MGI Pharma 10Q/A 2006 Q2 Quarterly report (amended)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q/A

(Amendment No. 1)

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-10736

MGI PHARMA, INC.

(Exact name of registrant as specified in its charter)


Minnesota (State or other jurisdiction of incorporation or organization)		41-1364647 (I.R.S. employer identification number)


5775 West Old Shakopee Road Suite 100 Bloomington, Minnesota 55437 (Address of principal executive offices and zip code)		(952) 346-4700 (Registrant’s telephone number, including area code)

Indicate by check mark, whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.


Large accelerated filerþ		Accelerated filero		Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Common Stock, $.01 par value (Class)		78,517,717 shares (Outstanding at July 31, 2006)

EXPLANATORY NOTE

MGI PHARMA, INC. is filing this Amendment No. 1 to its Form 10-Q for the quarter ended June 30, 2006 that was originally filed on August 7, 2006 (the “Original 10-Q”) to reflect changes to disclosures made in the Condensed Consolidated Statement of Cash Flows and related management discussion and analysis disclosures. There are no changes to the Condensed Consolidated Statements of Operations or to the Condensed Consolidated Balance Sheets as originally filed. This Amendment No. 1 amends and restates Items 1, 2 and 4 of Part I of the Original 10-Q. The revisions made appear in the following sections: the Condensed Consolidated Statement of Cash Flows and Note 1 to Condensed Consolidated Financial Statements of Item I, under the headings “Restatement” and “Liquidity and Capital Resources” in Item 2, and under the heading “Controls and Procedures” in Item 4. This Amendment No. 1 continues to speak as of the date of the Original 10-Q, and MGI PHARMA has not updated the disclosure contained herein to reflect any events that occurred at a later date. All information contained in this Amendment No. 1 is subject to updating and supplementing as provided in MGI PHARMA’s periodic reports filed with the SEC subsequent to the date of the filing of the Original 10-Q. In addition, this Form 10-Q/A includes certain exhibits, including updated certifications from MGI PHARMA’s Chief Executive Officer and Chief Financial Officer as Exhibits 31.1, 31.2, 32.1, and 32.2.

This Amendment No. 1 is a result of MGI PHARMA’s determination on February 27, 2007 that it had not accurately determined the proper Condensed Consolidated Statement of Cash Flows classification related to the deconsolidation of Symphony Neuro Development Company (“SNDC”), a variable interest entity, in accordance with FIN46R, “Consolidation of Variable Interest Entities.” With the acquisition of Guilford in October 2005, MGI PHARMA assumed certain rights related to SNDC. MGI PHARMA had no ownership in SNDC but was required to consolidate SNDC’s financial results with MGI PHARMA’s financial results primarily due to an exclusive option to purchase SNDC. In the second quarter 2006, MGI PHARMA terminated its exclusive option to purchase SNDC and as a result, was no longer deemed the primary beneficiary of SNDC, and therefore ceased consolidating SNDC’s financial results. MGI PHARMA incorrectly netted SNDC cash flows in cash from operating activities in the Condensed Consolidated Statement of Cash Flows in the Original 10-Q.

This Amendment No. 1 correctly classifies this transaction and results within the Condensed Consolidated Financial Statements.

There is no net change to cash and cash equivalents, and no impact on the Condensed Consolidated Statements of Operations or to the Condensed Consolidated Balance Sheets as originally filed.

Effects of the Restatement

The following table sets forth the effects of the restatement on the Condensed Consolidated Statement of Cash Flows reported in the Original 10-Q. There was no impact to the balance of cash and cash equivalents as of June 30, 2006.


	As
	Originally			SNDC			As
(in thousands)	Reported				Adjustment		Restated
Net cash provided by (used in) operating activities	$	3,631			($4,898	)		($1,267	)
Net cash used in investing activities		(44,040	)		4,898			(39,142	)
Net cash provided by financing activities		6,625			—			6,625

Decrease in cash and cash equivalents		($33,784	)		—			($33,784	)

MGI PHARMA, INC.

FORM 10-Q/A INDEX


	Page
	Number
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets — June 30, 2006 and December 31, 2005		3

Condensed Consolidated Statements of Operations — Three and Six Months Ended June 30, 2006 and 2005		4

Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2006 and 2005		5

Notes to Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18

Item 3. Quantitative and Qualitative Disclosures About Market Risk		27

Item 4. Controls and Procedures		27

PART II. OTHER INFORMATION

Item 1A: Risk Factors		28

Item 4. Submissions of Matter to a Vote of Security Holders		30

Item 6. Exhibits		30

SIGNATURES		31

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

MGI PHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)


	June 30,			December 31,
	2006			*2005 ()**
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	17,352		$	51,136
Short-term marketable investments		73,751			53,067
Restricted cash, current		121			750
Restricted marketable investments, current		5,816			5,822
Investments held by SNDC		—			18,580
Receivables, less contractual allowances and allowance for bad debts of $48,148 and $37,118, respectively		109,312			105,959
Inventories		39,413			49,392
Other current assets		1,046			1,558


Total current assets		246,811			286,264

Restricted cash, less current portion		1,604			1,101
Long-term marketable investments		20,330			23,952
Restricted marketable investments, less current portion		—			2,859
Equipment, furniture and leasehold improvements, at cost less accumulated depreciation of $5,793 and $4,810, respectively		8,721			5,647
Debt issuance costs, less accumulated amortization of $2,712 and $2,131, respectively		5,424			6,005
Intangible assets, at cost less accumulated amortization of $13,169 and $8,779, respectively		90,675			73,505
Goodwill		66,183			70,203
Other assets		1,374			2,049


Total assets	$	441,122		$	471,585


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,007		$	19,463
Accrued expenses		51,370			54,050
Current portion of long-term debt		376			1,563
Deferred revenue, current		2,242			318
Other current liabilities		1,022			1,430


Total current liabilities		67,017			76,824


Noncurrent liabilities:
Senior subordinated convertible notes, face value of $349,500 net of unamortized discount of $87,828		261,672			261,672
Other long-term debt, net of current portion		242			359
Deferred revenue, net of current portion		2,004			2,540
Other noncurrent liabilities		5,416			6,367


Total noncurrent liabilities		269,334			270,938


Total liabilities		336,351			347,762


Commitments and contingent liabilities		—			—

Minority interest		—			14,798

Stockholders’ equity:
Preferred stock, 10,000,000 authorized and unissued shares		—			—
Common stock, $.01 par value, 140,000,000 authorized shares, 78,413,865 and 77,583,796 issued and outstanding shares, respectively		784			776
Additional paid-in capital		567,802			557,841
Unearned compensation		(4,255	)		(6,013	)
Accumulated other comprehensive income (loss)		2,164			(4,098	)
Accumulated deficit		(461,724	)		(439,481	)


Total stockholders’ equity		104,771			109,025


Total liabilities and stockholders’ equity	$	441,122		$	471,585


(*)		The Balance Sheet at December 31, 2005 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

MGI PHARMA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Revenues:
Product sales	$	86,190		$	65,318		$	163,715		$	127,703
Licensing and other		963			1,844			1,641			2,694


		87,153			67,162			165,356			130,397


Costs and expenses:
Cost of sales		33,813			22,920			62,155			44,836
Selling, general and administrative		35,463			16,974			66,985			35,591
Research and development		28,192			14,248			51,157			24,701


		97,468			54,142			180,297			105,128



Income (loss) from operations		(10,315	)		13,020			(14,941	)		25,269

Interest income		1,361			1,747			2,517			3,104
Interest expense		(1,925	)		(1,754	)		(3,922	)		(3,510	)
Other-than-temporary impairment of investment		(9,880	)		—			(9,880	)		—
Other income (expense)		(126	)		—			55			—


Income (loss) before minority interest and income taxes		(20,885	)		13,013			(26,171	)		24,863
Minority interest		1,450			—			3,881			—


Income (loss) before income taxes		(19,435	)		13,013			(22,290	)		24,863
Provision (benefit) for income taxes		—			305			(47	)		555


Net income (loss)	$	(19,435	)	$	12,708		$	(22,243	)	$	24,308


Net income (loss) per common share:
Basic	$	(0.25	)	$	0.18		$	(0.29	)	$	0.34
Diluted	$	(0.25	)	$	0.17		$	(0.29	)	$	0.32

Weighted average number of common shares outstanding:
Basic		78,210			71,768			78,000			71,558
Diluted		78,210			75,703			78,000			75,691

See accompanying Notes to Condensed Consolidated Financial Statements.

MGI PHARMA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)


	Six Months Ended June 30,
	2006 (Restated)			2005
OPERATING ACTIVITIES:
Net income (loss)	$	(22,243	)	$	24,308
Adjustments for non-cash items:
Depreciation and intangible amortization		5,385			1,670
Benefit plan contribution		915			226
Employee stock compensation expense		3,993			1,804
Excess tax benefits from stock-based compensation		(107	)		—
Stock option term modification		—			326
Other-than-temporary impairment of investment		9,880			—
Amortization of non-cash financing charges		581			581
Minority interest related to SNDC		(3,881	)		—
Other		259			—
Change in assets and liabilities (net of acquisitions):
Receivables		(2,943	)		(8,345	)
Inventories		10,971			(27,904	)
Other assets		430			(149	)
Accounts payable and accrued expenses		(4,242	)		(18,773	)
Deferred revenue		1,388			(7	)
Other liabilities		(636	)		(45	)
SNDC working capital		(1,017	)		—

Net cash used in operating activities		(1,267	)		(26,308	)


INVESTING ACTIVITIES:
Purchase of available for sale investments		(481,835	)		(1,025,484	)
Maturity of available for sale investments		424,151			1,023,685
Maturity of investments held by SNDC		14,533			—
Distribution of SNDC funds to SNDC investors		(9,635	)		—
Purchase of held-to-maturity investments		—			38,053
Maturity of held-to-maturity investments		37,000			67,150
Purchase of equipment, furniture and leasehold improvements		(4,083	)		(1,139	)
Dacogen license agreement milestone payment		(20,000	)		—
Other		727			—


Net cash provided by (used in) investing activities		(39,142	)		26,159


FINANCING ACTIVITIES:
Maturity of restricted marketable securities held by trustee for debt service		2,865			2,827
Cash consideration from issuance of shares under stock plans		4,953			4,609
Excess tax benefits from stock-based compensation		107			—
Payments on long-term debt		(1,300	)		—


Net cash provided by financing activities		6,625			7,436


Increase (decrease) in cash and cash equivalents		(33,784	)		7,287

Cash and cash equivalents at beginning of period		51,136			10,098


Cash and cash equivalents at end of period	$	17,352		$	17,385


Supplemental disclosure of cash and non-cash information:
Cash paid for interest	$	3,072		$	2,927
Cash paid for taxes	$	—		$	214

See accompanying Notes to Condensed Consolidated Financial Statements.

