##### Table of Contents



FORM 10-Q
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended
    
    September 30, 2005
  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.)
 58 South Service Road, Suite 110, Melville, New York
    
    11747(Address of principal executive offices)
    
    (Zip Code)
  
  
  þ o
 þ o
 o þ




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
  Page No.PART I. FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Consolidated Balance Sheets- September 30, 2005 (Unaudited) and September 30, 2004
    
    
    1Consolidated Statements of Operations- Three Months Ended September 30, 2005 and 2004 (Unaudited)
    
    
    2Consolidated Statements of Operations- Nine Months Ended September 30, 2005 and 2004 (Unaudited)
    
    
    3Consolidated Statements of Cash Flows- Nine Months Ended September 30, 2005 and 2004 (Unaudited)
    
    
    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
    
    
    47Item 4. Controls and Procedures
    
    
    48PART II. OTHER INFORMATION
    
    
    50Item 1. Legal Proceedings
    
    
    50Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    50Item 3. Defaults Upon Senior Securities
    
    
    50Item 4. Submission of Matters to a Vote of Security Holders
    
    
    50Item 5. Other Information
    
    
    50Item 6. Exhibits
    
    
    50SIGNATURES
    
    
    53INDEX TO EXHIBITS
    
    
    54EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATIONEX-99.1: RISK FACTORS




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 CONSOLIDATED BALANCE SHEETS OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
 September 30,
    
    
    September 30,2005
    
    
    2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    162,855
    
    
    $
    84,598Investment securities
    
    
    392,962
    
    
    
    163,085Restricted investment securities  short-term
    
    
    4,833
    
    
    
    4,835Receivables, including amounts due from related parties of $29,565 and $1,283 at
September 30, 2005 and September 30, 2004, respectively
    
    
    37,363
    
    
    
    10,771Inventory  net
    
    
    16,990
    
    
    
    1,437Interest receivable
    
    
    2,920
    
    
    
    1,341Prepaid expenses and other current assets
    
    
    8,127
    
    
    
    9,378Total current assets
    
    
    626,050
    
    
    
    275,445Restricted investment securities  long-term
    
    
    
    
    
    
    4,711Property, equipment and leasehold improvements  net
    
    
    44,608
    
    
    
    35,356Debt issuance costs  net
    
    
    3,095
    
    
    
    4,156Goodwill
    
    
    39,091
    
    
    
    39,017Other intangible assets  net
    
    
    11,960
    
    
    
    26,566Other assets
    
    
    2,830
    
    
    
    2,778Total Assets
    
    $
    727,634
    
    
    $
    388,029LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses, including amounts due to related parties of
$4,964 and $13,903 at September 30, 2005 and September 30, 2004,
respectively
    
    $
    35,327
    
    
    $
    46,140Unearned revenue  current; including amounts from related parties
of $8,753 and $500 at September 30, 2005 and September 30, 2004, respectively9,275
    
    
    
    1,074Capital leases payable  current
    
    
    
    
    
    
    8Total current liabilities
    
    
    44,602
    
    
    
    47,222Other liabilities:Deferred rent expense  long-term
    
    
    2,206
    
    
    
    1,873Unearned revenue  long-term, representing amounts from related parties
    
    
    26,668
    
    
    
    8,750Convertible senior subordinated notes  long-term
    
    
    150,000
    
    
    
    150,000Contingent value rights
    
    
    22,047
    
    
    
    22,047Accrued postretirement benefit cost
    
    
    5,066
    
    
    
    3,904Total liabilities
    
    
    250,589
    
    
    
    233,796Stockholders equity:Preferred stock, $.01 par value; 5,000 shares authorized; no shares issued at
September 30, 2005 and September 30, 2004
    
    
    
    
    
    
    Common stock, $.01 par value; 200,000 shares authorized, 52,931 and 45,030 shares issued
at September 30, 2005 and September 30, 2004, respectively
    
    
    529
    
    
    
    450Additional paid-in capital
    
    
    1,391,994
    
    
    
    943,994Deferred compensation
    
    
    (762
    )
    
    
    (206
    )Accumulated deficit
    
    
    (891,424
    )
    
    
    (765,951
    )Accumulated other comprehensive income
    
    
    2,159
    
    
    
    1,397502,496
    
    
    
    179,684Less: treasury stock, at cost; 1,443 shares at September 30, 2005 and September 30, 2004
    
    
    (25,451
    )
    
    
    (25,451
    )Total stockholders equity
    
    
    477,045
    
    
    
    154,233Commitments and contingenciesTotal liabilities and stockholders equity
    
    $
    727,634
    
    
    $
    388,029
  1




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##### Table of Contents



CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except per share data)
 Three Months EndedSeptember 30,2005
    
    
    2004Revenues:Net revenue from unconsolidated joint business, from related party
    
    $
    21,464
    
    
    $
    Royalties on product sales, from related party
    
    
    1,453
    
    
    
    Sales commissions and product sales
    
    
    7,559
    
    
    
    9,577License and milestone revenues, including $419 and $3,250 from
related parties in 2005 and 2004, respectively
    
    
    3,512
    
    
    
