##### Table of Contents



FORM 10-Q
 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
    
    March 31, 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
     1




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##### 



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
  Page No.PART I. FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Consolidated Balance Sheets
- March 31, 2006 (Unaudited) and December 31, 2005
    
    
    1Consolidated Statements of Operations
- Three Months Ended March 31, 2006 and 2005 (Unaudited)
    
    
    2Consolidated Statements of Cash Flows
- Three Months Ended March 31, 2006 and 2005 (Unaudited)
    
    
    3Notes to Consolidated Financial Statements (Unaudited)
    
    
    4Item 2.Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risks
    
    
    31Item 4. Controls and Procedures
    
    
    32PART II. OTHER INFORMATION
    
    
    33Item 1. Legal Proceedings
    
    
    33Item 1A. Risk Factors
    
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    34SIGNATURES
    
    
    35INDEX TO EXHIBITS
    
    
    36EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




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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)
 March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    100,650
    
    
    $
    164,084Investment securities
    
    
    55,016
    
    
    
    5,061Restricted investment securities
    
    
    8,043
    
    
    
    10,461Accounts receivables  net
    
    
    152,708
    
    
    
    152,482Inventory  net
    
    
    62,942
    
    
    
    75,715Interest receivable
    
    
    498
    
    
    
    78Prepaid expenses and other current assets
    
    
    13,067
    
    
    
    10,618Total current assets
    
    
    392,924
    
    
    
    418,499Property, equipment and leasehold improvements  net
    
    
    64,036
    
    
    
    61,947Debt issuance costs  net
    
    
    6,308
    
    
    
    6,667Goodwill
    
    
    358,442
    
    
    
    359,035Other intangible assets  net
    
    
    202,254
    
    
    
    207,194Other assets
    
    
    5,680
    
    
    
    5,240$
    1,029,644
    
    
    $
    1,058,582LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    71,991
    
    
    $
    80,467Collaboration profit share payable
    
    
    40,556
    
    
    
    49,869Unearned revenue  current
    
    
    10,569
    
    
    
    10,737Other liabilities
    
    
    292
    
    
    
    1,255Total current liabilities
    
    
    123,408
    
    
    
    142,328Other liabilities:Rent obligations and deferred rent expenses
    
    
    6,515
    
    
    
    6,337Unearned revenue  long-term
    
    
    38,188
    
    
    
    39,051Convertible senior subordinated notes
    
    
    265,000
    
    
    
    265,000Contingent value rights
    
    
    22,047
    
    
    
    22,047Accrued postretirement benefit cost
    
    
    5,746
    
    
    
    5,353Total liabilities
    
    
    460,904
    
    
    
    480,116Stockholders equity:Preferred stock, $.01 par value; 5,000 shares authorized; no shares issued at
March 31, 2006 and December 31, 2005, respectively
    
    
    
    
    
    
    Common stock, $.01 par value; 200,000 shares authorized, 58,784 and 58,728 shares issued
at March 31, 2006 and December 31, 2005, respectively
    
    
    588
    
    
    
    587Additional paid-in capital
    
    
    1,592,970
    
    
    
    1,592,155Deferred compensation
    
    
    
    
    
    
    (7,341
    )Accumulated deficit
    
    
    (989,324
    )
    
    
    (971,469
    )Accumulated other comprehensive income
    
    
    1,727
    
    
    
    1,755605,961
    
    
    
    615,687Less: treasury stock, at cost; 1,943 shares at March 31, 2006 and December 31, 2005
    
    
    (37,221
    )
    
    
    (37,221
    )Total stockholders equity
    
    
    568,740
    
    
    
    578,466Commitments and contingencies$
    1,029,644
    
    
    $
    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)
 Quarter
Ended March 31,2006
    
    
    2005Revenues:Net revenue from unconsolidated joint business
    
    $
    35,655
    
    
    $
    11,721Product sales
    
    
    50,894
    
    
    
    348Royalties on product sales
    
    
    8,033
    
    
    
    83Sales commissions
    
    
    7,138
    
    
    
    6,629License, milestone and other revenues
    
    
    8,777
    
    
    
    286Collaborative agreement revenues
    
    
    5,945
    
    
    
    116,442
    
    
    
    19,067Expenses:Cost of goods sold
    
    
    23,556
    
    
    
    423Collaborative profit share
    
    
    20,454
    
    
    
    Research and development
    
    
    43,681
    
    
    
    26,949Selling, general and administrative
    
    
    40,313
    
    
    
