##### Table of Contents



FORM 10-Q
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 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
  Large accelerated filer þAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company o o þ




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##### 



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
 TABLE OF CONTENTS
 Page No.PART I. FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Consolidated Balance Sheets
- June 30, 2008 (Unaudited) and December 31, 2007
    
    
    1Consolidated Statements of Operations
- Three Months Ended June 30, 2008 and 2007 (Unaudited)
    
    
    2Consolidated Statements of Operations
- Six Months Ended June 30, 2008 and 2007 (Unaudited)
    
    
    3Consolidated Statements of Cash Flow
- Six Months Ended June 30, 2008 and 2007 (Unaudited)
    
    
    4Notes to Consolidated Financial Statements (Unaudited)
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    39Item 4. Controls and Procedures
    
    
    40PART II. OTHER INFORMATION
    
    
    41Item 1. Legal Proceedings
    
    
    41Item 1A. Risk Factors
    
    
    41Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    44Item 3. Defaults Upon Senior Securities
    
    
    44Item 4. Submission of Matters to a Vote of Security Holders
    
    
    45Item 5. Other Information
    
    
    45Item 6. Exhibits
    
    
    45SIGNATURES
    
    
    46INDEX TO EXHIBITS
    
    
    47EX-10.1: COMPENSATORY ARRANGEMENTS FOR EXECUTIVE OFFICERSEX-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 31,2008
    
    
    2007(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    347,700
    
    
    $
    162,737Investment securities
    
    
    82,383
    
    
    
    137,439Restricted investment securities
    
    
    5,016
    
    
    
    4,922Accounts receivable  net
    
    
    98,274
    
    
    
    87,523Inventory  net
    
    
    21,039
    
    
    
    21,064Interest receivable
    
    
    1,329
    
    
    
    1,116Prepaid expenses and other current assets
    
    
    7,299
    
    
    
    9,882Assets related to discontinued operations
    
    
    8,041
    
    
    
    25,442Total current assets
    
    
    571,081
    
    
    
    450,125Property, equipment and leasehold improvements  net
    
    
    45,751
    
    
    
    46,694Debt issuance costs  net
    
    
    8,269
    
    
    
    3,047Goodwill
    
    
    39,422
    
    
    
    39,411Other intangible assets  net
    
    
    11,804
    
    
    
    4,966Other assets
    
    
    15,533
    
    
    
    14,137$
    691,860
    
    
    $
    558,380LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    38,154
    
    
    $
    45,843Unearned revenue  current
    
    
    10,107
    
    
    
    10,912Liabilities related to discontinued operations
    
    
    38,528
    
    
    
    45,739Convertible senior subordinated notes
    
    
    100,000
    
    
    
    150,000Total current liabilities
    
    
    186,789
    
    
    
    252,494Other liabilities:Rent obligations and deferred rent expenses
    
    
    9,259
    
    
    
    10,812Unearned revenue  long-term
    
    
    35,117
    
    
    
    37,075Convertible senior subordinated notes
    
    
    315,000
    
    
    
    115,000Accrued post-retirement benefit cost and other
    
    
    4,354
    
    
    
    4,043Total liabilities
    
    
    550,519
    
    
    
    419,424Commitments and contingenciesStockholders equity:Preferred stock, $.01 par value; 5,000 shares authorized; no shares issued at
June 30, 2008 and December 31, 2007
    
    
    
    
    
    
    Common stock, $.01 par value; 200,000 shares authorized, 60,543 and 60,352
shares issued at June 30, 2008 and December 31, 2007, respectively
    
    
    605
    
    
    
    604Additional paid-in capital
    
    
    1,671,670
    
    
    
    1,658,737Accumulated deficit
    
    
    (1,433,151
    )
    
    
    (1,487,686
    )Accumulated other comprehensive income
    
    
    4,436
    
    
    
    4,522243,560
    
    
    
    176,177Less: treasury stock, at cost; 3,396 and 1,943 shares at June 30, 2008 and
December 31, 2007, respectively
    
    
    (102,219
    )
    
    
    (37,221
    )Total stockholders equity
    
    
    141,341
    
    
    