MGI PHARMA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Restatement

The Condensed Consolidated Statement of Cash Flows as of June 30, 2006 is being restated due to MGI PHARMA, INC. and its wholly owned subsidiaries (collectively, “we,” “MGI,” “MGI PHARMA,” or “Company”) concluding on February 27, 2007 it had not accurately determined the proper Condensed Consolidated Statement of Cash Flows classification related to the deconsolidation of a variable interest entity in accordance with FIN46R, “Consolidation of Variable Interest Entities.”

With the acquisition of Guilford in October 2005, MGI PHARMA assumed certain rights related to SNDC. MGI PHARMA had no ownership in SNDC but was required to consolidate SNDC’s financial results with MGI PHARMA’s financial results primarily due to an exclusive option to purchase SNDC. In the second quarter 2006, MGI PHARMA terminated its exclusive option to purchase SNDC and as a result, was no longer deemed the primary beneficiary of SNDC, and therefore ceased consolidating SNDC’s financial results. MGI PHARMA incorrectly netted SNDC cash flows in cash from operating activities in the Condensed Consolidated Statement of Cash Flows in the Original 10-Q.

This Amendment No. 1 correctly classifies this transaction and results within the Condensed Consolidated Financial Statements.

There is no net change to cash and cash equivalents, and no impact on the Condensed Consolidated Statements of Operations or to the Condensed Consolidated Balance Sheets as originally filed.

Effects of the Restatement

MGI PHARMA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	Six months ended June 30, 2006
(in thousands)	As reported			Adjustment			As restated
OPERATING ACTIVITIES:
Net income (loss)	$	(22,243	)	$			$	(22,243	)
Adjustments for non-cash items:
Depreciation and intangible amortization		5,385						5,385
Benefit plan contributions		915						915
Employee stock compensation expense		3,993						3,993
Excess tax benefits from stock-based compensation		(107	)					(107	)
Other-than-temporary impairment to investment		9,880						9,880
Amortization of non-cash financing charges		581						581
Minority interest related to SNDC		—			(3,881	)		(3,881	)
Other		259						259
Change in assets and liabilities (net of acquisitions and divestiture):
Receivables		(2,943	)					(2,943	)
Inventories		10,971						10,971
Other assets		430						430
Accounts payable and accrued expenses		(4,242	)					(4,242	)
Deferred revenue		1,388						1,388
Other liabilities		(636	)					(636	)
SNDC working capital		—			(1,017	)		(1,017	)

Net cash provided by (used in) operating activities		3,631			(4,898	)		(1,267	)


INVESTING ACTIVITIES:
Purchase of available for sale investments		(481,835	)					(481,835	)
Maturity of available for sale investments		424,151						424,151
Maturity of investments held by SNDC		—			14,533			14,533
Distribution of SNDC funds to SNDC investors		—			(9,635	)		(9,635	)
Maturity of held-to-maturity investments		37,000						37,000
Purchase of equipment, furniture, and leasehold improvements		(4,083	)					(4,083	)
Dacogen license agreement milestone payments		(20,000	)					(20,000	)
Other		727						727

Net cash used in investing activities		(44,040	)		4,898			(39,142	)


FINANCING ACTIVITIES:
Maturity of restricted marketable securities held by trustee for debt services		2,865						2,865
Cash consideration from issuance of shares under stock plans		4,953						4,953
Excess tax benefits from stock-based compensation		107						107
Payments on long-term debt		(1,300	)					(1,300	)

Net cash provided by financing activities		6,625			—			6,625


Decrease in cash and cash equivalents		(33,784	)		—			(33,784	)
Cash and cash equivalents at beginning of period		51,136			—			51,136

Cash and cash equivalents at end of period	$	17,352		$	—		$	17,352


Supplemental disclosure of cash and non-cash information:
Cash paid for interest	$	3,072		$			$	3,072
Cash paid for taxes		—						—

2. Basis of Presentation

In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements (“consolidated financial statements”) of the Company have been prepared on a consistent basis with the December 31, 2005 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly present the information set forth therein. The consolidated financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission (“SEC”), and, therefore, omit certain information and footnote disclosure necessary to present the statements in accordance with U.S. generally accepted accounting principles. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, which was filed with the SEC on March 16, 2006. Certain amounts reported in previous periods have been reclassified to conform to the current period presentation. The results of operations for the first six months of 2006 are not necessarily indicative of the results to be expected for the entire fiscal year or any future period.

Accounting Policies:

In preparing the consolidated financial statements in conformity with U.S. generally accepted accounting principles, management must make decisions that impact the reported amounts and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, management applies judgments based on its understanding and analysis of the relevant circumstances, historical experience, and actuarial valuations. Actual amounts could differ from those estimated at the time the consolidated financial statements are prepared. Note 1 to the consolidated financial statements in the Company’s 2005 Annual Report on Form 10-K provides a summary of the significant accounting policies followed in the preparation of the consolidated financial statements. Other footnotes in the Company’s 2005 Annual Report on Form 10-K describe various elements of the consolidated financial statements and the assumptions made in determining specific amounts.

The consolidated financial statements include the accounts of MGI PHARMA and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Consolidation of Entities: In accordance with FIN 46R, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights, and accordingly should consolidate the entity, SNDC Holdings LLC, the parent of Symphony Neuro Development Company (“SNDC”), is considered a variable interest entity. We were deemed to be the primary beneficiary of SNDC Holdings LLC, under FIN 46R; and therefore, we consolidated the financial results of SNDC Holdings LLC with ours on our financial statements. In the second quarter of 2006, we ceased to be deemed the primary beneficiaries of SNDC Holdings LLC and therefore, we no longer consolidate SNDC’s balance sheet with ours and in future periods will not consolidate its financial results with ours. However, the three and six month periods ended June 30, 2006 reflects the financial results of SNDC Holdings LLC during the period of required consolidation.

Concentration of Supply Risk: We depend on a single supplier to provide Aloxi injection (“Aloxi”), which accounted for 80 percent of our sales revenue for the six months ended June 30, 2006. If this supplier is unable to meet our demand we may be unable to provide Aloxi for commercial sale.

We depend on a single supplier to provide the active ingredient for Dacogen (decitabine) for Injection (“Dacogen”) and Salagen (pilocarpine hydrochloride) Tablets (“Salagen”), which accounted for 3 percent and 2 percent of our sales for the six months ended June 30, 2006, respectively. If these suppliers end their relationship with us, or are unable to meet our demand for the ingredient, we may be unable to provide Dacogen and Salagen for commercial sale.

Recent Accounting Pronouncements:

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This Interpretation is effective for the Company beginning in fiscal year 2007. The Company does not expect the adoption of this pronouncement to have a significant impact on its consolidated financial statements.

In November 2005, the FASB issued FASB Staff Position (“FSP”) Nos. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than- Temporary Impairment and Its Application to Certain Investments,” (FSP 115-1 and 124-1), which address the determination as to when an investment is considered impaired, whether that impairment is other than temporary and the measurement of an impairment loss. FSP 115-1 and 124-1 also include accounting considerations subsequent to the recognition of an other-than-temporary impairment and require certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. These FSPs were effective for us beginning January 1, 2006. We have evaluated the impact this standard has on our evaluation of our long-term available for sale marketable securities and have determined that the application of this standard does not materially change our recognition and disclosures.

In May 2005, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections,” which replaces Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” This Statement changes the requirements for the accounting for and reporting of a change in accounting principle, and applies to all voluntary changes in accounting principles, as well as changes required by an accounting pronouncement in the unusual instance it does not include specific transition provisions. Specifically, this Statement requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the effects of the change, the new accounting principle must be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and a corresponding adjustment must be made to the opening balance of retained earnings for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of the change, the new principle must be applied as if it were adopted prospectively from the earliest date practicable. This Statement is effective for the Company for all accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. This Statement does not change the transition provisions of any existing pronouncements. The Company does not expect the adoption of this pronouncement to have a significant impact on its consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment.” SFAS No. 123R is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services through share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost will be recognized over the period during which an employee is required to provide services in exchange for the award. SFAS No. 123R is effective as of the beginning of the first annual reporting period that begins after June 15, 2005. The impact of implementing SFAS No. 123R to our consolidated results of operations is expected to be in the range of $8 to $10 million for 2006. Our disclosure of compensation expense related to prior periods under SFAS No. 123 can be found under Note 2. Our expected 2006 impact from the implementation of SFAS No. 123R differs from our disclosure of compensation expense related to prior periods under SFAS No. 123 due to the acceleration of a large number of outstanding options in the third and fourth quarters of 2005. On January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123R using the modified prospective method. Options are priced based on the closing price of a share of our common stock at the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. To determine the inputs for the Black-Scholes option pricing model, we use the implied volatility inherent in the value of exchange traded options on the Company’s stock to estimate expected volatility and the period of time that option grants are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option.

3. Stock Incentive Plans

Under the Company’s stock incentive plans, designated persons (including officers, directors, employees, licensors and consultants) have been or may be granted rights to acquire our common stock. These rights include stock options, restricted stock units and other equity rights. Stock options become exercisable over varying periods, generally four years, and expire up to seven years from the date of grant. Options may be granted in the form of incentive stock options or nonqualified stock options. At the May 9, 2006 Annual Meeting of Shareholders, the shareholders approved the addition of 7.4 million shares to the Amended and Restated 1997 Stock Incentive Plan. At June 30, 2006, shares issued and shares available under stock incentive plans are as follows:


	Shareholder				Total
	Approved		Other		For All
(in thousands, except exercise price)	Plans		Plans		Plans
Shares issuable under outstanding awards		10,092		41		10,133
Shares available for future issuance		8,328		—		8,328


Total		18,420		41		18,461


Average exercise price for outstanding options	$	16.92	$	5.24	$	16.87

Activity under the Company’s stock incentive plans in the six months ended June 30, 2006 is summarized as follows:


	Stock Options
				Weighted		Weighted		Aggregate Intrinsic
	Number of			Average Exercise		Average Remaining		Value as of June 30,
(in thousands, except share price)	Shares			Price		Contractual Term		2006
Outstanding at December 31, 2005		10,350		$	16.38
Granted		337			18.04
Exercised		(613	)		6.55
Expired		(218	)		26.25
Forfeited		(94	)		11.79


Outstanding at June 30, 2006		9,762			16.87		5.69	$	66,657
Ending vested and expected to vest		9,695			16.88		5.69		66,263
Ending exercisable		8,261		$	17.45		5.49	$	54,779


	Restricted Stock Units
						Weighted		Aggregate Intrinsic
	Number of			Weighted Average Grant		Average Remaining		Value as of June 30,
(in thousands, except share price)	Shares			Date Fair Value		Contractual Term		2006
Outstanding at December 31, 2005		264		$	24.83
Granted		119			17.32
Exercised		—			—
Forfeited		(12	)		24.59


Outstanding at June 30 2006		371			22.43		1.48	$	7,109
Ending vested and expected to vest		348		$	22.43		1.43	$	6,668

The weighted average estimated fair values of stock options granted during the six months ended June 30, 2006 and 2005 were $8.56 and $17.06, respectively. The total intrinsic values of options exercised during the six months ended June 30, 2006 and 2005 were $7.3 million and $13.1 million, respectively.