    23,031Amortization of intangibles
    
    
    4,974
    
    
    
    3,803132,978
    
    
    
    54,206Loss from operations
    
    
    (16,536
    )
    
    
    (35,139
    )Other income (expense):Investment income  net
    
    
    1,484
    
    
    
    4,037Interest expense
    
    
    (1,851
    )
    
    
    (1,219
    )Other (expense) income  net
    
    
    (952
    )
    
    
    (183
    )Net loss
    
    $
    (17,855
    )
    
    $
    (32,504
    )Basic and diluted net loss per common share
    
    $
    (0.31
    )
    
    $
    (0.64
    )Weighted average shares of common stock outstanding
    
    
    56,815
    
    
    
    51,096
  2




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 (In thousands)
 Quarter
Ended March 31,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (17,855
    )
    
    $
    (32,504
    )Adjustments to reconcile net loss to net cash
used in operating activities:Gain on sale of investment
    
    
    
    
    
    
    (68
    )Gain on sale and disposals of equipment
    
    
    
    
    
    
    (21
    )Depreciation and amortization
    
    
    9,128
    
    
    
    6,851Non-cash compensation charges
    
    
    3,854
    
    
    
    117Other non-cash charges-net
    
    
    131
    
    
    
    (98
    )Impact of inventory step-up related to inventory sold
    
    
    11,161
    
    
    
    Changes in assets and liabilities:Receivables
    
    
    (526
    )
    
    
    (10,909
    )Inventory
    
    
    37
    
    
    
    (3,918
    )Prepaid expenses and other current assets
    
    
    (3,107
    )
    
    
    (1,321
    )Other assets
    
    
    421
    
    
    
    78Accounts payable and accrued expenses
    
    
    (13,760
    )
    
    
    (4,273
    )Unearned revenue
    
    
    (1,031
    )
    
    
    1,792Accrued postretirement benefit cost
    
    
    393
    
    
    
    288Net cash used in operating activities
    
    
    (11,154
    )
    
    
    (43,986
    )Cash flows from investing activities:Purchases of investments (restricted and unrestricted)
    
    
    (50,032
    )
    
    
    (274,779
    )Maturities and sales of investments (restricted and unrestricted)
    
    
    2,437
    
    
    
    93,190Net additions to property, equipment and leasehold improvements
    
    
    (5,722
    )
    
    
    (1,855
    )Proceeds from sale of assets
    
    
    786
    
    
    
    Additions to compound library assets
    
    
    
    
    
    
    (241
    )Investments in privately-owned companies
    
    
    
    
    
    
    (230
    )Net cash provided by (used in) investing activities
    
    
    (52,531
    )
    
    
    (183,915
    )Cash flows from financing activities:Proceeds from the exercise of stock options, stock warrants, employee purchase plan and other
    
    
    809
    
    
    
    4,727Other
    
    
    (102
    )
    
    
    (116
    )Payments on capital leases obligation
    
    
    (348
    )
    
    
    (4
    )Net cash provided by financing activities
    
    
    359
    
    
    
    4,607Net decrease in cash and cash equivalents
    
    
    (63,326
    )
    
    
    (223,294
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (108
    )
    
    
    (257
    )Cash and cash equivalents at beginning of period
    
    
    164,084
    
    
    
    329,556Cash and cash equivalents at end of period
    
    $
    100,650
    
    
    $
    106,005Non-cash activities:Issuance of common stock to directors
    
    $
    128
    
    
    $
    514Purchase accounting adjustments
    
    $
    614
    
    
    $
    Cash paid for interest
    
    $
    2,438
    
    
    $
    2,438
  3




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




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
   Quarter EndedMarch 31,2006
    
    2005Co-promotion profit and reimbursement of sales
force and marketing related costs
    
    $
    32,874
    
    
    $
    9,799Reimbursement of manufacturing costs
    
    
    2,781
    
    
    
    1,922Net revenue from unconsolidated joint business
    
    $
    35,655
    
    
    $
    11,721
 Product Sales
   5




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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
  6




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
   Collaborative Program Revenues
   Accounting for Stock-Based Compensation
  7




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
     CompensationStock-based
    
    expense related tocompensation as a
    
    restricted stock
    
    Total stock- basedresult of the
    
    and restricted
    
    compensationadoption of SFAS 123(R)
    
    options
    
    expenseCost of sales
    
    $
    96
    
    
    $
    141
    
    
    $
    237Research and development expenses
    
    
    739
    
    
    
    500
    
    
    