    3,45033,988
    
    
    
    13,027Expenses:Cost of goods sold
    
    
    1,464
    
    
    
    6,723Research and development
    
    
    28,698
    
    
    
    34,220Acquired in-process research and development (see note 14)
    
    
    
    
    
    
    32,785Selling, general and administrative
    
    
    21,363
    
    
    
    33,630Impairment of intangible asset (see note 9)
    
    
    
    
    
    
    24,599Amortization of intangibles
    
    
    3,831
    
    
    
    4,62055,356
    
    
    
    136,577Loss from operations
    
    
    (21,368
    )
    
    
    (123,550
    )Other income (expense):Investment income  net
    
    
    2,393
    
    
    
    1,074Interest expense
    
    
    (1,219
    )
    
    
    (1,220
    )Other income  net
    
    
    157
    
    
    
    507Net loss
    
    $
    (20,037
    )
    
    $
    (123,189
    )Basic and diluted net loss per common share
    
    $
    (0.39
    )
    
    $
    (2.88
    )Weighted average shares of common stock outstanding
    
    
    51,439
    
    
    
    42,794
  2




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CONSOLIDATED STATEMENTS OF OPERATIONS Nine Months Ended OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except per share data)
 Nine Months EndedSeptember 30,2005
    
    
    2004Revenues:Net revenue from unconsolidated joint business, from
related party
    
    $
    54,892
    
    
    $
    Royalties on product sales, from related
party
    
    
    1,952
    
    
    
    Sales commissions and product sales
    
    
    22,103
    
    
    
    25,384License and milestone revenues, including $949 and $5,750
from related parties in 2005 and 2004
    
    
    8,737
    
    
    
    6,02587,684
    
    
    
    31,409Expenses:Cost of goods sold
    
    
    3,636
    
    
    
    8,875Research and development
    
    
    86,007
    
    
    
    86,293Acquired
in-process research and development (see note 14 and 15)
    
    
    3,542
    
    
    
    32,785Selling, general and administrative
    
    
    65,765
    
    
    
    78,089Impairment of intangible asset (see note 9)
    
    
    
    
    
    
    24,599Amortization of intangibles
    
    
    11,435
    
    
    
    13,768170,385
    
    
    
    244,409Loss from operations
    
    
    (82,701
    )
    
    
    (213,000
    )Other income (expense):Investment income  net
    
    
    10,563
    
    
    
    3,772Interest expense
    
    
    (3,657
    )
    
    
    (10,616
    )Other expense  net
    
    
    (1,283
    )
    
    
    (394
    )Net loss
    
    $
    (77,078
    )
    
    $
    (220,238
    )Basic and diluted net loss per common share
    
    $
    (1.50
    )
    
    $
    (5.44
    )Weighted average shares of common stock outstanding
    
    
    51,284
    
    
    
    40,492
  3




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CONSOLIDATED STATEMENTS OF CASH FLOWS OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
 Nine Months EndedSeptember 30,2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (77,078
    )
    
    $
    (220,238
    )Adjustments to reconcile net loss to net cash
used in operating activities:Loss (gain) on sale of investment
    
    
    114
    
    
    
    (32
    )Loss (gain) on sale and disposals of equipment
    
    
    753
    
    
    
    (7
    )Depreciation and amortization
    
    
    19,851
    
    
    
    26,791Impairment of intangible asset
    
    
    
    
    
    
    24,599Provision for inventory obsolescence
    
    
    
    
    
    
    8,565In-process research and development
    
    
    3,542
    
    
    
    32,785Non-cash compensation charges
    
    
    1,288
    
    
    
    538Other non-cash charges  net
    
    
    
    
    
    
    493Changes in assets and liabilities:Receivables
    
    
    (24,572
    )
    
    
    (547
    )Inventory
    
    
    (14,868
    )
    
    
    (6,496
    )Prepaid expenses and other current assets
    
    
    (104
    )
    
    
    (3,274
    )Other assets
    
    
    123
    
    
    
    31Accounts payable and accrued expenses
    
    
    (7,242
    )
    
    
    12,289Unearned revenue
    
    
    15,915
    
    
    
    3,917Accrued postretirement benefit cost
    
    
    862
    
    
    
    621Net cash used in operating activities
    
    
    (81,416
    )
    
    
    (119,965
    )Cash flows from investing activities:Payments for acquisitions, net of cash acquired
    
    
    (1,794
    )
    
    
    (36,393
    )Purchases of investments (restricted and unrestricted)
    
    
    (357,351
    )
    
    
    (131,683
    )Maturities and sales of investments (restricted and unrestricted)
    
    
    285,039
    
    
    
    222,638Net additions to property, equipment and leasehold improvements
    
    
    (21,512
    )
    
    
    (2,346
    )Additions to Compound library assets
    
    
    (377
    )
    
    
    Investments in privately-owned companies
    
    
    (344
    )
    
    
    (215
    )Net cash provided by (used in) investing activities
    
    
    (96,339
    )
    
    
    52,001Cash flows from financing activities:Payment of expenses relating to public offering
    
    
    (116
    )
    
    
    Proceeds from the exercise of stock options, stock warrants, employee purchase plan
and other
    
