By Randall Osborne

West Coast Editor

SAN FRANCISCO - At mid-morning Monday, Colin Goddard, chairman and CEO of OSI Pharmaceuticals Inc., sat in Dewey's lounge with his chin in his hand. His company's stock was down 20 percent, and still sliding.

Goddard's green eyes shone bright. He grinned.

OSI, of Uniondale, N.Y., had just disclosed a potential $187 million agreement with Genentech Inc. and Roche Holdings Inc. to co-develop and commercialize OSI's lead cancer drug, still in Phase II trials.

"This is a premier deal," Goddard said. "It's undoubtedly one of the biggest deals ever done for a drug at this stage, if not the biggest."

The drug, OSI-774, is an oral inhibitor of the epidermal growth factor receptor, and is being studied for non-small-cell lung cancer, as well as cancers of the head, neck and ovaries. OSI disclosed the deal with South San Francisco-based Genentech and Roche, of Basel, Switzerland, during the J.P. Morgan H&Q Healthcare Conference here.

As part of the show-stealing deal, Roche and Genentech each will buy $35 million worth of OSI stock, along with paying up-front fees, which were not disclosed. OSI will have about 34 million shares outstanding when the transaction is complete, Goddard said.

Louis Lavigne, chief financial officer of Genentech, said the pact indicates the "growing significance of our bio-oncology program," which includes the strong revenue players Herceptin (trastuzumab), for HER-2 positive metastatic breast cancer, and Rituxan (rituximab), for relapsed or refractory low-grade or follicular, CD20-positive, B-cell, non-Hodgkin's lymphoma.

Cancer drugs brought in 55 percent of total Genentech product sales in the third quarter of 2000, which were up 25 percent from the same period the year before, to $334 million, Lavigne said. He told a crowded room of conference attendees during Genentech's presentation that the OSI deal is "a fine example of the type of collaborations with excellent partners that leverage our strengths."

Wall Street was less than enthusiastic, especially regarding OSI. Goddard, speaking in the lounge of the Westin St. Francis hotel, site of the conference, blamed a "skittish" market.

"There's an axiom that some people sell on good news, but the deal speaks for itself," he told BioWorld Today.

Under the terms of the agreement, the equity investments will be supplemented by undisclosed up-front fees and milestone payments based on regulatory filings.

OSI keeps certain co-promotion rights in the U.S., but Genentech will be primarily responsible for commercializing the drug here, if it's approved. Roche will handle regulatory approval and marketing elsewhere. Genentech and OSI will split cost and profit sharing in the U.S., and Roche will pay royalties to OSI elsewhere.

Overall, costs of the development program will be split three ways.

After Pfizer Inc., of New York, said it was merging with Morris Plains, N.J.-based Warner-Lambert Co., and gave rights to the cancer drug back to OSI, investors were relieved to hear about positive initial Phase II results - proving the drug is "absolutely a bona fide competitor in this space," Goddard said. (See BioWorld Today, Sept. 15, 2000.)

"We'll continue to see some Phase II results in the early part of the year, but obviously the bulk of the program will gear up during this year," he added. "You'll see some of the smaller studies report perhaps in the final quarter of this year, and the big programs will unfold over the course of 2002."

Pfizer's move didn't keep other would-be partners from lining up at the door, Goddard said.

"Everybody came to us on this; everybody who's anybody in the industry was approaching us," he said. "We had the luxury of choice. Our only concern with Genentech was their lack of global presence, and in Roche, we see that filled in spades."

OSI raised $374.5 million in a public offering in November. (See BioWorld Today, Nov. 2, 2000.)

The company's stock (NASDAQ: OSIP) regained ground, as did others late Monday, ending at $55.875, down $7.812, or 12 percent. Genentech's shares (NYSE: DNA) closed at $62, down $4.625, almost 7 percent..