As of June 30, 2006, there was $8.1 million of total unrecognized compensation expense. That cost is expected to be recognized over a weighted-average period of 1.5 years.

The following table summarizes information concerning options outstanding and exercisable at June 30, 2006:


	Options						Options
	Outstanding						Exercisable
			Weighted		Weighted				Weighted
	Number		Average		Average		Number		Average
	Outstanding		Remaining		Exercise		Exercisable		Exercise
Range of Exercise Price	(in thousands)		Life		Price		(in thousands)		Price
$1.81—$3.71		1,119		5.59	$	3.49		980	$	3.49
$3.80—$8.08		1,199		5.07		6.13		1,101		6.03
$8.15—$8.59		987		4.46		8.37		949		8.36
$8.88—$12.75		130		5.47		11.03		112		11.14
$12.79—$13.31		1,225		7.01		13.30		560		13.30
$13.45—$21.72		981		5.69		17.73		524		17.96
$21.77—$24.11		976		6.06		23.14		890		23.10
$24.18—$26.91		1,142		5.94		26.49		1,142		26.49
$26.99—$27.43		213		5.44		27.27		213		27.27
$27.86—$33.22		1,790		5.64		28.73		1,790		28.73


Total		9,762		5.69	$	16.87		8,261	$	17.45

On January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123R using the modified prospective method. As a result, for the three and six months ended June 30, 2006, our results of operations reflect compensation expense for new stock options and awards granted and vested under our stock incentive plans, and the unvested portion of previous stock option and award grants which vested during the quarter. Amounts recognized in the financial statements related to stock-based compensation were as follows:


	For the three months ended
	June 30,
(in thousands, except per share data)	2006		2005
Amounts charged against earnings (loss), before income tax benefits	$	1,935	$	837
Amount of income tax expense recognized in earnings (loss)		—		60

Amount charged against net earnings (loss)	$	1,935	$	897


Impact on net earnings (loss) per common share:
Basic	$	0.02	$	0.01
Diluted	$	0.02	$	0.01


	For the six months ended
	June 30,
(in thousands, except per share data)	2006		2005
Amounts charged against earnings (loss), before income tax benefits	$	3,886	$	1,940
Amount of income tax expense recognized in earnings (loss)		107		190

Amount charged against net earnings (loss)	$	3,993	$	2,130


Impact on net earnings (loss) per common share:
Basic	$	0.05	$	0.03
Diluted	$	0.05	$	0.03

Stock-based compensation expense was reflected in the statement of operations for the three and six months ended June 30, 2006 as follows (in thousands):


	Three months ended
	June 30, 2006
Selling, general, and administrative	$	1,341
Research and development		594

Total	$	1,935


	Six months ended
	June 30, 2006
Selling, general, and administrative	$	2,823
Research and development		1,063

Total	$	3,886

Options are priced based on the closing price of a share of our common stock at the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. To determine the inputs for the Black-Scholes option pricing model we use the implied volatility inherent in the value of exchange traded options on the Company’s stock to estimate expected volatility and the period of time that option grants are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The following assumptions were used to estimate the fair value of options granted during the six month period ended June 30, 2006 using the Black-Scholes option-pricing model:


Expected dividend yield	0	%
Risk-free interest rate	4.92	%
Expected volatility	0.42
Expected life, in years	5.89

Prior to January 1, 2006, we accounted for stock-based employee compensation arrangements in accordance with the provisions and related interpretations of Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees.” Had compensation cost for stock-based compensation been determined consistent with SFAS 123, the net earnings and net earnings per share for the three and six months ended June 30, 2005 would have been adjusted to the following pro forma amounts:


	Three months ended			Six months ended
(in thousands, except per share data)	June 30, 2005			June 30, 2005
Net income, as reported	$	12,708		$	24,308
Add: Total stock-based employee compensation expense included in reported net income		897			2,130
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards		(8,411	)		(17,832	)


Pro forma net income	$	5,194		$	8,606


Net income per common share:
As reported basic	$	0.18		$	0.34
Pro forma basic	$	0.07		$	0.12

As reported diluted	$	0.17		$	0.32
Pro forma diluted	$	0.07		$	0.11

Expected dividend yield		0	%		0	%
Risk-free interest rate		3.87	%		3.87	%
Annualized volatility		0.67			0.72
Expected life, in years		4.8			5.1

Prior to January 1, 2006, the following methods and assumptions were used to determine the fair value of options granted. Options were priced based on the closing price of a share of our common stock at the date of grant. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. To determine the inputs for the Black-Scholes option pricing model we used the historical volatility of the Company’s stock to estimate expected volatility and the period of time that option grants were expected to be outstanding. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option.

4. Net Income (Loss) Per Common Share

Net income (loss) per common share for the three and six month periods ended June 30, 2006 and 2005 is based on weighted average shares outstanding as summarized in the following table:


	Three Months
	Ended June 30,
(in thousands)	2006		2005
Weighted-average shares — basic		78,210		71,768
Effect of dilutive stock options		—		3,935
Effect of convertible debt		—		—


Weighted-average shares — assuming dilution		78,210		75,703


	Six Months
	Ended June 30,
(in thousands)	2006		2005
Weighted-average shares — basic		78,000		71,558
Effect of dilutive stock options		—		4,133
Effect of convertible debt		—		—


Weighted-average shares — assuming dilution		78,000		75,691

Weighted-average shares issuable upon the exercise of stock options, which were not included in the diluted earnings per share calculation because they were not dilutive, were 9.8 million and 5.1 million for the three month periods ended June 30, 2006 and 2005, respectively and were 9.8 million and 4.9 million for the six month periods ended June 30, 2006 and 2005, respectively. The potential dilutive shares related to our senior subordinated convertible notes issued in March 2004 are excluded from our diluted net income (loss) per share for the three and six months ended June 30, 2006 and 2005 because their inclusion in a calculation of net income (loss) per share would be antidilutive. When dilutive, our diluted shares outstanding will be increased by up to 8.3 million shares and the net earnings (loss) used for earnings per share calculations would be adjusted, using the if-converted method. The Company estimates it would need to record annual net income of approximately $69 million, or quarterly net income of approximately $17 million, in order for the inclusion of the convertible debt to be dilutive to earnings per share.

5. Marketable Investments

Marketable investments consisted of held-to-maturity and available-for-sale debt investments (reported at amortized cost, which approximates fair value) and available-for-sale, publicly traded, equity securities (reported at fair value). Unrealized gains or losses

from the available-for-sale, marketable securities have been reported as a separate component of Stockholders’ equity (“Accumulated Other Comprehensive Income (Loss)”).

Short-term marketable investments as of June 30, 2006 and December 31, 2005 are summarized in the following table:


	June 30,		December 31,
(in thousands)	2006		2005
Corporate notes (classified as held-to-maturity)	$	—	$	4,000
Government agencies (classified as held-to-maturity)		—		33,347
Auction rate securities (classified as available-for-sale)		73,751		15,720


Total	$	73,751	$	53,067

Long-term marketable securities as of June 30, 2006 and December 31, 2005 are summarized in the following table:


	June 30,		December 31,
(in thousands)	2006		2005
Equity securities (classified as available-for-sale)	$	20,330	$	23,952


Total	$	20,330	$	23,952

Restricted marketable investments of $5.8 million and $8.7 million at June 30, 2006 and December 31, 2005, respectively, consist of United States government investments and certificates of deposit, and relate to the issuance of convertible debt in March 2004.

In September 2004, we acquired four million shares of SuperGen, Inc. (“SuperGen”) as part of a transaction that included obtaining the worldwide licensing rights for decitabine (“Dacogen”). The investment is accounted for as long-term available for sale marketable securities. As such, unrealized gains and losses have been reported as accumulated other comprehensive income (loss). At the time of purchase, the fair value of the SuperGen securities was $24.4 million. As of June 30, 2006, the fair value of MGI PHARMA’s investment in SuperGen was $14.5 million. As the fair value of SuperGen common stock has been below our cost basis for over six months, we determined that an other-than-temporary impairment has occurred. In accordance with SFAS 115 “Accounting for Certain Investment in Debt and Equity Securities”, the Company recorded an other-than-temporary impairment charge of $9.9 million in the three months ended June 30, 2006. The amount of the charge was based on the difference between the fair value based on the June 30, 2006 closing market price and our original cost basis.

In addition to our investment in SuperGen, we also own an approximate 10 percent investment in MethylGene Inc. (“MethylGene”), a Canada-based biopharmaceutical company. MethylGene completed its initial public offering and began trading publicly on the Toronto Stock Exchange on June 29, 2004. MGI’s carrying value of the MethylGene investment prior to MethylGene’s initial public offering was $3.6 million. As of June 30, 2006, the fair value of our MethylGene investment was $5.8 million.

The unrealized gains (losses) for available for sale equity securities reported in accumulated other comprehensive income (loss) as of June 30, 2006 and December 31, 2005 are summarized as follows:


	June 30, 2006
			Gross		Gross
			Unrealized		Unrealized		Fair
(in thousands)	Cost		Gains		Losses		Value
Equity Securities (classified as available for sale)	$	18,166	$	2,164	$	—	$	20,330


	December 31, 2005
			Gross		Gross
			Unrealized		Unrealized			Fair
(in thousands)	Cost		Gains		Losses			Value
Equity Securities (classified as available for sale)	$	28,046	$	106	$	(4,200	)	$	23,952

6. Inventories

Inventories at June 30, 2006 and December 31, 2005 are summarized as follows:


	June 30,		December 31,
(in thousands)	2006		2005
Raw materials and supplies	$	680	$	472
Work in process		706		1,274
Finished products		37,832		47,450
Inventory on consignment		195		196

Total	$	39,413	$	49,392

Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis.

7. Accrued Expenses

Accrued expenses at June 30, 2006 and December 31, 2005 are summarized as follows:


	June 30,		December 31,
(in thousands)	2006		2005
Product rebate, administrative, and other fees	$	13,784	$	11,886
Product development		9,039		9,152
License fees		6,864		5,847
Vacation		3,272		2,295
Other bonuses		3,053		6,007
Interest		2,452		2,189
Field sales bonuses		2,180		1,306
Marketing		1,701		648
Payroll benefits		1,555		1,497
Product return		1,470		1,684
Retirement plan		869		3,088
Other		5,131		8,451

Total	$	51,370	$	54,050

8. Acquisitions

On October 3, 2005, Granite Acquisition, Inc., a Delaware corporation and wholly owned subsidiary of MGI, merged with and into Guilford Pharmaceuticals Inc., a Delaware corporation now known as MGI GP, Inc. (“Guilford” or “MGI GP”), with Guilford surviving as a wholly owned subsidiary of MGI (the “Guilford Merger”). Upon closing of the Guilford Merger, all shares of Guilford common stock were exchanged for the right to receive an aggregate of approximately 5.3 million shares of MGI PHARMA common stock plus approximately $53.9 million in cash, which represents $3.75 per Guilford share of common stock, based on the average closing price of MGI’s common stock over a five trading day period ended on September 27, 2005, or total consideration of $176.1 million to Guilford shareholders. The transaction has been accounted for as a purchase business combination. Commencing October 3, 2005, the results of Guilford’s operations have been included in our consolidated financial statements.

