SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
Commission File No. 0-10736
MGI PHARMA, INC.
(Exact name of registrant as specified in its charter)
| Minnesota | 41-1364647 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
5775 West Old Shakopee Road, Suite 100 Bloomington, Minnesota | 55437 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: 952/346-4700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value
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. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2003, the last business day of the registrant’s most recent second quarter, was approximately $669,000,000 (based on the closing price of the registrant’s common stock as reported by the Nasdaq National Market on such date).
The number of shares outstanding of each of the registrant’s classes of common stock, as of July 12, 2004, was: Common Stock, $.01 par value; 70,595,484 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to General Instruction G the responses to Items 10, 11, 12 and 14 of Part III of this report are incorporated herein by reference to certain information contained in the registrant’s definitive Proxy Statement for its 2004 Annual Meeting of Shareholders to be held on May 11, 2004.
EXPLANATORY NOTE
MGI PHARMA, Inc. is filing this Amendment No. 1 to its Form 10-K for the year ended December 31, 2003 that was originally filed on February 24, 2004 (the “Original 10-K”) to reflect changes to disclosures made in response to comments received from the Staff of the Division of Corporation Finance of the Securities and Exchange Commission (“SEC”). There are no changes to the amounts on the financial statements as originally filed. This Amendment No. 1 amends and restates in their entirety Items 7 and 8 of Part II and Item 15 of Part IV of the Original 10-K. All of the revisions made in response to the Staff’s comments appear under the headings “Results of Operations” and “Liquidity and Capital Resources” in Item 7 of Part II and in Note 1 to our audited financial statements in Item 8 of Part II. This Amendment No. 1 continues to speak as of the date of the Original 10-K, and we have 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 our periodic reports filed with the SEC subsequent to the date of the filing of the Original 10-K.
PART II
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
MGI PHARMA is an oncology-focused biopharmaceutical company that acquires, develops and commercializes proprietary products that meet cancer patient needs. We focus our direct sales efforts solely within the United States and create alliances with other pharmaceutical or biotechnology companies for the commercialization of our products in other countries.
We promote products directly to physician specialists in the United States using our own sales force. Our marketed products include AloxiTM (palonosetron hydrochloride) injection, Salagen® Tablets (pilocarpine hydrochloride), and Hexalen® (altretamine) capsules. Given the large market in which Aloxi injection competes and its favorable clinical profile, sales of Aloxi injection are expected to substantially exceed 2004 sales of our other current products. In the third quarter of 2003, Aloxi injection was approved by the U.S. Food and Drug Administration (“FDA”) for the prevention of acute and delayed chemotherapy-induced nausea and vomiting (“CINV”) and we began promoting Aloxi injection in September 2003. We obtained exclusive U.S. and Canadian license and distribution rights to Aloxi injection from Helsinn Healthcare SA (“Helsinn”) in May 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 injection and an oral Aloxi formulation.
Salagen Tablets are approved in the United States for two indications: the symptoms of dry mouth associated with radiation treatment in head and neck cancer patients and the symptoms of dry mouth associated with Sjögren’s syndrome, an autoimmune disease that damages the salivary glands. Sales of Salagen Tablets in the United States accounted for 67 percent of our product sales during 2003. Hexalen capsules is an orally administered chemotherapeutic agent approved in the United States for treatment of refractory ovarian cancer patients.
Our current product development efforts include preclinical and clinical programs for the acylfulvenes, including irofulven, our novel anti-cancer agent with demonstrated activity in a variety of cancers and a unique mechanism of action. We have also funded development of MG98 and inhibitors of DNA methyltransferase for North American markets. DNA methyltransferase is an enzyme that has been associated with uncontrolled tumor growth. We provide ongoing clinical support of Aloxi injection and Salagen Tablets. Our research and development expense also includes license fees related to Helsinn’s now concluded development of Aloxi injection for CINV and its ongoing development of Aloxi injection for PONV and for an oral Aloxi formulation.
In August 2003, we completed a sale of 5,060,000 newly issued shares of common stock in a follow-on public offering at $35.50 per share. Our net proceeds, after fees and expenses, were $168,581,477. Since our current operations are expected to begin producing positive cash flow near the end of 2004, these proceeds are primarily intended to fund expansion of our product portfolio.
2003 revenues were $49 million and we anticipate 2004 revenues will range between $109 million to $119 million. The anticipated increase would result from increasing Aloxi injection product sales. Net loss for 2003 was $62 million and we expect a net loss in 2004 of approximately $4 million, given our current product portfolio. This expectation is exclusive of any increase in net loss that would result from expanding our product portfolio.
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Results of Operations
Critical Accounting Policies
In preparing our financial statements in conformity with accounting principles generally accepted in the United States of America, our management must make decisions which impact reported amounts and 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, our management applies judgment based on our understanding and analysis of relevant circumstances. Note 1 to the financial statements provides a summary of the significant accounting policies followed in the preparation of the financial statements. Our critical accounting policies include the following:
Our accounting policy on revenue recognition is fully described in Notes 1 and 6 to the financial statements. The majority of our revenue relates to product sales. We recognize product sales revenue upon shipment to wholesalers, upon fulfillment of acceptance terms, if any, and when no significant contractual obligations remain. As is common in the pharmaceutical industry, our domestic sales are made to pharmaceutical wholesalers for further distribution through pharmacies to the ultimate consumers of our products. As such, our product sales revenue may be less than or greater than the underlying demand for our products. We report sales revenue net of wholesaler chargebacks, allowances for product returns, cash discounts, administrative fees and other rebates. We estimate wholesaler chargebacks, cash discounts, administrative fees and other rebates by considering the following factors: current contract prices and terms with both direct and indirect customers, estimated customer and wholesaler inventory levels and current average chargeback rates by product and by indirect customer. The majority of the expense and year-end liabilities associated with these estimates are defined contractually and resolved within several months following year-end and therefore it is unlikely the actual results will differ significantly from the estimates. We update these estimates for changes in facts and circumstances as appropriate. Our process to estimate product returns is tailored to the specific facts and circumstances of each product, including its product life cycle stage. For new products, product returns allowance is estimated based on historical information for similar or competing products in the same distribution channel. We obtain and evaluate product return data from distributors and, based on this evaluation, estimate return rates. For established products, product returns allowance is estimated by considering the following factors: current marketing efforts, estimated distribution channel inventory levels, underlying demand, historical experience and competitor behavior. Inventory in the distribution channel and underlying demand are estimated on a monthly basis by evaluating data obtained from a company that surveys pharmaceutical inventory movement and prescription data. We also use this data to monitor underlying demand in relation to significant external factors such as price changes from competitors and the introduction of new products by competitors. External and internal factors could have a material adverse effect on the demand for our products and on product returns. As of December 31, 2003, we had accrued $1.5 million for product returns. For the years ended December 31, 2003, 2002 and 2001, product returns reduced gross sales by $1.3 million, $0.5 million and $0.7 million, respectively. The increase in product return expense from 2002 to 2003 was a result of a one-time, $500K, return allowance increase for Didronel infusion in response to the decision, made in 2003, to stop distributing the product in 2004 and due to $350K of product return expense recognized as a result of Aloxi sales.
We also recognize revenue related to licensing agreements. Licensing revenue recognition requires management to estimate effective terms of agreements and identify points at which performance is met under the contracts such that the revenue earnings process is complete. Under this policy for out-licensing arrangements, revenue related to up-front, time-based and performance-based licensing payments is recognized over the entire contract performance period. For our major licensing contracts, this results in the deferral of revenue amounts (approximately $2.4 million at December 31, 2003) where non-refundable cash payments have been received, but the revenue is not immediately recognized due to the long-term nature of the respective agreements. Following our initial estimate of the effective terms of these arrangements, subsequent developments such as contract modifications or terminations could increase or decrease the period over which the deferred revenue is recognized.
Research and development expense includes work performed for us by outside vendors and research organizations. At each reporting period, we estimate expenses incurred but not reported or billed to us by these outside vendors. These expense estimates typically cover a period of 1 to 4 weeks of expense. Actual results are recorded on a timely basis and, historically, have not been materially different from our estimates. In addition, costs related to in-licensing arrangements for product candidates are expensed as research and development until their first commercial sale.
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Revenues
Sales:Sales revenue decreased 15 percent from $30,021,813 in 2001 to $25,402,300 in 2002, but increased 57 percent to $39,857,620 in 2003. As is common in the pharmaceutical industry, our domestic sales are made to pharmaceutical wholesalers for further distribution through pharmacies to the ultimate consumers of our products. The decrease in sales revenue from 2001 to 2002 reflects decreased revenue from Salagen Tablets as a result of a several million dollar drawdown of wholesaler inventory partially offset by unit price increases of $2.6 million and a 4.5 percent increase in underlying prescriptions (underlying demand based on evaluation of data obtained from a company that surveys pharmaceutical inventory movement). reflects decreased revenue from Salagen Tablets, resulting from a drawdown of wholesaler inventory amounts, partially offset by an increase in selling price and a continued increase in patient demand. Beginning in the second quarter of 2001, and continuing throughout the rest of 2001, a substantial increase in wholesaler inventory amounts occurred in anticipation of a unit price increase. A reduction of wholesaler inventories occurred throughout the first half of 2002 after the price increase became effective. In the second half of 2002, sales realigned with underlying demand.
The increase in sales revenue from 2002 to 2003 reflects increased revenue from Aloxi injection, Salagen Tablets and Hexalen capsules. We began the promotion of Aloxi injection in September 2003, following its approval by the U.S. Food and Drug Administration. We recognized $9.7 million in Aloxi injection net sales in 2003, which provided 24 percent of our sales revenue in 2003. Sales of Salagen Tablets in the United States provided 87 percent of our sales revenue in 2001, 88 percent in 2002 and 67 percent in 2003. Underlying demand for Salagen Tablets in the United States, as measured by prescription growth, grew at an annual rate of approximately one percent from 2002 to 2003. Sales of Aloxi injection for the first quarter of 2004 are expected to be $12 million. Annual 2004 sales for Aloxi injection are expected to range from $80 million to $90 million and for all other product sales are expected to be approximately $27 million.
Licensing: Licensing revenue decreased four percent from $2,932,007 in 2001 to $2,801,189 in 2002, and increased 240 percent to $9,527,433 in 2003. We and Dainippon Pharmaceutical Co. Ltd. terminated our collaborative acylfulvene license agreement in August 2003. Since we had no future obligations to Dainippon after termination, all remaining unamortized licensing revenue related to this relationship was amortized into license revenue in 2003. For 2003, we amortized $7,141,972 of deferred revenue into licensing revenue related to previously received non-refundable license fees from Dainippon, which included $6,867,280 being amortized in the third quarter of 2003.
Licensing revenue is a combination of deferred revenue amortization from licensing arrangements and from royalties that are recognized when the related sales occur. In 2001, we received a milestone payment of $750,000 from Novartis Ophthalmics AG related to the licensing of Salagen Tablets in Europe. We recognized $841,258, $794,384 and $7,386,972 of amortized deferred revenue in 2001, 2002 and 2003, respectively, related to all payments received under these license agreements. We will recognize the December 31, 2003 unamortized balance of $2,441,250 from our license agreements into licensing revenue over the expected periods of benefit for the related collaborative arrangements, which is expected to continue into 2015. 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. We expect licensing revenue for 2004 to be approximately $2 million.
Costs and Expenses
Cost of sales:Cost of sales as a percent of sales was 12 percent for 2001, 13 percent for 2002 and 17 percent for 2003. The increase from 2002 to 2003 in cost of sales as a percentage of sales is a result of sales of Aloxi injection, which launched in September 2003. Cost of sales may vary from quarter to quarter, depending on the product mix and production costs. We believe that cost of sales as a percent of product sales for our currently marketed products for 2004 will be approximately 30 percent.
Selling, general and administrative:Selling, general and administrative expenses increased 1 percent from $28,463,387 in 2001 to $28,827,337 in 2002, and increased 75 percent to $50,409,508 in 2003. Although total costs remained essentially unchanged from 2001 to 2002, our costs increased for field selling expense and decreased for direct product promotion and facility expenses. Promotion costs decreased from 2001 to 2002 due to our initiating promotion of Hexalen capsules and Mylocel tablets in 2001. Facility costs decreased from 2001 to 2002 due to an accrual in 2001 for lease obligations for the former office space in excess of estimated sublease income, and physical move costs related to our move to a new office location in the second quarter of 2001. Costs in 2002 also include $515,766 in expense related to a reduction in our workforce in the second quarter of 2002.
The increase from 2002 to 2003 is primarily a result of increased expenditures for the commercial launch of Aloxi injection in September 2003 and its continued commercialization. We expect selling, general and administrative expenses for 2004 to be approximately $59 million.
Research and development:Research and development expense decreased 11 percent from $36,101,373 in 2001 to $32,213,635 in 2002, and increased 56 percent to $50,120,596 in 2003. All three periods include expense related to milestone
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payments under our license agreement for Aloxi injection: $13.0 million in 2001, $14.0 million in 2002 and $31.3 million in 2003. Exclusive of these license payments, research and development expense decreased 21 percent from $23,035,123 in 2001 to $18,163,635 in 2002, and increased 4 percent to $18,799,596 in 2003. The following table details the Company’s research and development costs incurred for major development projects in the years ended December 31, 2003, 2002, and 2001:
| 2003 | 2002 | 2001 | |||||||
Aloxi product candidates | |||||||||
License/Milestone | $ | 31,271,000 | $ | 14,000,000 | $ | 13,016,250 | |||
Other research and development | 4,919,598 | 2,662,638 | 647,642 | ||||||
Total Aloxi | 36,190,598 | 16,662,638 | 13,663,892 | ||||||
Acylfulvenes | |||||||||
License/Milestone | 50,000 | 50,000 | 50,000 | ||||||
Other research and development | 10,007,450 | 11,932,232 | 16,055,649 | ||||||
Total Acylfulvenes | 10,057,450 | 11,982,232 | 16,105,649 | ||||||
MG98 and DNA MT | 3,152,548 | 2,531,543 | 5,016,155 | ||||||
Other projects | 720,000 | 1,037,222 | 1,315,677 | ||||||
Total research and development | $ | 50,120,596 | $ | 32,213,635 | $ | 36,101,373 | |||
Aloxi products and product candidates: In April 2001, we obtained from Helsinn Healthcare SA (“Helsinn”) the exclusive oncology license and distribution rights for Aloxi injection in the United States and Canada. Aloxi injection is a differentiated 5-HT3 antagonist for the prevention of chemotherapy-induced nausea and vomiting, which was approved by the FDA in July 2003. Under the terms of the agreement, we incurred $38 million in license expense through September 20, 2003. We expanded our agreement with Helsinn in November 2003 to include rights for the postoperative nausea and vomiting (“PONV”) application of Aloxi injection and an oral Aloxi formulation. Under the terms of the expanded agreement, we incurred license expense of $20.3 million in 2003 and we expect to incur additional license expense of $25 million over the course of the next several years upon achievement of certain development milestones leading up to the planned approvals of Aloxi PONV and an oral Aloxi formulation. Phase 3 trials are expected to begin during 2004 for the PONV and oral programs with a goal to seek FDA approval of Aloxi injection for the prevention of PONV and to develop an oral Aloxi formulation. Helsinn will continue to fund and conduct all registration directed development of Aloxi products for the new applications and will supply finished product for commercialization.
