SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002 Commission File No. 0-10736
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MGI PHARMA, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-1364647
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
5775 West Old Shakopee Road, Suite 100
Bloomington, Minnesota 55437
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(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 stock held by non-affiliates of
the Registrant as of June 30, 2002 was approximately $175,781,956 (based on the
closing price of such 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 March 17, 2003, was: Common Stock, $.01 par value;
25,343,718 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to General Instruction G the responses to Items 10, 11 and 12
of Part III of this report are incorporated herein by reference to certain
information contained in the Registrant's definitive Proxy Statement for its
2003 Annual Meeting of Shareholders to be held on May 13, 2003.
PART I
This Form 10-K contains forward-looking statements within the meaning of federal
securities laws that may include statements regarding intent, belief or current
expectations of the Company and its management. These forward-looking statements
are not guarantees of future performance and involve a number of risks and
uncertainties that may cause the Company's actual results to differ materially
from the results discussed in these statements. Risks and uncertainties that
might affect our results are detailed from time to time in the Company's filings
with the Securities and Exchange Commission, including in Exhibit 99.1 to this
Form 10-K. The Company does not intend to update any of the forward-looking
statements after the date of this Form 10-K to conform them to actual results.
Item 1. Business
Overview
MGI PHARMA, INC., is an oncology-focused biopharmaceutical company that
acquires, develops and commercializes proprietary pharmaceutical products that
meet cancer patient needs. It is our goal to become a leader in oncology through
application of our two core competencies of oncology product development and
commercialization, which we apply toward our portfolio of oncology products and
product candidates. We acquire intellectual property or product rights from
others after they have completed the basic research to discover the compounds
that will become our product candidates or marketed products. This allows us to
focus our skills on product development and commercialization rather than
directly performing drug discovery.
We believe we have a complementary portfolio of oncology product candidates. Our
current product candidates are at various stages with an emphasis on advanced
stages of development and are intended to have diverse roles in treating cancer
patients. Of our product candidates, one is under review by the U.S. Food & Drug
Administration, or FDA, for marketing approval and two are in Phase 1 or 2
clinical trials. Of these, one is a supportive care product candidate (a product
that may treat the symptoms associated with treatment of the medical condition
or the condition itself), one a cytotoxic product candidate (a product that may
cause cancer cells to die) and one is a cytostatic agent (agents that may slow
or stop the growth of cancer cells). In addition, we support two preclinical
development programs, one focused on a cytotoxic agent and one focused on a
cytostatic agent.
Palonosetron is our most advanced product candidate. A new drug application, or
NDA, was submitted to the FDA on September 27, 2002 for approval to market
palonosetron. On November 27, 2002, the FDA accepted the NDA for filing, which
is an acknowledgement by the FDA that the NDA is sufficiently complete to permit
a substantive review. Under the Prescription Drug User Fee Act, or PDUFA, the
FDA's goal is to review and act on the NDA within 10 months of receipt,
specifically by July 27, 2003. Palonosetron is a potent, selective serotonin
sub-type 3, or 5-HT3, receptor antagonist with a long plasma half-life developed
for the prevention of chemotherapy-induced nausea and vomiting, or CINV. If not
prevented, CINV is estimated to occur in up to 85 percent of cancer patients
treated with chemotherapy and can result in delay or even discontinuation of
treatment. The advent of 5-HT3 receptor antagonists in 1991 has revolutionized
the management of CINV.
Approximately 2,800 patients and subjects have participated in clinical trials
of palonosetron. A pivotal Phase 3 program comparing palonosetron to currently
available 5-HT3 antagonists enrolling approximately 1,800 patients was completed
in 2002. Each of these trials was the subject of a special protocol assessment
and agreement with the FDA and each trial met the targeted efficacy endpoints.
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Palonosetron will potentially be launched into a growing U.S. 5-HT3 receptor
antagonist market that is approximately $1.4 billion for the year 2002.
Irofulven, the lead cancer therapy product candidate from our proprietary family
of compounds, called acylfulvenes, is in a series of clinical trials. Based on
our analysis of results from our trials of irofulven, we believe that irofulven
is adequately tolerated for a chemotherapeutic, with evidence of monotherapy
activity against a wide range of cancers including liver, pancreatic, ovarian,
and prostate tumors. These results have been seen in patients with refractory
tumors, meaning tumors that are unresponsive to first-line chemotherapy. Trials
in refractory cancer patients are the usual way to begin development of new
chemotherapy agents, followed by trials comparing the activity of currently
approved therapies to the investigational chemotherapy agent. If the
investigational chemotherapy agent establishes improved safety and/or efficacy
compared to the established therapy, regulatory approval may be sought.
We also are conducting a series of Phase 1 dose escalation trials of irofulven
in combination therapy with currently approved cancer agents. We believe that an
advantage of combination therapy is the potential to achieve better anti-cancer
benefit with an acceptable side effect profile compared to either agent used as
single agents. In preclinical studies, irofulven has demonstrated synergistic
activity with a number of marketed chemotherapies, meaning the extent of tumor
cell death was greater than would be predicted by simply adding the activity of
each agent individually.
We currently market several cancer-related products in the United States using
our 65-person specialty sales organization. We focus our sales efforts solely
within the United States, where we have retained product rights to our currently
marketed products and product candidates under development. We create alliances
with other pharmaceutical or biotechnology companies for the sales and marketing
of our products in other countries. Currently, we market our primary commercial
product, Salagen(R) Tablets (pilocarpine hydrochloride), in the United States to
oncologists as a treatment for the symptoms of radiation-induced dry mouth in
head and neck cancer patients and to rheumatologists as a treatment for dry
mouth associated with the autoimmune disease Sjogren's syndrome. Historically,
the cash flow generated from the U.S. sales of Salagen Tablets has been the
primary source of funding for selling, general and administrative activities, as
sales of Salagen Tablets accounted for approximately 88 percent of our $25
million of product sales in 2002. In March 2001 we began direct promotion, or
face-to-face sales calls, of Hexalen(R) capsules after acquiring the Hexalen
capsules business in November 2000. Hexalen capsules are a second-line
chemotherapy for ovarian cancer patients who are refractory to first-line
therapies. We also sell Didronel(R) IV infusion, which is approved for the
treatment of elevated blood calcium in late-stage cancer patients.
The following table summarizes the principal indications and commercial rights
for our currently marketed products and development programs.
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Products Principal Indications Status Commercial Rights
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Salagen Tablets . Symptoms of radiation- . Currently marketed U.S.: MGI
induced dry mouth in head and Europe: Novartis
neck cancer patients Canada: Pharmacia
. Dry mouth, plus dry eyes . Currently marketed Rest of World: Various other
outside the U.S., in partners
Sjogren's syndrome patients
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Hexalen capsules . Ovarian cancer . Currently marketed U.S.: MGI
Outside U.S.: Various partners
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Didronel IV infusion . Cancer-related hypercalcemia . Currently marketed U.S.: MGI
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Palonosetron . Chemotherapy-induced nausea . NDA review U.S. & Canada: MGI
and vomiting
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Irofulven . Monotherapy . Phase 2 Worldwide: MGI
. Combination therapy . Phases 1 & 2
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Other Acylfulvene . Various cancers . Preclinicals Worldwide: MGI
Analogs
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MG98 . Myelodysplasia and acute . Phase 1 U.S. & Canada: MGI
myelogenous leukemia
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DNA Methyltransferase . Various cancers . Preclinicals U.S. & Canada: MGI
Inhibitors
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Business Strategy
Our goal is to become a leading oncology-focused biopharmaceutical company
serving well-defined markets. The key elements of our strategy are to:
. Seek Approval of and Commercialize Palonosetron for
Chemotherapy-induced Nausea and Vomiting. An NDA was submitted to the
FDA on September 27, 2002 seeking approval to market palonosetron for
the prevention of chemotherapy induced nausea and vomiting. In its
acceptance of the NDA for review, the FDA established July 27, 2003 as
the PDUFA goal date for this NDA. If approved for marketing,
palonosetron will compete in the approximately $1.4 billion 5-HT3
antagonist market in the U.S.