Purchase Price:The purchase price is as follows:


(In thousands)
Purchase of Guilford — cash consideration	$	53,888
Purchase of Guilford — equity consideration		122,246
Extinguishment of Guilford’s revenue interest obligation agreement with Paul Royalty Fund, L.P. and Paul Royalty Fund, II, L.P.		59,891
Repurchase of Guilford’s convertible debt		69,249
Transaction costs and fees		15,569

Purchase price	$	320,843

The purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. In accordance with SFAS No. 141, the excess of the purchase price over the fair values of the assets and liabilities was allocated to goodwill. The determination of estimated fair value requires management to make significant estimates and assumptions. We engaged an independent third party to assist in the valuation of assets that were difficult to value.

Subsequent to the preliminary allocation of the purchase price, information became available that has assisted us in determining the fair value of the liability assumed under a non-cancelable Manufacturing and Supply Agreement with Baxter Healthcare Corporation, other miscellaneous liabilities and receivables, inventory, and the acquired identifiable intangible asset for Aggrastat^® injection. To the extent that our estimates used in the purchase accounting need to be refined, we will do so upon making that determination but not later than one year from the date of acquisition. The following table summarizes the adjusted preliminary purchase price allocation to estimated fair values of the assets acquired and liabilities assumed as of the acquisition date:


(In thousands)
Cash and cash equivalents	$	19,500
Short-term marketable investments		2,978
Restricted marketable investments		15,930
Investments held by SNDC		21,262
Receivables, net		4,328
Inventories		7,957
Other current assets		1,394
Goodwill		66,183
In-process research and development		156,900
Acquired identifiable intangible assets		70,610
Equipment, furniture, and leasehold improvements, net		1,768
Other assets		2,810
Accounts payable		(7,072	)
Accrued expenses		(15,548	)
Long-term debt		(3,757	)
Other liabilities		(6,366	)
Minority interest		(18,034	)

Total purchase price	$	320,843

The amount preliminarily allocated to acquired identifiable intangible assets has been attributed to the following identifiable assets:


(in thousands)
Gliadel Wafer	$	62,300
Aggrastat Injection		8,310

Total acquired identifiable intangible assets	$	70,610

Acquired identifiable intangible assets relate to product rights for Gliadel and Aggrastat. The estimated fair value of both assets was derived using the income method. The estimated fair value attributed to Gliadel will be amortized on a straight-line basis over 15 years. While patent protection for Gliadel ends in August 2006, during September 2004, the U.S. Food and Drug Administration (“FDA”) notified Guilford that Gliadel is entitled to market exclusivity for the treatment of patients with malignant glioma undergoing primary surgical resection until February 2010 under applicable orphan drug laws. In addition, Gliadel is manufactured using a proprietary process. We believe that this proprietary process will provide a significant barrier to future, generic competition. The estimated fair value attributed to Aggrastat will be amortized on a straight-line basis over 5 years from the date of acquisition, which is the estimate of the life of the product.

Pro forma results of operations:The following unaudited pro forma information for the three and six months ended June 30, 2005 presents a summary of the combined results of the MGI PHARMA and Guilford as if the acquisition had occurred on January 1, 2005. The pro forma information is not necessarily indicative of results that would have occurred had the acquisition been consummated for the periods presented or indicative of results that may be achieved in the future.


	Three months ended			Six months ended
(in thousands)	June 30, 2005			June 30, 2005
Total revenues	$	79,927		$	153,898
Net loss		(5,391	)		(15,919	)
Pro forma loss per common share:
Basic and diluted	$	(0.07	)	$	(0.21	)

9. Stockholders’ Equity

Changes in selected Stockholders’ equity accounts for the six months ended June 30, 2006 were as follows:


					Additional					Accumulated other
	Common Stock				paid-in		Unearned			comprehensive
(in thousands)	Shares		Par value		capital		compensation			income (loss)
Balance at December 31, 2005		77,584	$	776	$	557,841	$	(6,013	)	$	(4,098	)
Exercise of stock options, including income tax benefit of $107		613		6		4,116		—			—
Employee retirement plan contribution		141		1		2,440		—			—
Shares issued pursuant to employee stock purchase plan		57		1		937		—			—
Restricted stock, net of shares withheld for tax		15		—		306		1,758			—
Employee stock option compensation expense		—		—		1,822		—			—
Unrealized gain and recognition of other-than-temporary impairment on available for sale investments		—		—		—		—			6,262
Other issuances		4		—		340		—			—

Balance at June 30, 2006		78,414	$	784	$	567,802	$	(4,255	)	$	2,164

10. Research and Development Expense

Research and development expense for the three and six month periods ended June 30, 2006 and 2005 consists of the following:


	Three Months Ended June 30,
(in thousands)	2006		2005
License fees	$	50	$	—
Other research and development		28,142		14,248

Total	$	28,192	$	14,248


	Six Months Ended June 30,
(in thousands)	2006		2005
License fees	$	50	$	—
Other research and development		51,107		24,701

Total	$	51,157	$	24,701

11. Comprehensive Income (Loss)

Total comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss), which consists of unrealized gains and losses on available-for-sale investments. Other comprehensive income (loss) has no impact on our net income (loss) but is reflected in our balance sheet through an adjustment to stockholders’ equity. The components of comprehensive income (loss) are as follows:


	Three Months Ended June 30,
(in thousands)	2006			2005
Net income (loss), as reported	$	(19,435	)	$	12,708
Unrealized gain (loss) and recognition of other-than-temporary impairment from securities classified as available for sale		351			(820	)
Foreign currency translation adjustment		3			—

Comprehensive income	$	(19,081	)	$	11,888


	Six Months Ended June 30,
(in thousands)	2006			2005
Net income (loss), as reported	$	(22,243	)	$	24,308
Unrealized gain (loss) and recognition of other-than-temporary impairment from securities classified as available for sale		6,259			(9,262	)
Foreign currency translation adjustment		3			—

Comprehensive income	$	(15,981	)	$	15,046

12. Licensing Arrangements

Dacogen Injection

In September 2004, we obtained exclusive worldwide rights to the development, commercialization, manufacturing and distribution of Dacogen for all indications from SuperGen. Dacogen is an anti-cancer therapeutic for the treatment of patients with myelodysplastic syndrome (“MDS”). A New Drug Application (“NDA”) for Dacogen for the treatment of MDS was submitted for marketing approval by the FDA in the United States. A pivotal phase 3 trial and two supporting phase 2 trials for the MDS indication form the clinical basis of the NDA. On May 2, 2006, MGI received approval from the FDA for the NDA. A regulatory application before the European Medicines Agency (“EMEA”) in Europe was withdrawn in November 2005. We are working with European regulatory authorities to determine the type of additional clinical information that will be needed to support a resubmission of the European application. Given the broad activity of Dacogen in hematologic cancers, a pivotal program in patients with acute myeloid leukemia (“AML”) was initiated in 2005. We have assumed responsibility for development of all other indications for Dacogen. Under the terms of our agreement with SuperGen, we paid $40 million to SuperGen and we incurred $1.1 million of transaction fees, including legal and accounting fees. We received four million shares of SuperGen that were valued at $24.4 million on the purchase date and are reported as an available-for-sale equity security. (See Note 4 for discussion on changes in the value of our SuperGen investment). The difference between total consideration ($41.1 million) and the fair value of the equity investment ($24.4 million) of $16.7 million was recorded as research and development expense in the third quarter of 2004. We expensed a total of $12.5 million in milestone obligations during 2004 for: (1) the filing of the NDA for Dacogen with the FDA and (2) a Marketing Authorization Application (“MAA”) filing with the EMEA. In the second quarter of 2006, we paid to SuperGen a milestone payment of $20 million for the first commercial sale of Dacogen in the United States. We expect to make additional milestone payments totaling $12.5 million upon achievement of regulatory and commercialization milestones in Europe and Japan. Subject to certain limitations, we will also pay

SuperGen 50 percent of certain revenue payable as a result of our sublicensing rights to market, sell or distribute Dacogen, to the extent such revenues are in excess of the milestone payments. In addition, SuperGen will receive a royalty on annual worldwide net sales of licensed product starting at 20 percent and escalating to a maximum of 30 percent. We also committed to fund at least $15 million of further Dacogen development costs by September 1, 2007, all of which had been incurred by December 2005.

13. Goodwill

The changes in the net carrying amount of goodwill for the six months ended June 30, 2006 are as follows:


(in thousands)
Balance at December 31, 2005	$	70,203
Valuation of Baxter loss contract		(723	)
Valuation of inventory		(991	)
Adjustments of other miscellaneous liabilities and receivables		(746	)
Valuation of Aggrastat Injection intangible asset		(1,560	)

Balance at June 30, 2006	$	66,183

14. Subsequent Events

On July 6, 2006, we entered into a license agreement with Cilag GmbH, a Johnson & Johnson (JNJ) company, granting exclusive development and commercialization rights for Dacogen^™ (decitabine) for Injection in all territories outside North America to Janssen-Cilag companies, members of the Johnson & Johnson family of companies. Total payments from Cilag GmbH to us as part of this license agreement, including an upfront payment, potential milestone payments, and research and development support, may exceed $80 million. MGI and the Janssen-Cilag companies will jointly implement a strategic plan for the global clinical development of Dacogen. Under the terms of this agreement, we will retain all commercialization rights to Dacogen in North America. Janssen-Cilag companies will be responsible for conducting regulatory and commercial activities related to Dacogen in all territories outside North America, while we retain all responsibility for all activities in the United States, Canada and Mexico. Pursuant to the terms of this agreement, we received from Cilag GmbH an upfront payment of $10 million and may earn milestone payments potentially totaling more than $47 million should all specified clinical development, regulatory, and commercial goals be achieved. Under the terms of the Dacogen license agreement between us and SuperGen, Inc., we will share these upfront and milestone payments from Cilag GmbH with SuperGen. In addition to the previously described payments, we will receive from Cilag GmbH research and development support totaling $25 million over the next three years related to specified clinical development activities. We will receive a royalty from Cilag GmbH on net sales of Dacogen in each of the countries covered by this agreement.

Item 2.

From time to time in this quarterly report we make statements that reflect our current expectations regarding our future results of operations, economic performance, and financial condition, as well as other matters that may affect our business. In general, we try to identify these forward-looking statements by using words such as “anticipate,” “believe,” “expect,” “estimate” and similar expressions.

The forward-looking statements may cover, but are not necessarily limited to, the following topics: (1) efforts to market, sell and distribute Aloxi^{^®} Injection in the United States and Canada; (2) efforts to market, sell and distribute Gliadel^{^®} Wafer; (3) efforts to develop, market, sell, and distribute Dacogen^™for Injection (4) the clinical development of Dacogen^™ for Injection, Saforis^™Powder for Oral Suspension, amolimogene (HPV E6 E7 plasmid) (formerly known as ZYC101a), Aloxi^{^®}Injection for PONV, Aquavan^{^®} Injection, and other clinical compounds; (5) efforts to secure adequate supply of the active pharmaceutical ingredients for clinical development and commercialization; (6) efforts to manufacture drug candidates for clinical development and eventual commercial supply; (7) strategic plans; (8) anticipated expenditures and the potential need for additional funds; and (9) specific guidance we give regarding our current expectations of our future operating results.