    138,956$
    691,860
    
    
    $
    558,380
  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 EndedJune 30,2008
    
    
    2007Revenues:Net revenue from unconsolidated joint business
    
    $
    51,941
    
    
    $
    42,999Royalties on product licenses
    
    
    35,020
    
    
    
    22,546License, milestone and other revenues
    
    
    8,693
    
    
    
    13,33895,654
    
    
    
    78,883Expenses:Cost of goods sold
    
    
    2,061
    
    
    
    2,047Research and development
    
    
    30,406
    
    
    
    27,269Selling, general and administrative
    
    
    23,192
    
    
    
    24,038Amortization of intangibles
    
    
    636
    
    
    
    45956,295
    
    
    
    53,813Operating income from continuing operations
    
    
    39,359
    
    
    
    25,070Other income (expense):Investment income  net
    
    
    2,960
    
    
    
    2,995Interest expense
    
    
    (3,015
    )
    
    
    (1,809
    )Other (expense) income  net
    
    
    (1,129
    )
    
    
    3,517Income from continuing operations before income taxes
    
    
    38,175
    
    
    
    29,773Income tax provision
    
    
    958
    
    
    
    497Net income from continuing operations
    
    
    37,217
    
    
    
    29,276Loss from discontinued operations
    
    
    (11,919
    )
    
    
    (9,654
    )Net income
    
    $
    25,298
    
    
    $
    19,622Basic and diluted income (loss) per common share:Basic earnings (loss):Income from continuing operations
    
    $
    0.65
    
    
    $
    0.51Loss from discontinued operations
    
    $
    (0.21
    )
    
    $
    (0.17
    )Net income
    
    $
    0.44
    
    
    $
    0.34Diluted earnings (loss):Income from continuing operations
    
    $
    0.61
    
    
    $
    0.48Loss from discontinued operations
    
    $
    (0.19
    )
    
    $
    (0.16
    )Net income
    
    $
    0.43
    
    
    $
    0.33Weighted average shares of common stock outstanding:Basic
    
    
    57,083
    
    
    
    57,545Diluted
    
    
    63,840
    
    
    
    62,182
  2




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except per share data)
 Six Months EndedJune 30,2008
    
    
    2007Revenues:Net revenue from unconsolidated joint business
    
    $
    101,736
    
    
    $
    82,121Royalties on product licenses
    
    
    66,603
    
    
    
    41,839License, milestone and other revenues
    
    
    18,050
    
    
    
    32,392186,389
    
    
    
    156,352Expenses:Cost of goods sold
    
    
    4,231
    
    
    
    3,951Research and development
    
    
    60,955
    
    
    
    57,895Selling, general and administrative
    
    
    47,723
    
    
    
    49,167Amortization of intangibles
    
    
    1,238
    
    
    
    917114,147
    
    
    
    111,930Operating income from continuing operations
    
    
    72,242
    
    
    
    44,422Other income (expense):Investment income  net
    
    
    6,694
    
    
    
    6,090Interest expense
    
    
    (6,146
    )
    
    
    (3,612
    )Other (expense) income  net
    
    
    (2,136
    )
    
    
    3,079Income from continuing operations before income taxes
    
    
    70,654
    
    
    
    49,979Income tax provision
    
    
    1,774
    
    
    
    1,008Net income from continuing operations
    
    
    68,880
    
    
    
    48,971Loss from discontinued operations
    
    
    (14,345
    )
    
    
    (22,708
    )Net income
    
    $
    54,535
    
    
    $
    26,263Basic and diluted income (loss) per common share:Basic earnings (loss):Income from continuing operations
    
    $
    1.21
    
    
    $
    0.85Loss from discontinued operations
    
    $
    (0.25
    )
    
    $
    (0.40
    )Net income
    
    $
    0.95
    
    
    $
    0.46Diluted earnings (loss):Income from continuing operations
    
    $
    1.14
    
    
    $
    0.82Loss from discontinued operations
    
    $
    (0.22
    )
    
    $
    (0.37
    )Net income
    
    $
    0.91
    
    
    $
    0.45Weighted average shares of common stock outstanding:Basic
    
    
    57,107
    
    
    