. Expand Our Oncology Sales and Marketing Efforts in the United States.
Our 65-person specialty sales organization markets our products to
oncology and rheumatology physician specialists in the United States.
We target these therapeutic areas because their physician populations
are relatively small in number and are generally concentrated in or
near urban areas. During FDA review of palonosetron, we plan to expand
our field sales force by approximately 30 sales representatives. This
would allow us to reach the oncology community with a frequency that
is considered optimal by industry standards.
. Develop and Commercialize Irofulven for Various Cancers. A substantial
portion of our product development efforts over the next several years
may be devoted to the further development of irofulven for the
treatment of various cancers. Initially we are seeking to develop
irofulven for 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
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developed and approved for marketing. In addition, we are
investigating irofulven's efficacy in combination with other cancer
therapies. We further intend to perform clinical trials to evaluate
irofulven in non-refractory cancer patients, with a goal of broadening
irofulven's uses. We plan to focus our direct sales and marketing
efforts for irofulven within the United States and to rely on partners
to commercialize it in other countries.
. Collaborate with Other Parties Outside the United States. Outside the
United States, we pursue strategic collaborations with pharmaceutical
and biotechnology companies to develop and commercialize our current
products and product candidates when we have international product
rights.
. Selectively Add to Our Product Portfolio through Product Acquisitions
and Co-promotion Arrangements. We seek to selectively expand our
product portfolio through product acquisitions or co-promotion
arrangements of complementary products. We focus on currently
marketable pharmaceutical products or product candidates for which we
believe we can effectively add value through application of our two
core competencies: (i) oncology sales and marketing and (ii) oncology
product development. Through this strategy, we seek to grow and
diversify while managing clinical development risk, since these
product candidates have generally progressed beyond the initial
discovery stage and preliminary toxicity testing and have often
demonstrated efficacy in early human clinical studies.
. Leverage Development and Commercialization Efforts through
Outsourcing. To reduce overhead, control expenses and maintain
strategic flexibility, we contract with third parties for a number of
business activities, including preclinical studies, clinical trials,
product formulation, product manufacturing and product distribution.
By using contract manufacturers to produce our current products, which
require relatively small and infrequent production runs, we limit our
investment in facilities and equipment and can better manage the risks
involved in pharmaceutical manufacturing. Similarly, by contracting
with third parties to perform certain research and development tasks
needed to bring our products to market, we reduce internal expenses
and risks associated with owning a research facility and retain
flexibility to allocate resources to various external contractors as
development program needs evolve. We expect to continue to contract
with third parties until it is economical to add such capabilities
internally.
Cancer Overview
According to the American Cancer Society, or ACS, there are approximately 1.3
million new cases of cancer diagnosed in the United States each year. Cancer is
the second leading cause of death in the United States and is projected to
result in approximately 556,500 deaths in the United States in 2003.
Cancer is characterized by the uncontrolled growth and spread of abnormal cells.
These abnormal or malignant cells accumulate and form tumors that can compress,
invade and destroy normal tissue. If malignant cells break away from the primary
tumor, they can travel through the bloodstream or lymphatic system to other
areas of the body. There they may settle and form new tumors. The spread of a
tumor to a new site is called metastasis.
Different types of cancer vary in their rates of growth and patterns of spread,
and, consequently, typically respond in varying degrees to different types of
treatment. The three most common forms of treatment for cancer in order of their
typical use are:
. surgery--the physical removal of a patient's tumor mass;
5
. radiation therapy--the use of high energy particles or waves,
such as x-rays or gamma rays, to destroy or damage cancer cells;
and
. chemotherapy--the use of drugs to inhibit the growth of or kill
cancer cells. Systemic chemotherapy uses cancer therapy drugs
that are administered intravenously or orally. These drugs enter
the bloodstream and can potentially reach all areas of the body,
which make this treatment especially useful for cancer that has
metastasized.
A cancer patient often receives a combination of treatments depending upon the
type and progression of the disease. While surgery attempts to remove the cancer
from the patient and radiation attempts to kill the cancer cells, there are
significant limitations and complications associated with these treatments that
result in high rates of treatment failure. This failure is due primarily to
metastasis and dose-limiting severe side effects. Chemotherapeutic agents
attempt to address the limitations of surgery and radiation, which are local
treatments, by interfering with the replication of cancer cells that may have
spread to distant sites in the patient. In addition to treatment of their
cancer, cancer patients often need supportive care to prevent or treat the side
effects of radiation or chemotherapy. Examples include treatment of
chemotherapy-induced nausea and vomiting, pain control or stimulation of blood
cell growth.
Cancer is a disease characterized by uncontrolled cell replication, which
requires cells to first replicate their DNA. Therefore, many chemotherapeutic
agents target the cancer cells' ability to replicate DNA, or following the
replication of their DNA, the ability of the cancer cells to divide. Different
classes of chemotherapeutic agents are distinguished by their mechanism of
action or how they specifically interfere with the cancer cells' ability to
replicate DNA or divide.
When a cancer cell's DNA is damaged by a chemotherapeutic agent, DNA synthesis
is inhibited or cell division is inhibited, and a cellular process known as
apoptosis, or programmed cell death, may be activated. Apoptosis of tumor cells
can lead to reduction in tumor size or to the arrest of tumor growth. Certain
chemotherapeutic agents may act to directly promote apoptosis in tumor cells.
Because different chemotherapeutic agents may target different cellular
processes required for DNA replication and cell division or of apoptosis,
chemotherapeutic agents are often used in combination to maximize tumor cell
death or inhibition of growth, while more effectively managing the side effect
profile of the individual agents. Agents that specifically induce apoptosis or
interfere with DNA replication or cell division in novel ways are therefore
excellent candidates to be used in combination with existing chemotherapy
agents.
One of the principal causes of chemotherapy treatment failure is the development
of drug resistance by cancer cells, where cancer cells become resistant or
refractory to the intended cytotoxic action of a variety of conventional
chemotherapeutic agents. In many cases, resistance developed to a specific
chemotherapeutic agent results in multi-drug resistance where the cancer cell
becomes cross-resistant to a wide variety of chemotherapeutic agents. Given the
current limitations of chemotherapy, there is a clear need for new therapies
that are effective against a broad range of resistant and refractory cancers, as
well as chemotherapeutics that act by novel mechanisms that can offer benefits
as a combination therapy with existing chemotherapeutic agents.
Standard response criteria are used to report the results of oncology clinical
trials. In solid tumor clinical trials, a complete response means that all
measurable tumor tissue has disappeared and the patient appears to be disease
free. A partial response means that measurable tumor tissue has shrunk by at
least 50 percent. Stable disease means that the size of the measurable tumor
tissue has not shrunk sufficiently to be considered a partial response, but it
has not grown more than 25 percent from its smallest size during
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treatment. Progressive disease means that the tumor has grown by more than 25
percent from its smallest size during treatment.
Chemotherapy-Induced Nausea and Vomiting Overview
Depending on the type of cancer and treatment goals determined by physicians,
patients may receive chemotherapy as part of their treatment regimen. One of the
most feared side-effects of most chemotherapy treatments is chemotherapy-induced
nausea and vomiting, or CINV. In recent years supportive care products to treat
the side-effects of chemotherapy, such as CINV, have emerged to improve patient
comfort and compliance with treatment regimens. While there are many types of
supportive care products for cancer patients, this discussion is focused on the
prevention of CINV.
