##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)41 Pinelawn Road, Melville, New York
    
    11747(Address of principal executive offices)
    
    (Zip Code)
  (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report.)
 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  June 30, 2006 (Unaudited) and December 31, 2005
    
    
    1Consolidated Statements of Operations (Unaudited)  Three Months Ended June 30, 2006 and June 30, 2005
    
    
    2Consolidated Statements of Operations (Unaudited)  Six Months Ended June 30, 2006 and June 30, 2005
    
    
    3Consolidated Statements of Cash Flows (Unaudited)  Six Months Ended June 30, 2006 and June 30, 2005
    
    
    4Notes to Consolidated Financial Statements (Unaudited)
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risks
    
    
    36Item 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
    
    
    43Item 5. Other Information
    
    
    43Item 6. Exhibits
    
    
    43SIGNATURES
    
    
    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)
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    125,836
    
    
    $
    164,084Investment securities
    
    
    69,923
    
    
    
    5,061Restricted investment securities
    
    
    8,056
    
    
    
    10,461Accounts receivables  net
    
    
    130,571
    
    
    
    152,482Inventory  net
    
    
    62,505
    
    
    
    75,715Interest receivable
    
    
    540
    
    
    
    78Prepaid expenses and other current assets
    
    
    9,148
    
    
    
    10,618Total current assets
    
    
    406,579
    
    
    
    418,499Property, equipment and leasehold improvements  net
    
    
    62,668
    
    
    
    61,947Debt issuance costs  net
    
    
    5,842
    
    
    
    6,667Goodwill
    
    
    39,213
    
    
    
    359,035Other intangible assets  net
    
    
    197,511
    
    
    
    207,194Other assets
    
    
    9,524
    
    
    
    5,240$
    721,337
    
    
    $
    1,058,582LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    70,496
    
    
    $
    80,467Collaboration profit share payable
    
    
    32,761
    
    
    
    49,869Unearned revenue  current
    
    
    15,335
    
    
    
    10,737Other liabilities
    
    
    163
    
    
    
    1,255Total current liabilities
    
    
    118,755
    
    
    
    142,328Other liabilities:Rent obligations and deferred rent expenses
    
    
    5,625
    
    
    
    6,337Unearned revenue  long-term
    
    
    69,464
    
    
    
    39,051Convertible senior subordinated notes
    
    
    265,000
    
    
    
    265,000Contingent value rights
    
    
    
    
    
    
    22,047Accrued postretirement benefit cost
    
    
    6,054
    
    
    
    5,353Total liabilities
    
    
    464,898
    
    
    
    480,116Stockholders equity:Preferred stock, $.01 par value; 5,000 shares authorized; no shares issued at
June 30, 2006 and December 31, 2005, respectively
    
    
    
    
    
    
    Common stock, $.01 par value; 200,000 shares authorized, 58,942 and 58,728 shares issued
at June 30, 2006 and December 31, 2005, respectively
    
    
    589
    
    
    
    587Additional paid-in capital
    
    
    1,599,739
    
    
    
    1,592,155Deferred compensation
    
    
    
    
    
    
    (7,341
    )Accumulated deficit
    
    
    (1,309,253
    )
    
    
    (971,469
    )Accumulated other comprehensive income
    
    
    2,585
    
    
    
    1,755293,660
    
    
    
    615,687Less: treasury stock, at cost; 1,943 shares at June 30, 2006 and December 31, 2005
    
    
    (37,221
    )
    
    
    (37,221
    )Total stockholders equity
    
    
    256,439
    
    
    
    578,466Commitments and contingencies$
    721,337
    
    
    $
    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 June 30,2006
    
    
    2005Revenues:Net revenue from unconsolidated joint business
    
    $
    39,211
    
    
    $
    21,707Product sales
    
    
    37,000
    
    
    
    228Royalties on product sales
    
    
    10,991
    
    
    
    416Sales commissions
    
    
    2,281
    
    
    
    7,339License, milestone and other revenues
    
    
    5,364
    
    
    
    4,939Collaborative agreement revenues
    
    
    7,128
    
    
    
    101,975
    
    
    
    34,629Expenses:Cost of goods sold
    
    
    15,667
    
    
    