Acylfulvene product candidates: In 1993, we obtained exclusive worldwide rights to the acylfulvene family of compounds from the Regents of the University of California. Irofulven, the lead product candidate is a novel, broadly active cytotoxic agent. In clinical trials of irofulven as a single agent, activity has been observed in prostate, liver, ovarian and pancreatic cancers. In clinical trials of irofulven in combination with currently marketed chemotherapies, activity has been seen in prostate, colorectal and thyroid cancers. A multicenter, phase 2 clinical trial of irofulven in patients with hormone refractory prostate cancer (“HRPC”) is scheduled to begin in the second quarter of 2004. This open-label study will assess time to disease progression, PSA response, pain palliation, survival, and quality of life in hormone-refractory prostate cancer patients who have progressed following treatment with docetexel. Patients will be randomized to receive prednisone, prednisone plus irofulven, or a combination of prednisone, irofulven, and capecitabine. This trial will enroll a total of approximately 135 HRPC patients at multiple sites in North America, South America, and Europe. A second phase 2 trial designed to evaluate irofulven in combination with a platinum agent in this HRPC population is planned to begin in mid-2004. The Company plans to evaluate the results of this program with a goal to identify the most promising irofulven combination regimen to advance to a phase 3 clinical program for patients with HRPC that have progressed following docetaxel treatment.
MG98 and DNA MT: In a December 2003 amendment to the MethylGene License Agreement (“License Agreement”), MethylGene acknowledged full satisfaction of our payment obligations and suspended further payment obligations by us until after completion by MethylGene of a planned clinical trial with MG98. If we resume development, our financial responsibilities under the License Agreement would also resume. We agreed with MethylGene to terminate the small molecule inhibitor of DNA methyltransferase portion of our license relationship and those rights reverted back to MethylGene without any additional payments by either party.
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For information about the commercial status, target diseases and the development of our drug compounds, refer to the product overview table contained in Part I, Item I of this Form 10-K. In general, the estimated times to completion within the various stages of clinical development are as follows:
Clinical Phase | Estimated Completion Time | |
Phase I | 1-2 years | |
Phase II | 2-3 years | |
Phase III | 2-3 years |
For Aloxi products, we expect to incur additional license expense of $25 million over the course of the next several years upon achievement of certain development milestones leading through the planned approvals of Aloxi PONV and an oral Aloxi formulation. Phase 3 trials are expected to begin during 2004 for each program with a goal to seek FDA approval of Aloxi injection for the prevention of PONV and an oral Aloxi formulation.
Due to the significant risks and uncertainties inherent in preclinical tests and clinical trials associated with each of our research and development projects, the cost to complete such projects as well as the timing of product marketing and sales is not reasonably estimable. The data obtained from these tests and trials may be susceptible to varying interpretation that could delay, limit or prevent a project’s advancement through the various stages of clinical development. The actual probability of success for each drug candidate and clinical program will be impacted by a variety of factors, including the biologic activity of the molecule, the validity of the target and disease indication, early clinical data, patient accrual, investment in the program, competition and commercial viability.
Interest Income
Interest income decreased 20 percent from $1,600,363 in 2001 to $1,278,645 in 2002, and increased 21 percent to $1,553,483 in 2003. The decrease from 2001 to 2002 is a result of decreases in the investment yields, partially reduced by increases in the average amount of funds available for investment. The increase from 2002 to 2003 is a result of increases in the average amount of funds available for investment partially reduced by declining yields. Funds available in 2001 increased as a result of the sales of stock in the second and fourth quarters of 2001. Funds available in 2002 additionally increased as a result of the issuance of convertible notes and warrants in the fourth quarter of 2002. Funds available in 2003 increased as a result of the sale of stock in the third quarter. Interest income for 2004 will fluctuate depending on the timing of cash flows and changes in interest rates for marketable securities.
Interest Expense
We had no debt in 2001. Interest expense increased from $83,130 in 2002 to $997,563 in 2003. The increase resulted from a full year of interest expense in 2003 related to our issuance of convertible debt in the fourth quarter of 2002. Given the full conversion of the debt on the first quarter of 2004, we expect interest expense related to this convertible debt for 2004 to be approximately $141,000, of which $81,000 will be paid using cash. The non-cash portion of interest expense primarily related to the issuance of warrants in conjunction with the issuance of our convertible debt. (See Note 7 to the financial statements) Our interest expense would increase if we issue new debt securities.
Impairment of Investment
In 2003 we recorded a $3,153,948 impairment to our investment in MethylGene Inc. We own an approximate 13 percent, minority interest in MethylGene Inc., a privately owned Canadian biopharmaceutical company. This minority interest is reported in the financial statements as “Long term equity investment” at the lower of cost or if its value is other than temporarily impaired, then at estimated fair value. Because MethylGene is a privately held company the value in this investment is inherently more difficult to estimate than an investment in a public company. We estimated that the value of the investment declined to $3,646,052 in the year ended December 31, 2003 and an impairment of this asset had occurred that was other than temporary.
Tax Expense
There is no provision for tax expense in 2001, 2002 or 2003, due to net losses of $35 million, $36 million, and $62 million, respectively. Our ability to achieve profitable operations is dependent upon our successful commercialization of Aloxi injection, among other things, and therefore, 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
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increase additional paid-in capital. 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 when this valuation allowance adjustment would occur is primarily dependent upon significant growth in sales of Aloxi injection. It is unlikely that an adjustment to reduce the valuation allowance would occur in 2004, given current operating expectations.
Net Loss
We had net losses of $34,825,322, $36,063,792 and $61,907,504 in 2001, 2002 and 2003, respectively. The increased net loss from 2001 to 2002 reflects a 14 percent decrease in revenues from 2001 to 2002, and a six percent decrease in costs and expenses. The increased net loss from 2002 to 2003 reflects a 75 percent increase in revenues from 2002 to 2003, and a 66 percent increase in costs and expenses. During the next several years, we expect to direct our efforts towards activities intended to grow long-term revenues, including the continued development and commercialization of Aloxi products and continued development of irofulven and other product candidates. We expect our net loss for 2004 to be approximately $4 million exclusive of increases in net loss that would result from expanding our product portfolio.
Liquidity and Capital Resources
At December 31, 2003, we had cash and marketable investments of $177,753,253 and working capital of $128,571,606, compared with $60,472,901 and $49,999,430, respectively, at December 31, 2002. For the year ended December 31, 2003, we received $168,581,477 in cash from the issuance of 5,060,000 shares of common stock in a follow-on public offering, and $12,255,220 in cash from issuance of shares under stock award plans. We used $56,718,784 of cash to fund our operating activities, repaid a $4,300,000 deposit to Dainippon as a result of the termination of our license agreement, and purchased $744,684 in equipment and furniture. Our investment in inventories increased in 2003 by $5,658,137 due to the launch of Aloxi. Increased sales and longer payment terms related to sales of Aloxi injection resulted in accounts receivables increasing by $3,475,143. We expect receivable balances to increase significantly as a result of increased Aloxi injection sales and credit terms. This was offset by an increase in accounts payable and accrued expenses of $14,977,016 that includes the $10,000,000 Helsinn payment due in the first quarter of 2004.
Our cash use in 2004 will be very dependent upon the pattern of Aloxi injection sales. We expect the rate of Aloxi injection sales to increase during 2004, which will result in increased working capital deployed for Aloxi injection finished product inventory and receivables. However, as sales increase we expect our operations to generate positive cash flow and by the quarter ending December 31, 2004, cash flow from operations could be positive. We expect annual cash use in 2004 to be approximately $15 million, which includes cash needed for operations and is reduced by the receipt in the first quarter of 2004 of $3,850,000 upon the exercise of our outstanding stock purchase warrants. We have sufficient liquidity in our cash and marketable investments to fund these operations.
Substantial amounts of capital will be needed to continue executing on our goal of growing our pharmaceutical business. These capital needs will include funding of continued development and commercialization of our product candidates and marketed products. We intend to expand our product portfolio through various means such as additional product acquisitions or business combinations. These transactions will require the use of capital and their timing is difficult to predict. Our capital needs may exceed the capital available from our future operations, collaborative arrangements and existing liquid assets. For these needs or in anticipation of these needs, we may seek capital from additional equity or debt issuances.
As identified in our risk factors, adverse changes that affect our future demand for our marketed products, continued access to the capital markets, and continued development and expansion of our product candidates would affect our longer-term liquidity.
On January 5, and February 6, 2004, an aggregate of 2,571,428 shares of our common stock were issued to Deerfield International Limited and Deerfield Partners, L.P. pursuant to their election to, first partially and then fully, convert our 3% convertible subordinated notes issued in December 2002 for gross proceeds of $21 million. Also on February 6, 2004, the common stock purchase warrants that were issued in connection with that December 2002 financing were exercised. We received $3,850,000 upon the exercise of the warrants and issued 400,000 common shares.
Payment Obligations
Our future, noncancellable, contractual commitments, are summarized in the following table:
| 2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | |||||||||||||
Lease Payments | $ | 1,859,000 | $ | 1,733,000 | $ | 1,461,000 | $ | 1,483,000 | $ | 622,000 | $ | — | ||||||
AloxiTM License | 10,000,000 | — | — | — | — | — | ||||||||||||
Total | $ | 11,859,000 | $ | 1,733,000 | $ | 1,461,000 | $ | 1,483,000 | $ | 622,000 | $ | — | ||||||
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We expect to make additional payments to Helsinn related to Aloxi product candidates totaling $25 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.
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RISKS RELATED TO OUR BUSINESS
Our business is dependent on the commercial success of Aloxi injection. If we are unable to successfully commercialize Aloxi injection we may be unable to continue our operations as planned.
The success of our business is dependent on the successful commercialization of Aloxi injection. Aloxi injection is new to the market and may be unfamiliar to members of the medical community. Market acceptance will depend largely on our ability to demonstrate, to the oncology community in particular, the efficacy and safety of Aloxi injection as an alternative to currently marketed therapies. We cannot be certain that Aloxi injection will provide benefits considered adequate by providers of oncology services or that enough providers will use the product to ensure its commercial success.
The 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, such as unacceptable toxicities or side effects, with a product 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.
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 injection or cause sales of Aloxi injection to decline. In those circumstances, our stock price would decline and we may have to find additional sources of funding or scale back or cease operations.
We have a history of net losses. If we do not have net income in the future, we may be unable to continue our operations.
We are not currently profitable and have a very limited history of profitability. We expect to incur significant expenses over the next several years as we devote substantial resources to 1) support of the development efforts of Aloxi products through milestone payments to Helsinn, 2) the continued development of product candidates, including irofulven, and other product candidates and 3) continued commercialization of Aloxi injection and our other marketed products. Therefore, we will not generate net income unless we are able to significantly increase revenues from sales of Aloxi injection or other products. Furthermore, if we continue to sustain losses, we may be unable to fund development of our product candidates or to continue our business operations as planned.
If we fail to obtain additional capital to grow our business, we will be unable to complete our product portfolio development and expansion plans.
We may need to raise additional funds for various reasons including the following:
| • | to expand our portfolio of marketed products and product candidates; |
| • | to develop products we have acquired or may license; |
| • | to develop irofulven and other acylfulvene analogs; |
| • | to obtain necessary working capital; and |
| • | to fund operating losses. |
Adequate funds for these purposes may not be available when needed or on terms acceptable to us. Insufficient funds may cause us to delay, scale back, or abandon some or all of our product acquisition and licensing programs and product development programs. We may seek additional funding through public and private financing, including equity and debt financing or enter into collaborative arrangements. Any sale of additional convertible debt securities or equity securities may result in additional dilution to our shareholders and any debt financing may require us to pledge our assets and enter into restrictive covenants. Entry into collaborative arrangements may require us to give up rights to some of our products or to some potential markets or to enter into licensing arrangements on unfavorable terms.
Clinical trials are complex and unpredictable and may be difficult to complete or produce unexpected results that could delay or prevent our ability to commercialize our product candidates.
Before obtaining regulatory approvals for the commercial sale of any product under development, including irofulven, we, or Helsinn Healthcare SA in the case of the Aloxi products, must demonstrate through preclinical studies and clinical trials that the product is safe and effective for use in each target indication. We depend on collaboration from Helsinn Healthcare SA, medical institutions and
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laboratories to conduct our clinical and preclinical testing in compliance with good clinical and laboratory practices as required by the FDA. We, or Helsinn Healthcare SA, may depend on contract research organizations to manage a substantial portion of the medical institutions utilized to conduct clinical testing. The results from preclinical animal studies and human clinical trials may not be predictive of the results that will be obtained in large-scale testing. Some of the results reported from phase 2 clinical trials are interim results and may not be predictive of future results, including final results from such phase 2 trials, because, among other factors, patient enrollment and the time period for evaluating patient results are not complete. If we, or Helsinn Healthcare SA, fail to adequately demonstrate the safety and efficacy of a product candidate, the FDA would not provide regulatory approval of the product. The appearance of unacceptable toxicities or side effects during clinical trials could interrupt, limit, delay or abort the development of a product. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after experiencing promising results in previous animal and human studies.
The time required to complete clinical trials is dependent upon, among other factors, the rate of patient enrollment. Patient enrollment is a function of many factors, including:
| • | the size of the patient population; |
| • | the nature of clinical protocol requirements; |
| • | the diversion of patients to other trials or marketed therapies; |
| • | our ability to recruit and manage clinical centers and associated trials; |
| • | the proximity of patients to clinical sites; and |
| • | the patient criteria for the study. |
Other factors, such as lack of efficacy and unacceptable toxicities, may result in increased costs and delays or termination of clinical trials prior to completion. In addition, delays in manufacturing of product for our clinical trials could impact our ability to complete our clinical trials as planned. Any failure to meet expectations related to our product candidates could adversely affect our stock price.
Since our product candidates such as irofulven may have many potential applications and we have limited resources, our focus on a particular area may result in our failure to capitalize on more profitable areas and may not result in viable products.
We have limited financial and product development resources. This requires us to focus on product candidates in specific areas and forego opportunities with regard to other product candidates or applications. For example, our most significant product candidate, irofulven, is in clinical and preclinical trials for a number of applications. We expect that a substantial portion of our product development efforts over the next several years may be devoted to the further development of irofulven, including its application to the treatment of cancers or sub-populations of certain types of cancers with limited therapeutic options such as refractory cancers, for which we believe irofulven could most quickly be developed and approved for marketing. We are also investigating the efficacy of irofulven in combination with other cancer therapies. While some of these studies have indicated some effectiveness in relation to the target medical conditions, additional clinical trials must be conducted before product registration may be requested.
If we fail to identify, develop and successfully commercialize applications for irofulven, we may not achieve expectations of our future performance and our stock price may decline. For example, in April 2002 we stopped enrollment in our phase 3 trial of irofulven in advanced-stage, gemcitabine-refractory pancreatic cancer patients and our stock price declined significantly. In addition, we may focus our development of irofulven on a particular application that may result in our failure to capitalize on another application or another product candidate. Our decisions impacting resource allocation may not lead to the development of viable commercial products and may divert resources away from more profitable market opportunities.
Our operating results may fluctuate significantly, which may adversely affect our stock price.
If our operating results do not meet the expectations of investors or securities analysts, our stock price may decline. Our operating results may fluctuate significantly from period to period due to a variety of factors including:
| • | the acceptance of, and demand for, Aloxi injection; |
| • | changing demand for our current products, particularly Salagen; |
| • | third parties introducing competing products; |
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| • | the pace and breadth of our development programs; |
| • | expenditures we incur to acquire, license, develop or promote additional products; |
| • | availability of product supply from third-party manufacturers; |
| • | changes in sales and marketing expenditures; and |
| • | the timing of licensing and royalty revenues. |
For the year ended December 31, 2003, we had a net loss of $61.9 million, compared to a net loss of $36.1 million for the year ended December 31, 2002. The continuing pattern of losses is primarily a result of spending for research and development and spending for launch activities for Aloxi injection exceeding product revenue available from our currently marketed products.