    57,424Diluted
    
    
    64,248
    
    
    
    61,958
  3




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
 Six Months EndedJune 30,2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    54,535
    
    
    $
    26,263Adjustments to reconcile net income to net cash provided by operating activitiesLoss on sale and disposals of equipment
    
    
    
    
    
    
    1,319Depreciation and amortization
    
    
    6,920
    
    
    
    5,294Non-cash compensation charges
    
    
    9,916
    
    
    
    9,545Impact of inventory step-up related to inventory sold
    
    
    47
    
    
    
    1,734Non-cash impairment charges
    
    
    6,078
    
    
    
    Changes in assets and liabilities:Receivables
    
    
    (142
    )
    
    
    (6,990
    )Inventory
    
    
    (426
    )
    
    
    (1,494
    )Prepaid expenses and other current assets
    
    
    2,666
    
    
    
    1,849Other assets
    
    
    (1,093
    )
    
    
    1,232Accounts payable and accrued expenses
    
    
    (14,546
    )
    
    
    (13,704
    )Unearned revenue
    
    
    (4,391
    )
    
    
    8,154Accrued postretirement benefit cost
    
    
    10
    
    
    
    (4,107
    )Net cash provided by operating activities
    
    
    59,574
    
    
    
    29,095Cash flows from investing activities:Purchases of investments (restricted and unrestricted)
    
    
    (80,664
    )
    
    
    (107,840
    )Maturities and sales of investments (restricted and unrestricted)
    
    
    135,379
    
    
    
    124,516Purchase of patent rights
    
    
    (8,000
    )
    
    
    Net additions to property, equipment and leasehold improvements
    
    
    (2,573
    )
    
    
    (1,498
    )Proceeds from sale of equipment and other
    
    
    (68
    )
    
    
    134Net cash provided by investing activities
    
    
    44,074
    
    
    
    15,312Cash flows from financing activities:Proceeds from the exercise of stock options and employee purchase plan
    
    
    3,018
    
    
    
    8,067Proceeds from the issuance of 2038 Notes
    
    
    200,000
    
    
    
    Purchase of treasury shares
    
    
    (64,998
    )
    
    
    Debt issuance costs
    
    
    (6,704
    )
    
    
    Repurchase of a portion of the 2023 Notes
    
    
    (50,000
    )
    
    
    Net cash provided by financing activities
    
    
    81,316
    
    
    
    8,067Net increase in cash and cash equivalents
    
    
    184,964
    
    
    
    52,474Effect of exchange rate changes on cash and cash equivalents
    
    
    (1
    )
    
    
    525Cash and cash equivalents at beginning of period
    
    
    162,737
    
    
    
    42,028Cash and cash equivalents at end of period
    
    $
    347,700
    
    
    $
    95,027Cash paid for taxes
    
    
    1,488
    
    
    
    675Cash paid for interest
    
    
    3,795
    
    
    
    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 30,2008
    
    2007
    
    2008
    
    2007Co-promotion profit and reimbursement
of sales force and marketing related costs
    
    $
    49,490
    
    
    $
    40,749
    
    
    $
    96,836
    
    
    $
    77,409Reimbursement of manufacturing costs
    
    
    2,451
    
    
    
    2,250
    
    
    
    4,900
    
    
    
    4,712Net revenue from unconsolidated joint
business
    
    $
    51,941
    
    
    $
    42,999
    
    
    $
    101,736
    
    
    $
    82,121
 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)
    ®
 7




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
 Earnings Per Share
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Net income from continuing operations  basic
    
    $
    37,217
    
    
    $
    29,276
    
    
    $
    68,880
    
    
    $
    48,971Add: Interest and issuance cost related to dilutive
convertible debt
    
    
    1,943
    
    
    
    760
    
    
    
    4,162
    
    
    
    1,551Net income from continuing operations  diluted
    
    $
    39,160
    
    
    $
    30,036
    
    
    $
    73,042
    
    
    $
    50,522Weighted-average common shares outstanding  basic
    
    
    57,083
    
    
    
    57,545
    
    
    