    1,749Collaborative profit share
    
    
    15,729
    
    
    
    Research and development
    
    
    46,304
    
    
    
    30,360Acquired in-process R&D
    
    
    
    
    
    
    3,542Selling, general and administrative
    
    
    41,022
    
    
    
    21,371Goodwill impairment
    
    
    319,391
    
    
    
    Amortization of intangibles
    
    
    4,977
    
    
    
    3,802443,090
    
    
    
    60,824Loss from operations
    
    
    (341,115
    )
    
    
    (26,195
    )Other income (expense):Investment income  net
    
    
    1,915
    
    
    
    4,133Interest expense
    
    
    (1,915
    )
    
    
    (1,219
    )Other (expense) income  net
    
    
    (860
    )
    
    
    (1,257
    )Net loss before extraordinary item
    
    
    (341,975
    )
    
    
    (24,538
    )Extraordinary gain net of tax
    
    
    22,046
    
    
    
    Net income (loss)
    
    $
    (319,929
    )
    
    $
    (24,538
    )Basic and diluted net loss per common share:Loss before extraordinary item
    
    $
    (6.00
    )
    
    $
    (0.48
    )Extraordinary gain
    
    
    0.39
    
    
    
    Net income (loss)
    
    $
    (5.62
    )
    
    $
    (0.48
    )Weighted average shares of common stock outstanding
    
    
    56,962
    
    
    
    51,313
  2




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
(In thousands except per share data)
 Six Months Ended June 30,2006
    
    
    2005Revenues:Net revenue from unconsolidated joint business
    
    $
    74,866
    
    
    $
    33,428Product sales
    
    
    87,894
    
    
    
    576Royalties on product sales
    
    
    19,024
    
    
    
    499Sales commissions
    
    
    9,419
    
    
    
    13,968License, milestone and other revenues
    
    
    14,141
    
    
    
    5,225Collaborative agreement revenues
    
    
    13,073
    
    
    
    218,417
    
    
    
    53,696Expenses:Cost of goods sold
    
    
    39,223
    
    
    
    2,172Collaborative profit share
    
    
    36,183
    
    
    
    Research and development
    
    
    89,985
    
    
    
    57,309Acquired in-process R&D
    
    
    
    
    
    
    3,542Selling, general and administrative
    
    
    81,335
    
    
    
    44,402Goodwill impairment
    
    
    319,391
    
    
    
    Amortization of intangibles
    
    
    9,951
    
    
    
    7,605576,068
    
    
    
    115,030Loss from operations
    
    
    (357,651
    )
    
    
    (61,334
    )Other income (expense):Investment income  net
    
    
    3,399
    
    
    
    8,170Interest expense
    
    
    (3,766
    )
    
    
    (2,438
    )Other (expense) income  net
    
    
    (1,812
    )
    
    
    (1,440
    )Net loss
before extraordinary item
    
    
    (359,830
    )
    
    
    (57,042
    )Extraordinary gain net of tax
    
    
    22,046
    
    
    
    Net loss
    
    $
    (337,784
    )
    
    $
    (57,042
    )Basic and diluted net loss per common share:Loss before extraordinary item
    
    $
    (6.33
    )
    
    $
    (1.11
    )Extraordinary gain
    
    
    0.39
    
    
    
    Net loss
    
    $
    (5.94
    )
    
    $
    (1.11
    )Weighted average shares of common stock outstanding
    
    
    56,889
    
    
    
    51,205
  3




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
(In thousands)
 Six Months Ended June 30,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (337,784
    )
    
    $
    (57,042
    )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
    
    
    
    
    
    
    (68
    )Gain on sale and disposals of equipment
    
    
    4
    
    
    
    655Depreciation and amortization
    
    
    17,576
    
    
    
    13,364Acquired in-process R&D
    
    
    
    
    
    
    3,542Non-cash compensation charges
    
    
    9,621
    
    
    
    1,095Other non-cash charges-net
    
    
    336
    
    
    
    Impact of inventory step-up related to inventory sold
    
    
    17,252
    
    
    
    Goodwill impairment
    
    
    319,391
    
    
    
    Changes in assets and liabilities:Receivables
    
    
    21,775
    
    
    
