
    
    3,512
    
    
    
    (937
    )
    
    
    16,716
    
    
    
    8,737
    
    
    
    7,979Collaborative agreement revenues
    
    
    6,221
    
    
    
    
    
    
    
    6,221
    
    
    
    19,294
    
    
    
    
    
    
    
    19,294Total revenues
    
    $
    73,993
    
    
    $
    33,988
    
    
    $
    40,005
    
    
    $
    292,410
    
    
    $
    87,684
    
    
    $
    204,726
 Net Revenue from Unconsolidated Joint Business
  27




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Product Sales
   Royalties on Product Sales
  28




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Sales Commissions
  License, Milestone and Other Revenues
   Collaborative Program Revenues
  29




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Expenses
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    $ Change
    
    2006
    
    2005
    
    $ ChangeCost of goods sold
    
    $
    6,660
    
    
    $
    1,464
    
    
    $
    5,196
    
    
    $
    45,883
    
    
    $
    3,636
    
    
    $
    42,247Collaborative profit share
    
    
    3,007
    
    
    
    
    
    
    
    3,007
    
    
    
    39,190
    
    
    
    
    
    
    
    39,190Research and development
    
    
    43,080
    
    
    
    28,698
    
    
    
    14,382
    
    
    
    133,065
    
    
    
    86,007
    
    
    
    47,058Acquired in-process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,542
    
    
    
    (3,542
    )Selling, general and administrative
    
    
    36,599
    
    
    
    21,363
    
    
    
    15,236
    
    
    
    117,934
    
    
    
    65,765
    
    
    
    52,169Goodwill impairment
    
    
    870
    
    
    
    
    
    
    
    870
    
    
    
    320,261
    
    
    
    
    
    
    
    320,261Amortization of intangibles
    
    
    4,979
    
    
    
    3,831
    
    
    
    1,148
    
    
    
    14,930
    
    
    
    11,435
    
    
    
    3,495Total expenses
    
    $
    95,195
    
    
    $
    55,356
    
    
    $
    39,839
    
    
    $
    671,263
    
    
    $
    170,385
    
    
    $
    500,878
 Cost of Goods Sold
    Collaborative Profit Share
  30




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Research and Development
    31




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##### Table of Contents



Selling, General and Administrative
  Acquired In-Process Research and Development
    32




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Amortization of Intangibles
  Other Income and Expense
 Three Months Ended September 30,
    
    Nine Months Ended September 30,2006
    
    2005
    
    $ Change
    
    2006
    
    2005
    
    $ ChangeInvestment income  net
    
    $
    2,503
    
    
    $
    2,393
    
    
    $
    110
    
    
    $
    5,902
    
    
    $
    10,563
    
    
    $
    (4,661
    )Interest expense
    
    
    (1,906
    )
    
    
    (1,219
    )
    
    
    (687
    )
    
    
    (5,672
    )
    
    
    (3,657
    )
    
    
    (2,015
    )Other income (expense)  net
    
    
    (652
    )
    
    
    157
    
    
    
    (809
    )
    
    
    (2,464
    )
    
    
    (1,283
    )
    
    
    (1,181
    )Total other income (expense)
    
    $
    (55
    )
    
    $
    1,331
    
    
    $
    (1,386
    )
    
    $
    (2,234
    )
    
    $
    5,623
    
    
    $
    (7,857
    )
    Extraordinary Gain
  33




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##### Table of Contents



Liquidity and Capital Resources
    Commitments and Contingencies
  Remainder of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2011 &2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    TotalContractual Obligations:Senior convertible debt(a)
    
    $
    1,150
    
    
    $
    7,175
    
    
    $
    7,175
    
    
    $
    7,175
    
    
    $
    7,175
    
    
    $
    362,875
    
    
    $
    392,725Operating leases
    
    
    2,331
    
    
    
    10,470
    
    
    
    9,878
    
    
    
    9,408
    
    
    
    9,079
    
    
    
    78,414
    
    
    
    119,580Purchase obligations(b)
    
    
    12,833
    
    
    
    36,137
    
    
    
    34,120
    
    
    
    17,882
    
    
    
    11,271
    
    
    
    24,500
    
    
    
    136,743Obligations related to exit
activities(c)
    
    
    2,150
    
    
    
    1,434
    
    
    
    548
    
    
    
    2,455
    
    
    
    
    
    
    
    802
    
    
    
    7,389Total contractual obligations
    
    $
    18,464
    
    
    $
    55,216
    
    
    $
    51,721
    
    
    $
    36,920
    
    
    $
    27,525
    
    
    $
    466,591
    
    
    $
    656,437
 
 (a)
    
    Includes interest payments at a rate of 3.25% per annum relating to the 2023
Notes and at a rate of 2% per annum relating to the 2025 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 2008, and the holders of the 2025 Notes have the right to
require us to purchase, for cash, all of the 2025 Notes, or a portion thereof, in
December 2010.(b)
    
    Purchase obligations include inventory commitments, commercial and research
commitments and other significant purchase commitments.(c)
    
    Includes payments for termination benefits and facility refurbishments. 34




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##### Table of Contents



Other significant commitments and contingencies include the following:
 
    
    We are committed to share with Genentech and Roche approximately $650 million
combined amount of certain global development costs for Tarceva, which represents an
increase of approximately $350 million over the originally committed $300 million in
2001. These costs will be shared by the parties pursuant to the terms of our agreement
with our partners. As of September 30, 2006, our future share of the commitment is
approximately $80 million. We are also 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 and development costs.
    