    57,107
    
    
    
    57,424Dilutive effect of options and restricted stock
    
    
    554
    
    
    
    729
    
    
    
    618
    
    
    
    626Dilutive effect of 2025 Notes
    
    
    3,908
    
    
    
    3,908
    
    
    
    3,908
    
    
    
    3,908Dilutive effect of 2023 Notes
    
    
    2,295
    
    
    
    
    
    
    
    2,615
    
    
    
    Weighted-average common shares and dilutive
potential
common shares  diluted
    
    
    63,840
    
    
    
    62,182
    
    
    
    64,248
    
    
    
    61,958Income per share from continuing operations:Basic
    
    $
    0.65
    
    
    $
    0.51
    
    
    $
    1.21
    
    
    $
    0.85Diluted
    
    $
    0.61
    
    
    $
    0.48
    
    
    $
    1.14
    
    
    $
    0.82
  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 30,2008
    
    2007
    
    2008
    
    2007Common share equivalents
    
    
    2,709
    
    
    
    2,999
    
    
    
    2,601
    
    
    
    2,999Convertible note
interest and issuance
expense not added back
under the
if-converted method
    
    $
    1,797
    
    
    $
    1,454
    
    
    $
    3,388
    
    
    $
    2,909
 Comprehensive Income
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Net income
    
    $
    25,298
    
    
    $
    19,622
    
    
    $
    54,535
    
    
    $
    26,263Other comprehensive income:Foreign
currency translation adjustments
    
    
    77
    
    
    
    449
    
    
    
    110
    
    
    
    528Post retirement curtailment
    
    
    
    
    
    
    1,316
    
    
    
    
    
    
    
    1,316Unrealized holding gains
(losses) arising
during period
    
    
    (597
    )
    
    
    (281
    )
    
    
    (196
    )
    
    
    21Total comprehensive income
    
    $
    24,778
    
    
    $
    21,106
    
    
    $
    54,449
    
    
    $
    28,128
  June 30,
    
    December 31,2008
    
    2007Cumulative foreign currency translation adjustment
    
    $
    4,452
    
    
    $
    4,342Unrealized gain (loss) on available-for-sale securities
    
    
    (16
    )
    
    
    180Accumulated other comprehensive income
    
    $
    4,436
    
    
    $
    4,522
 Fair Value Measurements
  9




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
   Accounting for StockBased Compensation
   Stock Options
   10




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    49.62
    %
    
    
    45.07
    %
    
    
    48.53
    %
    
    
    46.45
    %Risk-free interest rate
    
    
    3.73
    %
    
    
    5.11
    %
    
    
    3.66
    %
    
    
    5.01
    %Expected term (years)
    
    
    4.67
    
    
    
    4.57
    
    
    
    4.67
    
    
    
    4.57
 Restricted Assets
  Inventory
   June 30,
    
    December 31,2008
    
    2007Raw materials
    
    $
    934
    
    
    $
    1,704Work-in-process
    
    
    12,379
    
    
    
    8,595Finished goods on hand, net
    
    
    2,038
    
    
    
    4,614Inventory subject to return
    
    
    5,688
    
    
    
    6,151Total inventory
    
    $
    21,039
    
    
    $
    21,064
  11




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
  Intangible Assets
  June 30, 2008
    
    December 31, 2007Carrying
    
    Accumulated
    
    Net Book
    
    Carrying
    
    Accumulated
    
    Net BookAmount
    
    Amortization
    
    Value
    
    Amount
    
    Amortization
    
    ValueNovantrone
    
    $
    46,009
    
    
    $
    (45,284
    )
    
    $
    725
    
    
    $
    46,009
    
    
    $
    (44,558
    )
    
    $
    1,451Acquired patent estate
    
    
    8,815
    
    
    
    (531
    )
    
    
    8,284
    
    
    
    770
    
    
    
    (198
    )
    
    
    572Acquired licenses
issued to other
companies
    
    
    3,999
    
    
    
    (1,204
    )
    
    
    2,795
    
    
    
    3,984
    
    
    
    (1,041
    )
    
