##### 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 June 30, 2007
 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 - June 30, 2007 (Unaudited) and December 31, 2006
    
    
    
    1CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 - Three Months Ended June 30, 2007 and June 30, 2006
    
    
    
    2CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- Six Months Ended June 30, 2007 and June 30, 2006
    
    
    
    3CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 - Six Months Ended June 30, 2007 and June 30, 2006
    
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risks
    
    
    
    37Item 4. Controls and Procedures
    
    
    
    38PART II. OTHER INFORMATION
    
    
    
    40Item 1. Legal Proceedings
    
    
    
    40Item 1A. Risk Factors
    
    
    
    40Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    
    40Item 3. Defaults Upon Senior Securities
    
    
    
    40Item 4. Submission of Matters to a Vote of Security Holders
    
    
    
    40Item 5. Other Information
    
    
    
    41Item 6. Exhibits
    
    
    
    41SIGNATURES
    
    
    
    43INDEX TO EXHIBITS
    
    
    
    44EX-10.2: NONQUALIFIED DEFERRED COMPENSATION PLANEX-10.3: FORM OF DEFERRED STOCK UNIT AGREEMENTEX-10.5: CONSULTING AGREEMENTEX-10.6: COMPENSATORY ARRANGEMENTEX-10.7: COMPENSATORY ARRANGEMENTEX-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 31,2007
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    95,027
    
    
    $
    42,028Investment securities
    
    
    149,115
    
    
    
    164,786Restricted investment securities
    
    
    9,774
    
    
    
    9,554Accounts receivables  net
    
    
    74,573
    
    
    
    80,075Inventory  net
    
    
    19,809
    
    
    
    36,860Interest receivable
    
    
    954
    
    
    
    3,674Prepaid expenses and other current assets
    
    
    6,429
    
    
    
    9,102Assets related to discontinued operations
    
    
    37,167
    
    
    
    Total current assets
    
    
    392,848
    
    
    
    346,079Property, equipment and leasehold improvements  net
    
    
    48,476
    
    
    
    56,223Debt issuance costs  net
    
    
    3,979
    
    
    
    4,910Goodwill
    
    
    39,446
    
    
    
    39,373Other intangible assets  net
    
    
    5,924
    
    
    
    6,742Other assets
    
    
    2,252
    
    
    
    4,405$
    492,925
    
    
    $
    457,732LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    36,406
    
    
    $
    54,741Collaboration profit share payable
    
    
    
    
    
    
    12,039Unearned revenue  current
    
    
    17,855
    
    
    
    12,803Liabilities related to discontinued operations
    
    
    46,851
    
    
    
    Total current liabilities
    
    
    101,112
    
    
    
    79,583Other liabilities:Rent obligations and deferred rent expenses
    
    
    11,264
    
    
    
    10,044Unearned revenue  long-term
    
    
    38,127
    
    
    
    66,089Convertible senior subordinated notes
    
    
    265,000
    
    
    
    265,000Accrued postretirement benefit cost and other
    
    
    3,398
    
    
    
    8,422Total liabilities
    
    
    418,901
    
    
    
    429,138Stockholders equity:Preferred stock, $.01 par value; 5,000 shares authorized; no shares issued at
June 30, 2007 and December 31, 2006
    
    
    
    
    
    
    Common stock, $.01 par value; 200,000 shares authorized, 59,638 and 59,179
shares issued at June 30, 2007 and December 31, 2006, respectively
    
    
    596
    
    
    
    592Additional paid-in capital
    
    
    1,634,174
    
    
    
    1,616,874Accumulated deficit
    
    
    (1,527,744
    )
    
    
    (1,554,005
    )Accumulated other comprehensive income
    
    
    4,219
    
    
    
    2,354111,245
    
    
    
    65,815Less: treasury stock, at cost; 1,943 shares at June 30, 2007 and December 31,
2006
    
    
    (37,221
    )
    
    
    (37,221
    )Total stockholders equity
    
    
    74,024
    
    
    
    28,594Commitments and contingencies$
    492,925
    
    
    $
    457,732
  1




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 (In thousands except per share data)
 Three Months Ended June 30,2007
    
    
    2006Revenues:Net revenue from unconsolidated joint business
    
    $
    42,999
    
    
    $
    39,211Royalties on product licenses
    
    
    22,546
    
    
    