Efforts to treat tumors such as those found in breast and lung cancer have led
physicians to administer more aggressive chemotherapy regimens. These cytotoxic
agents often cause CINV by triggering release of serotonin from certain cells in
the gastrointestinal tract. The released serotonin stimulates nerve receptors
that activate the vomiting center via the chemoreceptor trigger zone. When, and
if, serotonin stimulates the vagal afferents through the 5-HT3 receptors,
vomiting (emesis) ensues. Although CINV has been managed to a greater degree in
recent years, it is estimated that up to 85 percent of cancer patients receiving
chemotherapy will experience some degree of emesis if not prevented with an
antiemetic. The severity of emesis is dependent upon the type of chemotherapy
administered, the dosing schedule of the chemotherapy, how quickly it was
administered, and the patient's age and gender, among other predisposing
factors. If emesis is not properly managed, it can cause dehydration and poor
quality of life, eventually leading to interruption or discontinuation of
chemotherapy. Most chemotherapy regimens are classified as low or
moderately-emetogenic and, although the majority of patients receiving
moderately-emetogenic chemotherapy are administered a currently available 5-HT3
antagonist, there remains a need to improve upon the prevention of acute, within
24 hours of chemotherapy, CINV and, especially, delayed, more than 24 hours
after chemotherapy, CINV.
Developed Products
Salagen Tablets for the Symptoms of Xerostomia and Sjogren's Syndrome
MGI conceived, developed and continues to market Salagen Tablets (pilocarpine
hydrochloride) in the United States. Salagen Tablets' clinically-proven efficacy
and safety allow it to maintain market leadership in the treatment of chronic
dry mouth symptoms associated with head and neck cancer patients treated with
radiation and with Sjogren's syndrome patients.
Salagen Tablets were the first prescription drug approved to treat the symptoms
of chronic dry mouth in these patient populations. Chronic dry mouth can be a
painful and debilitating condition. Salagen Tablets stimulate the exocrine
glands, including the salivary glands, to increase their moisture-producing
activity. Saliva is important to oral health and quality of life in general.
People with chronic dry mouth can experience difficulty eating and sleeping,
rapid tooth decay, periodontal disease and oral infections. Sales of Salagen
Tablets in the United States were $22 million in 2002. Underlying demand for
Salagen Tablets in the United States, as measured by prescription growth, grew
at an annual rate of approximately 5 percent in 2002 over 2001.
7
Head and neck cancer
Although often effective in treating primary tumors of the head and neck,
radiation therapy can permanently damage a patient's salivary glands, resulting
in xerostomia, a significant, chronic reduction of saliva production. Patients
using Salagen Tablets (pilocarpine hydrochloride) for radiation-induced dry
mouth typically take one tablet three times per day during the course of
radiation therapy, which will last approximately six to eight weeks and may then
take it indefinitely to treat the residual dry mouth symptoms that follow
radiation therapy.
Salagen Tablets have been shown to stimulate the residual functioning tissue in
the damaged salivary glands to increase saliva production and provide patients
with a longer-lasting solution for the symptoms of radiation-induced chronic dry
mouth. In two 12-week trials that were the primary basis for the approval of
Salagen Tablets in 1994, 369 patients who had been treated with radiation
therapy for head and neck cancer were assessed for the ability of Salagen
Tablets, versus placebo, to relieve the symptoms of dry mouth and to stimulate
saliva production. In both studies, patients who received Salagen Tablets
experienced significant improvement in their overall condition of dry mouth.
Those patients also demonstrated statistically significant improvements in
salivary flow compared to the patients receiving placebo tablets. Less than one
percent of the patients who received Salagen Tablets withdrew from these studies
due to lack of efficacy. Sweating was the most commonly reported side effect;
however, less than one percent of patients taking the approved dosing regimen
withdrew from the study due to sweating.
Sjogren's syndrome
Sjogren's syndrome is a chronic autoimmune disorder in which the body's own
immune system attacks the moisture-producing glands, including the salivary
glands, causing them to lose their ability to produce adequate moisture.
Symptoms of Sjogren's syndrome vary in degree and type, but the common component
is chronic dryness. Patients can exhibit dry mouth, swollen glands, dry eyes,
vaginal dryness and fatigue. The syndrome can be manifested alone (primary
Sjogren's) or in combination with other autoimmune disorders (secondary
Sjogren's). We believe that approximately 50,000 of the 200,000 Sjogren's
syndrome patients could benefit from Salagen Tablets.
In patients with Sjogren's syndrome-related dry mouth, Salagen Tablets can help
to relieve the symptoms of oral dryness. Salagen Tablets can stimulate the
salivary glands to increase production of saliva, which is essential to
maintaining good oral health. For Sjogren's syndrome patients, previously
available therapies included tear and saliva substitutes. These types of
products provide transient relief at best and often fail to prevent
complications.
In two 12-week trials that were the primary basis for the supplemental approval
of Salagen Tablets for Sjogren's syndrome in 1998, a total of 629 primary or
secondary Sjogren's syndrome patients were assessed for the ability of Salagen
Tablets, versus placebo, to relieve the symptoms of dry mouth and to stimulate
saliva production. Patients receiving Salagen Tablets four times a day reported
a significant improvement in their symptoms associated with oral dryness, and
they also demonstrated a significant increase in saliva for the full 12 weeks.
Similar to the Salagen Tablet trials in head and neck cancer patients, less than
one percent of the patients receiving Salagen Tablets withdrew from the trial
due to lack of efficacy. The most common side effect was mild to moderate
sweating. Less than four percent of patients taking the approved dosing regimen
withdrew from the study due to sweating.
The FDA granted us orphan drug status for Salagen Tablets in 1994 as a treatment
for the symptoms of xerostomia induced by radiation therapy in head and neck
cancer patients and in 1998 for the symptoms
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of dry mouth associated with Sjogren's syndrome. Our orphan drug protection for
Salagen Tablets for the treatment of symptoms of radiation-induced xerostomia in
head and neck cancer patients expired in March 2001 and our orphan drug
protection for Sjogren's syndrome will expire in 2005. Expiration of our orphan
drug protection for Salagen Tablets may result in competition from manufacturers
of generic versions of Salagen Tablets.
Hexalen Capsules for Ovarian Cancer
In November 2000, we purchased worldwide rights to Hexalen (altretamine)
capsules from MedImmune Oncology, Inc. Hexalen capsules are an orally
administered chemotherapy that is approved as a second-line treatment of ovarian
cancer. Hexalen capsules are approved for the treatment of ovarian cancer in 21
countries including the United States. Sales of Hexalen capsules in the United
States were $2 million in 2002.
In the two trials that were the primary basis for its approval in the United
States, Hexalen capsules were administered as a single agent for 14 or 21 days
of a 28-day cycle. In the 51 patients with measurable or evaluable disease,
there were seven complete responses and two partial responses for an overall
response rate of 18 percent. The duration of these responses ranged from two
months in a patient with a palpable pelvic mass to 36 months in a patient who
achieved a complete response. In some patients, tumor regression was associated
with improvement in symptoms and performance status. Side effects of Hexalen
capsules are comparable to those seen with other approved chemotherapies and
include mild to moderate bone marrow suppression, nausea and vomiting, and
peripheral sensations of touch.
A more recent trial in 97 ovarian cancer patients, which was published in
Gynecologic Oncology (Vol. 82 pages 317-322, 2001), investigated the ability of
six months of treatment with Hexalen capsules to extend survival following
achievement of a complete response with front-line therapy. At two years,
following completion of front-line therapy, patients in this trial demonstrated
a higher survival rate compared to that seen in earlier trials. The authors
concluded that a randomized, controlled trial should be conducted to confirm
this result and expand the evaluation of Hexalen capsules for this specific
method of use.
Didronel IV for Cancer-Related Hypercalcemia
Didronel (etidronate disodium) IV infusion is used to treat cancer-related
hypercalcemia, or elevated blood calcium, which is the most common
life-threatening metabolic disorder associated with cancer. Etidronate is a
member of the bisphosphonate class of compounds. It acts to slow the turnover or
dissolving of bone, also known as bone resorption. Elevated blood calcium causes
mental confusion, nausea and vomiting, loss of kidney function, and, if left
untreated, death. The condition affects up to 20 percent of all cancer patients
sometime during the course of their disease, but appears to be most prevalent
with tumors that have metastasized to bone, usually myeloma and breast tumors.