    (24,339
    )Inventory
    
    
    (5,617
    )
    
    
    (9,008
    )Prepaid expenses and other current assets
    
    
    1,554
    
    
    
    (1,972
    )Other assets
    
    
    (4,155
    )
    
    
    120Accounts payable and accrued expenses
    
    
    (24,688
    )
    
    
    (5,245
    )Unearned revenue
    
    
    35,011
    
    
    
    4,117Accrued postretirement benefit cost
    
    
    701
    
    
    
    575Net cash provided by (used in) operating activities
    
    
    28,931
    
    
    
    (74,206
    )Cash flows from investing activities:Payments for acquisitions
    
    
    
    
    
    
    (776
    )Purchases of investments (restricted and unrestricted)
    
    
    (64,641
    )
    
    
    (303,368
    )Maturities and sales of investments (restricted and unrestricted)
    
    
    2,437
    
    
    
    188,967Net additions to property, equipment and leasehold improvements
    
    
    (6,991
    )
    
    
    (14,959
    )Proceeds from sale of assets
    
    
    786
    
    
    
    Additions to compound library assets
    
    
    (10
    )
    
    
    (377
    )Investments in privately-owned companies
    
    
    
    
    
    
    (230
    )Net cash used in investing activities
    
    
    (68,419
    )
    
    
    (130,743
    )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
    
    
    1,775
    
    
    
    7,850Other
    
    
    (102
    )
    
    
    Payments on capital leases obligation
    
    
    (478
    )
    
    
    (4
    )Net cash provided by financing activities
    
    
    1,195
    
    
    
    7,730Net decrease in cash and cash equivalents
    
    
    (38,293
    )
    
    
    (197,219
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    45
    
    
    
    (1,131
    )Cash and cash equivalents at beginning of period
    
    
    164,084
    
    
    
    329,556Cash and cash equivalents at end of period
    
    $
    125,836
    
    
    $
    131,206Non-cash activities:Issuance of common stock to employees
    
    $
    
    
    
    $
    614Issuance of common stock to directors
    
    $
    
    
    
    $
    527Issuance of common stock in connection with acquisition
    
    $
    
    
    
    $
    4,158Purchase accounting adjustments
    
    $
    614
    
    
    $
    Cash paid for interest
    
    $
    3,588
    
    
    $
    2,438Acceleration of options
    
    $
    
    
    
    $
    816
  4




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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
  5




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
 Notes to Consolidated Financial Statements
(Unaudited)
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Co-promotion profit and reimbursement of
sales force and marketing related costs
    
    $
    36,478
    
    
    $
    19,244
    
    
    $
    69,352
    
    
    $
    29,043Reimbursement of manufacturing costs
    
    
    2,733
    
    
    
    2,463
    
    
    
    5,514
    
    
    
    4,385Net revenue from unconsolidated joint business
    
    $
    39,211
    
    
    $
    21,707
    
    
    $
    74,866
    
    
    $
    33,428
 Product Sales
    6




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##### Table of Contents



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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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)
      CompensationStock-based
    
    
    expense relatedcompensation as a
    
    
    to restricted stock
    
    
    Total stock-basedresult of the adoption
    
    
    and restricted
    
    
    compensationof SFAS 123(R)
    
    
    options
    
    
    expenseThree months ended June 30, 2006Cost of sales
    
    $
    51
    
    
    $
    120
    
    
    $
    171Research and development expenses
    
    
    853
    
    
    
    386
    
    
    
    1,239Selling, general and administrative expenses
    
    
    3,830
    
    
    
    1,353
    
    
    
    5,183Stock-based compensation expense
    
    $
    4,734
    
    
    $
    1,859
    
    
    $
    6,593Six months ended June 30, 2006Cost of sales
    
    $
    147
    
    
    $
    261
    
    
    $
    408Research and development expenses
    
    
    1,591
    
    
    
    886
    
    
    
    2,477Selling, general and administrative expenses
    
    
    6,042
    
    
    
    2,638
    
    
    
    8,680Stock-based compensation expense
    
    $
    7,780
    
    
    $
    3,785
    
    
    $
    11,565
  9




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
     Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2005Net loss
    
    $
    (24,538
    )
    