    
    10,503
    
    
    
    38,755Debt issuance costs
    
    
    
    
    
    
    (101
    )Payments on loans and capital leases payable
    
    
    (3
    )
    
    
    (33
    )Net cash provided by financing activities
    
    
    10,384
    
    
    
    38,621Net increase (decrease) in cash and cash equivalents
    
    
    (167,371
    )
    
    
    (29,343
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    670
    
    
    
    (297
    )Cash and cash equivalents at beginning of period
    
    
    329,556
    
    
    
    114,238Cash and cash equivalents at end of period
    
    $
    162,855
    
    
    $
    84,598Non-cash activities:Conversion of notes
    
    $
    
    
    
    $
    160,000Reclassification of debt issuance costs in connection with notes
    
    $
    
    
    
    $
    3,723Issuance of common stock to employees
    
    $
    614
    
    
    $
    5Issuance of common stock to directors
    
    $
    527
    
    
    $
    475Issuance of Prosidion preferred stock to minority shareholders
    
    $
    4,158
    
    
    $
    1,400Acceleration of options
    
    $
    816
    
    
    $
    177Cash paid for interest
    
    $
    4,875
    
    
    $
    14,501
  4




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Notes to Consolidated Financial Statements OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
  Basis of Presentation
  Tarceva Regulatory 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
    
    
    Nine months endedSeptember 30, 2005
    
    
    September 30, 2005Co-promotion profit and reimbursement of sales
force and marketing related costs
    
    $
    18,851
    
    
    $
    47,894Reimbursement of manufacturing costs
    
    
    2,613
    
    
    
    6,998Net revenue from unconsolidated joint business
    
    $
    21,464
    
    
    $
    54,892
 Royalties on Product Sales
  Sales Commissions and Product Sales
  6




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
   Licenses and Milestone Revenues
   7




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
  â
  Stock Options
  8




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
    Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Risk-free interest rate
    
    
    3.94
    %
    
    
    2.86
    %
    
    
    3.92
    %
    
    
    2.98
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility factors of expected market
price of our common stock
    
    
    48.06
    %
    
    
    77.99
    %
    
    
    56.86
    %
    
    
    78.91
    %Weighted-average expected life of option (years)
    
    
    4.25
    
    
    
    3
    
    
    
    4.06
    
    
    
    3Weighted-average exercise price of stock option grants
    
    $
    37.85
    
    
    $
    57.06
    
    
    $
    41.61
    
    
    $
    61.76Weighted-average fair value of stock option grants
    
    $
    16.24
    
    
    $
    29.56
    
    
    $
    18.39
    
    
    $
    32.50
 9




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss
    
    $
    (20,037
    )
    
    $
    (123,189
    )
    
    $
    (77,078
    )
    
    $
    (220,238
    )Add: stock-based compensation included in net
loss
    
    
    193
    
    
    
    124
    
    
    
    2,667
    
    
    
    537Compensation cost determined under fair value method
    
    
    (6,625
    )
    
    
    (7,764
    )
    
    
    (19,855
    )
    
    
    (20,029
    )Pro forma net loss
    
    $
    (26,469
    )
    
    $
    (130,829
    )
    
    $
    (94,266
    )
    
    $
    (239,730
    )Basic and diluted net loss per common share:Net loss  as reported
    
    $
    (0.39
    )
    
    $
    (2.88
    )
    
    $
    (1.50
    )
    
    $
    (5.44
    )Net loss  pro forma
    
    $
    (0.51
    )
    
    $
    (3.06
    )
    
    $
    (1.84
    )
    
    $
    (5.92
    )
  Restricted Assets
  10




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




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
  September 30,
    
    
    September 30,2005
    
    
    2004Raw materials
    
    $
    7,037
    
    
    $
    Work in process
    
    
    3,697
    
    
    
    Finished goods on hand, net
    
    
    1,793
    
    
    
    1,263Inventory subject to return
    
    
    4,463
    
    
    
    174$
    16,990
    
    
    $
    1,437
  Comprehensive Income (Loss)
  Three months ended
    
    
    Nine Months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss
    
    $
    (20,037
    )
    
    $
    (123,189
    )
    
    $
    (77,078
    )
    
    $
    (220,238
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    (201
    )
    
    
    (145
    )
    
    
    (2,126
    )
    
    
    (132
    )Unrealized gains on derivative instruments
arising during period
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    131Unrealized holding gains (losses) arising
during period
    
    
    (332
    )
    
    
    732
    
    
    
    (1,100
    )
    
    
    (971
    )Less: Reclassification adjustment for
losses
(gains) realized in net loss
    
    
    2,189
    
    
    
    (67
    )
    
    
    2,127
    
    
    
    (98
    )1,656
    
    
    
    558
    
    
    
    (1,099
    )
    
    
    (1,070
    )Total comprehensive loss
    
    $
    (18,381
    )
    
    $
    (122,631
    )
    
    $
    (78,177
    )
    
    $
    (221,308
    )
 12




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
  September 30,
    
    
    September 30,2005
    
    
    2004Cumulative foreign currency translation adjustment
    
    $
    2,133
    
    
    $
    2,034Unrealized gain (loss) on available-for-sale securities
    
    
    26
    
    
    