Variations in the timing of our future revenue and expense could also cause significant fluctuations in our operating results from period to period and may result in unanticipated earnings shortfalls or losses.
Sales of Salagen Tablets have accounted for the majority of our product revenues. If any factor adversely impacts sales of Salagen Tablets, our product revenues will decrease.
Historically we derived the majority of our product revenues from the sale of Salagen Tablets. U.S. sales of Salagen Tablets represented 67 percent of our total product sales and 54 percent of our total revenue for the year ended December 31, 2003. Any factor adversely affecting sales of Salagen Tablets could cause our product revenues to decrease and our stock price to decline significantly. In March 2001, our orphan drug status for Salagen Tablets as a treatment for the symptoms of radiation-induced xerostomia, or severe dry mouth, in head and neck cancer patients expired. Our orphan status for Salagen as a treatment of symptoms associated with Sjögren’s syndrome expires in April 2005. Because Salagen Tablets does not have patent protection, competing generic products may enter these markets. In addition, we are aware of two currently marketed products that compete in the same or similar markets as Salagen Tablets. If sales of Salagen Tablets decline as a result of this competition, or for any other reason, our product revenues will decrease and our stock price could decline.
We depend on a single supplier to provide us with the finished drug product for Aloxi injection and a single supplier to provide us with the active ingredient for the production of Salagen Tablets. If either supplier terminates its relationship with us, or is unable to fill our demand for the ingredients or products, we may be unable to sell those products.
We rely on Helsinn Birex Pharmaceuticals Ltd. as our sole and exclusive supplier of the Aloxi injection finished drug product. In addition, we rely on the Fine Chemicals Division of Merck KgaA as our sole and exclusive supplier of oral-grade pilocarpine hydrochloride, the active ingredient in Salagen Tablets. The refined raw material for Salagen Tablets is a semi-synthetic salt of an extract from plants grown and processed exclusively on plantations in South America. To our knowledge, there is currently no other producer of oral-grade pilocarpine hydrochloride that is capable of meeting our commercial needs. If our relationship with Helsinn Birex Pharmaceuticals Ltd. or Merck KgaA terminates, or Helsinn Birex Pharmaceuticals Ltd. or Merck KgaA is unable to meet our needs for any reason, we will need to find an alternative source of the active ingredients and products supplied by those companies. If we are unable to identify an alternative source, we may be unable to continue offering Aloxi injection or producing Salagen Tablets for commercial sale. Even if we were able to procure adequate supplies of Aloxi injection finished drug product or pilocarpine hydrochloride from an alternative source, any disruption in supply could have a material adverse effect on our ability to meet customer demand for Aloxi injection or Salagen Tablets for commercial sale, which could cause our product revenues to decrease and our stock price to decline.
If our third-party manufacturer of Aloxi injection or Salagen Tablets 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 do not have manufacturing facilities and we rely on Helsinn Birex Pharmaceuticals Ltd. for the production of Aloxi injection, Patheon Inc. for the production of Salagen Tablets, and other third-party manufacturers for our other products. We intend to continue to rely on others to manufacture any future products, including any products that we may acquire or license, and we have no plans to establish manufacturing facilities. 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 prescribed by the FDA or other standards prescribed by the appropriate regulatory agency in the country of use. There is a risk that our manufacturers,
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including the current manufacturers of Aloxi injection and Salagen Tablets, will not comply with all applicable regulatory standards, and may not be able to manufacture Aloxi injection, Salagen Tablets, 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. |
Our business strategy depends on our ability to identify, acquire, license and develop product candidates and identify, acquire or license approved products.
As part of our business strategy we plan to identify, acquire, license and develop product candidates and identify, acquire and license approved products for markets that we can reach through our marketing and distribution channels. If we fail to obtain, develop and successfully commercialize additional products, we may not achieve expectations of our future performance and our stock price could decline. Because we do not directly engage in basic research or drug discovery, we must rely upon third parties to sell or license product opportunities to us. Other companies, including some with substantially greater financial, marketing and sales resources, are competing with us to acquire or license such products or product candidates. We may not be able to acquire or license rights to additional products or product candidates on acceptable terms, if at all. Furthermore, we may not be able to successfully develop any product candidates we acquire or license. In addition, we may acquire or license new products with different marketing strategies, distribution channels and bases of competition than those of our current products. Therefore, we may not be able to compete favorably in those product categories.
If we are unable to maintain relationships with third-party collaborators or enter into new relationships, we may not be able to develop any of our product candidates or commercialize our products in a timely manner, if at all.
Our continued success will depend in large part upon the efforts of third-parties. For the research, development, manufacture and commercialization of our products, we currently have, and will likely continue to enter into, various arrangements with other corporations, licensors, licensees, outside researchers, consultants and others. However, we cannot be certain of the actions these parties will take, and there is a risk that:
| • | we will be unable to negotiate acceptable collaborative arrangements to develop or commercialize our products; |
| • | any arrangements with third-parties will not be successful; |
| • | third-party collaborators will not fulfill their obligations to us under any arrangements entered into with them; |
| • | strategic collaborators, including Helsinn Healthcare SA, will terminate their relationship with us; or |
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| • | current or potential collaborators will pursue treatments for other diseases or seek alternative means of developing treatments for the diseases targeted by our programs or products. |
Our third-party collaborators include public research institutions, research organizations, teaching and research hospitals, community-based clinics, testing laboratories, contract product formulation organizations, contract packaging and distribution companies, manufacturers, suppliers and license collaborators. We consider our arrangements with Helsinn Healthcare SA, Patheon Inc., and Merck KgaA to be significant. If any of our collaborators breaches or terminates its agreement with us, or otherwise fails to conduct its collaborative activities in a timely manner, we may experience significant delays in the development or commercialization of the products or product candidates or the research program covered by the agreement and we may need to devote additional funds or other resources to these activities. If we are unable to enter into new or alternative arrangements to continue research and development activities, or are unable to continue these activities on our own, we may have to terminate the development program. As a consequence, we may experience a loss of future commercial product potential and a decline in our stock price.
We have licensed the right to promote, sell and distribute Aloxi products in the United States and Canada from a third party. We are particularly dependent on that third party for our ability to commercialize Aloxi products.
We have entered a license agreement with Helsinn Healthcare SA under which we have acquired a license to sell and distribute Aloxi products in the United States and Canada through December 31, 2015. Furthermore, under the terms of our license, we are required to purchase all of our Aloxi products from Helsinn Healthcare SA. The license agreement may be terminated for specified reasons, including if the other party is in substantial or persistent breach of the agreement, if we have experienced a change of control and the acquiring entity has competing products or our marketing and sales related commitments to the licensor are not maintained by the acquiring entity, or if either party has declared bankruptcy. Although we are not currently in breach of the license, and we believe that Helsinn Healthcare SA is not currently in breach of the license, there is a risk that either party could breach the license in the future. In addition, if we were to breach the supply agreement with Helsinn Birex Pharmaceutical Ltd. contemplated by the license, Helsinn Healthcare SA would be permitted to terminate the license.
If the license agreement were terminated, we would lose all of our rights to sell and distribute Aloxi products, as well as all of the related intellectual property and all regulatory approvals. In addition, Helsinn Healthcare SA holds the rights to palonosetron (the active ingredient in Aloxi products) through an agreement with Syntex (U.S.A.) Inc. and F. Hoffmann-La Roche AG. We cannot be certain of the actions that these parties will take, and there is a risk that these third parties will end their relationship, which would leave us without rights to the pharmaceutical preparations, products and know-how required to produce Aloxi products. As a consequence of such a termination, we would lose all of our rights to sell and distribute Aloxi products, which would harm our business and could cause our stock price to decline significantly.
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, our strategy for commercialization of such products in markets outside the United States is to enter into development and marketing alliances with multinational and foreign pharmaceutical companies. We have entered into alliances with various 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 marketing 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. |
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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 injection 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. Most of these products are marketed by large, multinational competitors, including GlaxoSmithKline, Roche and Aventis. If Aloxi injection does not compete successfully with existing products on the market, our stock price could decline significantly. Additionally, MedImmune, Inc. and Daichi Pharmaceutical have drugs that are approved for sale and compete in the same markets as Salagen Tablets.
Other pharmaceutical companies are developing products, which, if approved by the FDA, will compete directly with Aloxi injection or Salagen Tablets. Our competitors could also develop and introduce generic drugs comparable to Aloxi injection or Salagen Tablets, or drugs or other therapies that address the underlying causes of the symptoms that Aloxi injection or Salagen Tablets treat. If a product developed by a competitor is more effective than our product, or priced lower than our product, then our product revenue could decrease and our stock price could decline.
We are dependent on our key personnel. If we are not able to attract and retain key employees and consultants, our product development, marketing and commercialization plans could be harmed.
We are highly dependent on the members of our scientific and management staff. If we are not able to retain any of these persons, our product development, marketing and commercialization plans may suffer and our stock price could decline. None of our executive officers has an employment agreement with us. If we are unable to retain our scientific and management staff, we will need to hire additional qualified personnel for us to pursue our product acquisition, development, marketing and commercialization plans.
We may not be able to attract and retain personnel on acceptable terms, given the competition for such personnel among biotechnology, pharmaceutical and healthcare companies, universities and non-profit research institutions. If we are not able to attract and retain qualified personnel, our product acquisition, development, marketing and commercialization plans will suffer and our stock price could decline.
If we are unable to keep up with rapid technological changes in the pharmaceutical or biotechnology industries, we may be unable to continue our operations.
The pharmaceutical and biotechnology industries have experienced rapid and significant technological change. We expect that pharmaceutical technology and biotechnology will continue to develop rapidly. Our future success will depend, in large part, on our ability to develop and maintain technology that is competitive. If other companies achieve technological advances with their products or obtain FDA approval before we are able to obtain such approval, our products may become obsolete before they are marketed or before we recover any of our development and commercialization expenses incurred with respect to such products. In addition, alternative therapies or new medical treatments could alter existing treatment regimens, and thereby reduce the need for one or more of our products, which could result in the termination of the development in one or more of our product candidates, or in the decline in sales of one of our approved products, which could cause our stock price to decline.
RISKS RELATED TO OUR INDUSTRY
If we do not receive regulatory approvals for our product candidates, or if regulatory approval is delayed for any reason, we will be unable to commercialize and sell our products as we expect.
Prior to marketing, each of our product candidates must undergo an extensive regulatory approval process conducted by the FDA in the United States and by comparable agencies in other countries. The product development and approval process can take many years and require the expenditure of substantial resources. There is risk that the FDA or a foreign regulatory authority will not approve in a timely manner, if at all, any product we develop. Generally, the FDA approves for sale only a very small percentage of newly discovered pharmaceutical compounds that enter preclinical development. We may encounter delays or denials in regulatory approvals due to changes in FDA policy during the period of development, or changes in the requirements for regulatory review of each submitted new drug application, or NDA.
There is also risk that regulatory authorities in the United States and elsewhere may not allow us to conduct planned additional clinical testing of any of our product candidates, including irofulven or Aloxi products, or that, if permitted, this additional clinical testing will not prove that these product candidates are safe and effective to the extent necessary to permit us to obtain marketing approvals from regulatory authorities.
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Except for those products already approved, none of our product candidates are currently being tested in phase 3 or registration clinical trials. We cannot apply for a regulatory approval to market a product candidate until we successfully complete phase 3 or registration clinical trials for that product.
If we are unable to obtain intellectual property protection, or protect our proprietary technology, we may be unable to compete effectively.
The FDA awarded us orphan drug status for Salagen Tablets in 1994 as a treatment for the symptoms of xerostomia, or severe dry mouth, induced by radiation therapy in head and neck cancer patients and in 1998 for the symptoms of dry mouth associated with Sjögren’s syndrome. An orphan drug designation entitles us to marketing exclusivity of the protected drug for the stated condition for a period of seven years. Our orphan drug protection for Salagen Tablets expired in March 2001 for the treatment of symptoms of radiation-induced xerostomia in head and neck cancer patients and will expire in 2005 for the Sjögren’s syndrome indication. Upon expiration of any of our orphan drug protection for Salagen Tablets, we may face competition from manufacturers of generic versions of Salagen Tablets.
We hold an exclusive United States and Canada license on patents covering Aloxi injection proprietary rights. In addition, we hold an exclusive, worldwide license on patents and patent applications covering acylfulvene proprietary rights, including irofulven. The license applicable to these technologies is subject to certain statutory rights held by the U.S. government. Even though we have licensed these patents, we may not have exclusive rights to all possible acylfulvene analogs, all possible methods of using acylfulvene analogs to treat tumors or all possible synthetic methods for preparing acylfulvenes. In addition, we licensed rights to patents and patent applications covering MG98 and inhibitors of DNA methyltransferase. Protection of these rights and creation of additional rights involve joint responsibilities between us and the respective license party.
Our pending patent applications, those we may file in the future, or those we license from third parties, may not result in patents being issued. Patents, if issued, may be challenged, invalidated or circumvented. In addition, other entities may develop similar technologies that fall outside the scope of our patents. Thus, any patent rights that we own or license from third parties may not provide sufficient protection against potential competitors.
In the event that our technologies or methods used in the course of developing or selling our products infringe the patents or violate other proprietary rights of third parties, we and our corporate collaborators may be prevented from pursuing product development or commercialization.
In addition to patents, we rely on trade secrets and proprietary know-how. We protect our proprietary technology and processes in part by confidentiality agreements with our collaborators, employees and consultants. There is a risk that:
| • | these confidentiality agreements will be breached; |
| • | we will not have adequate remedies for any breach of these agreements; |
| • | our trade secrets will otherwise become known; or |
| • | our trade secrets will be independently discovered and used by competitors. |
The biotechnology and pharmaceutical industries have been characterized by litigation regarding patents and other intellectual property rights. If we become involved in any litigation, interference or other administrative proceedings, we will incur substantial expense and the efforts of our technical and management personnel will be diverted. An adverse determination may subject us to significant liabilities or require us to cease using the technology or to seek licenses that may not be available from third parties on commercially favorable terms, if at all, or to cease manufacturing and selling our products. This could cause us to terminate the development of one or more of our product candidates, to discontinue marketing an existing product, or to pay royalties to a third party. Any of these events could result in a decline in the price of our stock.
If the use of one of our products harms people, we may be subject to costly and damaging product liability claims.
We face exposure to product liability claims in the event that the use of our product is alleged to have harmed someone. Although we have taken, and continue to take, what we believe are appropriate precautions, there is a risk that we will not be able to avoid significant product liability exposure. We currently have product liability insurance in the amount of $30 million per occurrence and in the aggregate for the year. There is a risk that our insurance will not be sufficient to cover claims. There is also a risk that adequate insurance coverage will not be available in the future on commercially reasonable terms, if at all. The successful assertion of an uninsured product liability or other claim against us could cause us to incur a significant expense to pay such a claim, could adversely affect our product development and could cause a decline in our product revenue and the price of our stock.
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In addition to product liability risks associated with sales of our products, we may be liable to the claims of individuals who participate in clinical trials of our products. A number of patients who participate in trials are already critically ill when they enter a trial. The waivers we obtain may not be enforceable and may not protect us from liability or the costs of product liability litigation. Our product liability insurance may not provide adequate protection against potential liabilities. Moreover, we may not be able to maintain our insurance on acceptable terms. As a result of these factors, a product liability claim, even if successfully defended, could cause us to incur a significant expense to defend such a claim, could adversely affect our product development and could cause a decline in our product revenue and the price of our stock.