    
    2,943Total
    
    $
    58,823
    
    
    $
    (47,019
    )
    
    $
    11,804
    
    
    $
    50,763
    
    
    $
    (45,797
    )
    
    $
    4,966
   Consolidation of Facilities
 Restructuring Plan
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Opening liability
    
    $
    
    
    
    $
    1,927
    
    
    $
    1,557
    
    
    $
    1,897Accrual for severance payments
    
    
    
    
    
    
    455
    
    
    
    
    
    
    
    1,292Accrual for lease payments
    
    
    225
    
    
    
    
    
    
    
    367
    
    
    
    386Cash paid for severance
    
    
    
    
    
    
    (520
    )
    
    
    (411
    )
    
    
    (1,591
    )Cash paid for rent
    
    
    (225
    )
    
    
    (122
    )
    
    
    (1,513
    )
    
    
    (244
    )Ending liability
    
    $
    
    
    
    $
    1,740
    
    
    $
    
    
    
    $
    1,740
 12




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements  (continued)
(Unaudited)
 Oxford, England
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Opening liability
    
    $
    2,510
    
    
    $
    3,927
    
    
    $
    2,882
    
    
    $
    4,062Cash paid for rent
    
    
    (153
    )
    
    
    (155
    )
    
    
    (626
    )
    
    
    (308
    )Other (including accretion)
    
    
    9
    
    
    
    82
    
    
    
    110
    
    
    
    100Ending liability
    
    $
    2,366
    
    
    $
    3,854
    
    
    $
    2,366
    
    
    $
    3,854
 Employee Post-Retirement Plan and Other
 (a) Post-Retirement Plan
  13




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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 30,2008
    
    2007
    
    2008
    
    2007Service costs for benefits earned
during
the period
    
    $
    
    
    
    $
    95
    
    
    $
    
    
    
    $
    383Interest costs on accumulated post-
retirement benefits obligation
    
    
    44
    
    
    
    38
    
    
    
    88
    
    
    
    153Amortization of initial benefits
attributed to past services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Amortization of loss
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    7Net post-retirement benefit cost
    
    $
    44
    
    
    $
    135
    
    
    $
    88
    
    
    $
    545
 (b) Sabbatical Leave Accrual
  (c) Nonqualified Deferred Compensation Plan
  14




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements  (continued)
(Unaudited)
 Income Taxes
    15




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements  (continued)
(Unaudited)
 Discontinued Operations
     Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Net revenue
    
    $
    6,789
    
    
    $
    9,988
    
    
    $
    12,618
    
    
    $
    20,418Pretax loss
    
    
    (12,228
    )
    
    
    (9,813
    )
    
    
    (14,721
    )
    
    
    (23,183
    )Loss from discontinued operations
    
    $
    (11,919
    )
    
    $
    (9,654
    )
    
    $
    (14,345
    )
    
    $
    (22,708
    )
 16




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements  (continued)
(Unaudited)
   June 30,
    
    December 31,2008
    
    2007Assets:Accounts receivable
    
    $
    7,617
    
    
    $
    18,411Prepaid expenses and other assets
    
    
    336
    
    
    
    470Assets held for sale
    
    
    88
    
    
    
    6,561Assets related to discontinued operations
    
    $
    8,041
    
    
    $
    25,442Liabilities:Accounts payable and accrued expenses
    
    $
    10,582
    
    
    $
    13,382Collaboration profit share
    
    
    
    
    
    
    2,783Unearned revenue
    
    
    27,946
    
    
    
    29,574Total liabilities
    
    $
    38,528
    
    
    $
    45,739
 (OSI) Eyetech Divestiture  Severance Costs
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Opening liability
    
    $
    1,797
    
    
    $
    1,478
    
    
    $
    800
    
    
    $
    2,584Accrual for severance and retention
bonuses
    
    
    278
    
    
    
    1,560
    
    
    
    1,365
    
    
    
    3,851Cash paid for severance and retention
bonuses
    
    
    (94
    )
    
    
    (485
    )
    
    
    (184
    )
    
