OSI Pharma Easily Beats Estimate

OSI Pharmaceuticals Inc. (OSIP - Analyst Report) has reported third-quarter earnings of 81 cents per share, which was way above the Zacks Consensus Estimate of 35 cents. The company had earned 64 cents per share in the year-ago quarter.

Total revenues for the quarter came in at $111.45 million as against $94.57 million in the year-ago quarter, reflecting an increase of 17.8%. The company’s top growth driver Tarceva -- OSI's marketed product to treat lung and pancreatic cancer -- contributed the lion’s share of the revenues. Revenues related to Tarceva increased 9.9% to $88.74 million from $80.71 million in the year-ago quarter.

Tarceva is promoted in the U.S. by both OSI and Genentech -- now a part of the Roche Group (RHHBY) -- where both sales force costs and U.S. profits are split evenly through an unconsolidated joint venture. Internationally, the drug is marketed by Roche Holdings, and OSI receives substantial royalties on international sales.

U.S. Tarceva sales for the quarter came in at $118 million, compared to $110 million in the year-ago quarter. The U.S. sales were negatively impacted by a net reserve adjustment of approximately $2 million. International sales of Tarceva by Roche for the reported quarter were approximately $183 million, an increase of 8% versus a year ago. International sales of Tarceva in the quarter were negatively impacted by a stronger U.S. dollar compared to the prior-year period. Other revenues, mainly from royalties on diabetes treatments, increased 63.8% to $22.71 million.

We believe Tarceva sales in both the U.S. and the 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 recoup Tarceva sales, in our view.

Operating expenses for the quarter rose 21.7% to $71.2 million, with the increase primarily driven by a rise in research and development expenses related to the advancement of its clinical pipeline. Research and development expenses for the latest quarter were $38.5 million compared to $33 million for the same period last year. Selling, general and administrative expenses for the quarter were $24.6 million compared to $22.2 million for the same period last year. The company's income tax provision jumped to   $17.28 million from $987,000 a year ago.

OSI exited the quarter with $542 million of cash and investments, an increase of $27 million versus the end of 2008. The company reaffirmed its revenues guidance of approximately $425 million for fiscal 2009. Tarceva revenues for the year are expected to be approximately $355 million. Tarceva global sales for 2009 are expected to be approximately $1.2 billion.