    10,912License, milestone and other revenues
    
    
    13,338
    
    
    
    5,52978,883
    
    
    
    55,652Expenses:Cost of goods sold
    
    
    2,047
    
    
    
    1,999Research and development
    
    
    27,269
    
    
    
    29,421Selling, general and administrative
    
    
    24,038
    
    
    
    25,702Amortization of intangibles
    
    
    459
    
    
    
    45153,813
    
    
    
    57,573Operating income (loss) from continuing operations
    
    
    25,070
    
    
    
    (1,921
    )Other income (expense):Investment income  net
    
    
    2,995
    
    
    
    1,873Interest expense
    
    
    (1,809
    )
    
    
    (1,857
    )Other income (expense)  net
    
    
    3,020
    
    
    
    (535
    )Income (loss) from continuing operations
    
    
    29,276
    
    
    
    (2,440
    )Loss from discontinued operations
    
    
    (9,654
    )
    
    
    (339,535
    )Net income (loss) before extraordinary item
    
    
    19,622
    
    
    
    (341,975
    )Extraordinary gain net of tax
    
    
    
    
    
    
    22,046Net income (loss)
    
    $
    19,622
    
    
    $
    (319,929
    )Basic and diluted net loss per common share:Basic earnings (loss):Income (loss) from continuing operations
    
    $
    0.51
    
    
    $
    (0.04
    )Loss from discontinued operations
    
    $
    (0.17
    )
    
    $
    (5.96
    )Net income (loss) before extraordinary item
    
    $
    0.34
    
    
    $
    (6.00
    )Extraordinary gain net of tax
    
    $
    
    
    
    $
    0.39Net income (loss)
    
    $
    0.34
    
    
    $
    (5.62
    )Diluted earnings (loss):Income (loss) from continuing operations
    
    $
    0.48
    
    
    $
    (0.04
    )Loss from discontinued operations
    
    $
    (0.16
    )
    
    $
    (5.96
    )Net income (loss) before extraordinary item
    
    $
    0.33
    
    
    $
    (6.00
    )Extraordinary gain net of tax
    
    $
    
    
    
    $
    0.39Net income (loss)
    
    $
    0.33
    
    
    $
    (5.62
    )Shares used in the calculation of income (loss) per common share:Basic
    
    
    57,545
    
    
    
    56,962Diluted
    
    
    62,182
    
    
    
    56,962
  2




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 (In thousands except per share data)
 Six Months Ended June 30,2007
    
    
    2006Revenues:Net revenue from unconsolidated joint business
    
    $
    82,121
    
    
    $
    74,866Royalties on product licenses
    
    
    41,839
    
    
    
    18,926License, milestone and other revenues
    
    
    32,392
    
    
    
    21,115156,352
    
    
    
    114,907Expenses:Cost of goods sold
    
    
    3,951
    
    
    
    4,221Research and development
    
    
    57,895
    
    
    
    56,499Selling, general and administrative
    
    
    49,167
    
    
    
    53,510Amortization of intangibles
    
    
    917
    
    
    
    899111,930
    
    
    
    115,129Operating income (loss) from continuing operations
    
    
    44,422
    
    
    
    (222
    )Other income (expense):Investment income  net
    
    
    6,090
    
    
    
    3,240Interest expense
    
    
    (3,612
    )
    
    
    (3,655
    )Other income (expense)  net
    
    
    2,071
    
    
    
    (1,427
    )Income (loss) from continuing operations
    
    
    48,971
    
    
    
    (2,064
    )Loss from discontinued operations
    
    
    (22,708
    )
    
    
    (357,766
    )Net income (loss) before extraordinary item
    
    
    26,263
    
    
    
    (359,830
    )Extraordinary gain net of tax
    
    
    
    
    
    
    22,046Net income (loss)
    
    $
    26,263
    
    
    $
    (337,784
    )Basic and diluted net loss per common share:Basic earnings (loss):Income (loss) from continuing operations
    
    $
    0.85
    
    
    $
    (0.04
    )Loss from discontinued operations
    
    $
    (0.40
    )
    
    $
    (6.29
    )Net income (loss) before extraordinary item
    
    $
    0.46
    
    
    $
    (6.33
    )Extraordinary gain net of tax
    
    $
    
    
    
    $
    0.39Net income (loss)
    
    $
    0.46
    
    
    $
    (5.94
    )Diluted earnings (loss):Income (loss) from continuing operations
    