    
    (3,882
    )Ending liability
    
    $
    1,981
    
    
    $
    2,553
    
    
    $
    1,981
    
    
    $
    2,553
 17




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##### Table of Contents



OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
 (OSI) Eyetech Integration  Facility Restructuring
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Opening liability
    
    $
    3,506
    
    
    $
    4,460
    
    
    $
    3,282
    
    
    $
    2,053Accrual for lease termination costs
    
    
    
    
    
    
    774
    
    
    
    
    
    
    
    3,484Accretion expense
    
    
    40
    
    
    
    85
    
    
    
    80
    
    
    
    120Cash paid for rent
    
    
    (2,115
    )
    
    
    (567
    )
    
    
    (3,305
    )
    
    
    (905
    )Sublease income
    
    
    1,138
    
    
    
    
    
    
    
    2,512
    
    
    
    Ending liability
    
    $
    2,569
    
    
    $
    4,752
    
    
    $
    2,569
    
    
    $
    4,752
 Convertible Debt
  18




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##### Table of Contents



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




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OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
   20




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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, 2008 AND 2007
 Overview
   - ®
 21




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1A
  Quarterly Update
 1A
 22




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Subsequent Events
    23




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Critical Accounting Policies
  Revenue Recognition
 Net Revenue from Unconsolidated Joint Business
  24




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License Fees and Milestones
   Inventory
   25




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Stock-Based Compensation
   Accruals for Clinical Research Organization and Clinical Site Costs
  Income Taxes
   26




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Investments and Other-than-Temporary Impairments of Available-for-Sale Marketable Securities
   27




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Goodwill and Other Long-Lived Assets
     Discontinued Operations
  28




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(a) Macugen Product Sales
    (b) Macugen Collaborative Revenue
   29




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##### Table of Contents



(c) Macugen Milestone Revenue
   Revenues
 Three Months Ended
    
    
    Six Months Ended(in
thousands)
    
    June 30,
    
    
    June 30,2008
    
    
    2007
    
    
    $ Change
    
    
    2008
    
    
    2007
    
    
    $ ChangeNet revenue from
unconsolidated
joint business
    
    $
    51,941
    
    
    $
    42,999
    
    
    $
    8,942
    
    
    $
    101,736
    
    
    $
    82,121
    
    
    $
    19,615Royalties on product licenses
    
    
    35,020
    
    
    
    22,546
    
    
    
    12,474
    
    
    
    66,603
    
    
    
    41,839
    
    
    
    24,764License, milestone and other
revenues
    
    
    8,693
    
    
    
    13,338
    
    
    
    (4,645
    )
    
    
    18,050
    
    
    
    32,392
    
    
    
    (14,342
    )Total revenues
    
    $
    95,654
    
    
    $
    78,883
    
    
    $
    16,771
    
    
    $
    186,389
    
    
    $
    156,352
    
    
    $
    30,037
 Net Revenue from Unconsolidated Joint Business
  30




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Royalties on Product Licenses
  License, Milestone and Other Revenues
  b
  31




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Expenses
 (in
thousands)
    
    Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    $ Change
    
    2008
    
    2007
    
    $ ChangeCost of goods sold
    
    $
    2,061
    
    
    $
    2,047
    
    
    $
    14
    
    
    $
    4,231
    
    
    $
    3,951
    
    
    $
    280Research and development
    
    
    30,406
    
    
    
    27,269
    
    
    
    3,137
    
    
    
    60,955
    
    
    
    57,895
    
    
    
    3,060Selling, general and
administrative
    
    
    23,192
    
    
    
    24,038
    
    
    
    (846
    )
    
    
    47,723
    
    
    
    49,167
    
    
    
    (1,444
    )Amortization of intangibles
    
    
    636
    
    
    
    459
    
    
    
    177
    
    
    
    1,238
    
    
    
    917
    
    
    
    321$
    56,295
    
    
    $
    53,813
    
    
    $
    2,482
    
    
    $
    114,147
    
    
    $
    111,930
    
    
    $
    2,217
 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 Ended(in
thousands)
    
    June 30,
    
    June 30,2008
    
    2007
    
    $ Change
    
    2008
    
    2007
    
    $ ChangeInvestment income-net
    
    $
    2,960
    
    
    $
    2,995
    
    
    $
    (35
    )
    