    1,239Selling, general and administrative expenses
    
    
    2,212
    
    
    
    1,285
    
    
    
    3,497Stock-based compensation expense
    
    $
    3,047
    
    
    $
    1,926
    
    
    $
    4,973
    8




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
    Quarter EndedMarch 31, 2005Net loss, as reported
    
    $
    (32,504
    )Add: stock based compensation included in net loss
    
    
    117Compensation cost determined under fair value method
    
    
    (5,848
    )Pro forma net loss
    
    $
    (38,235
    )Basic and diluted net loss per share:As reported
    
    $
    (0.64
    )Pro forma
    
    $
    (0.75
    )
    9




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 Quarter EndedMarch 31,2006
    
    2005Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility.
    
    
    61.28
    %
    
    
    79.87
    %Risk-free interest rate
    
    
    4.49
    %
    
    
    3.93
    %Expected term (years)
    
    
    4.32
    
    
    
    3.00
  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
    
    
    93
    
    
    $
    29.15Exercised at fair value
    
    
    34
    
    
    $
    15.58Expired
    
    
    
    
    
    $
    Forfeited
    
    
    138
    
    
    $
    32.11Outstanding at March 31, 2006
    
    
    6,842
    
    
    $
    35.08
    
    
    $
    59.9
    
    
    
    6.66Exercisable at March 31, 2006
    
    
    4,465
    
    
    $
    38.48
    
    
    $
    52.0
    
    
    
    6.52
 (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.
    10




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
  Restricted Assets
   Inventory
  11




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
    March 31,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    5,333
    
    
    $
    5,905Work in process
    
    
    34,812
    
    
    
    44,961Finished goods on hand, net
    
    
    17,147
    
    
    
    19,533Inventory subject to return
    
    
    5,650
    
    
    
    5,316Total inventory
    
    $
    62,942
    
    
    $
    75,715
  12




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 Comprehensive Income (Loss)
  Quarter EndedMarch 31,2006
    
    
    2005Net loss
    
    $
    (17,855
    )
    
    $
    (32,504
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    66
    
    
    
    (506
    )Unrealized holding losses arising
during period
    
    
    (94
    )
    
    
    (1,706
    )Less: Reclassification adjustment for
gains realized in net loss
    
    
    
    
    
    
    (68
    )(28
    )
    
    
    (2,280
    )Total comprehensive
    
    $
    (17,883
    )
    
    $
    (34,784
    )
  March 31,
    
    
    December 31,2006
    
    
    2005Cumulative foreign currency translation adjustment
    
    $
    1,894
    
    
    $
    1,828Unrealized loss on available-for-sale securities
    
    
    (167
    )
    
    
    (73
    )Accumulated other comprehensive income
    
    $
    1,727
    
    
    $
    1,755
 Net Loss per Common Share
   Quarter EndedMarch 31,2006
    
    
    2005Common share equivalents
    
    
    7,374
    
    
    
    4,612Contingent shares
    
    
    1,585
    
    
    
    1,585
 13




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 Intangible Assets
  March 31, 2006
    
    
    December 31, 2005Carrying
    
    
    Accumulated
    
    
    Net Book
    
    
    Carrying
    
    
    Accumulated
    
    
    Net BookAmount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    ValueNovantrone
    
    $
    46,009
    
    
    $
    (42,019
    )
    
    $
    3,990
    
    
    $
    46,009
    
    
    $
    (41,657
    )
    
    $
    4,352Macugen technology
    
    
    201,400
    
    
    
    (6,789
    )
    
    
    194,611
    
    
    
    201,400
    
    
    
    (2,263
    )
    
    
    199,137Acquired patent estate
    
    
    674
    
    
    
    (110
    )
    
    
    564
    
    
    
    668
    
    
    
    (65
    )
    
    
    603Acquired licenses issued
to other companies
    
    
    3,486
    
    
    
    (397
    )
    
    
    3,089
    
    
    
    3,458
    
    
    
    (356
    )
    
    
    3,102Total
    
    $
    251,569
    
    
    $
    (49,315
    )
    
    $
    202,254
    
    
    $
    251,535
    
    
    $
    (44,341
    )
    
    $
    207,194
  Consolidation of Facilities
     14




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
  Quarter
Ended
March 31, 2006Opening liability
    
    $
    10,261Accrual for severance, relocation and retention bonuses
    
    
    2,650Accretion expense
    
    
    151Cash paid for severance
    
    
    (3,982
    )Cash paid for rent
    
    
    (151
    )Reversals
    
    
    (268
    )Ending liability
    
    $
    8,661
    Quarter Ended March 31,2006
    
    2005Opening liability .
    