    $
    (57,042
    )Add: stock-based compensation included in net loss
    
    
    978
    
    
    
    1,095Compensation cost determined under fair value method
    
    
    (6,628
    )
    
    
    (12,476
    )Pro forma net loss
    
    $
    (30,188
    )
    
    $
    (68,423
    )Basic and diluted net loss per common share:Net loss  as reported
    
    $
    (0.48
    )
    
    $
    (1.11
    )Net loss  pro forma
    
    $
    (0.59
    )
    
    $
    (1.34
    )
   10




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Expected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Expected volatility
    
    
    56.36
    %
    
    
    48.76
    %
    
    
    56.94
    %
    
    
    56.98
    %Risk-free interest rate
    
    
    4.49
    %
    
    
    3.92
    %
    
    
    4.49
    %
    
    
    3.92
    %Expected term (years)
    
    
    4.32
    
    
    
    4.44
    
    
    
    4.32
    
    
    
    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
    
    
    93
    
    
    $
    29.15Exercised at fair value
    
    
    34
    
    
    $
    15.58Expired
    
    
    
    
    
    $
    Forfeited
    
    
    138
    
    
    $
    32.11Outstanding at March 31, 2006
    
    
    6,842
    
    
    $
    35.08Granted at fair value
    
    
    352
    
    
    $
    29.47Exercised at fair value
    
    
    57
    
    
    $
    14.55Expired
    
    
    77
    
    
    $
    45.67Forfeited
    
    
    95
    
    
    $
    23.01Outstanding at June 30, 2006
    
    
    6,965
    
    
    $
    35.01
    
    
    $
    243.9
    
    
    
    6.4Exercisable at June 30, 2006
    
    
    4,492
    
    
    $
    38.85
    
    
    $
    174.5
    
    
    
    6.3
 
 (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 Assets
   Inventory
  12




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
     June 30,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    5,758
    
    
    $
    5,905Work in process
    
    
    33,804
    
    
    
    44,961Finished goods on hand, net
    
    
    15,823
    
    
    
    19,533Inventory subject to return
    
    
    7,120
    
    
    
    5,316Total inventory
    
    $
    62,505
    
    
    $
    75,715
  13




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 Comprehensive Income (Loss)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    (319,929
    )
    
    $
    (24,538
    )
    
    $
    (337,784
    )
    
    $
    (57,042
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    933
    
    
    
    (1,419
    )
    
    
    999
    
    
    
    (1,925
    )Unrealized holding losses arising
during period
    
    
    (75
    )
    
    
    938
    
    
    
    (169
    )
    
    
    (768
    )Less: Reclassification adjustment for
gains realized in net loss
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    (62
    )858
    
    
    
    (475
    )
    
    
    830
    
    
    
    (2,755
    )Total comprehensive income (loss)
    
    $
    (319,071
    )
    
    $
    (25,013
    )
    
    $
    (336,954
    )
    
    $
    (59,797
    )
  June 30,
    
    
    December 31,2006
    
    
    2005Cumulative foreign currency translation adjustment
    
    $
    2,827
    
    
    $
    1,828Unrealized loss on available-for-sale securities
    
    
    (242
    )
    
    
    (73
    )Accumulated other comprehensive income
    
    $
    2,585
    
    
    $
    1,755
 Net Loss per Common Share
   Three Months
    
    Six MonthsEnded
    
    EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Common share equivalent
    
    
    7,369
    
    
    
    4,148
    
    
    
    7,373
    
    
    
    4,380Contingent shares
    
    
    1,585
    
    
    
    1,585
    
    
    
    1,585
    
    
    
    1,585
 14




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 Intangible Assets
  June 30, 2006
    
    
    December 31, 2005Carrying
    
    
    Accumulated
    
    
    Net Book
    
    
    Carrying
    
    
    Accumulated
    
    
    Net BookAmount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    ValueNovantrone
    
    $
    46,009
    
    
    $
    (42,382
    )
    
    $
    3,627
    
    
    $
    46,009
    
    
    $
    (41,657
    )
    
    $
    4,352Macugen
technology
    
    
    201,400
    
    
    
    (11,316
    )
    
    
    190,084
    
    
    
    201,400
    
    
    
    (2,263
    )
    