    (666
    )Unrealized gains on derivative instruments
    
    
    
    
    
    
    29Accumulated other comprehensive income
    
    $
    2,159
    
    
    $
    1,397
 Net Loss per Common Share
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Common share equivalents
    
    
    3,732
    
    
    
    5,055
    
    
    
    4,164
    
    
    
    7,094Contingent shares
    
    
    1,585
    
    
    
    1,585
    
    
    
    1,585
    
    
    
    1,585
 Goodwill and Other Intangible Assets
  September 30, 2005
    
    
    September 30, 2004Net
    
    
    
    
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Book
    
    
    Carrying
    
    
    Accumulated
    
    
    BookAmount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    ValueNovantrone rights
    
    $
    46,009
    
    
    $
    (37,926
    )
    
    
    8,083
    
    
    $
    46,009
    
    
    $
    (23,004
    )
    
    $
    23,005Acquired patent estates
    
    
    684
    
    
    
    (53
    )
    
    
    631
    
    
    
    515
    
    
    
    (7
    )
    
    
    508Acquired licenses issued to
other companies
    
    
    3,541
    
    
    
    (295
    )
    
    
    3,246
    
    
    
    3,093
    
    
    
    (40
    )
    
    
    3,053Total
    
    $
    50,234
    
    
    $
    (38,274
    )
    
    $
    11,960
    
    
    $
    49,617
    
    
    $
    (23,051
    )
    
    $
    26,566
  13




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
  Impairment of Intangible Asset
  Consolidation of Facilities
   14




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Opening liability
    
    $
    3,686
    
    
    $
    1,938
    
    
    $
    4,302
    
    
    $
    Provision for severance
    
    
    
    
    
    
    3,728
    
    
    
    
    
    
    
    3,728Provision for rental obligations
    
    
    
    
    
    
    1,076
    
    
    
    761
    
    
    
    3,179Provision for facility refurbishment
    
    
    
    
    
    
    350
    
    
    
    1,019
    
    
    
    350Cash paid for rent less sublease income received
    
    
    (269
    )
    
    
    (130
    )
    
    
    (829
    )
    
    
    (295
    )Cash paid for facility refurbishment
    
    
    
    
    
    
    
    
    
    
    (350
    )
    
    
    Cash paid for severance
    
    
    
    
    
    
    
    
    
    
    (1,286
    )
    
    
    Other
    
    
    (26
    )
    
    
    
    
    
    
    (226
    )
    
    
    Ending liability
    
    $
    3,391
    
    
    $
    6,962
    
    
    $
    3,391
    
    
    $
    6,962
 Derivative Financial Instruments
  Employee Post-Retirement Plan
    15




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Service costs for benefits earned during the period
    
    $
    210
    
    
    $
    143
    
    
    $
    629
    
    
    $
    429Interest costs on accumulated post-retirement benefits obligation
    
    
    88
    
    
    
    65
    
    
    
    264
    
    
    
    197Amortization of initial benefits attributed to past services
    
    
    1
    
    
    
    1
    
    
    
    4
    
    
    
    4Amortization of loss
    
    
    16
    
    
    
    10
    
    
    
    48
    
    
    
    29Net post-retirement benefit cost
    
    $
    315
    
    
    $
    219
    
    
    $
    945
    
    
    $
    659
 Litigation
  Acquisition of Probiodrug Assets
  16




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 Acquisition of Minority Interest in Prosidion
   License agreements
    
    $
    615Patent estate
    
    
    203Acquired in-process research and development
    
    
    3,694Minority interest
    
    
    322Goodwill
    
    
    149Common stock and cash paid
    
    $
    4,983
   17




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
  Purchase of Corporate Headquarters
    Merger Agreement
  18




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




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Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations
 THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
 Overview
  Quarterly Update
 Corporate Update
 Merger Agreement
  20




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Change in Our Fiscal Year End
  21




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Pipeline Update
 Tarceva
     Diabetes and Obesity
    Critical Accounting Policies
  22




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Revenue Recognition
    23




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Inventory
   Accruals for Clinical Research Organization and Clinical Site Costs
  Acquired In-Process Research and development
  Goodwill and Other Long-Lived Assets
  24




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Revenues
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    $ Change
    
    
    2005
    
    
    2004
    
    
    $ ChangeNet revenue from unconsolidated joint business
    
    $
    21,464
    
    
    $
    
    
    
    $
    21,464
    
    
    $
    54,892
    
    
    $
    
    
    
    $
    54,892Royalties on product sales
    
    
    1,453
    
    
    
    
    
    
    
    1,453
    
    
    
    1,952
    
    
    
    
    
    
    
    1,952Sales commissions and product sales
    
    
    7,559
    
    
    
    9,577
    
    
    
    (2,018
    )
    
    
    22,103
    
    
    
    25,384
    
    
    
    (3,281
    )License and milestone revenues
    
    
    3,512
    
    
    
    3,450
    
    
    
    62
    
    
    
    8,737
    
    
    
    6,025
    
    
    