We could become the subject of legal proceedings or investigations that could result in substantial fines, penalties, injunctive or administrative penalties and criminal charges, which would increase our expenses and redirect management’s attention away from business operations.
Our business operations are subject to a wide range of laws and regulations. Other pharmaceutical companies have been the subjects of legal proceedings or investigations related to pricing, marketing, promotional and clinical trial practices. If we become the subject of legal proceedings or investigations, our expenses would increase and commercialization of our products could be adversely affected. Further, management’s attention would be diverted from our business operations.
If we issue a product recall, we may not sell as much of our products in the future and we may incur significant expenses.
The FDA or other government agencies having regulatory authority for product sales may request product recalls or we may issue product recalls. These product recalls may occur due to manufacturing issues, safety concerns or other reasons. We do not carry any insurance to cover the risk of a product recall. Any product recall could have a material adverse effect on our product revenue and could cause the price of our stock to decline.
If we or patients using our products are unable to obtain adequate reimbursement from government health administration authorities, private health insurers and other organizations, our product sales and price of our stock could decline.
There is much uncertainty about the reimbursement status of healthcare products. Our profitability will depend in part on: (1) the price we are able to charge for our products, and (2) the availability of adequate reimbursement for our products from third-party payors, such as government entities, private health insurers and managed care organizations. Federal and state regulations govern or influence the reimbursement status of healthcare products in many situations and third-party payors are increasingly challenging the pricing of medical products and services.
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 together with rulemaking by the Centers for Medicare and Medicaid Services (CMS) require a number of changes in Medicare practices, including reimbursement. The changes made to date, are not expected to have an adverse affect on our operations, sales or the price of our stock, but we cannot predict the impact, if any of future reimbursement changes.
Salagen Tablets generally have been eligible for reimbursement from third-party payors and we have applied for, or in certain cases already received confirmation of, reimbursement eligibility for Aloxi injection. Although third-party reimbursement previously has not been an issue for us, it becomes important to the commercialization of Aloxi products. Reimbursement of newly approved health products is uncertain. There is a risk that reimbursement will not be available for Aloxi products or for our future products. If government entities and other third-party payors do not provide adequate reimbursement levels for our products, our product and license revenues would be materially and adversely affected and our stock price could decline.
In recent years, various parties have proposed a number of legislative and regulatory proposals aimed at changing national healthcare systems. In the United States, we expect that there will continue to be a number of federal and state proposals to implement government control of pricing and profitability of prescription pharmaceuticals. Cost controls, if mandated by a government agency, could decrease the price that we receive for our current or future products. These proposals, if enacted, could have a material adverse effect on our product and license revenues and could cause our stock price to decline. In certain countries, regulatory authorities must also approve the sales price of a product after they grant marketing approval. There is a risk that we will not be able to obtain satisfactory prices in foreign markets even if we obtain marketing approval from foreign regulatory authorities.
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Our operations, and the operations of our third-party contractors, involve hazardous materials that could expose us to liability if environmental damage occurs.
Our operations, and the operations of our third-party contractors involve the controlled use of hazardous materials. We cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident or environmental discharge, third parties may hold us liable for any resulting damages, which may exceed our financial resources and may have a material adverse effect on our ability to fund our operations.
RISKS RELATED TO OUR COMMON STOCK
Our stock price is volatile, which may result in significant losses to shareholders.
There has been significant volatility in the market prices of pharmaceutical and biotechnology companies’ securities. Various factors and events may have a significant impact on the market price of our common stock, and some of these factors are beyond our control. These factors include:
| • | fluctuations in our operating results; |
| • | announcements of technological innovations or acquisitions or licensing of therapeutic products or product candidates by us or our competitors; |
| • | published reports by securities analysts; |
| • | positive or negative progress with our clinical trials; |
| • | governmental regulation, including healthcare reimbursement policies; |
| • | developments in patent or other proprietary rights; |
| • | developments in our relationship with collaborators and suppliers, and announcements of new strategic collaborations; |
| • | public concern as to the safety and efficacy of our products; and |
| • | general market conditions. |
The trading price of our common stock has been, and could continue to be, subject to wide fluctuations in response to these factors, including the sale or attempted sale of a large amount of our common stock into the market. Our stock price ranged from $4.68 to $43.12 per share during the two-year period ended December 31, 2003. Broad market fluctuations may also adversely affect the market price of our common stock.
In the past, following large falls in the price of a company’s shares, securities class action litigation has often been initiated against that company. Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which could harm our business. Any adverse determination in litigation could subject us to significant liabilities.
We have outstanding options that have the potential to dilute shareholder value and cause our stock value to decline.
We frequently grant stock options to our employees and other individuals. At December 31, 2003, we had options outstanding for 4,351,237 shares of our common stock at option prices ranging from $3.38 to $51.50. If some or all of such shares are sold into the public market over a short time period, the value of our stock is likely to decline, as the market may not be able to absorb those shares at the prevailing market prices. Such sales may also make it more difficult for us to sell equity securities in the future on terms that we deem acceptable.
Our charter documents, our shareholder rights plan and Minnesota law contain provisions that could delay or prevent an acquisition of our company.
Our charter documents contain provisions that may discourage third parties from seeking to acquire our company. These provisions include:
| • | advance notice requirements for shareholder proposals and nominations; and |
| • | the authority of the board of directors to issue, without shareholder approval, preferred stock with such terms as the board of directors may determine. |
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In addition, our board of directors has adopted a shareholder rights plan, or poison pill, which enables our board of directors to issue preferred stock purchase rights that would be triggered by an acquisition of 15 percent or more of the outstanding shares of our common stock. These provisions and specific provisions of Minnesota law relating to business combinations with interested shareholders may have the effect of delaying, deterring or preventing a merger or change in control. Some of these provisions may discourage a future acquisition of our company even if shareholders would receive an attractive value for their shares or if a significant number of our shareholders believed such a proposed transaction to be in their best interests. As a result, shareholders who desire to participate in such a transaction may not have the opportunity to do so.
Item 7A. 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 investment 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 impact on our net loss as a result of a one percentage point change in short-term interest rates would be approximately $1,399,000 based on our cash, cash equivalents and short-term marketable investment balances at December 31, 2003.
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Item 8. Financial Statements and Supplementary Data
BALANCE SHEETS
| December 31, 2002 | December 31, 2003 | |||||||
ASSETS: | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 52,933,393 | $ | 116,570,518 | ||||
Short-term marketable investments | 7,539,508 | 23,362,898 | ||||||
Receivables, less contractual and bad debt allowances of $403,153 and $3,315,399 | 2,748,821 | 6,223,964 | ||||||
Inventories | 1,779,413 | 7,437,550 | ||||||
Prepaid expenses | 448,559 | 922,070 | ||||||
Total current assets | 65,449,694 | 154,517,000 | ||||||
Equipment, furniture and leasehold improvements, at cost less accumulated depreciation of $2,121,915 and $3,041,360 | 3,110,938 | 2,828,602 | ||||||
Long-term marketable investments | — | 37,819,837 | ||||||
Long-term equity investment | 6,800,000 | 3,646,052 | ||||||
Intangible assets, at cost less accumulated amortization of $2,462,455 and $3,667,412 | 4,629,415 | 5,653,457 | ||||||
Other assets | 490,329 | 54,206 | ||||||
Total assets | $ | 80,480,376 | $ | 204,519,154 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,904,297 | $ | 4,039,139 | ||||
Accrued expenses | 8,431,446 | 21,632,345 | ||||||
Deposit payable | 4,300,000 | — | ||||||
Deferred revenue | 794,383 | 245,000 | ||||||
Other current liabilities | 20,138 | 28,910 | ||||||
Total current liabilities | 15,450,264 | 25,945,394 | ||||||
Noncurrent liabilities: | ||||||||
Convertible debt, face value of $21,000,000 net of warrant cost and issuance costs of $1,708,851 and $1,361,288 | 19,291,149 | 19,638,712 | ||||||
Deferred revenue | 9,033,839 | 2,196,250 | ||||||
Other noncurrent liabilities | 101,589 | 128,636 | ||||||
Total noncurrent liabilities | 28,426,577 | 21,963,598 | ||||||
Total liabilities | 43,876,841 | 47,908,992 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, 10,000,000 authorized and unissued shares | — | — | ||||||
Common stock, $0.01 par value, 70,000,000 authorized shares, 25,236,906 and 31,696,982 issued and outstanding shares | 252,369 | 316,970 | ||||||
Additional paid-in capital | 195,919,707 | 377,664,610 | ||||||
Unearned compensation – restricted shares | (128,756 | ) | (24,129 | ) | ||||
Accumulated deficit | (159,439,785 | ) | (221,347,289 | ) | ||||
Total stockholders’ equity | 36,603,535 | 156,610,162 | ||||||
Total liabilities and stockholders’ equity | $ | 80,480,376 | $ | 204,519,154 | ||||
See accompanying notes to financial statements.
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STATEMENTS OF OPERATIONS
| Year Ended December 31, | ||||||||||||
| 2001 | 2002 | 2003 | ||||||||||
Revenues: | ||||||||||||
Sales | $ | 30,021,813 | $ | 25,402,300 | $ | 39,857,620 | ||||||
Licensing | 2,932,007 | 2,801,189 | 9,527,433 | |||||||||
| 32,953,820 | 28,203,489 | 49,385,053 | ||||||||||
Costs and expenses: | ||||||||||||
Cost of sales | 3,632,767 | 3,239,845 | 6,959,467 | |||||||||
Selling, general and administrative | 28,463,387 | 28,827,337 | 50,409,508 | |||||||||
Research and development | 36,101,373 | 32,213,635 | 50,120,596 | |||||||||
Amortization | 1,181,978 | 1,181,979 | 1,204,958 | |||||||||
| 69,379,505 | 65,462,796 | 108,694,529 | ||||||||||
Loss from operations | (36,425,685 | ) | (37,259,307 | ) | (59,309,476 | ) | ||||||
Interest income | 1,600,363 | 1,278,645 | 1,553,483 | |||||||||
Interest expense | — | (83,130 | ) | (997,563 | ) | |||||||
Impairment of investment | — | — | (3,153,948 | ) | ||||||||
Loss before income taxes | (34,825,322 | ) | (36,063,792 | ) | (61,907,504 | ) | ||||||
Provision for income taxes | — | — | — | |||||||||
Net loss | $ | (34,825,322 | ) | $ | (36,063,792 | ) | $ | (61,907,504 | ) | |||
Net loss per common share: | ||||||||||||
Basic | $ | (1.74 | ) | $ | (1.44 | ) | $ | (2.23 | ) | |||
Diluted | $ | (1.74 | ) | $ | (1.44 | ) | $ | (2.23 | ) | |||
Weighted average number of common shares outstanding: | ||||||||||||
Basic | 19,985,192 | 25,110,023 | 27,777,860 | |||||||||
Diluted | 19,985,192 | 25,110,023 | 27,777,860 | |||||||||
See accompanying notes to financial statements.
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STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
| 2001 | 2002 | 2003 | ||||||||||
Operating activities: | ||||||||||||
Net loss | $ | (34,825,322 | ) | $ | (36,063,792 | ) | $ | (61,907,504 | ) | |||
Adjustments for non-cash items: | ||||||||||||
Stock issuance for Aloxi injection license | 2,999,992 | — | — | |||||||||
Impairment of long-term equity investment | — | — | 3,153,948 | |||||||||
Depreciation and intangible amortization | 1,876,327 | 2,048,260 | 2,230,026 | |||||||||
Benefit plan contribution | 836,507 | 949,381 | 1,291,954 | |||||||||
Financing transaction costs | 516,604 | — | — | |||||||||
Noncash consulting payments | 189,747 | 66,962 | 27,996 | |||||||||
Stock option term modification | — | 216,064 | — | |||||||||
Amortization of restricted stock expense | — | 110,688 | 104,627 | |||||||||
Amortization of non-cash financing charges | — | 28,963 | 367,563 | |||||||||
Other | 155,451 | 60,433 | 20,580 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Receivables | 976,808 | (1,213,044 | ) | (3,475,143 | ) | |||||||
Inventories | (23,779 | ) | (279,359 | ) | (5,658,137 | ) | ||||||
Prepaid expenses | 5,579,521 | (201,820 | ) | (473,511 | ) | |||||||
Accounts payable and accrued expenses | 4,388,684 | (2,483,105 | ) | 14,977,016 | ||||||||
Deferred revenue | (91,259 | ) | (794,384 | ) | (7,386,972 | ) | ||||||
Other current liabilities | 446 | (1,719 | ) | 8,773 | ||||||||
Net cash used in operating activities | (17,420,273 | ) | (37,556,472 | ) | (56,718,784 | ) | ||||||
Investing activities: | ||||||||||||
Purchase of investments | (49,472,664 | ) | (9,360,720 | ) | (62,939,380 | ) | ||||||
Maturity of investments | 35,326,665 | 34,834,284 | 9,296,153 | |||||||||
Acquisition of Hexalen capsules | (4,800,000 | ) | (1,200,000 | ) | — | |||||||
Purchase of minority investment in MethylGene | (3,000,000 | ) | — | — | ||||||||
Extension of rights for Aloxi injection | — | — | (2,229,000 | ) | ||||||||
Purchase of equipment, furniture and leasehold improvements | (2,588,234 | ) | (653,029 | ) | (744,684 | ) | ||||||
Other | (32,255 | ) | (60,260 | ) | 436,123 | |||||||
Net cash provided by (used in) investing activities | (24,566,488 | ) | 23,560,275 | (56,180,788 | ) | |||||||
Financing activities: | ||||||||||||
Proceeds from issuance of shares, net | 72,117,460 | — | 168,581,477 | |||||||||
Proceeds from issuance of convertible debt, net | — | 20,950,157 | — | |||||||||
Restricted cash | (4,000,000 | ) | 4,000,000 | — | ||||||||
Receipt (payment) of deposit payable | 2,200,000 | 550,000 | (4,300,000 | ) | ||||||||
Issuance of shares under stock plans | 1,336,995 | 700,517 | 12,255,220 | |||||||||
Other | — | 29,508 | — | |||||||||
Net cash provided by financing activities | 71,654,455 | 26,230,182 | 176,536,697 | |||||||||
Increase in cash and cash equivalents | 29,667,694 | 12,233,985 | 63,637,125 | |||||||||
Cash and cash equivalents at beginning of year | 11,031,714 | 40,699,408 | 52,933,393 | |||||||||
Cash and cash equivalents at end of year | $ | 40,699,408 | $ | 52,933,393 | $ | 116,570,518 | ||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid for interest | $ | 0 | $ | 0 | $ | 630,000 | ||||||
See accompanying notes to financial statements.