    
    199,137Acquired patent
estate
    
    
    717
    
    
    
    (140
    )
    
    
    577
    
    
    
    668
    
    
    
    (65
    )
    
    
    603Acquired licenses
issued to other
companies
    
    
    3,710
    
    
    
    (487
    )
    
    
    3,223
    
    
    
    3,458
    
    
    
    (356
    )
    
    
    3,102Total
    
    $
    251,836
    
    
    $
    (54,325
    )
    
    $
    197,511
    
    
    $
    251,535
    
    
    $
    (44,341
    )
    
    $
    207,194
  Consolidation of Facilities
   15




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 Three MonthsEndedJune 30, 2006Opening liability
    
    $
    2,734Accrual for rental payments
    
    
    240Accretion expense
    
    
    58Cash paid for rent and other
    
    
    (853
    )Ending liability
    
    $
    2,179
   Three Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2006Opening liability
    
    $
    8,661
    
    
    $
    10,261Accrual for severance, relocation and retention bonus
    
    
    1,598
    
    
    
    4,248Accretion expense
    
    
    116
    
    
    
    267Cash paid for severance
    
    
    (601
    )
    
    
    (4,583
    )Cash paid for rent
    
    
    (1,171
    )
    
    
    (1,322
    )Reversals
    
    
    
    
    
    
    (268
    )Ending liability
    
    $
    8,603
    
    
    $
    8,603
   16




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Opening liability
    
    $
    3,844
    
    
    $
    1,881
    
    
    $
    4,210
    
    
    $
    1,380Provision for rental adjustments
    
    
    
    
    
    
    
    
    
    
    (403
    )
    
    
    761Provision for facility refurbishment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,019Cash paid for severance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,173
    )Cash paid for rent
    
    
    
    
    
    
    (113
    )
    
    
    
    
    
    
    (194
    )Other
    
    
    246
    
    
    
    (94
    )
    
    
    283
    
    
    
    (119
    )Ending liability
    
    $
    4,090
    
    
    $
    1,674
    
    
    $
    4,090
    
    
    $
    1,674
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Opening liability
    
    $
    1,085
    
    
    $
    1,547
    
    
    $
    1,160
    
    
    $
    1,678Cash paid for rent less sublease income
received
    
    
    (157
    )
    
    
    (127
    )
    
    
    (232
    )
    
    
    (258
    )Ending liability
    
    $
    928
    
    
    $
    1,420
    
    
    $
    928
    
    
    $
    1,420
    17




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Service costs for benefits earned during the period
    
    $
    264
    
    
    $
    210
    
    
    $
    527
    
    
    $
    420Interest costs on accumulated post-retirement benefits
obligation
    
    
    102
    
    
    
    88
    
    
    
    205
    
    
    
    176Amortization of initial benefits attributed to past services
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    2Amortization of loss
    
    
    17
    
    
    
    16
    
    
    
    33
    
    
    
    32Net post-retirement benefit cost
    
    $
    384
    
    
    $
    315
    
    
    $
    768
    
    
    $
    630
 Litigation
  Acquisition of Eyetech and Goodwill Impairment
   18




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
   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
   19




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Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations
 THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
 Overview
     20




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##### Table of Contents



Quarterly Update and Subsequent Events
 Oncology
 ®
    
    
    On June 26, 2006, Genentech announced that it halted its Phase III trial of
Avastin in combination with chemotherapy as a first-line treatment for advanced
pancreatic cancer because it did not meet its primary endpoint of improving overall
survival.
    
    On June 6, 2006, sanofi-aventis announced that the use of Eloxatin® (oxaliplatin
injection) in combination with chemotherapy did not improve overall survival in
patients with locally advanced or metastatic pancreatic cancer.
  21




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##### Table of Contents



Eye Disease
  Ô
   
    
    On June 1, 2006, we announced interim Phase II study results which demonstrated
that intravitreal injections of Macugen maintained or improved vision in over 90
percent of patients with macular edema due to central retinal vein occlusion, or
CRVO, compared to approximately 69 percent of patients who received a placebo
injection.
    