Sales of Didronel IV infusion in the United States were $181,000 in 2002.
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Products Under Development
The following table summarizes the status of ongoing development of
palonosetron, irofulven, other acylfulvene analogs, MG98 and DNA
methyltransferase inhibitors:
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Product Indication Status Sponsor
- ------- ---------- ------ -------
Palonosetron CINV NDA Review Helsinn Healthcare
Irofulven Liver Cancer--Inoperable Phase 2 MGI PHARMA
Breast Cancer--Metastatic Phase 2 National Cancer
Institute
Glioma Phase 2 National Cancer
Institute
Combination Study with irinotecan Phase 2 MGI PHARMA
Combination Study with gemcitabine Phase 1 MGI PHARMA
Combination Study with docetaxel Phase 1 MGI PHARMA
Combination Study with cisplatin Phase 1 MGI PHARMA
Combination Study with capecitabine Phase 1 MGI PHARMA
MG98 Myelodysplasia and Acute Myelogenous Phase 1 MGI PHARMA
Leukemia
Other Acylfulvene
Analogs Various Cancers Preclinical MGI PHARMA
DNA Various Cancers Preclinical MGI PHARMA/
Methyltransferase MethylGene
Inhibitors
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Palonosetron for Chemotherapy-induced Nausea and Vomiting
Palonosetron is our most advanced product candidate. In April 2001, we
obtained exclusive license and distribution rights for palonosetron in the
United States and Canada from Helsinn Healthcare S.A., of Lugano,
Switzerland. Palonosetron is a potent, selective 5-HT3 receptor antagonist
differentiated by a strong receptor-binding affinity, a long plasma
half-life, and an extended duration of activity, developed for the
prevention of chemotherapy-induced nausea and vomiting, or CINV. A Phase 3
registration trials program concluded in early 2002 and an NDA was
submitted to the FDA on September 27, 2002. On November 26, 2002, the
palonosetron NDA was accepted for filing by the FDA. The FDA designated
July 27, 2003 as the goal date under the Prescription Drug User Fee Act, or
PDUFA, for completing its review of the NDA. The marketing of palonosetron
is subject to review and approval by the FDA. MGI plans to be ready to
launch the drug in the United States in the second half of 2003, pending
such approval.
Given the clinical profile of palonosetron, we expect sales revenue to
range from $40 million to $55 million for the first 12-month period
following launch of the product and to achieve at least a 25% market share
in the U.S. CINV market approximately four years after launch.
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The advent of 5-HT3 receptor antagonists in 1991 has revolutionized the
management of CINV. The three 5-HT3 antagonists currently on the market are
ondansetron, granisetron, and dolasetron. We will potentially launch
palonosetron into a growing U.S. 5-HT3 receptor antagonist market which is
approximately $1.4 billion, of which greater than $800 million is the CINV
treatment market.
We believe that palonosetron:
. is highly selective for the 5-HT3 receptor and has a higher binding
affinity for this receptor than currently marketed 5-HT3 receptor
antagonists,
. is more potent than currently marketed 5-HT3 receptor antagonists, and
. has demonstrated a plasma elimination half-life of almost 40 hours,
which is more than three times longer than any currently marketed
5-HT3 receptor antagonists.
Clinical Development of Palonosetron
Approximately 2,800 patients or subjects have participated in clinical trials of
palonosetron. Discovered and developed by Syntex Corporation of Palo Alto,
California, Syntex executed a robust palonosetron development program through
completion of a Phase 2 dose-ranging clinical trial, evaluating the safety and
efficacy of single intravenous doses of palonosetron in patients undergoing
highly-emetogenic chemotherapy. Following the acquisition of Syntex by Roche
Group, or Roche, worldwide rights to palonosetron were in-licensed by Helsinn
from Roche.
Based upon prior clinical trial results, the Phase 3 trials program was
developed and discussed with the FDA by Helsinn, and Phase 3 trials were
initiated in the first half of 2000. In April 2001, we obtained from Helsinn the
exclusive oncology license and distribution rights for palonosetron in the U.S.
and Canada. The palonosetron Phase 3 clinical trials program enrolled
approximately 1,800 patients in three well-controlled, blinded trials comparing
palonosetron to currently available 5-HT3 receptor antagonists.
An NDA was submitted to the FDA on September 27, 2002, seeking approval to
market palonosetron for the prevention of CINV. In its acceptance of the NDA for
review, the FDA established July 27, 2003 as the NDA PDUFA goal date. Under
PDUFA, the FDA's goal is to review and act on the NDA within 10 months of
receipt, specifically by July 27, 2003.
In April 2002, we and Helsinn announced that the initial analysis of the pivotal
Phase 3 trials showed palonosetron met the targeted efficacy endpoints for
complete response during the initial 24 hours after moderate or
highly-emetogenic chemotherapy and that the complete response rates for the
delayed time period (beyond 24 hours) favored palonosetron over the comparator
agents, which were currently marketed 5-HT3 antagonists.
In June 2002, results from the first of the three pivotal Phase 3 trials of
palonosetron were presented at the Multinational Association of Supportive Care
in Cancer, or MASCC, Fourteenth International Symposium. Results reported from
this trial comparing palonosetron to a currently approved 5-HT3 receptor
antagonist, dolasetron, demonstrated that a single intravenous, or IV, dose of
palonosetron achieved statistical significance for both primary (day 1, or
acute) and secondary (days 2 through 5, or delayed) endpoints. In this trial of
569 patients, the patients received moderately-emetogenic chemotherapy, such as
cyclophosphamide, doxorubicin, epirubicin or carboplatin, and were treated with
a single IV dose of palonosetron (0.25 or 0.75 mg), or a single dose of the
comparator agent, 30 minutes prior to chemotherapy administration. The primary
endpoint of the trial was demonstrating non-inferiority versus dolasetron for
the 24-hour, or acute, complete response, or CR rate, defined as the
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proportion of patients who did not vomit or receive rescue medication. Secondary
endpoints included daily and cumulative CR rates for the delayed time period.
In addition to the previously disclosed trial comparing palonosetron to
dolasetron, two pivotal Phase 3 trials compared palonosetron to ondansetron; one
in patients receiving moderately-emetogenic chemotherapy and one in patients
receiving highly-emetogenic chemotherapy. The primary endpoint for each pivotal
Phase 3 trial was demonstrating non-inferiority versus the comparator agent for
the acute CR rate. Secondary endpoints included daily and cumulative CR rates
for days two through five.
Single IV doses of palonosetron achieved the primary endpoint of non-inferiority
relative to the comparative agent in each trial. During the delayed period (days
2 through 5) the palonosetron-treated patients demonstrated higher CR rates
relative to the comparator-treated patients. Drug related adverse events in the
trials were similar to other 5-HT3 receptor antagonists across all groups, with
the most common being mild to moderate headache and constipation.
We expect the presentation of additional Phase 3 palonosetron clinical data at
major oncology meetings in 2003.
Irofulven for Chemotherapy Treatment
Irofulven is our lead cancer therapy product candidate under development and is
part of our family of proprietary cancer therapy compounds called acylfulvenes.
Acylfulvenes, including irofulven, are semi-synthetic derivatives of the natural
product illudin S obtained from the Omphalotus olearius mushroom. We licensed
rights to the entire class of acylfulvene agents, including irofulven, from the
Regents of the University of California in 1993.
Irofulven:
. is potentially active as an anti-cancer agent in treating a broad
range of cancers;
. has a unique mechanism of action that may make it effective in
treating refractory cancers, or cancers that are unresponsive to
existing cancer therapies and useful in combination with existing
cancer therapies;
. has demonstrated activity against tumors that are known to be
resistant to other cancer therapies; and
. has a side effect profile that is adequately tolerated.