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STATEMENTS OF STOCKHOLDERS’ EQUITY
| Shares | Common stock | Additional capital | Unearned compensation – restricted shares | Accumulated deficit | Total stockholders’ equity | ||||||||||||||||||
Balance at December 31, 2000 | 16,509,008 | $ | 165,090 | $ | 114,431,198 | $ | — | $ | (88,550,671 | ) | $ | 26,045,617 | |||||||||||
Issuance public offering | 4,000,000 | 40,000 | 29,128,655 | — | — | 29,168,655 | |||||||||||||||||
Issuance private placement | 3,025,000 | 30,250 | 31,086,712 | — | — | 31,116,962 | |||||||||||||||||
Issuance public offering | 900,000 | 9,000 | 11,822,843 | — | — | 11,831,843 | |||||||||||||||||
Issuance for technology license | 297,338 | 2,973 | 2,997,019 | — | — | 2,999,992 | |||||||||||||||||
Exercise of stock options | 175,885 | 1,759 | 861,138 | — | — | 862,897 | |||||||||||||||||
Employee retirement plan contribution | 38,226 | 383 | 553,235 | — | — | 553,618 | |||||||||||||||||
Employee stock purchase plan | 45,457 | 455 | 473,643 | — | — | 474,098 | |||||||||||||||||
Financing transaction costs | — | — | 516,604 | — | — | 516,604 | |||||||||||||||||
Other issuances | 14,136 | 141 | 189,606 | — | — | 189,747 | |||||||||||||||||
Net loss | — | — | — | — | (34,825,322 | ) | (34,825,322 | ) | |||||||||||||||
Balance at December 31, 2001 | 25,005,050 | 250,051 | 192,060,653 | — | (123,375,993 | ) | 68,934,711 | ||||||||||||||||
Exercise of stock options | 16,475 | 165 | 93,393 | — | — | 93,558 | |||||||||||||||||
Employee retirement plan contribution | 72,536 | 725 | 920,181 | — | — | 920,906 | |||||||||||||||||
Employee stock purchase plan | 106,561 | 1,065 | 605,893 | — | — | 606,958 | |||||||||||||||||
Stock option term modification | — | — | 214,744 | — | — | 214,744 | |||||||||||||||||
Restricted stock issuance | 34,702 | 347 | 239,097 | (239,444 | ) | — | — | ||||||||||||||||
Amortization of restricted stock to compensation expense | — | — | — | 110,688 | — | 110,688 | |||||||||||||||||
Issuance of warrants under convertible debt | — | — | 1,687,971 | — | — | 1,687,971 | |||||||||||||||||
Other issuances | 1,582 | 16 | 97,775 | — | — | 97,791 | |||||||||||||||||
Net loss | — | — | — | — | (36,063,792 | ) | (36,063,792 | ) | |||||||||||||||
Balance at December 31, 2002 | 25,236,906 | 252,369 | 195,919,707 | (128,756 | ) | (159,439,785 | ) | 36,603,535 | |||||||||||||||
Issuance public offering | 5,060,000 | 50,600 | 168,530,877 | — | — | 168,581,477 | |||||||||||||||||
Exercise of stock options | 1,227,322 | 12,273 | 11,471,513 | — | — | 11,483,786 | |||||||||||||||||
Employee retirement plan contribution | 103,794 | 1,038 | 1,023,586 | — | — | 1,024,624 | |||||||||||||||||
Employee stock purchase plan | 72,712 | 727 | 762,907 | — | — | 763,634 | |||||||||||||||||
Restricted stock cancellation | (4,854 | ) | (48 | ) | (99,765 | ) | — | — | (99,813 | ) | |||||||||||||
Amortization of restricted stock to compensation expense | — | — | — | 104,627 | — | 104,627 | |||||||||||||||||
Amortization of warrants value under convertible debt | — | — | 20,000 | — | — | 20,000 | |||||||||||||||||
Other issuances | 1,102 | 11 | 35,785 | — | — | 35,796 | |||||||||||||||||
Net loss | — | — | — | — | (61,907,504 | ) | (61,907,504 | ) | |||||||||||||||
Balance at December 31, 2003 | 31,696,982 | $ | 316,970 | $ | 377,664,610 | $ | (24,129 | ) | $ | (221,347,289 | ) | $ | 156,610,162 | ||||||||||
See accompanying notes to financial statements.
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NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
MGI PHARMA is an oncology-focused biopharmaceutical company that acquires, develops and commercializes proprietary products that meet cancer patient needs. We focus our direct sales efforts solely within the United States and create alliances with other pharmaceutical or biotechnology companies for the commercialization of our products in other countries.
We promote our products directly to physician specialists in the United States using our own sales force. These products include AloxiTM(palonosetron hydrochloride) injection, Salagen® Tablets (pilocarpine hydrochloride), and Hexalen® (altretamine) capsules. In the third quarter of 2003, Aloxi injection was approved by the U.S. Food and Drug Administration (“FDA”) for the prevention of acute and delayed chemotherapy-induced nausea and vomiting (“CINV”) and we began promoting Aloxi injection in September 2003. We obtained exclusive U.S. and Canada license and distribution rights to Aloxi injection from Helsinn Healthcare SA in May 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 injection and an oral Aloxi formulation. Salagen Tablets are approved in the United States for two indications: the symptoms of dry mouth associated with radiation treatment in head and neck cancer patients and the symptoms of dry mouth associated with Sjögren’s syndrome, an autoimmune disease that damages the salivary glands. Sales of Salagen Tablets in the United States accounted for 67 percent of our product sales during 2003. Hexalen capsules is an orally administered chemotherapeutic agent approved in the United States for treatment of refractory ovarian cancer patients.
Our current product development efforts include preclinical and clinical programs for the acylfulvenes, including irofulven, our novel anti-cancer agent with demonstrated activity in a variety of cancers and a unique mechanism of action. We have also funded development of MG98 and inhibitors of DNA methyltransferase for North American markets. DNA methyltransferase is an enzyme that has been associated with uncontrolled tumor growth. We provide ongoing clinical support of Aloxi injection and Salagen Tablets. Our research and development expense also includes license fees related to Helsinn’s now concluded development of Aloxi injection for CINV and its ongoing development of Aloxi injection for prevention of PONV and for an oral Aloxi formulation.
In August 2003, we completed a sale of 5,060,000 newly issued shares of common stock in a follow-on public offering at $35.50 per share. Our net proceeds, after fees and expenses, were $168,581,477.
Cash, Cash Equivalents and Investments: We consider highly liquid marketable securities with remaining maturities of ninety days or less at the time of purchase to be cash equivalents. Other highly liquid marketable securities with remaining maturities of one year or less at the balance sheet date are classified as short-term marketable investments. Long-term marketable investments are highly liquid marketable securities with remaining maturities of more than one year at the balance sheet date.
Short-term and long-term marketable investments are classified as held-to-maturity investments because we have the intent and the ability to hold our investments to maturity. As such, they are stated at amortized cost, which approximates estimated fair value. Amortized cost is adjusted for amortization of premiums and discounts to maturity, and this amortization is included in interest income in the accompanying statements of operations.
Concentration of Credit Risk: Financial instruments that may subject us to significant concentrations of credit risk consist primarily of short-term and long-term marketable investments and trade receivables.
Cash in excess of current operating needs is invested in accordance with our investment policy. This policy emphasizes principal preservation, so it requires strong issuer credit ratings and limits the amount of credit exposure from any one issuer or industry.
We grant credit primarily to pharmaceutical wholesale distributors throughout the United States in the normal course of business. Four wholesalers accounted for approximately 80 percent of Company sales in 2003. Customer credit-worthiness is routinely monitored and collateral is not normally required.
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Concentration of Supply Risk: We depend on a single supplier to provide the active ingredient for Salagen Tablets, which accounted for 67 percent of our sales during 2003. If this supplier ends its relationship with us, or is unable to meet our demand for the ingredient, we may be unable to produce Salagen Tablets for commercial sale.
We depend on a single supplier to provide Aloxi injection, which accounted for 24 percent of our sales revenue in 2003. If this supplier is unable to meet our demand we may be unable to provide Aloxi injection for commercial sale.
Inventories: Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis.
Long-term Equity Investment: We own an approximate 13 percent, minority investment in MethylGene Inc., a privately owned Canadian biopharmaceutical company. This minority investment is reported in the financial statements as “Long-term equity investment” at the lower of cost or if its value is other than temporarily impaired, then at estimated fair value and we review the fair value on a periodic basis.
Because MethylGene is a private company and its securities are not publicly traded, the value of this investment is inherently more difficult to estimate than an investment in a public company. In November of 2003, MethylGene, Inc. management negotiated a financing term sheet at arms length that indicated the value of our investment had declined from its original cost of $6.8 million to $3.6 million as of December 31, 2003 and an impairment of this investment had occurred which was considered to be other than temporary. Although, MethylGene’s Board of Directors ultimately rejected the financing terms, these terms provided the best available estimate of fair value for our investment in MethylGene and accordingly, we recorded an impairment charge of $3.2 million in the year ended December 31, 2003.
Sales Revenue Recognition: We recognize sales revenue upon shipment of products to customers, upon fulfillment of acceptance terms, if any, and when no significant contractual obligations remain. Net sales reflect reduction of gross sales for estimated wholesaler chargebacks (as more fully described below), allowances for product returns, cash discounts, administrative fees and other rebates. Reserves for chargebacks, product returns, cash discounts, administrative fees and other rebates were $6.7 million, $1.9 million and $1.5 million as of December 31, 2003, 2002, and 2001, respectively. Reserves for discounts and chargebacks are netted against trade receivables and reserves for administrative fees, returns and rebates are included in accrued expenses.
Chargebacks:The majority of our products are distributed through independent pharmaceutical wholesalers. In accordance with industry practice, sales to wholesalers are initially transacted at wholesale list price. The wholesalers then generally sell to an end user (normally a clinic, hospital, alternative healthcare facility, or an independent pharmacy) at a lower contracted price previously established between the end user and us. We negotiate the end user price through group purchasing organizations.
When we initially record a sale to a wholesaler, the sale and resulting receivable are recorded at our list price. However, experience indicates that most of these selling prices will eventually be reduced to a lower, end-user contract price. Therefore, at the time of the sale, a contra asset is recorded for, and revenue is reduced by, the difference between the list price and the estimated average end-user contract price. This contra asset is calculated by product, taking the expected number of outstanding wholesale units sold that will ultimately be sold under end-user contracts multiplied by the anticipated, weighted-average contract price. Thus, a contra asset is established, reducing the initial wholesaler receivable by the difference between the initial list price and the estimated, ultimate end-user selling price. When the wholesaler ultimately sells the product to the end user at the end-user contract price, the wholesaler charges us (“chargeback”) for the difference between the list price and the end-user contract price and such chargeback is offset against our initial estimated contra asset. Wholesalers and group purchasing organizations receive administrative fees from us based on sales units sold. In addition, we provide rebates to the end user based on units purchased. We record these administrative fees and rebates as accrued expenses at the time of our product sale.
Licensing Revenue Recognition: Under Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements”, we recognize revenue from licensing arrangements using a contingency-adjusted performance model. Under this method, revenue related to up-front, time-based, and performance-based licensing payments is recognized over the entire contract performance period. We recognize the aggregate of nonrefundable up-front and time-based fees ratably over the effective term of the underlying license and related supply arrangements. Performance-based, contingent license payment amounts are recognized on a pro rata basis in the period the licensee
24
achieves the performance criteria to the extent of the timing of the achievement of the milestone in relation to the term of the underlying arrangements – approximating the extent of contingent performance through the date of the milestone achievement in relation to the full term of the underlying arrangements. We recognize the remaining portion of any milestone payments over the remaining term of the underlying arrangements. Payments received by us in excess of amounts earned are classified as deferred revenue. We recognized $794,384 and $7,386,972 of amortized deferred revenue in 2002 and 2003, respectively. At December 31, 2003, the Company has an unamortized deferred revenue balance of $2,441,250. (See Note 6) Further, we recognize royalties on product sales and support services provided to strategic collaborators in licensing revenue when the related sales or provision of services occur.
Shipping and Handling Costs: Shipping and handling costs, which include transportation to customers, transportation to distribution points and warehouse and handling costs, are classified as cost of sales. We typically do not charge customers for shipping and handling costs.
Stock-Based Compensation: We apply the intrinsic value method described in Accounting Principles Board (APB) Opinion No. 25 in accounting for the issuance of stock options to employees and directors. Accordingly, as all grants are made at or above the market price, no compensation expense has been recognized in the financial statements. Had we determined compensation cost based on the fair value at the grant date for our stock options and the fair value of the discount related to the employee stock purchase plan under SFAS 123, our net loss would have been reported as shown below:
| 2001 | 2002 | 2003 | ||||||||||
Net loss, as reported | $ | (34,825,322 | ) | $ | (36,063,792 | ) | $ | (61,907,504 | ) | |||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards | (9,083,811 | ) | ()(7,297,800 | ) | (9,454,843 | ) | ||||||
Pro forma net loss | $ | (43,909,133 | ) | $ | ()(43,361,592) | $ | (71,362,347 | ) | ||||
Net loss per common share: | ||||||||||||
As reported basic and diluted | $ | (1.74 | ) | $ | (1.44 | ) | $ | (2.23 | ) | |||
Pro forma basic and diluted | $ | (2.20 | ) | $ | (1.73 | ) | $ | (2.57 | ) | |||
The per share weighted-average fair value of stock options granted during 2001, 2002 and 2003 was $9.00, $5.17 and $12.93, respectively, on the date of grant, using the Black-Scholes option-pricing model with the following weighted-average assumptions:
| 2001 | 2002 | 2003 | |||||||
Expected dividend yield | 0 | % | 0 | % | 0 | % | |||
Risk-free interest rate | 4.30 | % | 3.82 | % | 2.70 | % | |||
Annualized volatility | 0.80 | 0.80 | 0.80 | ||||||
Expected life, in years | 5 | 5 | 5 |
Advertising and Promotion Expense: Costs of advertising and promotion are expensed as incurred and were $4,933,137, $2,773,810 and $13,854,557 in 2001, 2002 and 2003, respectively. We do not defer any costs related to direct-response advertising.
Depreciation: Depreciation of equipment and furniture is provided over the estimated useful lives of the respective assets on a straight-line basis. Estimated useful lives of equipment and furniture range from three to ten years. Leasehold improvements are amortized over the shorter of the lease term or the useful life of the improvements.
Convertible Debt: Convertible debt is stated at face value, less issuance costs and the value of warrants issued in conjunction with the convertible debt. Both the issuance costs and the value of the warrants are amortized to interest expense over the 5-year term of the convertible debt.
Research and Development: Research and development costs are expensed as incurred. Costs of in-licensing payments for product candidates that have not yet been sold commercially are expensed as research and development.
25
Accruals for Clinical Research Organization and Clinical Site Costs:Estimates related to our accounting for outsourced preclinical and clinical trial expenses are based on contracts with contract research organizations (“CROs”) that generally require payments based upon patient enrollment and trial progress. We analyze the progress of clinical trials, including the stage of patient enrollment, invoices received and contracted costs when evaluating the adequacy of the accrued liabilities. We periodically audit the CROs’ data and cut-off procedures. These estimates are a modest portion of our total research and development expenses.
We intend to continue using CROs under contracts similar to historical contracts for outsourced preclinical and clinical trial expenses, so our historical experience of no material adjustments to estimates is expected to continue. If we pursue new and varied approaches to preclinical and clinical trails, we will update the estimates related to outsourced preclinical and clinical trial expenses for changes in facts and circumstances as appropriate.
License Capitalization and Expense: License payments made by the Company are expensed if the license payment relates to product rights for a product candidate through FDA approval and are capitalized and amortized into expense if the license payment relates to product rights to a commercialized product.
Amortization: Amortization of intangible assets relating to the purchase of the Hexalen capsules business is recognized as the greater of the amount computed on a straight-line basis over the six-year estimated commercial life of Hexalen capsules or in proportion to the actual product contribution compared to estimated product contribution over the estimated commercial life of Hexalen capsules.
