OSI Pharmaceuticals, Inc. - 2001 Annual Report

We began 2001 with four primary goals aimed at building both our clinical and corporate capabilities. These were: to sign a co-development and marketing agreement for Tarceva™ (OSI-774); to initiate a comprehensive Phase III development program for Tarceva™ (OSI-774); to continue to evolve our drug discovery efforts away from funded collaborations with single digit royalties; and to pursue a successful mergers and acquisitions program. Specifically, we sought to broaden our pipeline and fill in and strengthen skill sets in clinical development and regulatory affairs. These will permit us to provide excellence across the board, from drug discovery to drug registration.

With the OSI/Genentech/Roche alliance, two acquisitions, steady progress on Tarceva™ (OSI-774) and a comprehensive oncology team now in place, we can point to a successful year of continued progress. The depth and breadth of today’s pipeline has us well positioned to emerge as a major force in oncology—able to broaden therapeutic boundaries, improve the quality-of-life, and ultimately save the lives of those who suffer from cancer.

OSI, Genentech and Roche Alliance
In January 2001, OSI, Genentech and Roche formed a global co-development and commercialization alliance for Tarceva™ (OSI-774). In the United States, Genentech and OSI are co-developing Tarceva™ (OSI-774), employing an equal cost and profit sharing arrangement for commercialization. Roche, OSI’s international partner, is developing and commercializing Tarceva™ (OSI-774) outside the United States and will pay OSI royalties on net sales. Roche and Genentech also paid a combined $95 million on signing (in upfront fees and equity purchases) and could pay up to $92 million in additional milestones. With this strategy, OSI gains from Roche’s global product marketing expertise, while being able to leverage its own resources for commercialization with Genentech in the United States.

Execution of Tarceva™ (OSI-774) The program to develop Tarceva™ (OSI-774), an extensive global plan, will target non-small cell lung cancer (NSCLC) and pancreatic cancer as initial registration strategies. At the same time, it will continue to develop the product for multiple additional indications including breast, ovarian, colorectal and brain tumors. The program will assess the utility of Tarceva™ (OSI-774) in combination with existing chemotherapy and biological agents as well as a single agent. It will also seek to demonstrate a survival benefit for both earlier stage and late stage cancer patients. This will enable the product’s front-line use in a number of cancers.

In May 2001, the Tarceva™ (OSI-774) product development team announced positive data from three Phase II clinical studies. As presented at the 37th Annual Meeting of the American Society of Clinical Oncology (ASCO), the clinical results indicated encouraging anti-cancer activity of Tarceva™ (OSI-774), as a single agent, in patients with refractory NSCLC, ovarian and head and neck cancers. Specifically, the findings demonstrated objective partial responses and considerable evidence of long term disease stabilization in a patient population that is difficult to treat. These results were obtained against a backdrop of a relatively mild set of principal side effects: an acneiform rash (seen in 72% of patients) and diarrhea (seen in approximately 33% of patients).

Over the past year, the OSI/Genentech/Roche alliance initiated four registration studies with Tarceva™ (OSI-774). Three trials are designed to assess the use of Tarceva™ (OSI-774) in combination with chemotherapy for front-line use in lung and pancreatic cancers. A fourth study is a single agent trial for refractory lung cancer. In July 2001, the Company announced the first of the Phase III Tarceva™ (OSI-774) trials in NSCLC, launched by Genentech. Roche followed with the initiation of the global Phase III trial in NSCLC in November 2001, while OSI announced the commencement of the final two Phase III trials in refractory NSCLC and front-line pancreatic cancer. Both OSI trials are co-sponsored with the National Cancer Institute of Canada Clinical Trials Group.

The alliance also began additional Phase Ib trials designed to evaluate the safety, tolerance, pharmacokinetics and preliminary anti-cancer activity of escalating doses of Tarceva™ (OSI-774) in combination with various chemotherapies in advanced cancer patients. Together with the National Cancer Institute’s Cancer Therapy Evaluation Program (CTEP), we are collaborating to conduct clinical trials in multiple tumor types including metastatic breast, malignancies of the gastrointestinal and genitourinary tracts, gynecological malignancies and brain tumors.