    2,712Total Revenues
    
    $
    33,988
    
    
    $
    13,027
    
    
    $
    20,961
    
    
    $
    87,684
    
    
    $
    31,409
    
    
    $
    56,275
 Net Revenue from Unconsolidated Joint Business
  25




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Royalties on Product Sales
  Sales Commissions and Product Sales
   License and Milestone Revenues
  26




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Expenses
 Three months ended
    
    
    Nine Months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    $ Change
    
    
    2005
    
    
    2004
    
    
    $ ChangeCost of goods sold
    
    $
    1,464
    
    
    $
    6,723
    
    
    $
    (5,259
    )
    
    $
    3,636
    
    
    $
    8,875
    
    
    $
    (5,239
    )Research and development
    
    
    28,698
    
    
    
    34,220
    
    
    
    (5,522
    )
    
    
    86,007
    
    
    
    86,293
    
    
    
    (286
    )Acquired in-process research and development
    
    
    
    
    
    
    32,785
    
    
    
    (32,785
    )
    
    
    3,542
    
    
    
    32,785
    
    
    
    (29,243
    )Selling, general and administrative
    
    
    21,363
    
    
    
    33,630
    
    
    
    (12,267
    )
    
    
    65,765
    
    
    
    78,089
    
    
    
    (12,324
    )Impairment of intangible asset
    
    
    
    
    
    
    24,599
    
    
    
    (24,599
    )
    
    
    
    
    
    
    24,599
    
    
    
    (24,599
    )Amortization of intangibles
    
    
    3,831
    
    
    
    4,620
    
    
    
    (789
    )
    
    
    11,435
    
    
    
    13,768
    
    
    
    (2,333
    )Total Expenses
    
    $
    55,356
    
    
    $
    136,577
    
    
    $
    (81,221
    )
    
    $
    170,385
    
    
    $
    244,409
    
    
    $
    (74,024
    )
 Cost of Goods Sold
  27




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Research and Development
    28




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Acquired In-Process Research and Development
   29




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Impairment of Intangible Asset
  Selling, General and Administrative
  30




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Amortization of Intangibles
  Other Income and Expense
 Three months ended September 30,
    
    
    Nine months ended September 30,2005
    
    
    2004
    
    
    $ Change
    
    
    2005
    
    
    2004
    
    
    $ ChangeInvestment income  net
    
    $
    2,393
    
    
    $
    1,074
    
    
    $
    1,319
    
    
    $
    10,563
    
    
    $
    3,772
    
    
    $
    6,791Interest expense
    
    
    (1,219
    )
    
    
    (1,220
    )
    
    
    1
    
    
    
    (3,657
    )
    
    
    (10,616
    )
    
    
    6,959Other income (expense)  net
    
    
    157
    
    
    
    507
    
    
    
    (350
    )
    
    
    (1,283
    )
    
    
    (394
    )
    
    
    (889
    )Total Other Income (Expense)
    
    $
    1,331
    
    
    $
    361
    
    
    $
    970
    
    
    $
    5,623
    
    
    $
    (7,238
    )
    
    $
    12,861
  Liquidity and Capital
   31




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32




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Commitments and Contingencies
  2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010 & Thereafter
    
    
    TotalContractual Obligations:Senior convertible debt (a)
    
    $
    
    
    
    $
    4,875
    
    
    $
    4,875
    
    
    $
    4,875
    
    
    $
    4,875
    
    
    $
    218,250
    
    
    $
    237,750Purchase obligations (b)
    
    
    12,453
    
    
    
    39,644
    
    
    
    22,682
    
    
    
    8,482
    
    
    
    5,182
    
    
    
    13,747
    
    
    
    102,190Operating leases
    
    
    2,056
    
    
    
    5,733
    
    
    
    5,765
    
    
    
    6,016
    
    
    
    5,496
    
    
    
    46,870
    
    
    
    71,936Capital commitments (c)
    
    
    8,196
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,196Obligations related to exit activities (d)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    958
    
    
    
    
    
    
    
    958Total contractual obligations
    
    $
    22,705
    
    
    $
    50,252
    
    
    $
    33,322
    
    
    $
    19,373
    
    
    $
    16,511
    
    
    $
    278,867
    
    
    $
    421,030
 
 (a)
    
    Includes interest payments at a rate of 3.25% per annum relating to the 2023 Notes.(b)
    
    Purchase obligations include commercial and research and development commitments and other
significant purchase commitments.(c)
    
    Includes estimated construction commitments relating to renovation of our new corporate
headquarters.(d)
    
    Includes payments for facility refurbishments.  
    
    On August 21, 2005, we announced that we entered into a definitive merger agreement
to acquire Eyetech. Under the merger agreement, we will acquire all outstanding shares
of Eyetech common stock at a purchase price per share of $15 in cash and 0.12275 shares
of OSI common stock. Approximately 5.7 million shares of OSI common stock will be
issued in the transaction. The acquisition is subject to a number of closing
conditions, including Eyetech stockholder approval. Eyetech will seek stockholder
approval of the transaction at a special meeting to be held on November 10, 2005 to
consider the merger. The effect of the
 33




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merger is expected to reduce the combined cash and cash equivalents of the two
companies by approximately $700 million.
 