As a result of amending the Helsinn Healthcare SA license agreement in 2003, the term was extended for our preexisting rights to Aloxi injection for prevention of CINV. We recorded an intangible asset of $2,229,000 related to these rights that is being amortized on a straight-line basis over approximately twelve years. (See Note 6)
Amortized Intangible Assets:
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||
Hexalen product rights | $ | 7,091,869 | $ | (3,644,433 | ) | $ | 3,447,436 | |||
Helsinn CINV license agreement | 2,229,000 | (22,979 | ) | 2,206,021 | ||||||
Total | $ | 9,320,869 | $ | (3,667,412 | ) | $ | 5,653,457 | |||
Amortization for the year ended: | December 31, 2001 | December 31, 2002 | December 31, 2003 | ||||||
Amortization Expense | $ | 1,181,978 | $ | 1,181,979 | $ | 1,204,958 | |||
Estimated amortization expense for the year ending:
December 31, 2004 | $ | 1,365,813 | |
December 31, 2005 | 1,365,813 | ||
December 31, 2006 | 1,267,315 | ||
December 31, 2007 | 183,835 | ||
December 31, 2008 | 183,835 |
Income Taxes: Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is carried against deferred tax assets until it is deemed more-likely-than-not that some portion or all of the deferred tax assets will be realized.
Income (Loss) Per Common Share: Basic earnings per share (EPS) is calculated by dividing net income (loss) by the weighted-average common shares outstanding during the period. Diluted EPS reflects the potential dilution to basic EPS that could occur upon conversion or exercise of securities, options, or other such items to common shares using the treasury stock method and if converted method based upon the weighted-average fair value of our common shares during the period. During net loss periods, potentially dilutive securities are not included in the calculation of net loss per share since their inclusion would be anti-dilutive.
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Use of Estimates: Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions affecting reported asset and liability amounts and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Basis of Presentation: Certain prior year amounts have been reclassified to conform to current year presentation
New Accounting Pronouncements:
EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 provides revenue recognition guidance for arrangements with multiple deliverables, and the criteria to determine if items in a multiple deliverable agreement should be accounted for separately. The adoption of EITF 00-21 on July 1, 2003 did not have any impact on the financial position or the results of operations of the Company.
SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities”, addresses the costs associated with an exit activity (including restructuring). The Company will account for any future exit or disposal activities after December 31, 2002 under SFAS 146.
SFAS 148, “Accounting for Stock-based Compensation – Transition and Disclosure”, amends SFAS No. 123, “Accounting for Stock-based Compensation” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Since the Company plans to continue to use APB 25 to account for stock options issued to employees and directors, this portion of SFAS 148 will not have any impact on the financial position or the results of operations of the Company. SFAS 148 also amends the disclosure requirements of SFAS 123 to require additional disclosure in both annual and interim financial statements on the method of accounting for stock-based employee compensation. The Company adopted the disclosure provisions of SFAS 148 as of December 31, 2002.
FIN 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” requires companies to consolidate certain types of variable interest entities. A variable interest entity is an entity that has inadequate invested equity at risk to meet expected future losses, or whose holders of the equity investments lack any of the following three characteristics: (i) the ability to make decisions about the entity’s activities; (ii) the obligation to absorb the entity’s losses if they occur; (iii) the right to receive the entity’s future returns if they occur. The provisions of the interpretation are effective for financial statements issued for the first period ending after December 15, 2003, or March 15, 2004, depending on the nature of the variable interest entity. The Company does not expect the adoption of FIN46 to have any impact on the financial position or results of operations of the Company.
2. Marketable Investments
Marketable investments consist of held-to-maturity investments and are stated at amortized cost, which approximates estimated fair value. Short-term marketable investments at December 31, 2002 and 2003 are summarized as follows:
| 2002 | 2003 | |||||
Corporate notes | $ | 4,458,921 | $ | 23,362,898 | ||
Certificates of deposit | 3,080,587 | — | ||||
| $ | 7,539,508 | $ | 23,362,898 | |||
Long-term marketable investments of $37,819,837 as of December 31, 2003 consisted of government agencies and corporate notes that mature between June and September of 2005.
| 2002 | 2003 | |||||
Corporate notes | — | $ | 8,040,660 | |||
Government agencies | — | 29,779,177 | ||||
| $ | — | $ | 37,819,837 | |||
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3. Inventories
Inventories at December 31, 2002 and 2003 are summarized as follows:
| 2002 | 2003 | |||||
Raw materials and supplies | $ | 89,757 | $ | 348,087 | ||
Work in process | 520,092 | 593,028 | ||||
Finished products | 1,169,564 | 6,496,435 | ||||
| $ | 1,779,413 | $ | 7,437,550 | |||
4. Accrued Expenses
Accrued expenses at December 31, 2002 and 2003 are summarized as follows:
| 2002 | 2003 | |||||
Product development commitments | $ | 1,717,380 | $ | 11,056,023 | ||
Bonuses | 1,540,439 | 2,140,595 | ||||
Product return accrual | 1,109,913 | 1,484,638 | ||||
Lease accrual | 415,309 | 251,011 | ||||
Retirement plan accruals | 1,185,039 | 1,572,626 | ||||
Product administrative fee accrual | — | 1,080,215 | ||||
Other accrued expenses | 2,463,366 | 4,047,237 | ||||
| $ | 8,431,446 | $ | 21,632,345 | |||
5. Leases
We lease office space under noncancellable lease agreements that contain renewal options and require us to pay operating costs, including property taxes, insurance and maintenance. In 2001, we executed a lease agreement for new office space. At December 31, 2003, we have an accrual of $251,011 for lease obligations through July 2005 for the former office space in excess of estimated sublease rental income. Rent expense was $2,233,988, $1,205,027 and $1,436,167 in 2001, 2002 and 2003, respectively.
Gross future minimum lease payments under non-cancellable leases, including both the current and former office spaces, are as follows:
2004 | $ | 1,859,000 | ||
2005 | 1,733,000 | |||
2006 | 1,461,000 | |||
2007 | 1,483,000 | |||
2008 | 622,000 | |||
Thereafter | — | |||
Subtotal | $ | 7,158,000 | ||
Less: Expected receipts on sublease | (482,000 | ) | ||
Net lease obligations | $ | 6,676,000 | ||
6. Licensing Arrangements
Technology Out-License Arrangements
During 1995, we entered into a cooperative development and commercialization agreement with Dainippon Pharmaceutical Co., Ltd., whereby we granted Dainippon an exclusive license to develop and commercialize acylfulvenes, including irofulven, in Japan. Dainippon granted us an irrevocable, exclusive, royalty-free license allowing us to use any technology or data developed by Dainippon relating to the acylfulvenes. In 2003, we agreed with Dainippon Pharmaceutical Co. Ltd. to terminate their license to develop and commercialize the acylfulvenes in Japan effective August 2003. We repaid $4.3 million of deposit payments in cash in August 2003. Since we have no obligations to Dainippon after termination, we amortized $7,141,972 of deferred revenue into licensing revenue during 2003 related to the previously received non-refundable payments, of which $6,867,280 was recognized in the third quarter of 2003.
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Under a November 1994 license agreement with Pharmacia Corporation, we granted an exclusive, royalty-bearing license to develop and commercialize Salagen Tablets in Canada. Pharmacia granted us an irrevocable, non-exclusive, royalty-free license allowing us to use any technology or data developed by Pharmacia. Pharmacia paid us a $75,000 initial fee and agreed to pay us royalties equal to a percentage of Pharmacia’s net Salagen Tablet sales revenues, subject to annual minimum requirements. We also agreed to supply Pharmacia’s requirement of Salagen Tablets until the termination of the license agreement with Pharmacia. In addition, we agreed to pay Pharmacia royalties if we promote Salagen Tablets in Canada in the first or second year following termination of the agreement. After the initial commercial period concludes in January 2004, either party may terminate the agreement upon one year prior written notice. The agreement automatically expires in January 2006 unless extended by the parties.
In December 1994, we entered into a license agreement with Kissei Pharmaceutical Co., Ltd., a pharmaceutical company in Japan. Under the terms of the agreement, we granted an exclusive, royalty-bearing license to develop and commercialize Salagen Tablets in Japan. Kissei granted back to us an irrevocable, non-exclusive, royalty-free license allowing us to use any technology or data developed by Kissei related to Salagen Tablets. Kissei paid us an initial license fee and subsequent milestone payments that aggregated to $2.5 million through December 31, 2002. There are no additional milestone payments due under the agreement. In addition, Kissei agreed to pay us royalties equal to a percentage of Kissei’s Salagen Tablets net sales revenue. An application for marketing approval by the regulatory authorities in Japan for the initial indication of Salagen tablets was submitted by Kissei in 2003. A decision is pending. Unless earlier terminated by the parties for cause or by mutual agreement, the term of the agreement is for ten years from the date sales of Salagen Tablets begin in Japan. Thereafter, the agreement automatically renews for additional one-year periods.
In April 2000, we entered into a license agreement with Novartis Ophthalmics AG under which we granted Novartis an exclusive, royalty-bearing license to develop and commercialize Salagen Tablets in Europe, Russia and certain other countries. Novartis granted us an irrevocable, non-exclusive, royalty-free license allowing us to use any technology developed by Novartis related to Salagen Tablets. In addition, we simultaneously entered into a supply agreement with Novartis pursuant to which we agreed to supply Novartis’ requirements of Salagen Tablets until termination of the license agreement with Novartis. The term of the license agreement is 12 years and is thereafter automatically extended for additional two-year terms unless otherwise terminated in writing by either party. Either party may terminate the license agreement for cause. In addition, Novartis may terminate the license agreement if the supply agreement is terminated and Novartis has not been supplied with Salagen Tablets for a period of more than 180 days. A $750,000 license fee was received in June 2000 upon receipt of regulatory qualification for Novartis to sell the product in the UK, and an additional $750,000 license fee was received in April 2001 upon satisfaction of certain regulatory approvals or transfers. These amounts are being amortized to licensing revenue over the 12-year term of the agreement. The agreement includes milestone payments which are due if certain annualized and cumulative net sales thresholds are achieved. Royalty payments, based on a percentage of net sales revenue, continue for the term of the agreement.
Technology In-License Arrangements
To build our product pipeline, we acquire rights to develop and market pharmaceutical products from others. Under this approach, we may be required to pay up-front, development services and milestone fees. In addition, we may be required to pay royalties on net sales upon marketing the products. Within a period of time after providing notice, we generally may terminate the licenses. All material, non-cancellable commitments were recognized as of December 31, 2003.
In August 2000, we entered into a License, Research and Development Agreement (the “License Agreement”) and a Stock Purchase Agreement (the “Purchase Agreement”) with MethylGene Inc. Under the Purchase Agreement, we purchased a minority investment in MethylGene for $3.8 million and made an additional purchase of MethylGene shares for $3.0 million in April 2001. Under the License Agreement, MethylGene granted us an exclusive, royalty-bearing license to develop and commercialize MG98 in North America for all therapeutic indications. The License Agreement also included a license for similar rights to small molecule inhibitors of DNA methyltransferase. In
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exchange, we agreed to make initial payments to MethylGene aggregating $5.7 million and agreed to purchase up to $6 million of research services from MethylGene. In a December 2003 amendment to the License Agreement, MethylGene acknowledged full satisfaction of these payment obligations and suspended further payment obligations by us pending a planned June 2004 data review of the small molecule inhibitor program and following completion by MethylGene of a planned clinical trial with MG98. If we resume development, milestone payments are payable to MethylGene based on achievement of development milestones for MG98 and small molecule inhibitor programs. We also agreed to pay royalties on annual net sales revenue related to MG98 and small molecule inhibitors of methyltransferase. The term of the License Agreement extends until the later of the expiration of the last-to-expire patent that we have licensed or ten years after the first commercial sale of any licensed product. Either party may terminate the License Agreement in the event of a breach or bankruptcy by the other party. We may terminate the agreement on a licensed-product-by-licensed-product basis for any reason on 90 days notice to MethylGene.
In January 2001, we entered into an agreement with Barr Laboratories, Inc. for the exclusive marketing and distribution rights for Mylocel™ Tablets (hydroxyurea) in the United States. Mylocel Tablets are approved for the treatment of melanoma, resistant chronic myelocytic leukemia, and recurrent, metastatic, or inoperable carcinoma of the ovary. We began marketing and distributing Mylocel Tablets in March 2001. Under the terms of the agreement, Barr Laboratories receive royalty payments based upon the product contribution derived from our sales of Mylocel Tablets. We terminated this agreement effective April 2002.
In April 2001, we obtained the exclusive U.S. and Canadian oncology license and distribution rights for Aloxi injection from Helsinn Healthcare SA. Aloxi injection is a unique 5-HT3 antagonist and at that time was being developed for the prevention of CINV. Aloxi was approved for marketing by the FDA on July 25, 2003. Our $11 million upfront obligation was satisfied through a $5 million deposit made upon the execution of the letter of intent in October 2000, $3 million in cash paid in April 2001, and $3 million of our common shares delivered in April 2001. All time-based or performance milestone payments related to Helsinn’s development of Aloxi injection for the prevention of CINV were cash payments as follows: $2 million in October 2001, $4 million in April 2002, $10 million in December 2002 and $11 million in August 2003.
In November 2003, we expanded our exclusive United States and Canada license agreement for Aloxi injection to include the prevention of PONV application, an oral Aloxi formulation and extend the term through December 31, 2015 for all of our rights under the expanded agreement. Under the terms of this amendment, we made initial payments to Helsinn totaling $22.5 million and we expect to make additional payments totaling $25 million over the course of the next several years upon achievement of certain development milestones that culminate with the approvals in the United States of Aloxi injection for the prevention of PONV and an oral Aloxi formulation. We will also pay royalties and product supply fees based upon net sales. Helsinn will continue to fund and conduct all development of Aloxi injection for the prevention of PONV and oral Aloxi formulation, and will supply finished product for commercialization.
7. Convertible Debt
In December 2002, we issued $21 million of 3.0 percent convertible subordinated notes due December 1, 2007. These notes and the associated warrants were fully converted and exercised in the first quarter of 2004 (see Note 17 to the financial statements). Interest was payable semi-annually on June 1 and December 1 of each year, commencing on June 1, 2003. The notes were convertible into 2,571,428 shares of our common stock, at the option of the holder, in three tranches with conversion prices of $7.00 per share (1,428,570 shares), $8.75 per share (571,428 shares) and $10.50 per share (571,430 shares), for a weighted average conversion price of $8.17 per share.
In addition, we issued warrants (See Note 9 to the financial statements), for purchase during the five-year period of the agreement of up to 400,000 shares of our common stock at exercise prices of $8.75 per share (200,000 shares) and $10.50 per share (200,000 shares). The total value of the warrants, along with the debt issuance costs, was being amortized to interest expense over the 5-year term of the convertible debt.
Convertible debt, which is stated at face value less issuance costs and value of warrants, at December 31, 2002 and 2003, is summarized as follows:
| 2002 | 2003 | |||||||
Convertible notes | $ | 21,000,000 | $ | 21,000,000 | ||||
Warrants value | (1,659,838 | ) | (1,322,244 | ) | ||||
Issuance costs | (49,013 | ) | (39,044 | ) | ||||
| $ | 19,291,149 | $ | 19,638,712 | |||||
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8. Stockholder Rights Plan
Each outstanding share of our common stock has one preferred share purchase right (Right). Each Right entitles the registered holder to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock, at a price of $200 per one-hundredth of a preferred share (subject to adjustment). The Rights become exercisable only if certain change in ownership control events occur and we do not redeem the Rights. The Rights expire on July 14, 2008, if not previously redeemed or exercised.
9. Stockholders’ Equity
Stock Offerings
In May 2001, we completed a sale of 4,000,000 newly issued shares of common stock to U.S. Bancorp Piper Jaffray Inc., which were offered at a price of $8 per share. Our net proceeds, after fees and expenses, were $29,168,655.
In October 2001, we completed a private placement of 3,025,000 newly issued shares of common stock to accredited investors at $11 per share. Our net proceeds, after fees and expenses, were $31,116,962.
