continuing, nothing new of interest to me......
(3) ACQUISITIONS
(a) Cadus Pharmaceutical
On July 30, 1999, the Company acquired certain assets from Cadus for
approximately $2.2 million in cash, which includes professional fees and other
costs and the assumption of certain liabilities. The acquisition was accounted
for under the purchase method of accounting. The purchase price has been
allocated to the assets and the liabilities assumed based on the fair values at
the date of acquisition. The excess of the fair value of the net assets acquired
over the purchase price paid representing negative goodwill was approximately
$2.9 million. The negative goodwill was allocated proportionately to reduce the
value of the noncurrent assets acquired and the in-process R&D which was charged
to operations. The in-process R&D charge is included in R&D expenses in the
accompanying consolidated statement of operations for fiscal 1999. The purchase
price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Prepaid expenses and other current assets................... $ 362
Work force intangible....................................... 145
In-process R&D acquired..................................... 806
Compound library............................................ 336
Fixed assets................................................ 1,045
------
Total assets and in-process R&D acquired.................... 2,694
Less liabilities assumed.................................... (477)
------
Cash paid................................................... $2,217
======
</TABLE>
The value of the purchased in-process R&D from the acquisition was
determined by estimating the projected net cash flows related to products under
development, based upon the future revenues to be earned
40
<PAGE> 41
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
upon commercialization of such products. The percentage of the cash flow
allocated to purchased in-process research and development was based upon the
estimated percentage complete for each of the R&D projects. These cash flows
were discounted back to their net present value. The resulting projected net
cash flows from such projects were based on management's estimates of revenues
and operating profits related to such projects. The in-process R&D was valued
based on the income approach that focuses on the income-producing capability of
the assets. The underlying premise of this approach is that the value of an
asset can be measured by the present worth of the net economic benefit (cash
receipts less cash outlays) to be received over the life of the asset.
Significant assumptions and estimates used in the valuation of in-process R&D
included: the stage of development for each of the five projects; future
revenues based on royalties; growth rates for each product; individual product
revenues; product sales cycles; the estimated life of a product's underlying
technology of seven years from the date of introduction; future operating
expenses; and a discount rate of 60% to reflect present value and risk of
developing the acquired technology into commercially viable products.
The assets purchased include (a) certain assets associated with certain of
Cadus' research programs (including the GPCR-directed drug discovery program and
a collaboration with Solvay), (b) Cadus' compound library of 150,000 components,
(c) the purchase or license of certain intellectual property rights, and (d)
certain furniture, equipment, inventory, and supplies. Several assets were
retained by Cadus, including (a) monies in escrow in connection with the
judgment of SIBIA Neurosciences, Inc. against Cadus, (b) cash and accounts
receivable, (c) Cadus' Living Chip Technology, (d) Cadus' Functional Genomics
Program, and (e) Cadus' Research Collaboration and License Agreement with
SmithKline Beecham Corporation. Forty-seven Cadus employees were hired by the
Company. The Company intends to utilize the acquired assets in the GPCR Directed
Chemistry Program and the collaboration with Solvay, but expects to deploy the
balance of the assets in other research areas.
The Company also assumed Cadus' facility lease in Tarrytown, New York
(approximately 45,569 square feet) as of July 1, 1999 (approximately $898,249 in
rental payments per annum through December 31, 2002) and an equipment lease with
General Electric Capital Corporation (GECC). In fiscal 2001, the Company has
agreed to sublease approximately 9,100 square feet of the facility. On August
23, 1999, the Company elected to payoff the GECC lease in exchange for a payment
of $2.8 million and obtained ownership of the fixed assets covered by the lease
agreement. On September 21, 1999, Cadus reimbursed the Company $308,000 in
exchange for those fixed assets that have been retained by Cadus for its own
use. The source of the cash portion of the purchase price and the subsequent
decision to payoff the lease agreement with GECC was the Company's existing cash
resources. Liabilities and the facility lease obligation assumed will be paid
from existing cash resources and working capital to be generated in future
periods.
In connection with the acquisition, the Company entered into the following
additional agreements with Cadus: (a) a Patent License Agreement, (b) a
Technology License Agreement, and (c) a Software License Agreement, pursuant to
which the Company obtained non-exclusive licenses for the use and practice of
certain of Cadus' patents, Cadus' technology and Cadus' software programs,
respectively. The Company and Cadus also entered into another Patent License
Agreement under which the Company will license back to Cadus on a non-exclusive
basis certain of the patents which were assigned to the Company as part of the
acquisition.
In connection with the acquisition, the Company adopted a Non-Qualified
Stock Option Plan for Former Employees of Cadus. The Company granted ten-year
options to purchase an aggregate of 415,000 shares of common stock of the
Company at a purchase price of $5.00 per share, which represents the fair value
of the Company's stock at the date granted. These options became exercisable on
July 30, 2000, one year from the date of the grant.
Effective February 15, 2000, Cadus granted the Company a non-exclusive,
royalty-free, worldwide right and license (without the right to sublicense) to
use and practice Cadus' technology and patents involving
41
<PAGE> 42
OSI PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
Cadus' yeast GPCR patent estate; to access various reagents; to use a library of
over 30,000 yeast strains; and to use Cadus' proprietary bi-informatics software
for the mining of genomic databases. (see note 2(e)).
The operating results of Cadus' research business have been included in the
consolidated statements of operations from July 30, 1999. The following
unaudited pro forma information presents a summary of consolidated results of
operations for fiscal 1999 and 1998 assuming the asset acquisition had taken
place as of October 1, 1998 and October 1, 1997, respectively (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $ 24,902 $ 22,168
Net loss.................................................... (15,013) (16,452)
Net loss per share.......................................... (0.70) (0.77)
</TABLE>
The pro forma results give effect to the amortization of acquired
intangibles and reduction of investment income. The pro forma information is not
necessarily indicative of the results of operations had the asset acquisition
been affected on the assumed date. |