Mergers & Acquisitions The acquisition of clinical candidates together with clinical development and regulatory expertise was an important part of our overall strategy in 2001. Most recently, in December 2001, we acquired the oncology assets of Gilead Sciences for $170 million in cash and equity plus up to $30 million in potential milestones for the most advanced product NX211. As a result of this transaction, we now have three additional oncology candidates in clinical trials. These include OSI-211(formerly NX211) and OSI-7904 (formerly GS7904L), which are novel, liposomal formulations of cytotoxic, anti-cancer agents. OSI-211 is currently in Phase II clinical trials for refractory ovarian and small cell lung cancer, while OSI-7904 is in Phase I trials. The third product in this portfolio is OSI-7836 (formerly GS7836), a nucleoside analog being developed in Phase I testing as a next-generation GemzarÆ.

As part of this transaction we also acquired Gilead’s Boulder, Colorado operations, including clinical research and drug development capabilities, personnel and facilities. Nicole Onetto, M.D., the former Senior Vice President of Medical Affairs at Gilead, joined OSI as Executive Vice President, Oncology. She has brought with her a seasoned, multidisciplinary oncology and drug development team with a proven track record. In addition, in September 2001 we acquired pre-clinical research operations from British Biotech, including their state-of-the-art research and pilot manufacturing facilities in Oxford, UK for $13.9 million. We are currently consolidating our UK operations into the Oxford site. With this acquisition, as well as that of Gilead’s oncology business, we have expanded our R&D capabilities from early stage research through pre-clinical and clinical development by adding high quality infrastructure and professionals.

Further Accomplishments In 2000, two additional products entered Phase I clinical trials through our recently concluded alliance with Pfizer in cancer therapy. OSI-754 (formerly CP-609,754) a farnesyl transferase inhibitor, is being developed by OSI as a targeted therapy for bladder cancer subsequent to OSI gaining commercial rights to this product from Pfizer. The second compound, which inhibits cancer-related angiogenesis (new blood vessel formation) by targeting the vascular endothelial growth factor receptor (VEGFR), is the subject of a Pfizer-sponsored clinical program.

In addition to acquiring new facilities in Oxford, UK and Boulder, Colorado, we moved our corporate headquarters to a new facility in Melville, New York. We will consolidate our US discovery research operations into a new site located on the grounds of Farmingdale State University of New York (SUNY). The Farmingdale site is land specifically dedicated to the Broad Hollow Bioscience Park, a New York State funded project to establish a biotechnology industry on Long Island through the clustering of mature and incubator companies. OSI will serve as the anchor tenant in support of this important initiative.

On the financial front we enter 2002 with strong cash reserves. At the end of the calendar year, the Company’s cash and short term investments totaled approximately $400 million. Although we expect to significantly increase our R&D investments in 2002, we do this from a solid financial base and in the knowledge that these investments are focused on one of the most complete oncology pipelines in the industry. With the projected launch of Tarceva™ (OSI-774) and OSI-211 in 2004, we believe our shareholders can confidently look forward to the emergence of a strongly profitable organization.

In 2000, we presented our vision for becoming a world-class oncology franchise. This year that vision is fast becoming reality. We are now busy writing the next chapter in the history of the Company, as we prepare to rapidly develop products emerging from our pipeline and evolve a powerful commercial operation.

The key reason for our success has been, and will remain, the outstanding employees of OSI. I would like to take the opportunity to thank the employees, you the shareholders, and our corporate partners and friends. We believe that your support will make it possible for us to improve the quality-of-life for people afflicted with cancer and offer the promise of hope to those whose lives our products may one day touch.

Colin Goddard, Ph.D.
Chairman of the Board
and Chief Executive Officer

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“We have now assembled all the pieces of an exciting puzzle... creating a powerful and dynamic oncology franchise.”

Colin Goddard, Ph.D.
Chairman of the Board and Chief Executive Officer