    $
    6,694
    
    
    $
    6,090
    
    
    $
    604Interest expense
    
    
    (3,015
    )
    
    
    (1,809
    )
    
    
    (1,206
    )
    
    
    (6,146
    )
    
    
    (3,612
    )
    
    
    (2,534
    )Other income (expense)-net
    
    
    (1,129
    )
    
    
    3,517
    
    
    
    (4,646
    )
    
    
    (2,136
    )
    
    
    3,079
    
    
    
    (5,215
    )Total other income (expense)
    
    $
    (1,184
    )
    
    $
    4,703
    
    
    $
    (5,887
    )
    
    $
    (1,588
    )
    
    $
    5,557
    
    
    $
    (7,145
    )
    Discontinued Operations
  Liquidity and Capital Resources
  34




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##### Table of Contents



Commitments and Contingencies
  2008
    
    2009-2010
    
    2011-2012
    
    2013 & ThereafterContractual Obligations:Senior convertible debt (a)
    
    $
    5,775
    
    
    $
    23,100
    
    
    $
    23,100
    
    
    $
    633,650Operating leases
    
    
    5,990
    
    
    
    22,903
    
    
    
    21,976
    
    
    
    82,444Purchase obligations (b)
    
    
    23,576
    
    
    
    50,300
    
    
    
    8,700
    
    
    
    8,700Obligations related to exit
activities (c)
    
    
    1,982
    
    
    
    2,264
    
    
    
    
    
    
    
    1,486Total contractual obligations
    
    $
    37,323
    
    
    $
    98,567
    
    
    $
    53,776
    
    
    $
    726,280
 
 (a)
    
    All senior convertible notes assume the payment of interest through their respective maturity
dates and the payment of their outstanding principal balance at their respective maturity
dates. This includes interest payments at a rate of (i) 3.25% per annum relating to the
$100.0 million principal amount of the 2023 Notes, (ii) 2% per annum relating to the $115.0
million principal amount of the 2% Convertible Senior Subordinated Notes due 2025, or the 2025
Notes, and (iii) 3% per annum relating to the $200.0 million principal amount of the 2038
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. If the holders of the 2023 Notes exercise
this right, we expect to pay the purchase price in cash. Holders of the 2025 Notes have the
right to require us to purchase, for cash, all of the 2025 Notes, or a portion thereof, in
December 2010. Holders of the 2038 Notes have the right to require us to purchase, for cash,
all of the 2038 Notes, or a portion thereof, in January 2013.(b)
    
    Includes inventory commitments, commercial and research commitments and other significant
purchase commitments. Also includes our share of the remaining future commitment related to
the Tarceva global development costs of approximately $85 million. 35




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##### Table of Contents



(c)
    
    Includes payments for termination benefits and facility refurbishments. Other significant commitments and contingencies not in the table above include the
following:
 
    
    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 $2.4 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. We curtailed
this plan in 2007, however, certain employees, board members and qualified dependents
remain eligible for these benefits. Eligibility is determined based on age and years
of service. We had accrued liability for post-retirement benefit costs of $3.2 million
at June 30, 2008.
    
    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.
 Accounting Pronouncements
  36




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37




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38




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##### Table of Contents



Forward-Looking Statements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
      39




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##### Table of Contents



Item 4. Controls and Procedures
  Evaluation of Our Disclosure Controls and Procedures
 CEO/CFO Conclusions about the Effectiveness of the Disclosure Controls and Procedures
 Changes in Internal Control Over Financial Reporting.
 40




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##### Table of Contents



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



® ® ® ® ®
 ®   ® ® ®
 ®
  42




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##### Table of Contents



 1A ® ®
 ®
 We depend heavily on our co-development and marketing alliance with Genentech and Roche for
Tarceva. If Genentech or Roche terminate these alliances, or are unable to meet their contractual
obligations, it could negatively impact our revenues and harm our business until appropriate
corrective measures have been taken.
    43




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Total Number ofShares (or Units)
    
    Maximum Number (orPurchased as Part
    
    Approximate Dollar Value)Total Number of
    
    
    