    
    Under agreements with external CROs we will continue to incur expenses relating to
clinical trials of Tarceva and other clinical candidates. The timing and amount of
these disbursements can be based upon the achievement of certain milestones, patient
enrollment, services rendered or as expenses are incurred by the CROs and therefore we
cannot reasonably estimate the potential timing of these payments.
    
    We have outstanding letters of credit issued by a commercial bank totaling $3.0
million of which the full amounts were available on September 30, 2005. One is an
irrevocable letter of credit related to our Oxford, England facility which expires and
is renewed annually with a final expiration date of September 27, 2007. Another is an
irrevocable letter of credit related to our Horsham, Pennsylvania facility, whose lease
we assumed through the acquisition of Cell Pathways. The letter expires and is renewed
annually with a final expiration date of September 22, 2008.
    
    We have a retirement plan which provides post-retirement medical and life insurance
benefits to eligible employees, board members and qualified dependents. Eligibility is
determined based on age and years of service. We have accrued postretirement benefit
costs of $5.1 million at September 30, 2005.
    
    In connection with our acquisition of Cell Pathways, we provided additional
consideration in the form of five-year contingent value rights through which each share
of Cell Pathways common stock will be eligible for an additional 0.04 share of OSI
common stock in the event of a filing of a new drug application by June 12, 2008 for
either of the two clinical candidates acquired from Cell Pathways, OSI-461 or Aptosyn®
(exisulind).
    
    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.
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Accounting Pronouncements
      Forward Looking Statements
  35




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RISK FACTORS
 NOTE: The following risk factors relate to our present business. We expect that on or about
November 10, 2005, we will close our pending acquisition of Eyetech Pharmaceuticals, Inc. Pages
25-37 of our registration statement on Form S-4 (file no. 333-128446), which was declared effective by the SEC on October
6, 2005, contain risk factors relating to the business of Eyetech and
are set forth at Exhibit 99.1 to this Report. These risk factors should be
carefully considered in addition to the risk factors set forth below and are incorporated herein by
reference.
 We have incurred losses since our inception, and we expect to incur losses over the near term,
which may cause the value of our common stock to decrease.
   Assuming the closing of our acquisition of Eyetech following the affirmative vote of the Eyetech
stockholders at the special meeting of Eyetech stockholders on November 10, 2005 approving our
acquisition of Eyetech and satisfaction of certain closing conditions, we may need to obtain additional financing to satisfy our working capital
needs. If such financing is not available on favorable terms, our financial results may be
negatively affected, and if such financing is not available, we may experience delays in
commercializing products or may be required to limit the scope of our research and development
efforts.
  36




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##### Table of Contents



We, together with our alliance partners Genentech and Roche, may not be able to market or generate
sales of Tarceva to the extent anticipated.
  
    
    Physicians may be reluctant to switch from existing treatment methods, including
traditional chemotherapy agents, to Tarceva;
    
    The market for new oncology products is very competitive, with many products
currently in Phase III development. Most major pharmaceutical companies and many
biotechnology companies, including our partners Genentech and Roche, currently devote a
portion or all their operations to the development of new oncology drugs or additional
indications for oncology drugs which are already marketed. For example, our partner
Roche recently announced favorable clinical results for its chemotherapy product,
Xeloda, in pancreatic cancer in combination with gemcitabine, the same indication for
which Tarceva was recently approved. Tarceva may lose a portion of its planned market
share in the pancreatic indication to off-label use of Xeloda.
    
    Information from our competitors or the academic community indicating that current
products or new products are more effective than Tarceva could, if and when it is
generated, impede our market penetration or decrease our existing market share; and
    
    Our Tarceva-derived revenues may diminish if third-party payors, including private
health coverage insurers and health maintenance organizations, do not provide adequate
coverage or reimbursement for Tarceva.
  37




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##### Table of Contents



Although we have clinical candidates in the pipeline for both the oncology and diabetes business
units that appear to be promising at early stages of development, none of these potential products
may reach the commercial market for a number of reasons.
   If government agencies do not grant us or our collaborative partners required approvals for any of
our potential products in a timely manner or at all, we or our collaborative partners will not be
able to distribute or sell our products currently under development.
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We are responsible for the supply of Tarceva in the United States. Because we have no commercial
manufacturing facilities, we are dependent on two suppliers for the active pharmaceutical ingredient, or API, for Tarceva and a single
supplier for the tableting of Tarceva in the United States.
   If we do not maintain our co-development and marketing alliance with Genentech and Roche for
Tarceva, the marketing and sale of Tarceva may be compromised or delayed.
  39




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If any of our current or future marketed products, including Tarceva or Novantrone, were to become
the subject of problems related to their efficacy, safety, or otherwise, or if new, more effective
treatments were to be introduced, our revenues from such marketed products could decrease.
  
    
    efficacy or safety concerns with the products, even if not justified;
 40




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##### Table of Contents




    
    unexpected side-effects;
    
    regulatory proceedings subjecting the products to potential recall;
    
    publicity affecting doctor prescription or patient use of the product;
    
    pressure from competitive products; or
    
    introduction of more effective treatments;
  If we do not receive adequate third-party reimbursement for the sales of our products, we may not
be able to sell such products on a profitable basis.
  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