    $
    0.82
    
    
    $
    (0.04
    )Loss from discontinued operations
    
    $
    (0.37
    )
    
    $
    (6.29
    )Net income (loss) before extraordinary item
    
    $
    0.45
    
    
    $
    (6.33
    )Extraordinary gain net of tax
    
    $
    
    
    
    $
    0.39Net income (loss)
    
    $
    0.45
    
    
    $
    (5.94
    )Shares used in the calculation of income (loss) per common share:Basic
    
    
    57,424
    
    
    
    56,889Diluted
    
    
    61,958
    
    
    
    56,889
  3




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)

(In thousands)
 Six Months Ended June 30,2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    26,263
    
    
    $
    (337,784
    )Adjustments to reconcile net income (loss) to net cash
used in operating activities:Extraordinary gain from reversal of contingent consideration
    
    
    
    
    
    
    (22,046
    )Loss on sale and disposals of equipment
    
    
    1,319
    
    
    
    4Depreciation and amortization
    
    
    5,294
    
    
    
    17,576Non-cash compensation charges
    
    
    9,545
    
    
    
    9,957Impact of inventory step-up related to inventory sold
    
    
    1,734
    
    
    
    17,252Goodwill impairment
    
    
    
    
    
    
    319,391Changes in assets and liabilities:Receivables
    
    
    (6,990
    )
    
    
    21,775Inventory
    
    
    (1,494
    )
    
    
    (5,617
    )Prepaid expenses and other current assets
    
    
    1,849
    
    
    
    1,554Other assets
    
    
    1,232
    
    
    
    (4,155
    )Accounts payable and accrued expenses
    
    
    (13,704
    )
    
    
    (24,688
    )Unearned revenue
    
    
    8,154
    
    
    
    35,011Accrued postretirement benefit cost
    
    
    (4,107
    )
    
    
    701Net cash provided by operating activities
    
    
    29,095
    
    
    
    28,931Cash flows from investing activities:Purchases of investments (restricted and unrestricted)
    
    
    (107,840
    )
    
    
    (64,641
    )Maturities and sales of investments (restricted and unrestricted)
    
    
    124,516
    
    
    
    2,437Net additions to property, equipment and leasehold improvements
    
    
    (1,498
    )
    
    
    (6,991
    )Proceeds from sale of assets
    
    
    137
    
    
    
    786Additions to compound library assets
    
    
    (3
    )
    
    
    (10
    )Net cash provided by (used) in investing activities
    
    
    15,312
    
    
    
    (68,419
    )Cash flows from financing activities:Proceeds from the exercise of stock options, employee purchase plan and other
    
    
    8,067
    
    
    
    1,775Other
    
    
    
    
    
    
    (580
    )Net cash provided by financing activities
    
    
    8,067
    
    
    
    1,195Net increase (decrease) in cash and cash equivalents
    
    
    52,474
    
    
    
    (38,293
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    525
    
    
    
    45Cash and cash equivalents at beginning of period
    
    
    42,028
    
    
    
    164,084Cash and cash equivalents at end of period
    
    $
    95,027
    
    
    $
    125,836Non-cash activities:Purchase accounting adjustments
    
    $
    
    
    
    $
    614Cash paid for interest
    
    $
    3,588
    
    
    $
    3,588
  4




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




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Co-promotion profit and reimbursement
of sales force and marketing related costs
    
    $
    40,749
    
    
    $
    36,478
    
    
    $
    77,409
    
    
    $
    69,352Reimbursement of manufacturing costs
    
    
    2,250
    
    
    
    2,733
    
    
    
    4,712
    
    
    
    5,514Net revenue from unconsolidated joint
business
    
    $
    42,999
    
    
    $
    39,211
    
    
    $
    82,121
    
    
    $
    74,866
 Royalties on Product Licenses
  Licenses, Milestones and Other Revenues
  6




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
     Earnings Per Share
  7




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
   Three Months
    
    Six MonthsEnded
    
    EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Net income (loss) from continuing operations  basic
    
    $
    29,276
    
    
    $
    (2,440
    )
    
    $
    48,971
    
    
    $
    (2,064
    )Add: Interest related to convertible debt
    
    
    776
    
    
    
    
    
    
    
    1,551
    
    
    