    
    
    of Publicly
    
    Shares (or Units) that MayShares (or Units)
    
    Average Price Paid
    
    Announced Plans or
    
    Yet Be Purchased Under thePeriod
    
    Purchased
    
    per Share (or Unit)
    
    Programs
    
    Plans or ProgramsApril 1, 2008 
    
    
    497,800
    (1)
    
    $
    50.02
    
    
    
    N/A
    
    
    
    N/AApril 30, 2008
    
    
    16,570
    (2)
    
    $
    37.57May 1, 2008 
    
    
    241,900
    (1)
    
    $
    50.02
    
    
    
    N/A
    
    
    
    N/AMay 31, 2008
    
    
    849
    (2)
    
    $
    35.28June 1, 2008 
    
    
    1,134
    (2)
    
    $
    35.30
    
    
    
    N/A
    
    
    
    N/AJune 30, 2008
 (1)
    
    On April 22, 2008, April 29, 2008 and May 21, 2008, we repurchased an aggregate of $37.0
million principal amount of our 2023 Notes in open market transactions at a premium to their
par value. The repurchased 2023 Notes were subsequently cancelled. The table reflects the
number of shares of common stock into which the cancelled notes would have been convertible if
the holders of such notes exercised their right to convert the notes at the conversion price
of $50.02 prior to the maturity of the 2023 Notes in accordance with the terms of the
Indenture for the 2023 Notes.
 (2)
    
    Consists of shares of common stock withheld from officers and employees to satisfy their tax
withholding obligations arising upon the vesting of restricted stock awards granted under our
Amended and Restated Stock Incentive Plan.
 
 Item 3. Defaults Upon Senior Securities
  44




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Item 4. Submission of Matters to a Vote of Security Holders
  Votes For
    
    Votes WithheldRobert A. Ingram
    
    
    48,164,369
    
    
    
    2,888,953Colin Goddard, Ph.D.
    
    
    50,736,578
    
    
    
    316,744Santo J. Costa
    
    
    50,535,975
    
    
    
    517,347Daryl K. Granner, M.D.
    
    
    47,936,691
    
    
    
    3,116,631Joseph Klein, III
    
    
    49,293,961
    
    
    
    1,759,361Kenneth B. Lee, Jr.
    
    
    50,241,405
    
    
    
    811,917Viren Mehta
    
    
    50,744,260
    
    
    
    309,062David W. Niemiec
    
    
    50,744,226
    
    
    
    309,096Herbert M. Pinedo, M.D., Ph.D.
    
    
    50,744,178
    
    
    
    309,144Katharine B. Stevenson
    
    
    50,744,238
    
    
    
    309,084John P. White
    
    
    49,777,404
    
    
    
    1,275,918
  
 Item 5. Other Information
  
 Item 6. Exhibits
 3.1
    
    Restated Certificate of Incorporation of OSI Pharmaceuticals, Inc., filed by
the Company 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
    
    Second Amended and Restated Bylaws of OSI Pharmaceuticals, Inc., filed by the
Company as an exhibit to the Form 8-K, filed on December 17, 2007 (file no. 000-15190),
and incorporated herein by reference.10.1
    
    Compensatory Arrangements for Executive Officers. (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)
 45




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##### Table of Contents



SIGNATURES
  OSI PHARMACEUTICALS, INC.(Registrant)Date:      August 7, 2008
    /s/ Colin Goddard, Ph.D.Colin Goddard, Ph.D.Chief Executive OfficerDate:      August 7, 2008
    /s/ Michael G. AtiehMichael G. AtiehExecutive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer) 46




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INDEX TO EXHIBITS
 Exhibit3.1
    
    Restated Certificate of Incorporation of OSI Pharmaceuticals, Inc., filed by
the Company 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
    
    Second Amended and Restated Bylaws of OSI Pharmaceuticals, Inc., filed by the
Company as an exhibit to the Form 8-K, filed on December 17, 2007 (file no. 000-15190),
and incorporated herein by reference.10.1
    
    Compensatory Arrangements for Executive Officers. (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)
 47