Mechanism of action studies have indicated that irofulven is rapidly taken up by
sensitive tumor cell types where it reacts with tumor cell DNA and protein
targets in a novel manner, producing rapid inhibition of DNA synthesis and DNA
lesions that are difficult for the tumor cell to repair. The initiation of DNA
damage by irofulven begins tumor selective apoptosis that ultimately causes cell
death. Clinical trials will determine whether the differential effect of
irofulven on tumor cells compared to healthy cells translates into important
clinical benefit. We further believe that irofulven could be the first of a
series of acylfulvene analogs that merit development as cancer therapies.
We believe irofulven has a unique mechanism of action that makes it well-suited
for study in refractory patient populations and in combination with other cancer
therapies. Preclinical data and early clinical data demonstrate irofulven's
activity against tumors that are known to be resistant to other therapies.
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Preclinical studies have also demonstrated the additive or synergistic effect of
irofulven with a number of marketed cancer therapies. To date, irofulven has
demonstrated a side effect profile relative to certain marketed cancer
therapies, which we believe enhances the prospect of irofulven combining well
with these cancer therapies. Therefore, we believe that pursuing multiple
development paths in different refractory cancers and in combination with other
cancer therapies is warranted. Preclinical toxicology studies in rats and dogs
and initial clinical data from the dosing of over 1,000 cancer patients with
irofulven have demonstrated that irofulven is adequately tolerated as a
chemotherapeutic compound and its side effects are reversible. The primary
dose-limiting side effect has been bone marrow suppression, usually observed as
decreased blood platelet or white cell counts. Other drug-related side effects
have been nausea, vomiting, visual disturbances and fatigue. Bone marrow
suppression has been controlled through dose adjustments or treatment delays to
allow recovery of platelet or white cell counts. Nausea and vomiting are
prophylactically controlled with standard, currently available treatments.
Visual disturbances and fatigue are managed by dose adjustments and are
reversible after discontinuation of treatment.
One method of identifying cancer therapy targets for further human trials is to
conduct preclinical tests on mice that have been implanted with human, solid
tumors. Testing of irofulven in these disease models has demonstrated
dose-related anti-cancer activity, including an increase in survival or tumor
regressions in the following types of cancers:
. Prostate . Gastric
. Ovarian . Breast
. Pancreatic . Melanoma
. Non-small Cell Lung . Small Cell Lung
. Colon . Head and Neck
. Rhabdomyosarcoma . Neuroblastoma
. Glioma
An investigational new drug application for irofulven was submitted to the FDA
in September 1995 and Phase 1 human safety testing was initiated in December
1995. Phase 1 clinical trials are conducted in small patient populations and are
generally not designed to measure efficacy. In October 1997, we initiated a
second Phase 1 trial to evaluate the effect of longer infusion times. Both
initial Phase 1 trials completed enrollment in 1998 after establishing a maximum
tolerated dose level and a recommended dosing regimen for the initial Phase 2
trials.
The investigators participating in our initial Phase 1 trials observed
anti-cancer activity. Seven out of a total of 32 patients who received daily
treatments at a dose between 8 and 18 mg/m2 in these trials demonstrated
stabilization of disease or tumor shrinkage as a response to irofulven.
In late 1999, we initiated a Phase 1 dose optimization trial using intermittent
or weekly dosing in patients with malignant solid tumors that were refractory to
anti-cancer treatment or for which no standard treatment exists. In this
challenging patient population, greatly improved tolerance to acute effects of
treatment were observed compared to the five consecutive day dosing schedule
used to initiate our Phase 2 trials program. In addition, comparable dose
intensity was achieved and evidence of anti-cancer activity was observed in this
trial. Based on these results and consultation with our panel of outside
oncology experts, weekly or bi-weekly dosing schedules will generally be used in
ongoing and future trials.
We have tested irofulven in a variety of Phase 2 solid tumor trials. We chose to
investigate pancreas, ovary, prostate, liver and glioma cancers because:
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. these cancer types have significant mortality and morbidity associated
with them;
. current therapies are inadequate;
. there was noticeable anti-cancer response in our preclinical studies
or clinical trials;
. clinical trials for pancreas, liver and glioma cancers tend to be of a
relatively short duration; and
. product candidates for these indications may qualify for expedited
regulatory review.
Anti-cancer activity of irofulven has been observed in each of these trials,
including objective tumor shrinkage in pancreas, ovary, prostate and liver
cancers.
To obtain marketing approval for irofulven in the United States, pivotal
registration trials will need to be successfully completed and submitted to the
FDA. Phase 3 trials typically use survival as the primary endpoint, compared to
a randomly determined control group and have a higher number of enrolled
patients than in earlier phases.
Irofulven for Pancreatic Cancer
Our initial pivotal registration trial of irofulven was for the treatment of
refractory pancreatic cancer. Pancreatic cancer is the fifth most common cause
of cancer-related death in the United States, and is an aggressive disease that
has few effective treatment options. In February 2001, we began a pivotal Phase
3 trial of irofulven for treating refractory pancreatic cancer patients.
Initiation of this trial was based on Phase 2 results in pancreatic cancer
patients, improved acute tolerance with every-other-week dosing of irofulven
seen in the dose optimization trial, and discussions with the FDA and our panel
of outside oncology experts.
The Phase 3 trial was a randomized, multi-center, international trial in
advanced-stage pancreatic cancer patients whose disease progressed after
treatment with gemcitabine, the current standard-of-care treatment. The primary
endpoint was overall survival times following treatment with irofulven compared
to continuous infusion 5-fluorouracil (5-FU). Two patients were randomized into
the irofulven treatment arm for every patient enrolled in the 5-FU control arm.
In April 2002, we stopped enrollment in this Phase 3 clinical trial of irofulven
for gemcitabine-refractory pancreatic cancer patients. Despite evidence of
irofulven activity, preliminary analysis of the Phase 3 data by an independent
Data and Safety Monitoring Board, or DSMB, indicated that the comparator agent
5-FU demonstrated a greater than expected survival benefit, making it
statistically improbable that the final study results could achieve our planned
objectives for the trial. For this reason, we will no longer pursue this
specific indication for irofulven monotherapy in gemcitabine-refractory
pancreatic cancer. Following closure of the trial to enrollment, we continued to
make irofulven available to the remaining enrolled pancreatic cancer patients in
this trial who experienced clinical benefit.
Irofulven Combination Trials
We believe that an advantage of combination therapy is the potential to achieve
enhanced anti-cancer benefit with an acceptable side effect profile compared to
either agent used alone. Because irofulven has a unique mechanism of action,
retains activity against tumors that are known to be resistant to other cancer
therapies and in preclinical trials demonstrated additive or synergistic effects
in combination with a number of marketed chemotherapies, we are conducting drug
combination trials with irofulven. The first clinical step in exploring
combination therapy is to conduct Phase 1, dose-ranging trials to determine
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the maximum tolerated dose of both drugs together. The anti-tumor activity in a
completed Phase 1 trial of irofulven in combination with irinotecan led to the
initiation of a Phase 2 trial of irofulven with irinotecan in patients with
advanced gastrointestinal tumors. We are currently conducting four dose-ranging
trials of irofulven in combination with gemcitabine, docetaxel, cisplatin, and
capecitabene that may lead to Phase 2 trials. Data from these trials and
possible follow-up Phase 2 trials in specific tumor types will be evaluated to
determine whether further drug combination development with these marketed
therapies is warranted.
NCI Clinical Trials
Under a 1996 Clinical Trials Agreement, the National Cancer Institute, or NCI,
is sponsoring and overseeing, at its own expense, a clinical trials program
using irofulven in its network of designated cancer centers and other
institutions. We have agreed to provide drug product for these trials and will
have access to any resulting data. We intend to utilize the results from
NCI-sponsored trials to further characterize the safety of irofulven as well as
evaluate the potential of irofulven in additional refractory solid tumor types.
The NCI has sponsored 14 trials of irofulven in a range of solid tumor cancers
and leukemias and two trials are ongoing.
Other Acylfulvene Analogs
In addition to irofulven, we have obtained license rights to acylfulvene
analogs. The synthesis and the initial biological testing of over 100 of these
analogs has been performed at the University of California, San Diego, or UCSD.