    Net income (loss) from continuing operations 
diluted
    
    $
    30,052
    
    
    $
    (2,440
    )
    
    $
    50,522
    
    
    $
    (2,064
    )Weighted average common shares outstanding  basic
    
    
    57,545
    
    
    
    56,962
    
    
    
    57,424
    
    
    
    56,889Dilutive effect of options and restricted stock
    
    
    729
    
    
    
    
    
    
    
    626
    
    
    
    Dilutive effect of convertible debt
    
    
    3,908
    
    
    
    
    
    
    
    3,908
    
    
    
    Weighted-average common shares and dilutive
potential common shares  diluted
    
    
    62,182
    
    
    
    56,962
    
    
    
    61,958
    
    
    
    56,889Net income per share from continuing operations:Basic
    
    $
    0.51
    
    
    $
    (0.04
    )
    
    $
    0.85
    
    
    $
    (0.04
    )Diluted
    
    $
    0.48
    
    
    $
    (0.04
    )
    
    $
    0.82
    
    
    $
    (0.04
    )
  Discontinued Operations
  8




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
     Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Net revenue
    
    $
    9,988
    
    
    $
    46,321
    
    
    $
    20,418
    
    
    $
    103,509Pretax loss
    
    
    (9,813
    )
    
    
    (339,535
    )
    
    
    (23,183
    )
    
    
    (357,766
    )Net loss from
discontinued
operations
    
    $
    (9,654
    )
    
    $
    (339,535
    )
    
    $
    (22,708
    )
    
    $
    (357,766
    )
  9




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
      Assets:Accounts receivable
    
    $
    15,313Prepaid expenses and other assets
    
    
    1,521Inventories (assets held for sale)
    
    
    16,810Property, plant and equipment (assets held for sale)
    
    
    3,523Assets related to discontinued operations
    
    $
    37,167Liabilities:Accounts payable and accrued expenses
    
    $
    12,817Collaboration profit share
    
    
    2,831Unearned revenue
    
    
    31,203Total liabilities
    
    $
    46,851
 10




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
 (OSI) Eyetech Integration  Severance Costs
   Six Months EndedJune 30,2007
    
    2006Opening liability January 1
    
    $
    699
    
    
    $
    4,870Accrual for severance, relocation
and retention bonuses
    
    
    
    
    
    
    2,650Cash paid for severance, relocation and retention
bonuses
    
    
    (699
    )
    
    
    (3,982
    )Ending liability
    
    $
    
    
    
    $
    3,538
 (OSI) Eyetech Divestiture  Severance Costs
  11




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
  Three Months
    
    Six MonthsEnded
    
    EndedJune 30, 2007
    
    June 30, 2007Opening liability
    
    $
    1,478
    
    
    $
    2,584Accrual for severance, relocation
and retention bonuses
    
    
    1,560
    
    
    
    3,851Cash paid for severance
    
    
    (485
    )
    
    
    (3,882
    )Ending liability
    
    $
    2,553
    
    
    $
    2,553
 (OSI) Eyetech Integration  Facility Restructuring
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Opening liability
    
    $
    4,460
    
    
    $
    5,122
    
    
    $
    2,053
    
    
    $
    5,391Accrual for lease costs
    
    
    774
    
    
    
    
    
    
    
    3,484
    
    
    
    (269
    )Accretion expense
    
    
    85
    
    
    
    116
    
    
    
    120
    
    
    
    267Cash paid for rent
    
    
    (567
    )
    
    
    (1,171
    )
    
    
    (905
    )
    
    
    (1,322
    )Ending liability
    
    $
    4,752
    
    
    $
    4,067
    
    
    $
    4,752
    
    
    $
    4,067
 Accounting for StockBased Compensation
  12




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
      Stock Options
  13




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    45.07
    %
    
    
    56.36
    %
    
    
    46.45
    %
    
    
    56.94
    %Risk-free interest rate
    
    
    5.11
    %
    
    
    4.49
    %
    
    
    5.01
    %
    
    
    4.49
    %Expected term (years)
    
    
    4.57
    
    
    
    4.32
    
    
    
    4.57
    
    
    
    4.32
  Weighted AverageAggregate Intrinsic
    
    Contractual LifeWeighted-Average
    
    Value (1)
    
    Remaining inShares
    
    Exercise Price
    
    (in millions)
    