    On April 30 to May 4, 2006, we presented results from recent clinical trials
involving Macugen. Two studies presented promising preliminary results for the
sequential use of Macugen following non-selective anti-VEGF-A therapies. Data from
a retrospective review of patient data in 90 newly diagnosed wet AMD patients
supported the potential efficacy of Macugen as a primary therapy in the treatment
of new wet AMD lesions of any angiographic subtype. We also presented preliminary
data demonstrating the potential utility of Macugen in the treatment of diabetic
retinopathy patients. Results showed that, for 10 patients with proliferative
diabetic retinopathy, all 10 eyes injected with 0.3 milligrams of Macugen
experienced a marked regression of neovascularization within the first three weeks
of treatment.
 Diabetes and Obesity
  22




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Critical Accounting Policies
     Net revenues from unconsolidated joint business
  23




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##### Table of Contents



License fees and milestones
  Product Sales
   24




---



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Collaborative revenue
   Sales commissions
       25




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26




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Revenues
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    $ Change
    
    2006
    
    2005
    
    $ ChangeNet revenue from unconsolidated joint business
    
    $
    39,211
    
    
    $
    21,707
    
    
    $
    17,504
    
    
    $
    74,866
    
    
    $
    33,428
    
    
    $
    41,438Product sales
    
    
    37,000
    
    
    
    228
    
    
    
    36,772
    
    
    
    87,894
    
    
    
    576
    
    
    
    87,318Royalties on product sales
    
    
    10,991
    
    
    
    416
    
    
    
    10,575
    
    
    
    19,024
    
    
    
    499
    
    
    
    18,525Sales commission
    
    
    2,281
    
    
    
    7,339
    
    
    
    (5,058
    )
    
    
    9,419
    
    
    
    13,968
    
    
    
    (4,549
    )License and milestone revenues and other
revenues
    
    
    5,364
    
    
    
    4,939
    
    
    
    425
    
    
    
    14,141
    
    
    
    5,225
    
    
    
    8,916Collaborative agreement revenues
    
    
    7,128
    
    
    
    
    
    
    
    7,128
    
    
    
    13,073
    
    
    
    
    
    
    
    13,073Total revenues
    
    $
    101,975
    
    
    $
    34,629
    
    
    $
    67,346
    
    
    $
    218,417
    
    
    $
    53,696
    
    
    $
    164,721
 Net Revenue from Unconsolidated Joint Business
  27




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Product Sales
   Royalties on Product Sales
  28




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##### Table of Contents



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




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Expenses
 Three Months Ended June 30,
    
    Six Months Ended June 30,2006
    
    2005
    
    $ Change
    
    2006
    
    2005
    
    $ ChangeCost of goods sold
    
    $
    15,667
    
    
    $
    1,749
    
    
    $
    13,918
    
    
    $
    39,223
    
    
    $
    2,172
    
    
    $
    37,051Collaborative profit share
    
    
    15,729
    
    
    
    
    
    
    
    15,729
    
    
    
    36,183
    
    
    
    
    
    
    
    36,183Research and development
    
    
    46,304
    
    
    
    30,360
    
    
    
    15,944
    
    
    
    89,985
    
    
    
    57,309
    
    
    
    32,676Acquired in-process research and development
    
    
    
    
    
    
    3,542
    
    
    
    (3,542
    )
    
    
    
    
    
    
    3,542
    
    
    
    (3,542
    )Selling, general and administrative
    
    
    41,022
    
    
    
    21,371
    
    
    
    19,651
    
    
    
    81,335
    
    
    
    44,402
    
    
    
    36,933Goodwill impairment
    
    
    319,391
    
    
    
    
    
    
    
    319,391
    
    
    
    319,391
    
    
    
    
    
    
    
    319,391Amortization of intangibles
    
    
    4,977
    
    
    
    3,802
    
    
    
    1,175
    
    
    
    9,951
    
    
    
    7,605
    
    
    
    2,346$
    443,090
    
    
    $
    60,824
    
    
    $
    382,266
    
    
    $
    576,068
    
    
    $
    115,030
    
    
    $
    461,038
 Cost of Goods Sold
    30




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Collaborative Profit Share
  Research and Development
    31




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##### Table of Contents



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




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Amortization of Intangibles
  Other Income and Expense
 Three Months Ended June 30,
    