All of these items involve significant risks and uncertainties. These and any of the other statements we make in this quarterly report that are forward-looking are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution you that our actual results may differ significantly from the results we discuss in these forward-looking statements.

We discuss some factors that could cause or contribute to such differences in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2005, that we have previously filed with the Securities and Exchange Commission. In addition, any forward-looking statements we make in this document speak only as of the date of this document, and we do not intend to update any such forward-looking statements to reflect events or circumstances that occur after that date.

We have registered “Hexalen^®,” Salagen^®,” “Aquavan^®,” “Gliadel^®,” and “Aggrastat^®,” as trademarks with the U.S. Patent and Trademark Office, and own pending trademark applications for the marks “Saforis™” and “UpTec™”. All other trademarks used in this report are the property of their respective owners. “Aloxi^®” is a registered trademark of Helsinn Healthcare SA. “Dacogen™” is a trademark of SuperGen, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Restatement

The Company has restated its Condensed Consolidated Statement of Cash Flows as of June 30, 2006 as a result of the classification related to the deconsolidation of a variable interest entity in accordance with FIN 46R, “Consolidation of Variable Interest Entities” discussed in Note 1. There were no changes to the Condensed Consolidated Statements of Operations or to the Condensed Consolidated Balance Sheets as originally filed.

Business Overview –

MGI PHARMA, INC. (including its subsidiaries, “MGI,” “MGI PHARMA,” “we,” or the “Company”) is an oncology- and acute care- focused biopharmaceutical company that discovers, acquires, develops and commercializes proprietary pharmaceutical products that address the unmet needs of patients. It is our goal to become a leading biopharmaceutical company through application of our core competencies of product discovery, acquisition, development and commercialization, which we apply toward our portfolio of oncology and acute care products and product candidates. We acquire intellectual property or product rights from others after they have completed the basic research to discover the compounds that will become our product candidates or marketed products. This allows us to concentrate our skills on focused research, product development and commercialization. On October 3, 2005, we acquired Guilford Pharmaceuticals Inc., now known as MGI GP, Inc. (“Guilford” or “MGI GP”), located in Baltimore, Maryland. With the acquisition of Guilford, we added further drug discovery capabilities. We now expect to be able to concentrate on our relevant markets as a fully integrated biopharmaceutical company performing focused drug discovery, product acquisition, product development and commercialization. We have facilities in Bloomington, Minnesota; Lexington, Massachusetts; and Baltimore, Maryland.

We market products directly to physician specialists and hospitals in the United States using our own sales force. Our marketable products include Aloxi (palonosetron hydrochloride) Injection (“Aloxi”), Gliadel (carmustine) Wafer (“Gliadel”), Dacogen (decitabine) for Injection (“Dacogen”), Salagen (pilocarpine hydrochloride) Tablets (“Salagen”), Hexalen (altretamine) Capsules (“Hexalen”), and Aggrastat (tirofiban hydrochloride) Injection (“Aggrastat”).

The following tables set forth summary information about our marketable products and our product candidates and research pipeline:

MARKETABLE PRODUCTS


Products	Principal Indications	Status	Commercial Rights
Aloxi Injection	CINV	Currently marketed	U.S. & Canada: MGI PHARMA

Dacogen for Injection	MDS	Currently marketed	U.S. & Canada: MGI PHARMA Rest of World: Cilag GmbH

Gliadel Wafer	Malignant glioma at time of initial surgery	Currently marketed	U.S.: MGI PHARMA Outside U.S.: Various collaborators


Products	Principal Indications	Status	Commercial Rights
	GBM	Currently marketed	U.S.: MGI PHARMA Outside U.S.: Various collaborators

Salagen Tablets	Symptoms of radiation-induced dry mouth in head and neck cancer patients Dry mouth, plus dry eyes outside the U.S., in Sjögren’s syndrome patients	Currently marketed	U.S.: MGI PHARMA Europe: Novartis Canada: Pfizer Rest of World: Various other collaborators

Hexalen capsules	Ovarian Cancer	Currently marketed	U.S.: MGI PHARMA Outside U.S.: Various collaborators

Aggrastat Injection	Acute coronary syndrome	Currently marketed	U.S.: MGI PHARMA

We believe we have a strong portfolio of oncology and acute care related product candidates. Our current product candidates are a mixture of late stage and earlier stage opportunities. The late stage product candidates include oncology (Dacogen) and supportive care (Saforis Powder for Oral Suspension (“Saforis”)) products, as well as a biologics candidate amolimogene (HPV E6 E7 plasmid) (formerly known as ZYC101a), and two product candidates from our acute care franchise (Aloxi for PONV and Aquavan, a minimal to moderate sedative agent for patients undergoing short diagnostic or surgical procedures obtained in our acquisition of Guilford).

PRODUCT CANDIDATES AND RESEARCH PIPELINE


Products	Principal Indications	Status	Sponsor
Dacogen for Injection	AML	Phase 2 & 3	MGI PHARMA

Saforis Powder for Oral Suspension	Oral mucositis	October 12, 2006 PDUFA goal date	MGI PHARMA

amolimogene (HPV E6 E7 plasmid) (formerly known as ZYC101a)	Cervical dysplasia	Pivotal program ongoing	MGI PHARMA

Aloxi Injection	PONV	Phase 3	Helsinn Healthcare

Aquavan Injection	Minimal to moderate sedation of patients undergoing brief diagnostic or surgical procedures	Phase 3	MGI PHARMA

Aloxi Capsules	CINV	Phase 3	Helsinn Healthcare

irofulven	Hormone refractory prostate cancer Liver cancer, inoperable Combination with oxaliplatin	Phase 2 Phase 2 Phase 2	MGI PHARMA MGI PHARMA MGI PHARMA

ZYC300	Solid tumors	Phase 1/2	MGI PHARMA

GCP II Inhibitors	Chemotherapy induced neuropathy	Preclinical	MGI PHARMA

PARP Inhibitors	Cancer chemosensitization and radiosensitization	Preclinical	MGI PHARMA

MG98	Renal cell cancer	Phase 2	MethylGene

Other acylfulvene analogs	Various Cancers	Preclinical	MGI PHARMA

In the third quarter of 2003, Aloxi was approved by the FDA for the prevention of acute and delayed chemotherapy-induced nausea and vomiting (“CINV”), and we began promoting it. Given the large market in which Aloxi competes and its favorable clinical profile, sales of Aloxi substantially exceeded the second quarter 2006 sales of our other products, and the results of our operations are highly correlated to the success of this product. We obtained exclusive U.S. and Canadian license and distribution rights to Aloxi for CINV from Helsinn Healthcare SA (“Helsinn”) in April 2001. In November 2003, we and Helsinn expanded the agreement to include rights for the prevention of postoperative nausea and vomiting (“PONV”) application of Aloxi and an oral Aloxi formulation (“Aloxi Capsules”).

Gliadel is approved by the FDA for treatment of patients with newly-diagnosed high-grade malignant glioma as an adjunct to surgery and radiation. Gliadel is also indicated to treat recurrent glioblastoma multiforme (“GBM”) in addition to surgery. The approval was based on clinical trial results showing the median survival of patients with high-grade malignant gliomas increased to 13.9 months from 11.6 months, and the median survival of patients with recurrent GBM increased to 6.4 months from 4.6 months.

In September 2004, we obtained exclusive worldwide rights to the development, commercialization, manufacturing and distribution of Dacogen for all indications from SuperGen, Inc. Dacogen is an anti-cancer therapeutic for the treatment of patients with MDS including previously treated and untreated, de novo, and secondary MDS of all French-American-British (“FAB”) subtypes (refractory anemia, refractory anemia with ringed sideroblasts, refractory anemia with excess blasts, refractory anemia with excess blasts in transformation, and chronic myelomonocytic leukemia), and Intermediate-1, Intermediate-2, and High-Risk International Prognostic Scoring System (“IPSS”) groups. An NDA for Dacogen for the treatment of MDS was submitted for marketing approval by the FDA

in the United States. A pivotal phase 3 trial and two supporting phase 2 trials for the MDS indication form the clinical basis of the NDA. On May 2, 2006, MGI received approval from the FDA for the NDA. A regulatory application before the EMEA in Europe was withdrawn in November 2005. We are working with European regulatory authorities to determine what type of additional clinical information will be needed to support a resubmission of the European application. Given the broad activity of Dacogen in hematologic cancers, a pivotal program in patients with acute myeloid leukemia (“AML”) was initiated in 2005. This program includes one phase 2 trial and one phase 3 trial in elderly patients with AML.

Saforis (glutamine in UpTec) Powder for Oral Suspension (“Saforis”), an oral formulation of glutamine in a proprietary delivery system designed to increase uptake of glutamine by the oral mucosa, is an investigational drug for the prevention and treatment of oral mucositis in patients receiving mucotoxic cancer therapy. An NDA for Saforis was submitted to the FDA for review in April 2006. On June 12, 2006, the FDA accepted the NDA for Saforis for priority review with a Prescription Drug User Fee Act (“PDUFA”) goal date of October 12, 2006. One pivotal phase 3 trial and several supportive studies form the foundation of the Saforis NDA. The pivotal phase 3 trial of Saforis was successfully completed in 326 patients with breast cancer who were receiving anthracycline-based chemotherapy regimens. This trial met its primary endpoint, a reduction in incidence and severity of oral mucositis.

In March 2006, the Aquavan (fospropofol disodium) Injection (“Aquavan”) pivotal program was initiated. This program consists of two randomized, double-blind, multicenter phase 3 trials and an open label safety study. The first phase 3 trial is planned to enroll a total of 300 patients undergoing colonoscopy. The second phase 3 study will enroll 250 patients undergoing bronchoscopy. The primary endpoint of both trials is sedation success. Secondary endpoints include treatment success, amnestic effect, and patient willingness to be treated again. In addition to the two phase 3 trials, an open label, multi-center safety study will be conducted in 125 patients undergoing minor procedures, including arthroscopy, bunionectomy, dilation and curettage, upper endoscopy, hysteroscopy, lithotripsy, arterio-venous shunt placement, and trans-esophageal echocardiograms. The goal of this study is to assess the safety of Aquavan Injection in a variety of minor procedures.

Results of Operations

The three and six months ended June 30, 2006 compared to the three and six months ended June 30, 2005:

Revenues

Total revenues in the three and six months ended June 30, 2006 increased 30 percent and 27 percent, respectively, over total revenues in the three and six months ended June 30, 2005.