    YearsOutstanding at December 31,
2006
    
    
    6,737
    
    
    $
    36.00Granted
    
    
    15
    
    
    $
    33.94Exercised
    
    
    (183
    )
    
    $
    18.42Expired
    
    
    Forfeited
    
    
    (250
    )
    
    $
    31.57Outstanding at March 31, 2007
    
    
    6,319
    
    
    $
    36.68Granted
    
    
    99
    
    
    $
    35.57Exercised
    
    
    (249
    )
    
    $
    17.21Expired
    
    
    
    
    
    
    Forfeited
    
    
    (302
    )
    
    $
    46.35Outstanding at June 30, 2007
    
    
    5,867
    
    
    $
    37.04
    
    
    $
    29.6
    
    
    
    5.53Exercisable at June 30, 2007
    
    
    4,320
    
    
    $
    39.54
    
    
    $
    19.0
    
    
    
    5.57Unvested at June 30, 2007
    
    
    1,580
    
    
    $
    30.23
    
    
    $
    10.5
    
    
    
    5.43
 
 (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.   14




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
   Restricted Stock, Restricted Stock Units and Deferred Stock Units
    15




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
 WeightedAverage GrantNo. Shares
    
    Date Fair(in thousands)
    
    ValueOutstanding at December 31, 2006
    
    
    623
    
    
    $
    35.87Granted
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    Forfeited
    
    
    (35
    )
    
    $
    34.83Outstanding at March 31, 2007
    
    
    588
    
    
    $
    35.93Granted
    
    
    24
    
    
    $
    36.25Vested
    
    
    (6
    )
    
    $
    32.12Forfeited
    
    
    (14
    )
    
    $
    37.74Outstanding at June 30, 2007
    
    
    592
    
    
    $
    35.95
 Restricted Assets
  Inventory
    June 30,
    
    December 31,2007
    
    2006Raw materials
    
    $
    2,969
    
    
    $
    3,032Work in progress
    
    
    5,619
    
    
    
    22,282Finished goods on hand, net
    
    
    6,263
    
    
    
    6,088Inventory subject to return
    
    
    4,958
    
    
    
    5,458Total inventory
    
    $
    19,809
    
    
    $
    36,860
 16




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
  Comprehensive Income (Loss)
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Net income (loss)
    
    $
    19,622
    
    
    $
    (319,929
    )
    
    $
    26,263
    
    
    $
    (337,784
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    449
    
    
    
    933
    
    
    
    528
    
    
    
    999Post retirement curtailment
    
    
    1,316
    
    
    
    
    
    
    
    1,316
    
    
    
    Unrealized holding gains (losses) arising
during period
    
    
    (281
    )
    
    
    (75
    )
    
    
    21
    
    
    
    (169
    )1,484
    
    
    
    858
    
    
    
    1,865
    
    
    
    830Total comprehensive income (loss)
    
    $
    21,106
    
    
    $
    (319,071
    )
    
    $
    28,128
    
    
    $
    (336,954
    )
  June 30,
    
    December 31,2007
    
    2006Cumulative foreign currency translation
adjustment
    
    $
    4,504
    
    
    $
    3,976Adjustment to initially apply SFAS 158
    
    
    
    
    
    
    (1,316
    )Unrealized loss on available-for-sale securities
    
    
    (285
    )
    
    
    (306
    )Accumulated other comprehensive income
    
    $
    4,219
    
    
    $
    2,354
 Intangible Assets
  June 30, 2007
    
    December 31, 2006Carrying
    
    Accumulated
    
    Net Book
    
    Carrying
    
    Accumulated
    
    Net BookAmount
    
    Amortization
    
    Value
    
    Amount
    
    Amortization
    
    ValueNovantrone
    
    $
    46,008
    
    
    $
    (43,832
    )
    
    $
    2,176
    
    
    $
    46,009
    
    
    $
    (43,108
    )
    
    $
    2,901Acquired patent estate
    
    
    779
    
    
    
    (169
    )
    
    
    610
    
    
    
    760
    
    
    
    (135
    )
    
    
    625Acquired licenses
issued to other
companies
    
    
    4,032
    
    
    
    (894
    )
    
    
    3,138
    
    
    
    3,932
    
    
    
    (716
    )
    
    
    3,216Total
    
    $
    50,819
    
    
    $
    (44,895
    )
    
    $
    5,924
    
    
    $
    50,701
    
    
    $
    (43,959
    )
    
