OSI Pharma Reports Lower Profit in Q2

After the market close yesterday, New York- based biotechnology company OSI Pharmaceuticals, Inc. (OSIP - Analyst Report) reported second-quarter results. The company reported net income from continuing operations of $16.5 million ($0.28 per share) for the second quarter of 2009 compared to $34.2 million (or $0.59 per share) in the year-ago period. 

Total revenues from continuing operations for the quarter were $99 million compared to revenues of $96 million for the second quarter of 2008 which was in-line with our estimate of $98.6 million. 

The company’s top growth driver Tarceva contributed a major portion of the revenues. The company’s top growth driver Tarceva contributed a major portion to total revenues. Tarceva related revenues for the second quarter of 2009 were $85 million compared to $88 million in the relevant quarter of 2008. Tarceva is promoted in the U.S. by both OSI and Genentech (now a part of the Roche group (RHHBY)) and sales force costs are split equally. The two companies split U.S. profits through an unconsolidated joint venture. Internationally the drug is marketed by Roche Holdings and OSIP receives substantial royalty on international sales. US Tarceva sales in the quarter were $113 million which reflected a 5% decrease from the comparable quarter of 2008. US sales of Tarceva have been flat since 2008.
 
The international sales of Tarceva were $177 million which reflected a marginal increase from $173 million in the year-ago quarter. The US sales were negatively impacted by $7.4 million in the form of the non-returns related to sales allowances adjustments and international sales were negatively impacted by a stronger US dollar. We believe Tarceva sales in both US and rest of the world will be slow in the next few quarters until new indications are approved. Since Tarceva is the lead growth driver for OSI any slowdown in Tarceva sales will translate into lower net income and earning per share and weigh on the company’s stock price. Label expansion is a must to re-grow Tarceva sales in our view. 

Operating expenses from continuing operations for the second quarter of 2009 were $65 million compared to $56 million in the second quarter of 2008. The increase was primarily due to increased research and development expenses related to the advancement of the company’s pipeline. Management expects total Tarceva-related revenues to be approximately $355 million and total revenues of approximately $425 million in 2009. 

We believe OSIP is one of the few fully integrated, profitable biotech companies in the US. We still regard OSIP as a core holding in biotech portfolio and our Hold rating for OSIP’s shares.