Our reliance on third parties, such as clinical research organizations, or CROs, may result in
delays in completing, or a failure to complete, clinical trials if we fail to perform under our
agreements with them.
  The use of any of our potential products in clinical trials and the sale of any approved products
exposes us to liability claims.
  42




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##### Table of Contents



The failure to prevail in litigation or the costs of litigation, including patent infringement
claims, could harm our financial performance and business operations and could cause delays in
product introductions.
   If we or our collaborative partners are required to obtain licenses from third parties, our
revenues and royalties on any commercialized products could be reduced.
  If we cannot successfully protect, exploit or enforce our intellectual property rights, our ability
to develop and commercialize our products will be severely limited.
  43




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##### Table of Contents



We have outstanding options, convertible debt, contingent value rights and warrants, the exercise,
conversion or exchange of which could dilute stockholder value and cause our stock price to
decline.
   Our outstanding indebtedness increased substantially with the issuance of convertible senior
subordinated notes in September 2003, or the 2023 Notes, and we may not be able to make the
required payments on these notes when due and therefore may face liquidity problems.
   
    
    make it more difficult for us to obtain any necessary financing in the future for
working capital, capital expenditures, debt service requirements or other purposes; and
 44




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##### Table of Contents




    
    make us more vulnerable in the event of a downturn in our business.
  If the market price of our common stock, similar to other biotechnology companies, remains highly
volatile, our stockholders may not be able to sell our stock when desired or at desirable prices.
   
    
    sales of our marketed products, including Tarceva;
    
    fluctuations in the business operating results or prospects;
    
    announcement or launching of technological innovations or new therapeutic products
by others;
    
    negative or neutral clinical trial results;
    
    developments concerning strategic alliance agreements;
    
    unanticipated clinical efficacy or safety results from our competitors products;
    
    changes in government regulation, including pricing controls;
    
    delays with the FDA in the approval process for products and clinical candidates;
    
    developments in patent or other proprietary rights;
    
    public concern as to the safety of our products and potential products;
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##### Table of Contents




    
    future sales of substantial amounts of our common stock by existing stockholders;
and
    
    comments by securities analysts and general market conditions.
 Our governance documents and state law provide certain anti-takeover measures which will discourage
a third party from seeking to acquire us and may impede the ability of stockholders to remove and
replace our board of directors and, therefore, our management.
  
    
    no stockholder action may be taken without a meeting, without prior notice and
without a vote; solicitations by consent are thus prohibited;
    
    special meetings of stockholders may be called only by our board of directors;
    
    nominations by stockholders of candidates for election to the board of directors at
our annual meeting of stockholders must be made at least 45 days prior to the
anniversary of the date on which we first mailed our proxy materials for the prior
years annual meeting of stockholders; and
    
    our board of directors has the authority, without further action by the
stockholders, to fix the rights and preferences, and issue shares, of preferred stock.
An issuance of preferred stock with dividend and liquidation rights senior to the
common stock and convertible into a large number of shares of common stock could
prevent a potential acquiror from gaining effective economic or voting control.
  46




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Item 3. Quantitative and Qualitative Disclosures About Market Risks
     47




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##### Table of Contents



Item 4. Controls and Procedures
 CEO and CFO Certifications.
 Evaluation of Our Disclosure Controls and Procedures.
 CEO/CFO Conclusions about the Effectiveness of the Disclosure Controls and Procedures.
 Limitations on the Effectiveness of Controls.
 48




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Changes in Internal Control Over Financial Reporting.
 49




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 2.1+
    
    Agreement and Plan of Merger among OSI Pharmaceuticals, Inc., Merger EP
Corporation and Eyetech Pharmaceuticals, Inc., dated August 21, 2005, filed with the
Securities and Exchange Commission on August 22, 2005 by OSI Pharmaceuticals, Inc. as
an exhibit to the Form 8-K (file no. 000-15190), and incorporated herein by reference.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.
 50




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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*
    
    Letter Agreement by and between OSI Pharmaceuticals, Inc. and David R. Guyer,
M.D., dated August 21, 2005, filed with the Securities and Exchange Commission on
August 22, 2005 by OSI Pharmaceuticals, Inc. as an exhibit to the Form 8-K (file no.
000-15190), and incorporated herein by reference.10.2*
    
    Service Contract by and between OSI Pharmaceuticals, Inc. and Dr. Anker
Lundemose, dated September 20, 2005, filed with the Securities and Exchange Commission
on September 23, 2005 by OSI Pharmaceuticals, Inc. as an exhibit to the Form 8-K (file
no. 000-15190), and incorporated herein by reference.10.3*
    
    Change in Control Agreement by and between OSI Pharmaceuticals, Inc. and Dr.
Neil Gibson, dated September 20, 2005, filed with the Securities and Exchange
Commission on September 23, 2005 by OSI Pharmaceuticals, Inc. as
an exhibit to the Form8-K (file no. 000-15190), and incorporated herein by reference.10.4*
    