In November 2001, we completed a sale of 900,000 newly issued shares of common stock to U.S. Bancorp Piper Jaffray Inc., which were offered at a price of $13.25 per share. Our net proceeds, after fees and expenses, were $11,831,843.
In August 2003, we completed a sale of 5,060,000 newly issued shares of common stock in a follow-on public offering at $35.50 per share. Our net proceeds, after fees and expenses, were $168,581,477.
Stock Incentive Plans
Under stock incentive plans, designated persons (including officers, employees, directors and consultants) have been or may be granted rights to acquire our common stock. These rights include stock options and other equity rights. At December 31, 2003, shares issued and shares available under stock incentive plans are as follows:
| Shareholder Approved Plans | Other Plans | Total For All | |||||||
Shares issuable under outstanding options | 4,325,174 | 26,063 | 4,351,237 | ||||||
Shares available for future issuance | 395,466 | — | 395,466 | ||||||
Total | 4,720,640 | 26,063 | 4,746,703 | ||||||
Average exercise price for outstanding options | $ | 16.03 | $ | 9.58 | $ | 16.00 | |||
Stock options become exercisable over varying periods and expire up to ten years from the date of grant. Options may be granted in the form of incentive stock options or nonqualified stock options. The option price for incentive stock options cannot be less than fair market value on the date of the grant. The option price for nonqualified stock options may be set by the board of directors.
Stock option activity in the three years ended December 31, 2003 is summarized as follows:
| Number of Shares | Average Price Per Share | |||||
Outstanding at December 31, 2000 | 2,263,766 | $ | 11.48 | |||
Granted | 1,373,919 | 13.47 | ||||
Exercised | (175,885 | ) | 4.91 | |||
Canceled | (77,472 | ) | 17.27 | |||
Outstanding at December 31, 2001 | 3,384,328 | 12.49 | ||||
Granted | 866,721 | 7.98 | ||||
Exercised | (16,475 | ) | 5.68 | |||
Canceled | (105,337 | ) | 14.54 | |||
Outstanding at December 31, 2002 | 4,129,237 | 11.52 | ||||
Granted | 1,586,099 | 22.33 | ||||
Exercised | (1,227,322 | ) | 9.36 | |||
Canceled | (136,777 | ) | 14.01 | |||
Outstanding at December 31, 2003 | 4,351,237 | $ | 16.00 | |||
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The following table summarizes information concerning options outstanding and exercisable at December 31, 2003:
Options Outstanding | Options Exercisable | |||||||||||
Range of Exercise Price | Number Outstanding | Weighted Average Remaining Life | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||
$3.38-$7.10 | 397,023 | 4.99 | $ | 5.31 | 281,526 | $ | 4.70 | |||||
$7.30 | 525,225 | 8.43 | $ | 7.30 | 102,975 | $ | 7.30 | |||||
$7.34-$10.25 | 720,536 | 7.71 | $ | 9.22 | 220,268 | $ | 9.88 | |||||
$10.33-$16.16 | 562,415 | 7.04 | $ | 13.57 | 285,504 | $ | 12.30 | |||||
$16.29-$16.44 | 331,655 | 6.04 | $ | 16.44 | 224,129 | $ | 16.44 | |||||
$16.69-$16.75 | 495,932 | 7.00 | $ | 16.75 | 211,904 | $ | 16.75 | |||||
$17.13-$25.58 | 193,800 | 8.15 | $ | 19.56 | 46,563 | $ | 21.80 | |||||
$25.84-$26.61 | 809,508 | 9.55 | $ | 26.60 | 2,625 | $ | 26.04 | |||||
$26.90-$51.50 | 315,143 | 8.24 | $ | 32.68 | 93,401 | $ | 32.85 | |||||
Total | 4,351,237 | $ | 16.00 | 1,468,895 | $ | 10.57 | ||||||
Employee Stock Purchase Plan Under our employee stock purchase plan, substantially all employees may purchase shares of common stock at the end of semi-annual purchase periods at a price equal to the lower of 85 percent of the stock’s fair market value on the first or last day of that period. Plan funding occurs throughout the purchase period by pre-elected payroll deductions of up to 15 percent of regular pay. No compensation expense results from the plan under APB 25. Shares issued under the plan were 45,457, 106,561 and 72,712 at average prices of $10.43, $5.70 and $10.50 per share in 2001, 2002 and 2003, respectively. At December 31, 2003, 77,171 shares remain reserved for future issuance under the plan.
Retirement Plan Participation in our retirement plan is available to substantially all employees. Participants may elect to contribute a percentage of their eligible compensation consistent with Section 401(k) of the Internal Revenue Code and we make contributions that are a portion of participant contributions and a percentage of their eligible compensation. In addition, we may make discretionary contributions ratably to all eligible employees. Our contributions are made in cash or our common stock and become fully vested when a participant attains five years of service. Participants may direct investment of contributions into any of the plan’s investment alternatives, but contributions made in the form of our common stock must be fully vested before redirection can occur. Total retirement plan contribution expense was $1,204,388, $1,506,874 and $1,969,704 in 2001, 2002 and 2003, respectively, of which $836,507, $949,381 and $1,291,954 was made in our common stock in 2001, 2002 and 2003, respectively. We had 502,238 shares reserved for future issuance under the retirement plan at December 31, 2003.
Preferred Stock At December 31, 2003, 10,000,000 shares of preferred stock remained issuable. Issuance is subject to action by our board of directors.
Warrants In conjunction with the issuance of convertible debt (See Note 7 to the financial statements), the Company issued warrants to purchase 400,000 shares of common stock. Warrants to purchase 200,000 shares of common stock are exercisable at $8.75 per share and warrants to purchase an additional 200,000 shares are exercisable at $10.50 per share. At December 31, 2003, warrants to purchase 400,000 shares of common stock were outstanding and in February 2004 the warrants were fully exercised (see Note 17 to the financial statements).
Restricted Stock On June 24, 2002, we issued 35,487 shares of restricted common stock to certain non-executive officer employees. One-half of these shares vested one year after the date of grant, and the remainder of these shares vest in two years after the date of grant, given continued employment through the vesting dates. We recognize compensation expense for the market value ($6.90 per share) of the shares at the date of grant over the vesting periods. As of December 31, 2003, 2,005 shares have been cancelled, 18,899 shares vested (of which, 3,634 were subsequently cancelled for employee tax withholding) and 14,583 shares vest on June 24, 2004.
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10. Income Taxes
The provision for income taxes differs from statutory federal income tax rate of 35 percent in the years ended December 31, 2001, 2002 and 2003 as follows:
| 2001 | 2002 | 2003 | ||||||||||
Statutory federal income tax rate | $ | (12,188,863 | ) | $ | (12,622,327 | ) | $ | (21,667,626 | ) | |||
Valuation allowance change | 14,248,690 | 17,731,938 | 21,941,710 | |||||||||
Research activities credit | (791,797 | ) | (477,636 | ) | (906,187 | ) | ||||||
Orphan drug credit | (1,868,469 | ) | (5,436,649 | ) | (573,675 | ) | ||||||
State income taxes, net of federal benefit | (870,633 | ) | (649,148 | ) | (1,114,335 | ) | ||||||
Nondeductible items | — | 196,725 | 370,487 | |||||||||
Net operating loss expiration | 1,193,570 | 334,127 | 1,752,739 | |||||||||
Other | 277,502 | 922,970 | 196,887 | |||||||||
| $ | 0 | $ | 0 | $ | 0 | |||||||
Deferred taxes as of December 31, 2002 and 2003 consist of the following:
| 2002 | 2003 | |||||||
Deferred tax assets: | ||||||||
Receivable allowances | $ | 40,213 | $ | 94,820 | ||||
Inventory allowances | 6,163 | 6,163 | ||||||
Product return allowance | 408,448 | 546,347 | ||||||
Miscellaneous accrued expenses | 399,486 | 237,924 | ||||||
Deferred revenue | 3,616,786 | 898,380 | ||||||
Amortization of intangibles | 543,710 | 804,691 | ||||||
Net operating loss carryforward | 55,203,486 | 86,676,863 | ||||||
Research credit carryforward | 3,870,014 | 4,776,201 | ||||||
Orphan drug credit | 9,420,383 | 9,994,058 | ||||||
Long term equity impairment | — | 1,160,653 | ||||||
Alternative minimum tax credit carryforward | 100,270 | 100,270 | ||||||
| 73,608,959 | 105,296,370 | |||||||
Less valuation allowance | (73,337,567 | ) | (105,147,086 | ) | ||||
| $ | 271,392 | $ | 149,284 | |||||
Deferred tax liabilities: | ||||||||
Tax depreciation greater than book | $ | 271,392 | $ | 149,284 | ||||
We maintain a valuation allowance to almost fully reserve against our deferred tax assets due to uncertainty over the ability to realize these assets. As of December 31, 2002 and December 31, 2003, the valuation allowances were $73,337,567 and $105,147,086, respectively. Of these amounts, $4,852,125 as of the year ended December 31, 2002, and $14,719,932 as of the year ended December 31, 2003, were attributable to increases in the net operating loss carryover resulting from the exercise of stock options. These amounts will be recorded as an increase to additional paid-in capital if it is determined in the future that this portion of the valuation allowance is no longer required.
At December 31, 2003, the expiration dates and amounts of our carryforward losses and credits for federal income tax purposes are as follows:
Years Expiring | Net Operating Losses | Research Credits | Orphan Drug Credits | ||||||
2004-2006 | $ | 15,336,657 | $ | 729,858 | $ | — | |||
2007-2011 | 40,556,469 | 1,115,937 | 512,875 | ||||||
2012-2016 | 52,733,546 | 183,577 | 222,155 | ||||||
2017-2023 | 126,908,282 | 2,746,829 | 9,259,028 | ||||||
| $ | 235,534,954 | $ | 4,776,201 | $ | 9,994,058 | ||||
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We also had a credit for alternative minimum tax of $100,270, which has no expiration date.
The utilization of the Company’s net operating losses and credits is potentially subject to annual limitations under the ownership change rules of Internal Revenue Code Sections 382 and 383. Subsequent equity changes could further limit the utilization of these net operating losses and credits.
11. Loss Per Common Share
Loss per common share for the years ended December 31, 2001, 2002 and 2003 is based on weighted average shares outstanding as summarized in the following table:
| Year Ended December 31, | ||||||
| 2001 | 2002 | 2003 | ||||
Weighted-average shares—basic | 19,985,192 | 25,110,023 | 27,777,860 | |||
Effect of dilutive stock options | — | — | — | |||
Effect of convertible debt | — | — | — | |||
Weighted-average shares—assuming dilution | 19,985,192 | 25,110,023 | 27,777,860 | |||
Potentially dilutive securities, excluded from the calculation because their inclusion in a calculation of net loss per common share would have been anti-dilutive, include options of 3,384,328, 4,129,237 and 4,351,237 for 2001, 2002 and 2003, respectively, and convertible debt and warrants of 2,971,428 and 2,971,428 in 2002 and 2003, respectively. (See Note 7 to the financial statements).
12. Related Party Transactions
One of our directors, who became a director in May 1998, is the managing partner of Boston Healthcare Associates, a biotechnology consulting firm. We made payments to Boston Healthcare of $101,000 in 2001. Transactions with Boston Healthcare were in the ordinary course of business at prices comparable to transactions with other companies.
13. Segment and Geographical Information
We operate in a single operating segment of specialty pharmaceuticals. Essentially all of our assets are located in the United States. Revenues attributable to the U.S. and foreign customers in the years ended December 31, 2001, 2002 and 2003 are as follows:
| 2001 | 2002 | 2003 | |||||||
United States | $ | 30,573,044 | $ | 25,690,947 | $ | 39,907,124 | |||
Europe | 681,446 | 797,804 | 829,266 | ||||||
Japan | 701,033 | 680,029 | 7,354,804 | ||||||
Other foreign | 998,297 | 1,034,709 | 1,293,859 | ||||||
| $ | 32,953,820 | $ | 28,203,489 | $ | 49,385,053 | ||||
Other foreign areas include Australia, Canada, Colombia, Egypt, Hong Kong (Peoples’ Republic of China), Israel, Korea, Singapore, Malaysia and Taiwan.
14. Product Acquisition
On November 21, 2000, we acquired certain assets and assumed certain liabilities related to the business associated with the product Hexalen capsules from MedImmune Oncology, Inc. The $7,091,869 excess of the $7.2 million purchase price over the $108,130 fair value of the net assets acquired was allocated to intangible assets. Under the terms of the agreement, royalties are due to MedImmune on quarterly net sales of Hexalen capsules for a period of ten years. Royalties of $392,914, $342,589 and $418,205 were included in Hexalen cost of sales in 2001, 2002 and 2003, respectively.
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15. Research and Development Expense
Research and development expense for the years ended December 31, 2001, 2002 and 2003 consists of the following:
| 2001 | 2002 | 2003 | |||||||
License payments | $ | 13,066,250 | $ | 14,050,000 | $ | 31,321,000 | |||
Other research and development | 23,035,123 | 18,163,635 | 18,799,596 | ||||||
| $ | 36,101,373 | $ | 32,213,635 | $ | 50,120,596 | ||||
16. Reduction in Workforce
To reduce costs, we reduced our workforce by approximately 10 percent, or 19 positions, in the second quarter of 2002. We recognized total expense of $1,291,044 for this reduction, consisting of $1,076,300 for severance payments, and $214,744 for extending the terms of selected stock option awards. The total expense was allocated as follows: $775,278 to research and development expense and $515,766 to selling, general and administrative expense based on the positions held by the terminated employees. These severance obligations were completely paid during 2003.