    $
    6,742
 17




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
  Consolidation of Facilities
 Restructuring
Plan
   Three Months
    
    Six MonthsEnded
    
    EndedJune 30, 2007
    
    June 30, 2007Opening liability
    
    $
    1,927
    
    
    $
    1,897Accrual for severance payments
    
    
    455
    
    
    
    1,292Accrual for lease payments
    
    
    
    
    
    
    386Cash paid for severance
    
    
    (520
    )
    
    
    (1,591
    )Cash paid for rent
    
    
    (122
    )
    
    
    (244
    )Ending liability
    
    $
    1,740
    
    
    $
    1,740
 Corporate
Headquarters
  18




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Opening liability
    
    $
    511
    
    
    $
    2,734
    
    
    $
    1,924
    
    
    $
    Accrual for lease termination costs
    
    
    
    
    
    
    241
    
    
    
    
    
    
    
    2,975Accretion expense
    
    
    10
    
    
    
    58
    
    
    
    31
    
    
    
    58Cash paid for rent
    
    
    
    
    
    
    (853
    )
    
    
    (1,434
    )
    
    
    (853
    )Ending liability
    
    $
    521
    
    
    $
    2,180
    
    
    $
    521
    
    
    $
    2,180
 Oxford,
England
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Opening liability
    
    $
    3,927
    
    
    $
    3,844
    
    
    $
    4,062
    
    
    $
    4,210Cash paid for rent
    
    
    (155
    )
    
    
    
    
    
    
    (308
    )
    
    
    (403
    )Other
    
    
    82
    
    
    
    246
    
    
    
    100
    
    
    
    283Ending liability
    
    $
    3,854
    
    
    $
    4,090
    
    
    $
    3,854
    
    
    $
    4,090
 Employee
Post-Retirement Plan
   19




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Service costs for benefits earned
during
the period
    
    $
    95
    
    
    $
    264
    
    
    $
    383
    
    
    $
    527Interest costs on accumulated post-
retirement benefits obligation
    
    
    38
    
    
    
    102
    
    
    
    153
    
    
    
    205Amortization of initial benefits
attributed to past services
    
    
    0
    
    
    
    1
    
    
    
    2
    
    
    
    3Amortization of loss
    
    
    2
    
    
    
    17
    
    
    
    7
    
    
    
    33Net post-retirement benefit cost
    
    $
    135
    
    
    $
    384
    
    
    $
    545
    
    
    $
    768
  Sabbatical Leave Accrual
  Income Taxes
  20




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##### Table of Contents



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




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
  22




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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, 2007 AND 2006
 Overview
    23




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®
    24




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Quarterly Update
    Subsequent Events
  Critical Accounting Policies
  25




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##### Table of Contents



Discontinued Operations
  Revenue
Recognition
 Net revenues from unconsolidated joint business
  License fees and milestones
   26




---



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Macugen Product Sales
    27




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##### Table of Contents



Macugen Collaborative Revenue
   Macugen Milestone Revenue
    Accruals for Clinical Research Organization and Clinical Site Costs
  28




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Goodwill and Other Long-Lived Assets
    Stock-Based Compensation
    29




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Revenues
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    $ Change
    
    2007
    
    2006
    
    $ ChangeNet revenue from unconsolidated
joint business
    
    $
    42,999
    
    
    $
    39,211
    
    
    $
    3,788
    
    
    $
    82,121
    
    
    $
    74,866
    
    
    $
    7,255Royalties on product licenses
    
    
    22,546
    
    
    
    10,912
    
    
    
    11,634
    
    
    
    41,839
    
    
    
    18,926
    
    
    
    22,913License, milestone and other
revenues
    
    
    13,338
    
    
    
    5,529
    
    
    
    7,809
    
    
    
    32,392
    
    
    
    21,115
    
    
    
    11,277Total revenues
    
    $
    78,883
    
    
    $
    55,652
    
    
    $
    23,231
    
    
    $
    156,352
    
    
    $
    114,907
    
    
    $
    41,445
 Net Revenue from Unconsolidated Joint Business
  Royalties on Product Licenses
  30




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License, Milestone and Other Revenues
      31




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Expenses
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    $ Change
    