	Three Months Ended June 30,
(in thousands)	2006		2005		Change			% Change
Product sales:
Aloxi Injection	$	67,438	$	60,755	$	6,683			11	%
Gliadel Wafer		8,427		—		8,427			—
Salagen Tablets		1,637		3,339		(1,702	)		(51	)
Hexalen Capsules		720		640		80			13
Aggrastat Injection		2,497		—		2,497			—
Dacogen		5,217		—		5,217			—
Other		254		584		(330	)		(57	)


Total product sales		86,190		65,318		20,872			32

Licensing and other		963		1,844		(881	)		(48	)


Total revenues	$	87,153	$	67,162	$	19,991			30


	Six Months Ended June 30,
(in thousands)	2006		2005		Change			% Change
Product sales:
Aloxi Injection	$	130,738	$	117,909	$	12,829			11	%
Gliadel Wafer		18,091		—		18,091			—
Salagen Tablets		3,022		6,972		(3,950	)		(57	)
Hexalen Capsules		1,440		1,206		234			19
Aggrastat Injection		4,877		—		4,877			—
Dacogen		5,217		—		5,217			—
Other		330		1,616		(1,286	)		(80	)


Total product sales		163,715		127,703		36,012			28

Licensing and other		1,641		2,694		(1,053	)		(39	)


Total revenues	$	165,356	$	130,397	$	34,959			27

Product Sales:Product sales revenue in the three and six months ended June 30, 2006 increased 32 percent and 28 percent over product sales for the comparable periods in 2005. The primary reasons for the increase were increased sales of Aloxi, the sales of Gliadel and Aggrastat (products acquired in our acquisition of Guilford during the fourth quarter of 2005), and the commercial launch of Dacogen in the second quarter of 2006. These increases were partially offset by decreases in sales of our Salagen Tablets. Additional information relating to specific product sales are shown below.

	•		Aloxi net sales revenue was $67.4 million, or 78 percent, and $130.7 million, or 80 percent of our product sales revenue for the three and six months ended June 30, 2006, respectively. This compares with Aloxi net sales revenue of $60.8 million, or 93 percent, and $117.9 million, or 92 percent, of our product sales revenue for the three and six months ended June 30, 2005.

	•		Gliadel net sales revenue was $8.4 million, or 10 percent, and $18.1 million, or 11 percent of our product sales revenue for the three and six months ended June 30, 2006 respectively. Because Gliadel was a product we acquired in our purchase of Guilford during the fourth quarter of 2005, we had no comparable sales for the three and six months ended June 30, 2005.

	•		Dacogen net sales revenue was $5.2 million for the three and six months ended June 30, 2006 and represented 6 percent of our product sales revenue for the three months ended June 30, 2006 and 3 percent of our product sales revenue for the six months ended June 30, 2006. We began our commercial launch of Dacogen during the second quarter of 2006.

	•		Salagen net sales continued to decline from historical levels. Salagen net sales revenue was $1.6 million, or 2 percent, and $3.0 million, or 2 percent of our product sales revenue for the three and six months ended June 30, 2006. This compares with Salagen net sales revenue of $3.3 million, or 5 percent, and $7.0 million, or 5 percent of our product sales revenue for the three and six months ended June 30, 2005. This decline began as a result of the FDA approval of a competitor’s Abbreviated New Drug Application (“ANDA”) for a generic 5 milligram pilocarpine hydrochloride tablet in December 2004. Since then, three additional ANDAs have been approved by the FDA, two of which were approved in 2005 and an additional ANDA approved in 2006 that included the approval of the first generic 7.5 milligram pilocarpine hydrochloride tablet. We suspended promotion of Salagen in 2005.

At June 30, 2006, we estimate the days of sales in inventory in the distribution channel utilized by the Company was materially unchanged when compared to inventory levels at March 31, 2006. These estimates are based on inventory levels provided by our wholesalers, historical and current sales trends and the timing of charge-back claims.

Licensing and other:Licensing and other revenue decreased 48 percent to $1.0 million in the three months ended June 30, 2006 from $1.8 million in the three months ended June 30, 2005 and decreased 39 percent to $1.6 million in the six months ended June 30, 2006 from $2.7 million in the six months ended June 30, 2005. Licensing revenue is a combination of deferred revenue amortization that is recognized over the term of the underlying arrangement and royalties that are recognized when the related sales occur. Future licensing revenue will fluctuate from quarter to quarter depending on the level of recurring royalty generating activities and changes in amortization of deferred revenue, including the initiation or termination of licensing arrangements.

Costs and Expenses


	Three Months Ended June 30,
(in thousands)	2006		2005		Change		% Change
Costs and expenses:
Cost of sales	$	33,813	$	22,920	$	10,893		48	%
Selling, general and administrative		35,463		16,974		18,489		109
Research and development		28,192		14,248		13,944		98

Total	$	97,468	$	54,142	$	43,326		80


	Six Months Ended June 30,
(in thousands)	2006		2005		Change		% Change
Costs and expenses:
Cost of sales	$	62,155	$	44,836	$	17,319		39	%
Selling, general and administrative		66,985		35,591		31,394		88
Research and development		51,157		24,701		26,456		107

Total	$	180,297	$	105,128	$	75,169		72

Cost of sales:Cost of sales as a percentage of product sales was 39 percent and 38 percent for the three and six months ended June 30, 2006 respectively. This compares to cost of sales as a percentage of product sales of 35 percent for the comparable periods in 2005. This increase in cost of sales is primarily due to a change in sales mix resulting from the addition of Gliadel and Aggrastat products (acquired in our acquisition of Guilford during the fourth quarter of 2005), the commercial launch of Dacogen in the second quarter of 2006, and the decrease in Salagen product sales, which has a higher margin than our other currently marketed products. Cost of sales may vary from quarter to quarter depending on the product mix and production costs.

Selling, general and administrative:Selling, general and administrative expenses increased 109 percent to $35.5 million in the three months ended June 30, 2006 from $17.0 million in the three months ended June 30, 2005 and increased 88 percent to $67.0 million in the six months ended June 30, 2006 from $35.6 million in the six months ended June 30, 2005. The increase is primarily a result of investment in Aloxi, pre-launch expenses related to Dacogen, and the expansion of the acute care sales force. The increase also reflects ongoing general, and administrative activities acquired in the Guilford acquisition.

Research and development:Research and development expense increased 98 percent to $28.2 million in the three months ended June 30, 2006 from $14.2 million in the three months ended June 30, 2005 and increased 107 percent to $51.2 million in the six months ended June 30, 2006 from $24.7 million in the six months ended June 30, 2005. The increase primarily represents increased spending on development programs for the late-stage product candidates in our pipeline, such as Aquavan, Dacogen, amolimogene (HPV E6 E7 plasmid), and Saforis. The increase also reflects ongoing research and development activities acquired in the Guilford acquisition.

Interest Income and Expense and Other Income


	Three Months Ended June 30,
(in thousands)	2006			2005			Change			% Change
Interest income	$	1,361		$	1,747		$	(386	)		(22	)%
Interest expense		(1,925	)		(1,754	)		(171	)		10
Impairment of investment		(9,880	)		—			(9,880	)		—
Other (expense)		(126	)		—			(126	)		—

Total	$	(10,570	)	$	(7	)	$	(10,563	)	NM*


*		Not Meaningful


	Six Months Ended June 30,
(in thousands)	2006			2005			Change			% Change
Interest income	$	2,517		$	3,104		$	(587	)		(19	)%
Interest expense		(3,922	)		(3,510	)		(412	)		12
Impairment of investment		(9,880	)		—			(9,880	)		—
Other income		55			—			55			—

Total	$	(11,230	)	$	(406	)	$	(10,824	)	NM*


*		Not Meaningful

Interest Income: Interest income decreased 22 percent to $1.4 million in the three months ended June 30, 2006 from $1.7 million in the three months ended June 30, 2005 and decreased 19 percent to $2.5 million in the six months ended June 30, 2006 from $3.1 million in the six months ended June 30, 2005. The decrease was due to a decrease in the average amount of funds available for investment, $100.3 million and $215.3 million for the three months ended June 30, 2006 and 2005, respectively, and $96.6 million and $228.4 million for the six months ended June 30, 2006 and 2005, respectively, which was partially offset by the increase in the effective interest rates received on our cash and marketable investments, 4.88% and 3.00% for the three months ended June 30, 2006 and 2005, respectively, and 4.34% and 2.74% for the six months ended June 30, 2006 and 2005, respectively. Interest income for 2006 will fluctuate depending on the timing of cash flows and changes in interest rates for marketable investments.

Interest Expense: Interest expense increased 10 percent to $1.9 million in the three months ended June 30, 2006 from $1.8 million in the three months ended June 30, 2005 and increased 12 percent to $3.9 million in the six months ended June 30, 2006 from $3.5 million in the six months ended June 30, 2005. The increase for the three and six months ended June 30, 2006 was due to the inclusion of financial obligations acquired from Guilford. .

Impairment of Investment: In the second quarter of 2006, we recorded a $9.9 million impairment to our investment in SuperGen. This investment is accounted for as long term available for sale marketable security carried at fair value with unrealized gains and losses reported as accumulated other comprehensive income (loss), or if the fair value of the investment is determined to be other than temporarily impaired, the loss is recognized in earnings. We determined that the decline in the SuperGen stock to $14.5 million at June 30, 2006 resulted in an other-than-temporary impairment of this asset, requiring a $9.9 million charge in the quarter ended June 30, 2006. Refer to Note 4 in the Notes to Condensed Consolidated Financial Statements for additional information.

Other income (expense):In the acquisition of Guilford, we acquired warrants issued by Guilford to investors in Symphony Neuro Development Company (“SNDC”) and warrants that had been issued by Guilford to investors in connection with a Private Investment in Public Equity (“PIPE”). The SNDC and PIPE warrants are classified as liabilities and will be measured at fair value, with changes in fair value reported in earnings. The change in fair value of these warrant liabilities for the three and six months ended June 30, 2006 was $0.1 million and $(0.1) million, respectively.

Provision for Income Taxes

Tax benefit for the six months ended June 30, 2006 is $47,000 and represents the net of $107,000 in federal alternative minimum taxes offset by $154,000 in tax benefits realized on the sale of unused New Jersey State net operating losses and research and development credits under the state of New Jersey’s Technology Business Tax Certificate Transfer Program. We continue to maintain a valuation allowance against our deferred tax assets. If and when it is judged to be more-likely-than-not that we will be able to utilize some or all of our deferred tax assets, the related valuation allowance will be reduced and a tax benefit will be recorded, and the portion of the allowance pertaining to the exercise of stock options will increase additional paid-in capital. The benefits realized from the use of acquired net operating losses and credits will first reduce to zero the intangible assets related to the acquisitions and then reduce tax expense. Then, for subsequent tax periods, our tax provision would likely reflect normal statutory tax rates, and utilization of our deferred tax attributes would reduce our deferred tax asset balance. The timing of this valuation allowance adjustment is primarily dependent upon the demonstration of consecutive quarters of profitability.