At UCSD, both in vitro and in vivo anti-tumor activity has been demonstrated for
a significant number of the acylfulvene analogs. Further testing by the NCI of
some of these analogs has confirmed broad spectrum anti-tumor activity. The
broad-spectrum anti-tumor activity of the acylfulvene analogs suggests that this
class of compounds has the potential to produce additional clinical development
candidates. We are currently evaluating these analogs for further preclinical
development.
MG98 and Small Molecule DNA Methyltransferase Inhibitor Programs
In August 2000, as part of our strategy to expand our portfolio of marketed and
development stage anti-cancer products, we entered into an exclusive license,
research and development agreement with MethylGene Inc. for North America rights
to its proprietary anti-cancer product candidate MG98 and its DNA
methyltransferase small molecule inhibitor program. Included within our license
rights is a United States patent that has been issued on a method for reversing
the tumor-causing state of a cell by administering an agent that corrects an
aberrant methylation pattern in the DNA of the cell. MethylGene is a
chemistry-driven, rational drug design and development company focused on the
inhibition of enzyme targets that are associated with disease. It pursues two
approaches to enzyme inhibition: rationally designed mRNA inhibitors that block
the production of enzymes and rationally designed small molecule inhibitors that
block the activity of enzymes.
DNA Methylation
DNA methylation, the attachment of a small molecule known as a methyl, or CH3,
group to DNA, affects which genes will be expressed. DNA methyltransferase is an
enzyme that is vital to controlling the methylation of DNA and therefore
regulation of gene expression. This process normally occurs in a controlled
manner within cells. However, in certain circumstances, over-production of DNA
methyltransferase can lead to hypermethylation of DNA and improper inhibition of
gene expression. For example, if tumor suppressor genes are hypermethylated,
expression of these genes is turned off and cancer may progress.
15
Hypermethylation of tumor suppressor genes has been implicated in cancer
progression for a wide variety of human cancers. While the incidence of tumor
suppressor gene methylation can vary widely, significant methylation has been
observed with certain types of head and neck, renal, acute myelogenous leukemia,
breast, colorectal, lung and prostate cancers and myelodysplastic syndrome. In
preclinical testing, MethylGene has demonstrated that blocking the production or
activity of DNA methyltransferase reduces DNA methylation of several important
tumor suppressor genes, resulting in the re-establishment of gene expression and
the loss of tumor-like characteristics in cells.
MG98 Program
MG98 is a novel mRNA-based approach to inhibiting gene expression of the nuclear
enzyme DNA methyltransferase by blocking the production of DNA
methyltransferase. Due to the precise interaction with a specific piece of mRNA,
mRNA inhibitors are highly selective, thus minimizing side effects. Using
mRNA-based approaches to treat diseases has been an area of active development
by other investigators for a number of years and in 1998, the FDA approved the
first mRNA inhibitors for human use against cytomegalovirus infections. There
are currently several human clinical trials of mRNA inhibitors ongoing
throughout the world targeting cancers, inflammatory processes and infectious
agents.
Based on preclinical studies and Phase 1 clinical data, we believe that MG98:
. binds to DNA methyltransferase mRNA and inhibits subsequent production
of protein in a dose dependent manner;
. may allow tumor suppressor genes to restore cell growth regulation;
and
. potentially inhibits the growth of human tumors.
Clinical Development of MG98
Phase 2 trials of MG98 in head and neck cancer patients and in renal cancer
patients have concluded without significant indication of anti-tumor activity as
a single agent at the dose and schedule studied. In January 2002, a trial was
initiated with MG98 in advanced myelodysplastic syndrome (MDS) or
relapsed/refractory acute myelogenous leukemia (AML) patients. This trial shares
characteristics of Phase 1 trials in that it will assess the safety and define
the optimal effective dose of MG98. The trial also shares characteristics of
Phase 2 trials in that it will document both biological and clinical effects in
this defined patient group. MDS is a group of stem cell disorders that may
result in substantial reductions in blood cells and may evolve into AML. Data
from these trials will be evaluated to determine future development plans for
MG98.
To date, MG98 has been well tolerated and has occasionally caused the following
reversible side-effects: fatigue, anorexia, fever, chills and elevated liver
enzymes. Generally, patients who have withdrawn from the trials have withdrawn
due to progressive disease.
In preclinical testing, MG98 has demonstrated additive or synergistic effects
when combined with other chemotherapies. Combination use of MG98 could be an
important area of investigation given the prospect that MG98 could slow or stop
the growth of tumors while chemotherapy could then reduce or eliminate the
remaining tumor cells. Investigation may continue to identify promising
combinations for potential clinical trials of MG98.
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Other DNA Methyltransferase Inhibitors
As part of our license agreement with MethylGene, we may collaborate to select a
small molecule inhibitor of DNA methyltransferase for further development. Small
molecule inhibitors are seen as complementing MG98 since early preclinical
studies that combine MG98 with small molecule DNA methyltransferase inhibitors
have demonstrated synergistic activity.
Sales and Marketing
We currently promote our products in the United States directly to radiation
oncologists, select medical oncologists, hematology oncologists, rheumatologists
and internal medicine physicians, and other physician specialists using our
65-person sales organization, which includes 48 sales representatives, each
assigned to a geographic territory. In 2003, we anticipate expanding the sales
organization to around 100 people, including approximately 30 additional sales
representatives, in preparation for the potential product launch of
palonosetron. Our sales organization will continue to be used to promote our
current and future oncology products in the United States.
In addition, we have an in-house marketing, manufacturing and commercial
management staff of 27 persons who support our commercial activities. We use a
variety of marketing programs to reach our targeted audiences, including
distribution of product-specific brochures in face-to-face meetings and direct
mailings, exhibits at select medical meetings and journal advertising. Our sales
and marketing organizations are highly trained and experienced.
We use international partnerships to commercialize our products outside the
United States. We currently have agreements with Novartis Ophthalmics AG
(formerly CIBA Vision AG), Kissei Pharmaceutical Co., Ltd. and Pharmacia
Corporation to develop and commercialize Salagen Tablets for the European,
Japanese and Canadian markets, respectively. Under these agreements, we receive
payments based on development milestones and/or product sales in the pertinent
territory. We also have distribution agreements for Salagen Tablets in Israel,
Korea, Singapore, Taiwan, Hong Kong and Colombia. We receive payments based upon
product sales to these distributors.
Research and Development
We maintain active drug development programs for our new drug candidates and
commercialized products. Current drug development efforts are primarily focused
on palonosetron, irofulven and MG98. Licensing payments for palonosetron are
recognized as research and development expense. We also participate in
post-marketing studies to support the continued commercialization of Salagen
Tablets and Hexalen capsules. Research and development expenses increased from
2000 through 2001 due to the expanding clinical trial program for irofulven and
MG98, plus expenses related to the new license agreements with Helsinn and
MethylGene. Our research and development expenses decreased from 2001 to 2002
due to decreased spending for irofulven. The amount of future research and
development expense will be dependent upon, in-part, the number of trials being
conducted, the stages of the trials and the achievement of licensing milestones.
We may also seek product candidate acquisitions in order to expand our
development pipeline.
We have incurred significant research and development costs in the past and
believe that substantial capital resources will be required to support current
and future development programs. We spent approximately, $17.2 million in 2000,
$36.1 million in 2001 and $32.2 million in 2002 on research and development. In
recent years, 70 to 80 percent of our research and development expense was
attributable to contracts with third parties. Approximately 74 percent of our
research and development expense in 2002 was attributable to third party
services, license fees or FDA user fees. Funding for research and
17
development is expected to come from internally generated funds, joint ventures,
strategic alliances or other sources of capital, including equity or debt
offerings.
Successful drug development requires a broad spectrum of scientific, clinical
and product development expertise. As part of our strategy, we do not directly
conduct basic research or traditional drug discovery activities because we
primarily intend to acquire rights to product candidates that are in the human
clinical stage of development. This approach substantially reduces our research
risk due to product failure and eliminates the need for direct investment in
discovery research laboratories and personnel.