    2007
    
    2006
    
    $ ChangeCost of goods sold
    
    $
    2,047
    
    
    $
    1,999
    
    
    $
    48
    
    
    $
    3,951
    
    
    $
    4,221
    
    
    $
    (270
    )Research and development
    
    
    27,269
    
    
    
    29,421
    
    
    
    (2,152
    )
    
    
    57,895
    
    
    
    56,499
    
    
    
    1,396Selling, general and
administrative
    
    
    24,038
    
    
    
    25,702
    
    
    
    (1,664
    )
    
    
    49,167
    
    
    
    53,510
    
    
    
    (4,343
    )Amortization of intangibles
    
    
    459
    
    
    
    451
    
    
    
    8
    
    
    
    917
    
    
    
    899
    
    
    
    18$
    53,813
    
    
    $
    57,573
    
    
    $
    (3,760
    )
    
    $
    111,930
    
    
    $
    115,129
    
    
    $
    (3,199
    )
 Cost of Goods Sold
   Research and Development
  32




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Selling, General and Administrative
  33




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Other
Income and Expense
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    $ Change
    
    2007
    
    2006
    
    $ ChangeInvestment income-net
    
    $
    2,995
    
    
    $
    1,873
    
    
    $
    1,122
    
    
    $
    6,090
    
    
    $
    3,240
    
    
    $
    2,850Interest expense
    
    
    (1,809
    )
    
    
    (1,857
    )
    
    
    48
    
    
    
    (3,612
    )
    
    
    (3,655
    )
    
    
    43Other income (expense)-net
    
    
    3,020
    
    
    
    (535
    )
    
    
    3,555
    
    
    
    2,071
    
    
    
    (1,427
    )
    
    
    3,498Total other income (expense)
    
    $
    4,206
    
    
    $
    (519
    )
    
    $
    4,725
    
    
    $
    4,549
    
    
    $
    (1,842
    )
    
    $
    6,391
   Discontinued Operations
  Extraordinary Gain
  34




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##### Table of Contents



Liquidity and Capital Resources
    Commitments and Contingencies
  Remainder
    
    
    
    
    
    
    
    
    
    2013 andof 2007
    
    2008-2010
    
    2011-2012
    
    beyondSenior convertible debt(a)
    
    $
    3,588
    
    
    $
    21,525
    
    
    $
    14,350
    
    
    $
    348,525Operating leases
    
    
    7,825
    
    
    
    34,327
    
    
    
    21,932
    
    
    
    82,621Purchase obligations(b)
    
    
    21,768
    
    
    
    59,797
    
    
    
    7,700
    
    
    
    6,000Obligations related to exit
activities(c)
    
    
    2,924
    
    
    
    3,375
    
    
    
    108
    
    
    
    1,144Total contractual obligations
    
    $
    36,105
    
    
    $
    119,024
    
    
    $
    44,090
    
    
    $
    438,290
 
 (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 all of the 2023 Notes, or a portion thereof,
in September 2008. We may choose to pay the purchase price in cash or shares of our
common stock. Holders of the 2025 Notes have the right to
 35




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##### Table of Contents



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. Included in these purchase
obligations is our share of the remaining future commitment related to the Tarceva
global development cost of approximately $90 million.(c)
    
    Includes payments for termination benefits and facility refurbishments.
  
    
    We are committed to share certain commercialization costs relating to Tarceva with
Genentech. Under the terms of our agreement, there are no contractually determined
amounts for future commercial costs.
    
    Under agreements with external CROs we will continue to incur expenses relating to
clinical trials of Tarceva, 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 $8.0 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. As of April 18, 2007, we curtailed this
plan and grandfathered those employees, board members and qualified dependants who were
eligible to participate in the plan on that date. Only those grandfathered
participants will continue to be entitled to receive benefits under the plan. As of
June 30, 2007, we have $3.0 million of accrued post-retirement benefit costs.
    
    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
 36




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##### Table of Contents



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 Pharmaceuticals 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. 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.
    
    We have a minor investment in a privately owned venture fund, and are obligated to
make an additional $1.7 million of capital contribution upon request.
 Accounting Pronouncements
   Forward Looking Statements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risks
  37




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Item 4. Controls and Procedures
  Evaluation of Our Disclosure Controls and Procedures
 38




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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.
 39




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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
  Votes For
    
    Votes WithheldRobert A. Ingram
    
    
    45,941,330
    
    
    
    5,377,450Colin Goddard, Ph.D.
    