    Amended Letter Agreement by and between OSI Pharmaceuticals, Inc. and Robert
L. Simon, dated September 20, 2005, filed with the Securities and Exchange Commission
on September 23, 2005 by OSI Pharmaceuticals, Inc. as an exhibit to the Form8-K (file
no. 000-15190), and incorporated herein by reference.10.5*
    
    Amended Change in Control Agreement by and between OSI Pharmaceuticals, Inc.
and Barbara A. Wood, Esq., dated September 20, 2005, filed with the Securities and
Exchange Commission on September 23, 2005 by OSI Pharmaceuticals, Inc. as an exhibit to
the Form 8-K (file no. 000-15190), and incorporated herein by reference.10.6*
    
    Compensatory Arrangements of Executive Officers, as amended, filed with the
Securities and Exchange Commission on September 23, 2005 by OSI Pharmaceuticals, Inc.
as an exhibit to the Form 8-K (file no. 000-15190), and incorporated herein by
reference.99.1
    
    Risk Factors relating to Eyetech Pharmaceuticals, Inc., previously filed by OSI
Pharmaceuticals, Inc. on October 6, 2005 at pages 25-37 of Amendment No. 1 to the Registration Statement
on Form S-4 (file no. 333-128446). (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)
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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)
 
 +
    
    The schedules to this exhibit have been omitted pursuant to Item 601(b)(2) of
Regulation S-K promulgated by the Securities and Exchange Commission. The omitted
schedules from this filing will be provided upon request.*
    
    Indicates a management contract or compensatory plan, contract or arrangement in which a
director or executive officers participate. 52




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SIGNATURES
  OSI PHARMACEUTICALS, INC.(Registrant)Date: November 9, 2005
    /s/ Colin Goddard, Ph.D.Colin Goddard, Ph.D.Chief Executive Officer Date: November 9, 2005
    /s/ Michael G. AtiehMichael G. AtiehExecutive Vice President and
Chief Financial Officer
(Principal Financial Officer) 53




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INDEX TO EXHIBITS
 Exhibit
 2.1+
    
    Agreement and Plan of Merger among OSI Pharmaceuticals, Inc., Merger EP
Corporation and Eyetech Pharmaceuticals, Inc., dated August 21, 2005, filed with the
Securities and Exchange Commission on August 22, 2005 by OSI Pharmaceuticals, Inc. as
an exhibit to the Form 8-K (file no. 000-15190), and incorporated herein by reference.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*
    
    Letter Agreement by and between OSI Pharmaceuticals, Inc. and David R. Guyer,
M.D., dated August 21, 2005, filed with the Securities and Exchange Commission on
August 22, 2005 by OSI Pharmaceuticals, Inc. as an exhibit to the Form 8-K (file no.
000-15190), and incorporated herein by reference.10.2*
    
    Service Contract by and between OSI Pharmaceuticals, Inc. and Dr. Anker
Lundemose, dated September 20, 2005, filed with the Securities and Exchange Commission
on September 23, 2005 by OSI Pharmaceuticals, Inc. as an exhibit to the Form 8-K (file
no. 000-15190), and incorporated herein by reference.10.3*
    
    Change in Control Agreement by and between OSI Pharmaceuticals, Inc. and Dr.
Neil Gibson, dated September 20, 2005, filed with the Securities and Exchange
Commission on September 23, 2005 by OSI Pharmaceuticals, Inc. as
an exhibit to the 
Form 8-K (file no. 000-15190), and incorporated herein by reference.10.4*
    
    Amended Letter Agreement by and between OSI Pharmaceuticals, Inc. and Robert
L. Simon, dated September 20, 2005, filed with the Securities and Exchange Commission
on September 23, 2005 by OSI Pharmaceuticals, Inc. as an exhibit
to the 
Form 8-K (file
no. 000-15190), and incorporated herein by reference.10.5*
    
    Amended Change in Control Agreement by and between OSI Pharmaceuticals, Inc.
and Barbara A. Wood, Esq., dated September 20, 2005, filed with the Securities and
Exchange Commission on September 23, 2005 by OSI Pharmaceuticals, Inc. as an exhibit to
the Form 8-K (file no. 000-15190), and incorporated herein by reference.




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##### Table of Contents



10.6*
    
    Compensatory Arrangements of Executive Officers, as amended, filed with the
Securities and Exchange Commission on September 23, 2005 by OSI Pharmaceuticals, Inc.
as an exhibit to the Form 8-K (file no. 000-15190), and incorporated herein by
reference.99.1
    
    Risk Factors relating to Eyetech Pharmaceuticals, Inc., previously filed by OSI
Pharmaceuticals, Inc. on October 6, 2005 at pages 25-37 of Amendment No. 1 to the Registration Statement
on Form S-4 (file no. 333-128446). (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)
 
 +
    
    The schedules to this exhibit have been omitted pursuant to Item 601(b)(2) of
Regulation S-K promulgated by the Securities and Exchange Commission. The omitted
schedules from this filing will be provided upon request.*
    
    Indicates a management contract or compensatory plan, contract or arrangement in which a
director or executive officers participate.