    Six Months Ended June 30,2006
    
    2005
    
    $ Change
    
    2006
    
    2005
    
    $ ChangeInvestment income  net
    
    $
    1,915
    
    
    $
    4,133
    
    
    $
    (2,218
    )
    
    $
    3,399
    
    
    $
    8,170
    
    
    $
    (4,771
    )Interest expense
    
    
    (1,915
    )
    
    
    (1,219
    )
    
    
    (696
    )
    
    
    (3,766
    )
    
    
    (2,438
    )
    
    
    (1,328
    )Other expense  net
    
    
    (860
    )
    
    
    (1,257
    )
    
    
    397
    
    
    
    (1,812
    )
    
    
    (1,440
    )
    
    
    (372
    )Total other income (expense)
    
    $
    (860
    )
    
    $
    1,657
    
    
    $
    (2,517
    )
    
    $
    (2,179
    )
    
    $
    4,292
    
    
    $
    (6,471
    )
   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)
    
    $
    3,588
    
    
    $
    7,175
    
    
    $
    7,175
    
    
    $
    7,175
    
    
    $
    7,175
    
    
    $
    362,875
    
    
    $
    395,163Operating leases
    
    
    5,409
    
    
    
    11,832
    
    
    
    11,513
    
    
    
    11,157
    
    
    
    10,860
    
    
    
    100,973
    
    
    
    151,744Purchase obligations(b)
    
    
    25,072
    
    
    
    26,514
    
    
    
    28,304
    
    
    
    13,804
    
    
    
    6,935
    
    
    
    20,600
    
    
    
    121,229Obligations related to exit
activities(c)
    
    
    4,881
    
    
    
    1,434
    
    
    
    548
    
    
    
    2,424
    
    
    
    
    
    
    
    798
    
    
    
    10,085Total contractual obligations
    
    $
    38,950
    
    
    $
    46,955
    
    
    $
    47,540
    
    
    $
    34,560
    
    
    $
    24,970
    
    
    $
    485,246
    
    
    $
    678,221
 
 (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. 34




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##### Table of Contents



(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 June 30, 2006, the parties have spent approximately 60% 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 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 $6.1 million at June 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
 35




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##### Table of Contents



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
   Forward Looking Statements
  
 Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risks
  36




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##### Table of Contents



Item 4.
    
    Controls and Procedures
  Evaluation of Our Disclosure Controls and Procedures
 CEO/CFO Conclusions about the Effectiveness of the Disclosure Controls and Procedures
 37




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##### Table of Contents



Changes in Internal Control Over Financial Reporting.
 38




---



##### 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 two marketed products, Tarceva and Macugen, to generate revenues in order
to fund our operations and, to a lesser extent, potential upfront fees, milestones and royalties
from the licensing of our DP-IV patent estate.
   For Tarceva:
 
 39




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##### Table of Contents




 
 
 For Macugen:
 
 
 
 
 
  40




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##### Table of Contents



®
 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.
  ® ®
  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
  42




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##### Table of Contents



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 June 15, 2006 incorporated herein by reference.10.1*
    
    
    Employment Agreement, dated May 3, 2006, between OSI Pharmaceuticals, Inc. and
Paul G. Chaney, filed by the Company as an exhibit to the Form 8-K filed on May 3,
2006, and incorporated herein by reference.10.2*
    
    
    Employment Agreement between OSI Pharmaceuticals, Inc. and Colin Goddard,
Ph.D, as amended on June 21, 2006, filed by the Company as an exhibit to the Form 8-K
filed on June 22, 2006, and incorporated herein by reference.
 43




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##### Table of Contents



10.3*
    
    
    Form of Non-Qualified Option Agreement for U.S.-Based Executive Officers of
OSI Pharmaceuticals, Inc., filed by the Company as an exhibit to the Form 8-K filed on
June 22, 2006, and incorporated herein by reference.10.4*
    
    
    Form of Non-Qualified Option Agreement for U.K.-Based Employees of OSI
Pharmaceuticals, Inc., filed by the Company as an exhibit to the Form 8-K filed on June
22, 2006, and incorporated herein by reference.10.5*
    
    
    Form of Non-Qualified Option Agreement for Non-Management Directors of OSI
Pharmaceuticals, Inc., filed by the Company as an exhibit to the Form 8-K filed on June
22, 2006, and incorporated herein by reference.10.6*
    
