Expanding the Base:
Prosidion and Eyetech
In implementing our strategy, we completed two key transactions in 2005 that have established the framework from which to execute on our plan going forward; first, we enhanced our investment in Prosidion by acquiring the outstanding minority interests in our UK-based subsidiary, then we found, in Macugen, a secondary source of revenues and revenue growth to complement Tarceva.

The spring buyout of Prosidion’s minority stockholders committed us operationally to diabetes as a second area of opportunity. Although we intend to commercialize our diabetes assets in collaboration with major pharmaceutical company partners, we believe that the widely recognized emergence of diabetes as a growing healthcare issue in the Western world has created a significant enough commercial opportunity to allow innovators an appreciable share of the economic returns in this major, and growing, market.

In 2002, the global diabetes market totaled $7 billion. By 2012, we expect the market to be over $18 billion. We project that over 50% of this growth to come from novel mechanism of action drugs such as those we are developing.

In November of last year, we completed our acquisition of Eyetech Pharmaceuticals in a transaction that we valued at roughly $638 million, net of Eyetech’s cash at closing. This expanded OSI to include a third business team, operating in the commercially attractive arena of ophthalmology. Macugen, which anchors the Eyetech franchise, is a novel, first-in-class therapeutic that selectively binds to vascular endothelial growth factor isoform 165 (VEGF-165), the pathogenic isoform of VEGF that is the principal cause of choroidal neovascularization. Choroidal neovascularization, in turn, leads to neovascular age-related macular degeneration, or wet AMD. This illness afflicts more than 200,000 people every year in the U.S. alone and leads to blindness. Macugen was launched in January 2005 for the wet form of AMD and achieved $185 million in U.S. net sales last year.

Despite the burgeoning market for Macugen, many in the investment community have criticized the acquisition of Eyetech based upon concerns surrounding the emerging competitive threat posed by non-selective VEGF inhibitors. At OSI, however, we continue to believe that Macugen’s efficacy in newly diagnosed patients is widely under-appreciated, and we know that Macugen’s safety profile especially in terms of systemic thromboembolic events where imbalances have been described in clinical trials of competitive agents – is excellent. These two factors, we believe, will allow for a continued and meaningful role for Macugen in the AMD marketplace; a marketplace that is evolving toward the use of multiple therapies in combination. In this setting Macugen – because of its excellent safety profile – could potentially become the maintenance therapy of choice administered over extended periods irrespective of whether it is used as a front-line medicine for AMD.

Moreover, we recently published data from a Phase II clinical trial in the widely respected journal Ophthalmology demonstrating promising activity for Macugen in patients with diabetic macular edema, a form of diabetic retinopathy afflicting some 500,000 Americans. We believe that Macugen can be expanded to this indication. Phase III trials are ongoing together with our collaborator Pfizer.

The Macugen based revenues will help us sustain a credible scale to our research and development investment, improving our ability to draw out the value we believe to be inherent in our pipeline, and allowing us to reap much of the profitability offered by Tarceva success. While we remain confident in the longer-term prospects of Macugen, we recognize that 2006 could be a difficult year as competitors enter the market. We have committed to you, our shareholders, that we will manage this franchise – as with all our commercial and R&D assets – in a financially disciplined manner to ensure that it contributes positively to the growth of our business.