We manage our human clinical development of product candidates by selectively
outsourcing certain activities. We have in-house medical communications
capabilities and regulatory affairs expertise which allow us to maintain support
systems, monitor adverse drug experience reporting, and file new drug
applications with the FDA. We outsource other development activities, such as
the conduct of preclinical studies and clinical trials, product formulation and
production of clinical supplies.
We expect to continue to contract with third parties until it is necessary and
economical to add these capabilities internally. As of December 31, 2002, we
employed 51 persons in research and development, medical communications,
regulatory affairs and product formulation.
International Alliances
Dainippon Pharmaceutical Co., Ltd.
During 1995, we entered into a cooperative development and commercialization
agreement with Dainippon, 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.
Dainippon and MGI agreed in the first quarter of 2003 to terminate this
agreement effective August 2003. Under the agreement, Dainippon paid initial and
continuing quarterly milestone payments totaling $11.1 million through April
2000. From April 2000 through January 2002, $4.3 million in deposit payments
were received from Dainippon, which we will repay to Dainippon in August 2003.
Kissei Pharmaceutical Co., Ltd.
In December 1994, we entered into a license agreement with Kissei under which we
granted to Kissei an exclusive, royalty-bearing license to develop and
commercialize Salagen Tablets in Japan. Kissei is currently preparing a
submission to the Japanese regulatory authorities for the use of Salagen Tablets
in treating the symptoms of radiation-induced xerostomia in head and neck cancer
patients. Kissei granted back to us an irrevocable, non-exclusive, royalty-free
license allowing us to use any technology or data developed by Kissei relating
to Salagen Tablets. Kissei paid us an initial license fee upon execution of the
agreement and agreed to pay us additional milestone payments. Through December
31, 2002, we have received all $2.5 million of the required license fees and
milestone payments. In addition, Kissei agreed to pay us royalties equal to a
certain percentage of net sales revenues, subject to annual minimum
requirements. Unless earlier terminated by the parties for cause or by mutual
agreement, the term of the agreement is for ten years from the date Salagen
Tablets are first launched in Japan. Thereafter, the agreement automatically
renews for additional one year periods.
Novartis Ophthalmics AG (formerly CIBA Vision AG)
In April 2000, we entered into a license agreement with Novartis under which we
granted Novartis an exclusive, royalty-bearing license to develop and
commercialize Salagen Tablets in Europe, Russia and
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certain other countries. Novartis granted to us an irrevocable, non-exclusive,
royalty-free license allowing us to use any technology or data developed by
Novartis relating to Salagen Tablets. Simultaneous with this agreement, the
previous agreements with Chiron B.V. for Salagen Tablet rights in Europe were
terminated. Through December 31, 2002 Novartis paid us $1.5 million of net
license fees upon completion of transfer activities. Additional milestone
payments may be received if specified sales targets are achieved. Further,
Novartis agreed to pay us royalties equal to a percentage of net sales revenues.
Unless earlier terminated by the parties, the term of the agreement is for 12
years and may be extended for additional two-year periods.
In addition, we simultaneously entered into a supply agreement with Novartis
under which we agree to supply Novartis' requirement of Salagen Tablets until
the termination of the license agreement with Novartis.
Pharmacia Corporation
In November 1994, we entered into a license agreement with Pharmacia
Corporation, under which we granted to Pharmacia Corporation an exclusive,
royalty-bearing license to develop and commercialize Salagen Tablets in Canada.
Pharmacia granted to us an irrevocable, non-exclusive, royalty-free license
allowing us to use any technology or data developed by Pharmacia relating to
Salagen Tablets. Pharmacia paid us an initial license fee of $75,000 upon
execution of the agreement and agreed to pay us royalties equal to a percentage
of net sales revenues, subject to annual minimum requirements. 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. Thereafter, the agreement
continues for an additional two-year period and thereupon automatically expires
unless extended by the parties.
In addition, we simultaneously entered into a supply agreement with Pharmacia
under which we agree to supply Pharmacia's requirement of the product until the
termination of the License Agreement with Pharmacia.
Technology In-licensing Agreements
Acylfulvenes, Including Irofulven
In August 1993, we entered into an exclusive license agreement with the Regents
of the University of California. Under the agreement, the university granted to
us an exclusive, worldwide, royalty-bearing license for the commercial
development, manufacture, use and sale of acylfulvene analogs, methods of
synthesizing acylfulvene analogs and methods of treating tumors using
acylfulvene analogs. We have been developing irofulven under this license. We
paid the university an initial license fee upon execution of the agreement and
agreed to pay license maintenance fees on each anniversary of the execution of
the agreement until we submit the first NDA relating to the analogs to the FDA.
In addition, we make development milestone payments prior to commercialization
of the product. We have also agreed to pay royalties on net sales revenues,
subject to annual minimum requirements. Through December 31, 2002, we have made
approximately $800,000 in cash payments to the university under this agreement.
Unless earlier terminated by the parties, the term of the agreement extends
until the later of: (a) the expiration of the last-to-expire patent we have
licensed; or (b) ten years from the date of the first commercial sale of
products developed from the acylfulvene analogs.
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MG98 and Other DNA Methyltransferase Inhibitors
In August 2000, we entered into a license, research and development agreement
with MethylGene for two anti-cancer product programs. Under the agreement,
MethylGene granted to us an exclusive, royalty-bearing license to develop and
commercialize MG98 in North America for all therapeutic indications. The
agreement also included similar rights to other DNA methyltransferase inhibitors
for oncology and rheumatology indications. In exchange for the licenses, we
agreed to:
. make initial cash payments to MethylGene;
. make certain development milestone payments for both MG98 and the
first DNA methyltransferase inhibitor that achieves such development
milestones;
. purchase research services from MethylGene; and
. pay MethylGene royalties on annual future net sales revenue.
Through the time of the initial regulatory approvals in the United States and
Canada, the initial and milestone cash payments would aggregate to approximately
$16 million for each of the two development programs. Unless earlier terminated
by the parties, the term of the agreement extends until the later of: (a) the
expiration of the last-to-expire patent we have licensed; or (b) ten years from
the date of the first commercial sale of any licensed product. Simultaneous with
the execution of the license agreement, we entered into a stock purchase
agreement and have purchased the $6.8 million of MethylGene common stock
required by this agreement.
Palonosetron
In April 2001, we obtained from Helsinn Healthcare SA the exclusive oncology
license and distribution rights for palonosetron in the United States and
Canada. Palonosetron is a differentiated 5-HT3 antagonist for the prevention of
chemotherapy-induced nausea and vomiting. The NDA for palonosetron was accepted
for filing by the FDA on November 26, 2002. Under the terms of the agreement, we
have made an aggregate of $27 million in license payments as of December 31,
2002. Upon FDA approval for marketing of palonosetron, we will pay Helsinn the
final development milestone fee of $11.0 million. We have also agreed to pay
royalties and supply fees based on net sales revenues.
Mylocel Tablets
In January 2001, MGI entered into an agreement with Barr Laboratories, Inc. for
the exclusive marketing and distribution rights for Mylocel(TM) (hydroxyurea)
tablets 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. MGI began marketing and distributing Mylocel
tablets in March 2001. Under the terms of the agreement, Barr Laboratories
received royalty payments based upon the product contribution derived from MGI's
sale of product. This agreement was terminated in April 2002.
Hexalen Product Purchase Agreement
In November 2000, we purchased certain assets and assumed certain liabilities
related to the Hexalen capsules business from MedImmune Oncology, Inc. Hexalen
(altretamine) capsules are an orally administered cytotoxic drug that was
approved for treatment of ovarian cancer in patients with persistent or
recurrent disease following first-line therapy with Platinol and/or alkylating
agent-based combination chemotherapy. Hexalen capsules are approved for the
treatment of ovarian cancer in the United States and
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a number of other countries and, in Germany, for small cell lung cancer. We
purchased worldwide rights subject to existing distribution agreements for
territories outside the United States. The purchase price of $7.2 million has
been fully paid and royalties are due on net sales or distribution margins.