Net (Loss) Income

We reported net (loss) income of $(19.4) million and $12.7 million for the three months ended June 30, 2006 and 2005, respectively and net (loss) income of $(22.2) million and $24.3 million for the six months ended June 30, 2006 and 2005, respectively. The primary reasons for the decrease in net income were the increased research and development cost of $13.9 million primarily related to our pivotal programs such as Aquavan, Dacogen, amolimogene (HPV E6 E7 plasmid), and Saforis and ongoing research and development activities acquired in the Guilford acquisition. There was also an increase in our selling, general and administrative costs of $18.5 million primarily related to the acute care sales force, pre-launch expenses related to Dacogen, and ongoing selling, general, and administrative activities acquired in the Guilford acquisition. Also, we recorded a $9.9 million other-than-temporary impairment to our investment in SuperGen.

Liquidity and Capital Resources

At June 30, 2006, we had cash, cash equivalents and unrestricted marketable debt investments of $91 million and working capital of $180 million, compared with $104 million and $209 million, respectively, at December 31, 2005.

Historically, we have primarily funded our operations through the issuance of equity securities, senior subordinated convertible notes, revenues from the sales of Aloxi, Salagen, and other products, and since October 2005, revenues from the sales of Gliadel and Aggrastat. We have also funded operations through collaborative and partnering agreements and through proceeds from loans or other borrowings. Any, or all, of these financing vehicles or others may be utilized to fund our future capital requirements.

Activities of SNDC

The activities of SNDC are reported in our Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2006 due to our requirement to consolidate the variable interest entity in accordance with FIN 46R, “Consolidation of Variable Interest Entities” as we were deemed to be the primary beneficiary of SNDC. In the second quarter of 2006, we terminated the purchase option agreement with SNDC and as a result ceased to be the primary beneficiary of SNDC, therefore we are no longer required to consolidated its financial results with ours. SNDC activities had no impact on our net decrease in cash and cash equivalents during the period. Further, the impact of SNDC on our Condensed Consolidated Statement of Cash Flow classifications is not indicative of our historical or ongoing operations.

The impact to net cash used in operating activities for the six months ended June 30, 2006 was a $1.0 million decrease from SNDC's usage of working capital and a $3.9 million decrease in minority interest related to SNDC. The impact to net cash used in investing activities for the six months ended June 30, 2006 was $14.5 million in maturity of investments held by SNDC offset by a $9.6 million distribution of SNDC funds to SNDC investors.

Net Cash Used in Operating Activities

Net cash used in operations was $1.3 million and $26.3 million for the six months ended June 30, 2006 and 2005, respectively. The 2006 cash used in operations was primarily the result of an $11.0 million decrease in inventory offset by a $4.2 million decrease in accounts payable and accrued expenses and a $2.9 million increase in accounts receivable and a $22.2 million net loss offset by non cash items including $9.9 million of other than temporary impairment of investment, $5.4 million in depreciation and intangible amortization, and $4.0 million of employee stock compensation expense. The 2005 cash used in operations was the result of the $27.9 million increase in inventory, $18.8 million decrease in accounts payable and accrued expenses, and $8.3 million increase in receivables offset by $24.3 million in net income.

Net Cash Provided by (Used in) Investing Activities

Net cash used in investing was $39.1 million for the six months ended June 30, 2006, and net cash provided by investing was $26.2 million for the six months ended June 30, 2005. The 2006 cash used in investing activities was primarily the result of a $20.0 million Dacogen license agreement milestone payment, $4.1 million of equipment, furniture and leasehold improvement purchases and a net cash outflow of $57.7 million related to the purchase and maturity of available for sale investments offset by a cash inflow of $37.0 million related to the maturity of held-to-maturity investments. The 2005 cash provided by investing activities was primarily the result of a net cash inflow of $29.1 million related to the purchase and maturity of held-to-maturity investments offset by a cash outflow of $1.8 million related to the purchase and maturity of available for sale investments and $1.1 million of equipment, furniture and leasehold improvement purchases. Cash provided by or used in investing activities will fluctuate due to investments in acquisitions, in-licensing and the timing of purchases and maturities of investments.

Net Cash Provided by Financing Activities

Net cash provided by financing was $6.6 million and $7.4 million for the six months ended June 30, 2006 and 2005, respectively. The 2006 cash provided by financing activities was the result of the $2.9 million from the maturing of restricted investments and $5.0 million from the issuance of shares under stock plans offset by $1.3 million in long term debt payments. The 2005 cash provided by investing activities was due to net proceeds of $4.6 million from issuance of shares under stock award plans and $2.8 million from maturing of restricted investments.

Cash Uses and Capital Raising Activities

Substantial amounts of capital will be needed to continue growing our business. We will require this capital to:

	•		fund our research and development and drug discovery efforts;

	•		expand our portfolio of marketed products and product candidates, including through additional product or product candidate acquisitions or business combinations;

	•		develop products we have discovered, acquired, or licensed;

	•		fund our sales and marketing efforts;

	•		fund operating losses; and

	•		support our contractual obligations and debt service requirements.

The timing of these events is difficult to predict due to many factors, including the costs and outcomes of our research and development programs and when those outcomes are determined, the timing of product or product candidate acquisitions or business combinations, the timing and expense of obtaining regulatory approvals, the presence and status of competing products, and the protection and freedom to operate for our intellectual property.

Our capital needs may exceed the capital available from our future operations, collaborative arrangements and existing liquid assets. Our future capital requirements and liquidity will depend on many factors, including but not limited to:

	•		the revenue from Aloxi, Gliadel, Dacogen, and our other products;

	•		the future expenditures we may make to increase revenue from our products;

	•		the progress of our research and development programs;

	•		the progress of pre-clinical and clinical testing;

	•		the time and cost involved in obtaining regulatory approval;

	•		the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

	•		the changes in our existing research relationships, competing technological and marketing developments;

	•		our ability to establish collaborative arrangements and to enter into licensing agreements and contractual arrangements with others;

	•		the conversion of our senior subordinated convertible notes;

	•		the costs of additional product or product candidate acquisitions or business combinations; and

	•		any future change in our business strategy.

For these needs or in anticipation of these needs, we may decide to seek additional capital. The source, timing and availability of this funding will depend on market conditions, interest rates and other factors. This funding may be sought through various sources, including debt and equity offerings, corporate collaborations, divestures, bank borrowings, lease arrangements relating to fixed assets or other financing methods. There can be no assurance that additional capital will be available on favorable terms, if at all.

Payment Obligations

The following table summarizes our future, non-cancelable, contractual obligations at June 30, 2006 and the effect these obligations are expected to have on our liquidity and cash flow in future periods:


	Remainder of
(in thousands)	2006		2007		2008		2009		2010		Thereafter		Total
Operating lease payments	$	2,751	$	5,606	$	4,810	$	4,307	$	3,832	$	29,661	$	50,967
Capital lease payments		258		94		37		—		—		—		389
Baxter loss contract (a)		1,459		1,459		1,459		1,459		—		—		5,836
Other long term debt		36		63		64		66		—		—		229
Convertible debt		2,964		5,929		7,429		5,854		5,854		350,927		378,957
Helsinn minimum sales obligation (b)		—		6,123		5,559		4,801		4,052		6,241		26,776


Total	$	7,468	$	19,274	$	19,358	$	16,487	$	13,738	$	386,829	$	463,154


(a)		In the acquisition of Guilford, MGI assumed obligations under a supply agreement with Baxter Healthcare Corporation for Aggrastat 250 ml and 100 ml bags through July 2009. As of June 30, 2006, the Company has committed to purchasing approximately $5.8 million, of which approximately $1.5 million will be incurred during the remainder of 2006.

(b)		In connection with the April 2001 in-licensing agreement with Helsinn Healthcare SA where we obtained the exclusive U.S. and Canadian oncology license and distribution rights for Aloxi, we agreed to pay minimum payments over the first ten years following commercialization. The minimum is only payable to the extent that it exceeds the actual payments that would otherwise be payable under the agreement. Minimum sales targets of Aloxi for prevention of CINV peak at approximately $90 million in the fourth year of commercialization.

We expect to make additional payments to Helsinn related to Aloxi product candidates totaling $22.5 million, to SuperGen related to Dacogen totaling $12.5 million and to Aesgen former security holders related to Saforis totaling $33 million over the course of the next several years upon achievement of certain development milestones.

Off Balance Sheet Arrangements

We do not have any “off-balance sheet arrangements” (as such term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Impact of Recently Issued Accounting Standards

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment.” SFAS No. 123R is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services through share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost will be recognized over the period during which an employee is required to provide services in exchange for the award. SFAS No. 123R is effective as of the beginning of the first annual reporting period that begins after June 15, 2005. The impact of implementing SFAS No. 123R to our consolidated results of operations is expected to be in the range of $8 to $10 million for 2006. As of June 30, 2006, there was $8.1 million of total unrecognized compensation expense. That cost is expected to be recognized over a weighted-average period of 1.5 years. Our disclosure of compensation expense related to prior periods under SFAS No. 123 can be found under Note 2 of our Condensed Consolidated Financial Statements set forth in Part I, Item 1 of this quarterly report. Our expected 2006 impact from the implementation of SFAS No. 123R differs from our disclosure of compensation expense related to prior periods under SFAS No. 123 due to the acceleration of a large number of outstanding options in the third and fourth quarters of 2005. On January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123R using the modified prospective method. Options are priced based on the closing price of a share of our common stock at the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. To determine the inputs for the Black-Scholes option pricing model we use the implied volatility inherent in the value of exchange traded options on the Company’s stock to estimate expected volatility and the period of time that option grants are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. For a complete discussion of the effect of the adoption of this accounting standard see Note 2 of the Condensed Consolidated Financial Statements set forth in Part I, Item 1 of this quarterly report.

recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This Interpretation is effective for the Company beginning in fiscal year 2007. The Company does not expect the adoption of this pronouncement to have a significant impact on its consolidated financial statements.

Application of Critical Accounting Policies and Estimates

Stock-based Compensation:MGI adopted SFAS No. 123R in the first quarter of 2006 using the modified prospective method. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements as compensation cost based on the fair value on the date of grant. The Company determines fair value of such awards using the Black-Scholes option pricing model. See our discussion of the application of the SFAS No. 123R under the heading “Recent Accounting Pronouncements” in Footnote 1 to the Condensed Consolidated Financial Statements, which are contained in Item 1 of Part I of this quarterly report on Form 10-Q/A.

See our most recent Annual Report filed on Form 10-K for the year ended December 31, 2005 for a discussion of our critical accounting policies.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Our operations are not subject to risks of material foreign currency fluctuations, nor do we use derivative financial instruments in our treasury practices. We place our marketable investments in instruments that meet high credit quality standards, as specified in our investment policy guidelines. We do not expect material losses with respect to our investment portfolio or exposure to market risks associated with interest rates. The favorable impact on our net income as a result of a 25, 50 or 100 basis point (where 100 basis points equals 1%) increase in short-term interest rates would be approximately $0.2 million, $0.5 million or $0.9 million annually based on our cash, cash equivalents and marketable investment balances at June 30, 2006.