    $
    4,211
    
    
    $
    1,380Provision for rental obligations
    
    
    
    
    
    
    761Provision for facility refurbishment
    
    
    
    
    
    
    1,019Cash paid for severance
    
    
    
    
    
    
    (1,173
    )Cash paid for rent
    
    
    (403
    )
    
    
    Other
    
    
    37
    
    
    
    (106
    )Ending liability
    
    $
    3,845
    
    
    $
    1,881
   15




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
  Quarter Ended March 31,2006
    
    2005Opening liability
    
    $
    1,160
    
    
    $
    1,678Cash paid for rent less sublease income received
    
    
    (75
    )
    
    
    (130
    )Ending liability
    
    $
    1,085
    
    
    $
    1,548
     Quarter Ended March 31,2006
    
    
    2005Service costs for benefits earned during the period
    
    $
    264
    
    
    $
    210Interest costs on accumulated post-retirement benefits
obligation
    
    
    102
    
    
    
    88Amortization of initial benefits attributed to past services
    
    
    1
    
    
    
    1Amortization of loss
    
    
    17
    
    
    
    16Net post-retirement benefit cost
    
    $
    384
    
    
    $
    315
 Litigation
  16




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
  Acquisition of Eyetech
    Cash and Investments
    
    $
    271,934Accounts receivable
    
    
    92,165Inventory
    
    
    63,086Fixed assets
    
    
    15,410Prepaid expenses and other assets
    
    
    7,928Amortizable intangibles
    
    
    201,400Goodwill
    
    
    319,391In-process research and development (R&D)
    
    
    60,900Total assets and in-process R&D acquired
    
    
    1,032,214Less liabilities assumed
    
    
    122,821Purchase price
    
    $
    909,393
 17




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 THREE
MONTHS ENDED MARCH 31, 2006 AND 2005
 Overview
     18




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Quarterly Update
       Critical Accounting Policies
  19




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Net revenues from unconsolidated joint business
  License fees and milestones
  20




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Product Sales
   Collaborative revenue
   Sales commissions
  21




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22




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23




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Revenues
 Quarter Ended March 31,(in thousands)2006
    
    
    2005
    
    
    $ ChangeNet revenue from unconsolidated joint business
    
    $
    35,655
    
    
    $
    11,721
    
    
    $
    23,934Product sales
    
    
    50,894
    
    
    
    348
    
    
    
    50,546Royalties on product sales
    
    
    8,033
    
    
    
    83
    
    
    
    7,950Sales commissions
    
    
    7,138
    
    
    
    6,629
    
    
    
    509License, milestone and other revenues
    
    
    8,777
    
    
    
    286
    
    
    
    8,491Collaborative agreement revenues
    
    
    5,945
    
    
    
    
    
    
    
    5,945Total revenues.
    
    $
    116,442
    
    
    $
    19,067
    
    
    $
    97,375
 Net Revenue from Unconsolidated Joint Business
  Product Sales
  Royalties on Product Sales
  24




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Sales Commissions
  License, Milestone and Other Revenues
   Collaborative Program Revenues
  Expenses
 Quarter Ended March 31,(in thousands)2006
    
    
    2005
    
    
    $ ChangeCost of goods sold
    
    $
    23,556
    
    
    $
    423
    
    
    $
    23,133Collaborative profit share
    
    
    20,454
    
    
    
    
    
    
    
    20,454Research and development
    
    
    43,681
    
    
    
    26,949
    
    
    
    16,732Selling, general and administrative
    
    
    40,313
    
    
    
    23,031
    
    
    
    17,282Amortization of intangibles
    
    
    4,974
    
    
    
    3,803
    
    
    
    1,171$
    132,978
    
    
    $
    54,206
    
    
    $
    78,772
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##### Table of Contents



Cost of Goods Sold
    Collaborative Profit Share
  Research and Development
  26




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Selling, General and Administrative
  27




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##### Table of Contents



Amortization of Intangibles
  Other Income and Expense
 Quarter Ended March 31,(in thousands)2006
    
    
    2005
    
    
    $ ChangeInvestment income-net.
    
    $
    1,484
    
    
    $
    4,037
    
    
    $
    (2,553
    )Interest expense
    
    
    (1,851
    )
    
    
    (1,219
    )
    
    
    (632
    )Other income (expenses)-net.
    