    Under agreements with external CROs we will continue to incur expenses relating to
clinical trials of Tarceva, Macugen and other clinical candidates. The timing and
amount of these disbursements can be based upon the achievement of certain milestones,
patient enrollment, services rendered or as expenses are incurred by the CROs and
therefore we cannot reasonably estimate the potential timing of these payments.
    
    We have outstanding letters of credit of $9.0 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. Eligibility is
determined based on age and years of service. We accrued postretirement benefit costs
of $6.4 million at September 30, 2006.
    
    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.
    
    In connection with the acquisition of Eyetech in November 2005, we assumed various
contracts related to the in-licensing, development, manufacture and marketing of
Macugen. These license agreements represent rights and obligations of our subsidiary,
(OSI) Eyetech, Inc. Under the terms of the license agreements, we will be required to
make additional milestone payments, and we are also required to pay royalties on net
sales.
 35




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##### Table of Contents



Accounting Pronouncements
     Forward Looking Statements
  36




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risks
     
 Item 4. Controls and Procedures
  Evaluation of Our Disclosure Controls and Procedures
 37




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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.
 38




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Risks Related to Our Business
 We depend heavily on our principal marketed product, Tarceva, to generate revenues in order to fund
our operations.
   
    
    We must continue to expand the market share and revenues for Tarceva in the
treatment of second-line and third-line NSCLC and for first-line pancreatic cancer;
 39




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##### Table of Contents




    
    Physicians may be reluctant to switch from existing treatment methods, including
traditional chemotherapy agents, to Tarceva;
    
    The market for oncology products is very competitive, and there are marketed
products and products which are currently in Phase III development that are or could be
competitive with Tarceva;
    
    We must be successful in our clinical trials in additional indications and in
receiving approval from the FDA and our foreign counterparts to market and sell Tarceva
in such additional indications; and
    
    Third-party payors, including private health coverage insurers and health
maintenance organizations, must continue to provide adequate coverage or reimbursement
for Tarceva.
 If our competitors succeed in developing products and technologies that are more effective than our
own, or if scientific developments change our understanding of the potential scope and utility of
our products, then our products and technologies may be rendered less competitive.
  ® ®
  40




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##### Table of Contents



We may be required to record a significant charge to our earnings if certain of our assets become
impaired.
  41




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 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
    
    Certificate of Incorporation, as amended, filed by OSI Pharmaceuticals, Inc. 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
    
    Amended and Restated Bylaws, filed by OSI Pharmaceuticals, Inc. as an exhibit
to the Form 8-K filed on September 15, 2006 incorporated herein by reference.
 42




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##### Table of Contents



10.1*
    
    OSI Pharmaceuticals, Inc. 1999 Incentive and Non-Qualified Stock Option Plan
(incorporating Amendments No. 1 and 2, adopted July 19, 2001 and September 19, 2006,
respectively). (Filed herewith)31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-14(a). (Filed herewith)31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or
15d-14(a). (Filed herewith)32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350. (Filed
herewith)32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350. (Filed
herewith)
 
 *
    
    Indicates a management contract or compensatory plan, contract or arrangement in which a
director or executive officer participates. 43




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##### Table of Contents



SIGNATURES
  OSI PHARMACEUTICALS, INC.(Registrant)Date: November 9, 2006
    
    /s/ Colin Goddard, Ph.D.Colin Goddard, Ph.D.Chief Executive OfficerDate: November 9, 2006
    
    /s/ Michael G. AtiehMichael G. AtiehExecutive Vice President andChief Financial Officer(Principal Financial Officer)
 44




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##### Table of Contents



INDEX TO EXHIBITS
 Exhibit
 3.1
    
    Certificate of Incorporation, as amended, filed by OSI Pharmaceuticals, Inc. 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
    
    Amended and Restated Bylaws, filed by OSI Pharmaceuticals, Inc. as an exhibit
to the Form 8-K filed on September 15, 2006 incorporated herein by reference.10.1*
    
    OSI Pharmaceuticals, Inc. 1999 Incentive and Non-Qualified Stock Option Plan
(incorporating Amendments No. 1 and 2, adopted July 19, 2001 and September 19, 2006,
respectively). (Filed herewith)31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-14(a). (Filed herewith)31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or
15d-14(a). (Filed herewith)32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350. (Filed
herewith)32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350. (Filed
herewith)
 
 *
    
    Indicates a management contract or compensatory plan, contract or arrangement in which a
director or executive officer participates. 45