17. Subsequent Events
On January 5, and February 6, 2004, an aggregate of 2,571,428 shares of our common stock were issued to Deerfield International Limited and Deerfield Partners, L.P. pursuant to their election to, first partially and then fully, convert our 3% convertible subordinated notes issued in December 2002 for gross proceeds of $21 million. Also on February 6, 2004, the common stock purchase warrants that were issued in connection with that December 2002 financing were exercised. We received $3,850,000 upon the exercise of the warrants and issued 400,000 common shares.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
MGI PHARMA, INC.:
We have audited the accompanying balance sheets of MGI PHARMA, Inc. as of December 31, 2002 and 2003, and the related statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MGI PHARMA, Inc. as of December 31, 2002 and 2003, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP |
Minneapolis, Minnesota
February 6, 2004
36
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 10-K/A
Page in (a) 1.
| Financial Statements | Amendment No. 1 | ||
| Balance Sheets at December 31, 2002 and 2003 | 19 | |||
| Statements of Operations for the Years Ended December 31, 2001, 2002 and 2003 | 20 | |||
| Statements of Cash Flows for the Years Ended December 31, 2001, 2002 and 2003 | 21 | |||
| Statements of Stockholders’ Equity for the Years Ended December 31, 2001, 2002 and 2003 | 22 | |||
| Notes to Financial Statements | 23 | |||
| Report of Independent Registered Public Accounting Firm | 36 | |||
| Report of Independent Registered Public Accounting Firm on Financial Statement Schedule | 44 | |||
2.
| Financial Statement Schedules | Page in Original Annual Report | ||
| Schedule II—Valuation and Qualifying Accounts | 72 | |||
All other schedules have been omitted because they are not applicable or not required, or because the required information is included in the financial statements or the notes thereto.
| 3. | Exhibits |
Exhibit No.
| 3.1 | Second Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). | |
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| 3.2 | Restated Bylaws of the Company, as amended to date (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). | |
| 4.1 | Specimen certificate for shares of Common Stock of the Company (Incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). | |
| 4.2 | Rights Agreement, dated as of July 14, 1998, between the Company and Norwest Bank, Minnesota, N.A. (including the form of Rights Certificate attached as Exhibit B thereto) (Incorporated by reference to Exhibit 1 to the Company’s Registration Statement on Form 8-A, filed July 15, 1998). | |
| 4.3 | First Amendment to Rights Agreement, dated March 14, 2000, between the Company and Norwest Bank, Minnesota, N.A. (Incorporated by reference to Exhibit 2 to the Company’s Registration Statement on Form 8-A/A-1, filed March 20, 2000). | |
| 4.4 | Form of Convertible Subordinated Promissory Notes issued to Deerfield Partners, L.P. and Deerfield International Limited on December 2, 2002 (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 4, 2002). | |
| 4.5 | Form of Common Stock Purchase Warrants issued to Deerfield Partners, L.P. and Deerfield International Limited on December 2, 2002 (Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on December 4, 2002). | |
| *10.1 | 1993 Nonemployee Director Stock Option Plan (Incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1994). | |
| *10.2 | Nonemployee Director Stock Option Plan (Incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1994). | |
| *10.3 | Deferred Compensation Plan for Nonemployee Directors (Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). | |
| *10.4 | 1994 Stock Incentive Plan (Incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1994). | |
| *10.5 | 1984 Stock Option Plan (Incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1994). | |
| *10.6 | 1999 Nonemployee Director Stock Option Plan (Incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999, as amended by Form 10-K/A-1 filed on March 31, 2000 and Form 10-K/A-2 filed on February 14, 2001). | |
| *10.7 | 1997 Stock Incentive Plan, as amended through May 14, 2002 (Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). | |
| *10.8 | Termination Agreement, dated as of January 2, 1999 with Charles N. Blitzer (Incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998). | |
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| 10.9 | Trademark License Agreement, dated as of December 31, 1989, between the Company and Norwich Eaton Pharmaceutical, Inc. (Incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1994). | |
| **10.10 | Supply and License Agreement, dated March 19, 1992, among E Merck Fine Chemicals Division, EM Industries and the Company (Incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997). | |
| 10.11 | Development, Marketing and Cooperation Agreement, dated October 23, 1995, between the Company and Dainippon Pharmaceutical Co., Ltd. (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). | |
| 10.12 | Manufacturing Agreement, dated December 12, 1995, between the Company and Global Pharm, Inc. (now known as Patheon Inc.). (Incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995). | |
| **10.13 | Exclusive License Agreement, dated August 31, 1993, between the Company and The Regents of the University of California (Incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998). | |
| *10.14 | Termination Agreement, dated as of September 14, 1999, with William C. Brown (Incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999, as amended by Form 10-K/A-1 filed on March 31, 2000 and Form 10-K/A-2 filed on February 14, 2001). | |
| *10.15 | Termination Agreement, dated as of September 27, 1999, with Leon O. Moulder, Jr. (Incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999, as amended by Form 10-K/A-1 filed on March 31, 2000 and Form 10-K/A-2 filed on February 14, 2001). | |
| 10.16 | Lease Agreement, dated April 19, 1999, with West Bloomington Center LLC (Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). | |
| **10.17 | Co-Exclusive Marketing Agreement, dated June 29, 1999, between the Company and Pharmacia & Upjohn Company (now known as Pharmacia Corporation) (Incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). | |
| **10.18 | License Agreement, dated December 14, 1999, between the Company and Kissei Pharmaceutical Co., Ltd. (Incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999, as amended by Form 10-K/A-1 filed on March 31, 2000 and Form 10-K/A-2 filed on February 14, 2001). | |
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| 10.19 | License Agreement, dated as of April 11, 2000, by and between the Company and CIBA Vision AG (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). | |
| **10.20 | License, Research and Development Agreement, dated as of August 2, 2000, by and between the Company and MethylGene, Inc. (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). | |
| 10.21 | Stock Purchase Agreement, dated as of August 5, 2000, by and between the Company and MethylGene, Inc. (Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). | |
| **10.22 | Asset Purchase Agreement, dated as of October 26, 2000, by and between MedImmune Oncology, Inc. and the Company (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). | |
| 10.23 | Lease Agreement, dated January 3, 2001, by and between Liberty Property Limited Partnership and the Company (Incorporated by reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000). | |
| 10.24 | Common Stock Underwriting Agreement, dated as of February 28, 2001, between Ramius Securities, LLC and the Company (Incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed on March 1, 2001). | |
| 10.25 | Stand-By Purchase Agreement, dated as of February 28, 2001, between Ramius Capital Group, LLC and the Company (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 1, 2001). | |
| **10.26 | License Agreement, dated as of April 6, 2001, between Helsinn Healthcare SA and the Company (Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on April 25, 2001). | |
| **10.27 | Supply and Purchase Agreement, dated as of April 6, 2001, between Helsinn Birex Pharmaceuticals Ltd. and the Company (Incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on April 25, 2001). | |
| *10.28 | Termination Agreement, dated as of January 16, 2001 with John McDonald. (Incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001). | |
| *10.29 | Amended and Restated Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). | |
| 10.30 | Convertible Note and Warrant Purchase Agreement dated November 27, 2002, among the Company, Deerfield Partners, L.P. and Deerfield International Limited (Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on December 4, 2002). | |
| **10.31 | Amendments to License Agreement, dated as of April 6, 2001 between Helsinn Healthcare SA and the Company (Incorporated by reference to Exhibits 99.1 and 99.2 to the Company’s Current Report on Form 8-K filed on December 23, 2003). | |
40
| **10.32 | Amendment to Supply and Purchase Agreement, dated as of April 6, 2001 between Helsinn Birex Pharmaceuticals Ltd. and the Company (Incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed on December 23, 2003). | |
| ***10.33 | Letter Amendment to License, Research and Development Agreement, dated as of August 2, 2000, between the Company and MethylGene, Inc. | |
| ***12-a | Computation of Ratio of Earnings to Fixed Charges. | |
| 23 | Consent of KPMG LLP. | |
| 31.1 | Certification of Leon O. Moulder, Jr. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of William C. Brown Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of Leon O. Moulder, Jr. Pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of William C. Brown Pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| * | Items that are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 15(c) of this Form 10-K. | |
| ** | Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of Exhibits 10.10, 10.13, 10.17, 10.18, 10.20, 10.22, 10.26, 10.27, 10.31 and 10.32 have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. | |
| *** | Previously filed with the original Annual Report on Form 10-K for the year ended December 31, 2003. | |
(b)Reports on Form 8-K
We furnished (in accordance with Item 12 of Form 8-K) a report on Form 8-K on October 15, 2003 to report under Items 7 and 12 our results of operations and financial condition for the fiscal quarter ended September 30, 2003.
We filed a report on Form 8-K on December 23, 2003 to report under Item 5 we entered into amendments of our license agreement with Helsinn Healthcare SA, and our supply and purchase agreement with Helsinn Birex Pharmaceuticals, Ltd.
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SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: July 22, 2004 MGI PHARMA, INC.
By | /s/ William C. Brown | |
William C. Brown | ||
Executive Vice President and Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Amendment No. 1 has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/Leon O. Moulder, Jr. Leon O. Moulder, Jr. | President and Chief Executive Officer (principal executive officer) | July 22, 2004 | ||
/s/William C. Brown William C. Brown | Executive Vice President, Chief Financial Officer and Secretary (principal financial officer) | July 22, 2004 | ||
/s/Nancy S. Evertz Nancy S. Evertz | Vice President, Finance and Administration (principal accounting officer) | July 22, 2004 | ||
/s/Andrew J. Ferrara Andrew J. Ferrara | Director | July 22, 2004 | ||
/s/Gilla Kaplan, Ph.D. Gilla Kaplan Ph.D. | Director | July 22, 2004 | ||
/s/Edward W. Mehrer Edward W. Mehrer | Director | July 22, 2004 | ||
/s/Hugh E. Miller Hugh E. Miller | Director | July 22, 2004 | ||
/s/David B. Sharrock David B. Sharrock | Director | July 22, 2004 | ||
/s/Lee J. Schroeder Lee J. Schroeder | Director | July22, 2004 | ||
/s/Waneta C. Tuttle, Ph.D. Waneta C. Tuttle, Ph.D | Director | July 22, 2004 | ||
/s/Arthur L. Weaver, M.D. Arthur L. Weaver, M.D. | Director | July 22, 2004 | ||
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Shareholders
MGI PHARMA, INC.:
Under date of February 6, 2004, we reported on the balance sheets of MGI PHARMA, Inc. as of December 31, 2002 and 2003, and the related statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2003, as included in MGI PHARMA, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003. In connection with our audits of the aforementioned financial statements, we also audited the related financial statement schedule as listed in the accompanying index (see item 15(a)(2)). This financial statement schedule is the responsibility of MGI PHARMA, Inc.’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Minneapolis, Minnesota
February 6, 2004
43
MGI PHARMA, INC.
Amendment No. 1 on Form 10-K/A to Annual Report
For
Year Ended December 31, 2003
| Exhibit No. | ||
| 3.1 | Second Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). | |
| 3.2 | Restated Bylaws of the Company, as amended to date (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). | |
| 4.1 | Specimen certificate for shares of Common Stock of the Company (Incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). | |
| 4.2 | Rights Agreement, dated as of July 14, 1998, between the Company and Norwest Bank, Minnesota, N.A. (including the form of Rights Certificate attached as Exhibit B thereto) (Incorporated by reference to Exhibit 1 to the Company’s Registration Statement on Form 8-A, filed July 15, 1998). | |
| 4.3 | First Amendment to Rights Agreement, dated March 14, 2000, between the Company and Norwest Bank, Minnesota, N.A. (Incorporated by reference to Exhibit 2 to the Company’s Registration Statement on Form 8-A/A-1, filed March 20, 2000). | |
| 4.4 | Form of Convertible Subordinated Promissory Notes issued to Deerfield Partners, L.P. and Deerfield International Limited on December 2, 2002 (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 4, 2002). | |
| 4.5 | Form of Common Stock Purchase Warrants issued to Deerfield Partners, L.P. and Deerfield International Limited on December 2, 2002 (Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on December 4, 2002). | |
| *10.1 | 1993 Nonemployee Director Stock Option Plan (Incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1994). | |
| *10.2 | Nonemployee Director Stock Option Plan (Incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1994). | |
| *10.3 | Deferred Compensation Plan for Nonemployee Directors (Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). | |
| *10.4 | 1994 Stock Incentive Plan (Incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1994). | |
| *10.5 | 1984 Stock Option Plan (Incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1994). | |
44
| *10.6 | 1999 Nonemployee Director Stock Option Plan (Incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999, as amended by Form 10-K/A-1 filed on March 31, 2000 and Form 10-K/A-2 filed on February 14, 2001). | |
| *10.7 | 1997 Stock Incentive Plan, as amended through May 14, 2002 (Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). | |
| *10.8 | Termination Agreement, dated as of January 2, 1999 with Charles N. Blitzer (Incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998). | |
| 10.9 | Trademark License Agreement, dated as of December 31, 1989, between the Company and Norwich Eaton Pharmaceutical, Inc. (Incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1994). | |
| **10.10 | Supply and License Agreement, dated March 19, 1992, among E Merck Fine Chemicals Division, EM Industries and the Company (Incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997). | |
| 10.11 | Development, Marketing and Cooperation Agreement, dated October 23, 1995, between the Company and Dainippon Pharmaceutical Co., Ltd. (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). | |
| 10.12 | Manufacturing Agreement, dated December 12, 1995, between the Company and Global Pharm, Inc. (now known as Patheon Inc.). (Incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995). | |
| **10.13 | Exclusive License Agreement, dated August 31, 1993, between the Company and The Regents of the University of California (Incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998). | |
| *10.14 | Termination Agreement, dated as of September 14, 1999, with William C. Brown (Incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999, as amended by Form 10-K/A-1 filed on March 31, 2000 and Form 10-K/A-2 filed on February 14, 2001). | |
| *10.15 | Termination Agreement, dated as of September 27, 1999, with Leon O. Moulder, Jr. (Incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999, as amended by Form 10-K/A-1 filed on March 31, 2000 and Form 10-K/A-2 filed on February 14, 2001). | |
| 10.16 | Lease Agreement, dated April 19, 1999, with West Bloomington Center LLC (Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). | |
45
| **10.17 | Co-Exclusive Marketing Agreement, dated June 29, 1999, between the Company and Pharmacia & Upjohn Company (now known as Pharmacia Corporation) (Incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). | |
| **10.18 | License Agreement, dated December 14, 1999, between the Company and Kissei Pharmaceutical Co., Ltd. (Incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999, as amended by Form 10-K/A-1 filed on March 31, 2000 and Form 10-K/A-2 filed on February 14, 2001). | |
| 10.19 | License Agreement, dated as of April 11, 2000, by and between the Company and CIBA Vision AG (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). | |
| **10.20 | License, Research and Development Agreement, dated as of August 2, 2000, by and between the Company and MethylGene, Inc. (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). | |
| 10.21 | Stock Purchase Agreement, dated as of August 5, 2000, by and between the Company and MethylGene, Inc. (Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). | |
| **10.22 | Asset Purchase Agreement, dated as of October 26, 2000, by and between MedImmune Oncology, Inc. and the Company (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). | |
| 10.23 | Lease Agreement, dated January 3, 2001, by and between Liberty Property Limited Partnership and the Company (Incorporated by reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000). | |
| 10.24 | Common Stock Underwriting Agreement, dated as of February 28, 2001, between Ramius Securities, LLC and the Company (Incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed on March 1, 2001). | |
| 10.25 | Stand-By Purchase Agreement, dated as of February 28, 2001, between Ramius Capital Group, LLC and the Company (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 1, 2001). | |
| **10.26 | License Agreement, dated as of April 6, 2001, between Helsinn Healthcare SA and the Company (Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on April 25, 2001). | |
| **10.27 | Supply and Purchase Agreement, dated as of April 6, 2001, between Helsinn Birex Pharmaceuticals Ltd. and the Company (Incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on April 25, 2001). | |
| *10.28 | Termination Agreement, dated as of January 16, 2001 with John McDonald. (Incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001). | |
46
| *10.29 | Amended and Restated Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). | |
| 10.30 | Convertible Note and Warrant Purchase Agreement dated November 27, 2002, among the Company, Deerfield Partners, L.P. and Deerfield International Limited (Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on December 4, 2002). | |
| **10.31 | Amendments to License Agreement, dated as of April 6, 2001 between Helsinn Healthcare SA and the Company (Incorporated by reference to Exhibits 99.1 and 99.2 to the Company’s Current Report on Form 8-K filed on December 23, 2003). | |
| **10.32 | Amendment to Supply and Purchase Agreement, dated as of April 6, 2001 between Helsinn Birex Pharmaceuticals Ltd. and the Company (Incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed on December 23, 2003). | |
| ***10.33 | Letter Amendment to License, Research and Development Agreement, dated as of August 2, 2000, between the Company and MethylGene, Inc. | |
| ***12-a | Computation of Ratio of Earnings to Fixed Charges. | |
| 23 | Consent of KPMG LLP. | |
| 31.1 | Certification of Leon O. Moulder, Jr. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of William C. Brown Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of Leon O. Moulder, Jr. Pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of William C. Brown Pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| * | Items that are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 15(c) of this Form 10-K. | |
| ** | Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of Exhibits 10.10, 10.13, 10.17, 10.18, 10.20, 10.22, 10.26, 10.27, 10.31 and 10.32 have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. | |
| *** | Previously filed with the original Annual Report on Form 10-K for the year ended December 31, 2003. | |
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