    
    (952
    )
    
    
    (183
    )
    
    
    (769
    )Total other income (expenses)
    
    $
    (1,319
    )
    
    $
    2,635
    
    
    $
    (3,954
    )
   Liquidity and Capital
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Commitments and Contingencies
  Remainderof
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2011 &2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    TotalContractual Obligations:Senior convertible debt(a)
    
    $
    4,738
    
    
    $
    7,175
    
    
    $
    7,175
    
    
    $
    7,175
    
    
    $
    7,175
    
    
    $
    362,875
    
    
    $
    396,313Operating leases
    
    
    7,424
    
    
    
    11,134
    
    
    
    11,076
    
    
    
    10,904
    
    
    
    10,715
    
    
    
    99,495
    
    
    
    150,748Purchase obligations(b)
    
    
    27,627
    
    
    
    26,309
    
    
    
    28,309
    
    
    
    13,809
    
    
    
    6,936
    
    
    
    20,600
    
    
    
    123,590Obligations related to exit
activities(c)
    
    
    4,123
    
    
    
    1,180
    
    
    
    1,180
    
    
    
    2,278
    
    
    
    
    
    
    
    782
    
    
    
    9,543Total contractual obligations
    
    $
    43,912
    
    
    $
    45,798
    
    
    $
    47,740
    
    
    $
    34,166
    
    
    $
    24,826
    
    
    $
    483,752
    
    
    $
    680,194
 (a)
    
    Includes interest payments at a rate of 3.25% per annum relating to the $150.0
million principal amount of the 2023 Notes and at a rate of 2% per annum relating to
the $115.0 million principal amount of 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.
 Other significant commitments and contingencies include the following:
 
    
    We are committed to share equally with Genentech and Roche approximately $600
million combined amount of certain global development costs for Tarceva, which
represents an increase of approximately $300 million over the originally committed $300
million in 2001. The additional $300 million was agreed to by the three parties during
2005. These costs will be shared by the parties pursuant to the terms of our agreement
with our partners. As of March 31, 2006, the parties have spent approximately 57% of
our commitment under the agreement. 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
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##### Table of Contents



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 have accrued postretirement benefit
costs of $5.7 million at March 31, 2006.
    
    In connection with the acquisition of Cell Pathways, we provided additional
consideration in the form of five-year contingent value rights through which each share
of Cell Pathways common stock will be eligible for an additional 0.04 share of our
common stock in the event of a filing of a new drug application by June 12, 2008 for
either of the two clinical candidates acquired from Cell Pathways, OSI-461 or Aptosyn.
We have ceased our development efforts of these two clinical candidates and we are
attempting to outlicense them.
    
    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.
 Accounting Pronouncements
  30




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Forward Looking Statements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risks
     31




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Item 4. Controls and Procedures
  Evaluation of Our Disclosure Controls and Procedures
 CEO/CFO Conclusions about the Effectiveness of the Disclosure Controls and Procedures
 Changes in Internal Control Over Financial Reporting.
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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 
 
 Item 1A. Risk Factors
  
 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
  33




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##### Table of Contents



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 10-K for the fiscal year ended September 30, 2001 (file no. 000-15190), and
incorporated herein by reference.10.1*
    
    Scientific Advisory Board and Consulting Agreement, dated February 10, 2006,
between Prosidion Limited and Dr. Daryl Granner, filed by the Company as an exhibit to
the Form 8-K filed on February 13, 2006, 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)
 
 *
    
    Indicates a management contract or compensatory plan, contract or arrangement in which a
director or executive officers participate.
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##### Table of Contents



SIGNATURES
  OSI PHARMACEUTICALS, INC.(Registrant)Date: May 10, 2006
    
    /s/ Colin Goddard, Ph.D.Colin Goddard, Ph.D.Chief Executive OfficerDate: May 10, 2006
    
    /s/ Michael G. AtiehMichael G. AtiehExecutive Vice President and
Chief Financial Officer(Principal Financial Officer)


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##### Table of Contents



INDEX TO EXHIBITS
 Exhibit3.1
    
    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 10-K for the fiscal year ended September 30, 2001 (file no. 000-15190), and
incorporated herein by reference.10.1*
    
    Scientific Advisory Board and Consulting Agreement, dated February 10, 2006,
between Prosidion Limited and Dr. Daryl Granner, filed by the Company as an exhibit to
the Form 8-K filed on February 13, 2006, 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)
 
 *
    
    Indicates a management contract or compensatory plan, contract or arrangement in which a
director or executive officers participate.


36