Equity Price Risk

We invest in equity securities that are subject to fluctuations in market value. Our equity securities are classified as available for sale. Any changes in the fair value in these securities would be reflected in our accumulated other comprehensive income (loss) as a component of stockholders’ equity. The table below summarizes our equity price risk and shows the effect of a hypothetical increase or decrease in market prices as of June 30, 2006 on the estimated fair value of our consolidated equity portfolio. The selected hypothetical changes do not indicate what could be the potential best or worst case scenarios (dollars in thousands):


									Hypothetical Percentage
	Estimated Fair Value at		Hypothetical Price			Estimated Fair Value after			Increase(Decrease) in
	June 30, 2006		Change			Hypothetical Price Change			Stockholders’ Equity
Equity Securities	$	20,330		10	%	$	2,033			1.9	%
				(10	)%		(2,033	)		(1.9	)%
				20	%		4,066			3.9	%
				(20	)%		(4,066	)		(3.9	)%
				30	%		6,099			5.8	%
				(30	)%		(6,099	)		(5.8	)%

Item 4.

Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

In connection with the filing of this Amendment No. 1 on Form 10-Q/A and under the supervision and with the participation of our management, including our President and Chief Executive Officer, Leon O. Moulder, Jr., and our Senior Vice President and Chief Financial Officer, William F. Spengler, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2006, our disclosure controls and procedures were effective.

(b) Changes in Internal Controls Over Financial Reporting

During the most recent fiscal quarter covered by this report, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonable likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1A. Risk Factors

Item 1A (“Risk Factors”) of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 sets forth information relating to important risks and uncertainties that could adversely affect our business, financial condition or operating results. Those risk factors continue to be relevant to an understanding of our business, financial condition and operating results. As a result of certain changes in the marketplace and to our business we have updated certain risk factors in this Form 10-Q/A, as set forth below.

Sales of Aloxi injection (“Aloxi”) account for a significant portion of our product revenues. Our business is dependent on the commercial success of Aloxi. If any factor adversely affects sales of Aloxi, we may be unable to continue our operations as planned.

The success of our business is dependent on the continued successful commercialization of Aloxi. Aloxi sales represented 80 percent and 92 percent of our total product sales and 79 and 90 percent of our total revenue for the six months ended June 30, 2006 and June 30, 2005, respectively. Any factor adversely affecting sales of Aloxi could cause our product revenues to decrease and our stock price to decline significantly.

Aloxi is relatively new to the market, when compared to its competitors, and its long-term acceptance by the oncology community will depend largely on our ability to demonstrate the efficacy and safety of Aloxi as an alternative to other therapies. We cannot be certain that Aloxi will provide benefits considered adequate by providers of oncology services or that enough providers will use the product to ensure its continued commercial success.

Patent protection for injectable Zofran (ondansetron), a major competing product, will expire in December 2006. We believe that multiple companies may have filed abbreviated new drug applications, or ANDAs, to commercialize generic ondansetron at the time that the patent protection expires. Additionally, GlaxoSmithKline, the manufacturer of Zofran, may authorize a third party to make a generic version of Zofran. Either of these occurrences could negatively affect sales of all branded 5-HT₃ inhibitors, including Aloxi. Among other things, health care professionals could refrain from prescribing 5 HT3 inhibitors until they understand the effect that generic versions of ondansetron have on formularies and hospital contracting. Additionally, wholesalers and hospital pharmacies could delay buying 5 HT3 inhibitors in anticipation of lower prices resulting from generic competition.

The Food and Drug Administration (“FDA”) subjects an approved product and its manufacturer to continual regulatory review. After approval and use in an increasing number of patients, the discovery of previously unknown problems with a product, such as unacceptable toxicities or side effects, may result in restrictions or sanctions on the product or manufacturer that could affect the commercial viability of the product or could require withdrawal of the product from the market. Further, we must continually submit any labeling, advertising and promotional material to the FDA for review. There is risk that the FDA will prohibit use of the marketing material in the form we desire.

Unfavorable outcomes resulting from factors such as those identified above could limit sales of Aloxi or cause sales of Aloxi to decline. In those circumstances, our stock price would decline and we would have to find additional sources of funding or scale back or cease operations.

If the third-party manufacturer of Aloxi, Dacogen, Salagen, or Aggrastat or any of our other products ceases operations or fails to comply with applicable manufacturing regulations, we may not be able to meet customer demand in a timely manner, if at all.

We rely on Helsinn Birex Pharmaceuticals Ltd. for the production of Aloxi, Pharmachemie BV for production of Dacogen, Patheon Inc. for the production of Salagen, Baxter Pharmaceuticals for the production of Aggrastat, and other third-party manufacturers for our other products, other than Gliadel, which we manufacture ourselves. We expect to continue to rely on others to manufacture future products, including products currently in development. Our dependence on third parties for the manufacture of our products may adversely affect our ability to develop and deliver such products.

The manufacture of our products is, and will be, subject to current “good manufacturing practices” regulations enforced by the FDA or other standards prescribed by the appropriate regulatory agency in the country of use. There is a risk that the manufacturers of our products, including the current manufacturers of Aloxi, Dacogen, Salagen, and Aggrastat, will not comply with all applicable regulatory standards, and may not be able to manufacture Aloxi, Dacogen, Salagen, Aggrastat, or any other product for commercial sale. If this occurs, we might not be able to identify another third-party manufacturer on terms acceptable to us, or any other terms.

Material changes to an approved product, such as manufacturing changes or additional labeling claims, require further FDA review and approval. Even after approval is obtained, the FDA may withdraw approval if previously unknown problems are discovered. Further, if we, our corporate collaborators or our contract manufacturers fail to comply with applicable FDA and other regulatory requirements at any stage during the regulatory or manufacturing process, the FDA may impose sanctions, including:

	•		marketing or manufacturing delays;

	•		warning letters;

	•		fines;

	•		product recalls or seizures;

	•		injunctions;

	•		refusal of the FDA to review pending market approval applications or supplements to approval applications;

	•		total or partial suspension of production;

	•		civil penalties;

	•		withdrawals of previously approved marketing applications; or

	•		criminal prosecutions.

If we fail to compete successfully with our competitors, our product revenues could decrease and our stock price could decline.

Competition in the pharmaceutical industry is intense. Most of our competitors are large, multinational pharmaceutical companies that have considerably greater financial, sales, marketing and technical resources than we do. Most of our present and potential competitors also have dedicated research and development capabilities that may allow them to develop new or improved products that compete with our products. Currently, Aloxi competes with three other products from the 5-HT₃ receptor antagonist class of compounds, as well as products from other chemical classes that are also used for the prevention of chemotherapy-induced nausea and vomiting. These products are marketed by GlaxoSmithKline, Roche, Sanofi-Aventis, Merck and other large multinational competitors. If Aloxi does not compete successfully with existing products on the market, our stock price could decline significantly. Our other pharmaceutical products face competition as well. Gliadel currently competes as a treatment of malignant glioma with traditional systemic chemotherapy, radioactive seeds, radiation catheters, TEMODAR Capsules, a chemotherapy product manufactured by Schering Corporation, and other experimental protocols. MedImmune, Inc., Daiichi-Sankyo Pharmaceuticals, and three U.S. generic manufacturers have drugs that are approved for sale and compete in the same markets as Salagen. Dacogen competes with Vidaza for injectable suspension, manufactured by Pharmion Corporation. If these products do not successfully compete in their respective markets, the sales of these products could be negatively impacted, which could negatively affect our stock price.

Other pharmaceutical companies are developing products, which, if approved by the FDA, will compete directly with our products. Our competitors could also develop and introduce generic drugs comparable to our products, or drugs or combination of drugs or other therapies that address the underlying causes of the symptoms that our products treat. If a product developed by a competitor is more effective than our product, or priced lower than our product, our product revenue could decrease and our stock price could decline.

We rely on multinational and foreign pharmaceutical companies to develop and commercialize our products and product candidates in markets outside the United States.

With respect to products in which we own rights outside the United States, we have entered into alliances with various multinational and foreign pharmaceutical companies related to the development and commercialization of our products and product candidates in markets outside the United States. Our continued relationships with strategic collaborators are dependent in part on the successful achievement of development milestones. If we or our collaborators do not achieve these milestones, or we are unable to enter into agreements with our collaborators to modify their terms, these agreements could terminate, which could cause a loss of licensing revenue, a loss of future commercial product potential and a decline in our stock price.

We recognize licensing revenue from our strategic collaborators as a portion of our total revenue. Future licensing revenues from these collaborators will likely fluctuate from quarter-to-quarter and year-to-year depending on:

	•		the achievement of milestones by us or our collaborators;

	•		the amount of product sales and royalty-generating activities;

	•		the timing of initiating additional licensing relationships; and

	•		our continuing obligation related to license payments.

At the present time, our most significant collaboration for non-U.S. markets is our recently initiated licensing arrangement with Cilag GmbH, a Johnson & Johnson company (or Cilag), for Dacogen in all territories outside of North America. Under the terms of the arrangement, Cilag is responsible for development and commercialization of the product in its territories. There can be no assurance that Cilag will be successful in its activities, or that if it is not successful, we will have an opportunity to remedy the situation because Cilag’s activities may be beyond our control.

Item 4. Submission of Matters to a Vote of Security Holders

The Company held its Annual Meeting of Shareholders on May 9, 2006, and sufficient favorable votes were cast to approve all proposals as follows:

Election of slate of eight directors by the following vote tallies:


Nominee	For		Withheld
Andrew J. Ferrara		64,215,187		3,775,011
Edward W. Mehrer		67,604,258		385,940
Hugh E. Miller		63,890,862		4,099,336
Dean J. Mitchell		66,914,469		1,075,729
Leon O. Moulder, Jr.		67,277,461		712,737
David B. Sharrock		67,544,636		445,562
Waneta C. Tuttle, Ph. D.		64,215,807		3,774,391
Arthur L. Weaver, M.D.		64,203,161		3,787,037

Approval of the Amended and Restated 1997 Stock Incentive Plan (the “Incentive Plan”) to, among other things, increase the number of shares available for issuance under the Incentive Plan by 7,400,000 shares.


For	Against	Abstain	Broker Non-Vote
42,090,906	12,641,110	133,818	13,124,364

Ratification of appointment of KPMG LLP as independent registered public accounting firm for the Company for the fiscal year ending December 31, 2006.


For	Against	Abstain	Broker Non-Vote
67,531,520	408,748	49,930	—

Item 6. Exhibits


Exhibit
No.		Description

10.1		Termination Agreement between MGI PHARMA, INC. and William F. Spengler dated April 21, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed April 27, 2006 (File No. 0-10736).

10.2		Severance Agreement and General Release between MGI PHARMA, Inc. and James Hawley (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed April 27, 2006 (File No. 0-10736).

31.1		Certification of Leon O. Moulder, Jr. Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002).

31.2		Certification of William F. Spengler Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002).

32.1		Certification of Leon O. Moulder, Jr. Pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of William F. Spengler Pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	MGI PHARMA, INC.
Date: March 1, 2007	By:	/s/ William F. Spengler
		William F. Spengler
		Executive Vice President and Chief Financial Officer (principal financial officer, and duly authorized officer)

MGI Pharma (MOGN) Inactive 10-Q/A2006 Q2 Quarterly report (amended)