    
    OSI Pharmaceuticals, Inc. Stock Incentive Plan for New Hires, filed by the
Company as an exhibit to the Form 8-K filed on July 6, 2006 and incorporated herein by
reference.10.7*
    
    
    Form of Restricted Stock Agreement for Executive Officers of OSI
Pharmaceuticals, Inc., filed by the Company as an exhibit to the Form 8-K filed on July
12, 2006, and incorporated herein by reference.10.8*
    
    
    Form of Restricted Stock Agreement for Non-Management Directors of OSI
Pharmaceuticals, Inc., filed by the Company as an exhibit to the Form 8-K filed on July
12, 2006, and incorporated herein by reference.10.9*
    
    
    Form of Restricted Stock Unit Agreement for Executive Officers of OSI
Pharmaceuticals, Inc., filed by the Company as an exhibit to the Form 8-K filed on July
12, 2006, and incorporated herein by reference.10.10*
    
    
    Form of Restricted Stock Unit Agreement for Non-Management Directors of OSI
Pharmaceuticals, Inc., filed by the Company as an exhibit to the Form 8-K filed on July
12, 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. 44




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##### Table of Contents



SIGNATURES
  OSI PHARMACEUTICALS, INC.(Registrant)Date: August 9, 2006
    
    /s/ Colin Goddard, Ph.D.

Colin Goddard, Ph.D.Chief Executive OfficerDate: August 9, 2006
    
    /s/ Michael G. Atieh

Michael G. AtiehExecutive Vice President andChief Financial Officer(Principal Financial Officer)
 45




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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 8-K filed on June 15, 2006 incorporated herein by reference.10.1*
    
    Employment Agreement, dated May 3, 2006, between OSI Pharmaceuticals, Inc. and
Paul G. Chaney, filed by the Company as an exhibit to the Form 8-K filed on May 3,
2006, and incorporated herein by reference.10.2*
    
    Employment Agreement between OSI Pharmaceuticals, Inc. and Colin Goddard,
Ph.D, as amended on June 21, 2006, filed by the Company as an exhibit to the Form 8-K
filed on June 22, 2006, and incorporated herein by reference.10.3*
    
    Form of Non-Qualified Option Agreement for U.S.-Based Executive Officers of
OSI Pharmaceuticals, Inc., filed by the Company as an exhibit to the Form 8-K filed on
June 22, 2006, and incorporated herein by reference.10.4*
    
    Form of Non-Qualified Option Agreement for U.K.-Based Employees of OSI
Pharmaceuticals, Inc., filed by the Company as an exhibit to the Form 8-K filed on June
22, 2006, and incorporated herein by reference.10.5*
    
    Form of Non-Qualified Option Agreement for Non-Management Directors of OSI
Pharmaceuticals, Inc., filed by the Company as an exhibit to the Form 8-K filed on June
22, 2006, and incorporated herein by reference.10.6*
    
    OSI Pharmaceuticals, Inc. Stock Incentive Plan for New Hires, filed by the
Company as an exhibit to the Form 8-K filed on July 6, 2006 and incorporated herein by
reference.10.7*
    
    Form of Restricted Stock Agreement for Executive Officers of OSI
Pharmaceuticals, Inc., filed by the Company as an exhibit to the Form 8-K filed on July
12, 2006, and incorporated herein by reference.10.8*
    
    Form of Restricted Stock Agreement for Non-Management Directors of OSI
Pharmaceuticals, Inc., filed by the Company as an exhibit to the Form 8-K filed on July
12, 2006, and incorporated herein by reference.10.9*
    
    Form of Restricted Stock Unit Agreement for Executive Officers of OSI
Pharmaceuticals, Inc., filed by the Company as an exhibit to the Form 8-K filed on July
12, 2006, and incorporated herein by reference.10.10*
    
    Form of Restricted Stock Unit Agreement for Non-Management Directors of OSI
Pharmaceuticals, Inc., filed by the Company as an exhibit to the Form 8-K filed on July
12, 2006, and incorporated herein by reference.
 46




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##### Table of Contents



Exhibit31.1
    
    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. 47