    
    49,690,060
    
    
    
    1,628,720Santo J. Costa
    
    
    46,280,415
    
    
    
    5,038,365Daryl K. Granner, M.D.
    
    
    49,188,406
    
    
    
    2,130,374Joseph Klein, III
    
    
    49,770,980
    
    
    
    1,547,800
 40




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##### Table of Contents



Votes For
    
    Votes WithheldKenneth B. Lee, Jr.
    
    
    49,774,066
    
    
    
    1,544,694Viren Mehta
    
    
    46,423,343
    
    
    
    4,895,437David W. Niemiec
    
    
    49,780,907
    
    
    
    1,537,873Herbert Pinedo, M.D., Ph.D.
    
    
    49,784,654
    
    
    
    1,534,125Katharine B. Stevenson
    
    
    49,785,526
    
    
    
    1,533,254John P. White
    
    
    45,416,514
    
    
    
    5,902,266
  
 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 10-K for the fiscal year ended September 30, 2001 (file no. 000-15190),
and incorporated herein by reference.10.1
    
    Amended and Restated Stock Incentive Plan, filed by OSI Pharmaceuticals, Inc.
as an exhibit to the Form 8-K filed on June 19, 2007 (file no. 000-15190), and
incorporated herein by reference.
 41




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##### Table of Contents



10.2*
    
    OSI Pharmaceuticals, Inc. Nonqualified Deferred Compensation Plan, effective
July 1, 2007. (Filed herewith)10.3*
    
    Form of Deferred Stock Unit Agreement for the Non-Employee Directors of OSI
Pharmaceuticals, Inc. (Filed herewith)10.4
    
    Amended and Restated License Agreement, dated April 20, 2007, by and
between OSI Pharmaceuticals, Inc. and Pfizer Inc., filed by OSI Pharmaceuticals, Inc.
as an exhibit to the form 10-Q filed on May 8, 2007 (file no. 000-15190), and
incorporated herein by reference.10.5*
    
    Consulting Agreement by and between OSI Pharmaceuticals, Inc. and David
Guyer, M.D., effective May 2, 2006. (Filed herewith)10.6*
    
    Compensatory Arrangements for Executive Officers. (Filed herewith)10.7*
    
    Compensatory Arrangements for Non-Employee Directors. (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 officers participate.
    
    Portions of this exhibit have been redacted and are subject to a confidential
treatment request filed with the Secretary of the Securities and Exchange Commission
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. 42




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##### Table of Contents



SIGNATURES
  OSI PHARMACEUTICALS, INC.(Registrant)Date: August 7, 2007
    
    /s/ Colin Goddard, Ph.D.Colin Goddard, Ph.D.Chief Executive OfficerDate: August 7, 2007
    
    /s/ Michael G. AtiehMichael G. AtiehExecutive Vice President andChief Financial Officer(Principal Financial Officer)
 43




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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 10-K for the fiscal year ended September 30, 2001 (file no. 000-15190),
and incorporated herein by reference.10.1
    
    Amended and Restated Stock Incentive Plan, filed by OSI Pharmaceuticals, Inc.
as an exhibit to the Form 8-K filed on June 19, 2007 (file no. 000-15190), and
incorporated herein by reference.10.2*
    
    OSI Pharmaceuticals, Inc. Nonqualified Deferred Compensation Plan, effective
July 1, 2007. (Filed herewith)10.3*
    
    Form of Deferred Stock Unit Agreement for the Non-Employee Directors of OSI
Pharmaceuticals, Inc. (Filed herewith)10.4
    
    Amended and Restated License Agreement, dated April 20, 2007, by and
between OSI Pharmaceuticals, Inc. and Pfizer Inc., filed by OSI Pharmaceuticals, Inc.
as an exhibit to the form 10-Q filed on May 8, 2007 (file no. 000-15190), and
incorporated herein by reference.10.5*
    
    Consulting Agreement by and between OSI Pharmaceuticals, Inc. and David
Guyer, M.D., effective May 2, 2006. (Filed herewith)10.6*
    
    Compensatory Arrangements for Executive Officers. (Filed herewith)10.7*
    
    Compensatory Arrangements for Non-Employee Directors. (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)
 44




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##### Table of Contents



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.
    
    Portions of this exhibit have been redacted and are subject to a confidential
treatment request filed with the Secretary of the Securities and Exchange Commission
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. 45