Distribution Agreements
We entered into distribution agreements granting a license to the following
exclusive, independent distributors to promote and distribute Salagen Tablets in
the designated territories:
. Megapharm Ltd. (Israel)--expires April 7, 2004;
. Hyundai Pharmaceutical Co., Ltd. (Korea)--expires September 28, 2004
with an additional three year extension;
. Pharmaforte Singapore Pte. Ltd. (Singapore)--expires three years after
regulatory approval in Singapore;
. Jacobson Medical (HK) Ltd. (Hong Kong and Macao SAR) - expires five
years after regulatory approval in Hong Kong subject to renewal for an
additional two year period;
. Universal Integrated Corp. (Taiwan)--expires September 28, 2007 with
an additional three year extension; and
. EuroEtika Ltda. (Colombia)--expires July 17, 2006 subject to renewal
for an additional two year period.
We have distribution agreements granting a license to promote and distribute
Hexalen capsules in designated territories.
. Teva International Pharmaceutical Division - various countries in
Eastern Europe, South America and Africa - expires on a
country-by-country basis on the earlier of the 10-year anniversary of
the effective date of registration or the six-year anniversary of the
date of first sale. Automatically extends for 1-year terms unless
terminated.
The distributors are required to obtain local authorizations in connection with
the import/export and distribution of product in their designated territory. We
receive product supply payments and may receive distribution initiation fees.
Manufacturing
We do not own or operate any facilities for the manufacture of our products or
product candidates. Our marketed and development-stage pharmaceuticals are
manufactured under agreements with third party manufacturers. Our manufacturing
and quality assurance personnel authorize, audit and approve virtually all
aspects of the manufacturing process. In-process and finished product
inventories are analyzed through contract testing laboratories and the results
are reviewed and approved by us prior to release for further processing or
distribution. We intend to carry at least a six month inventory of each of our
marketable products.
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Salagen Tablets
We obtain pilocarpine hydrochloride, the active pharmaceutical ingredient for
the manufacture of Salagen Tablets, under an exclusive supply and license
agreement with Merck KgaA. The exclusive term of this agreement ends on December
31, 2007, and may be extended for additional five-year terms unless earlier
terminated by the parties. Upon termination of the exclusive term, the agreement
may continue for an indefinite period on a non-exclusive basis. The refined raw
material is a semi-synthetic salt of an extract from plants grown and processed
exclusively on carefully managed plantations in South America. We believe that
the supply of pilocarpine hydrochloride is adequate for the foreseeable future.
Salagen Tablets are currently manufactured for us by Patheon Inc. The initial
term of the Patheon agreement was four years, with automatic renewal periods of
three years. This agreement may be terminated by either party upon three years'
written notice. The current agreement's renewal expires November 19, 2005.
Hexalen Capsules
Pharmaceutical grade altretamine for the manufacture of Hexalen capsules is
obtained from Heumann Pharma GmbH, a wholly owned subsidiary of Pharmacia.
Heumann Pharma supplies the bulk active drug substance pursuant to an agreement
that we assumed. Hexalen capsules are currently manufactured pursuant to an
agreement with AAI International that expires March 8, 2005 (three year initial
term). Absent written notice of termination by either party at least 90 days in
advance of a renewal date, the term of the agreement is automatically renewed
for annual periods on January 1 of each year.
Didronel IV Infusion
Pharmaceutical grade etidronate disodium for the manufacture of Didronel IV
infusion is obtained under a supply agreement with Procter & Gamble
Pharmaceuticals, Inc. from OSG Norwich, Inc. We may extend these rights two
years to December 31, 2006. Didronel IV infusion is currently manufactured at
Akorn Inc. (formerly known as Taylor Pharmaceuticals, a unit of Akorn Inc.). Ben
Venue Laboratories, Inc., a unit of Boehringer Ingelheim Pharmaceuticals, Inc.,
is an approved alternate contract manufacturer of Didronel IV infusion.
Development-Stage Pharmaceuticals
As a regular part of our business, we establish contract manufacturing
arrangements for our development-stage pharmaceuticals. These arrangements
include purchase orders, supply agreements and development-scale manufacturing
contracts.
Palonosetron
Palonosetron, the active pharmaceutical ingredient, is manufactured by Helsinn.
Helsinn is responsible for the worldwide requirements of both the active
pharmaceutical ingredient and finished drug product, a sterile formulation in a
single-use vial. Helsinn contracts with Cardinal Healthcare, Inc., or Cardinal,
for filling and finishing vials with the active pharmaceutical ingredient.
Irofulven
In April 2000, we entered into a development agreement with Abbott Laboratories,
Inc. for scale-up of the current fermentation process used to produce raw
material for the production of irofulven. The agreement also gives Abbott the
opportunity to demonstrate its ability to produce the raw material on a
commercial scale. Irofulven is synthesized from the purified raw material
produced by Abbott at Regis Technologies, Inc. Regis has successfully
demonstrated synthesis of irofulven's active pharmaceutical
22
ingredient at commercial scale. Regis has the capacity to produce irofulven to
meet our long-term worldwide requirements. Irofulven Injection, the sterile
finished pharmaceutical dosage form, is manufactured by Cardinal. Cardinal is
capable of producing the finished packaged drug product, a liquid formulation in
a single-use vial, at commercial scale in the quantities consistent with our
long term production requirements for worldwide distribution. Clinical test
articles are currently stored, labeled and distributed by McKesson BioServices,
Inc.
MG98
The manufacture of the MG98 oligonucleotide is performed under a contract
between MethylGene Inc., and Boston Bioservices, Inc., a unit of Avecia. The
sterile clinical test article is manufactured by Cardinal.
Patents and Proprietary Rights
We rely on patent rights, orphan drug designation, trade secrets, trademarks,
and nondisclosure agreements to establish and protect our proprietary rights in
our products in both the United States and selected foreign jurisdictions.
Current patent and orphan drug status with respect to certain of our products is
as follows:
Subject Status Issue Date Country
------- ------ ---------- -------
Salagen Tablets for Orphan drug February 11, 1998 United States
symptoms of Sjogren's
syndrome
Palonosetron and process Four U.S. patents issued; April 13, 1993; United States and various
for preparation various patent April 23, 1996; other countries
applications pending November 19, 1996; and
November 22, 1996
Irofulven and use of Three patents issued, August 8, 1995; United States and various
irofulven, as cancer various patent June 4, 1996; and other countries
therapy agent applications pending October 8, 1996
Synthetic methods for Five patents issued; March 3, 1998; United States and various
preparing acylfulvenes various patent January 5, 1999; other countries
and compounds useful applications pending December 12, 2000;
as intermediates for October 5, 2001; and,
preparing acylfulvenes October 22, 2002
Substituted acylfulvene Six patents issued; August 8, 1995; United States and various
compounds and use as various patent August 3, 1999; other countries
cancer therapy agents applications pending February 15, 2000;
(not including irofulven) May 30, 2000;
November 27, 2001; and
April 30, 2002
23
Subject Status Issue Date Country
------- ------ ---------- -------
Irofulven for treatment Orphan drug April 6, 1999 United States
of pancreatic cancer
Irofulven for treatment Orphan drug July 12, 1999 United States
of ovarian cancer
Irofulven for treatment Orphan drug July 27, 1999 United States
of renal cell carcinoma
MG98 antisense compound Seven patents issued; November 26, 1996; United States and
for treatment of cancer various patent July 29, 1997; various other countries
applications pending July 6, 1999;
February 1, 2000;
April 25, 2000;
May 23, 2000; and
February 6, 2001
Small molecule Three patents issued February 6, 2001; United States and
inhibitors of DNA April 24, 2001; and various other countries
methyltransferase for July 31, 2001
treatment of cancer
The term of a U.S. patent issued from an application filed before June 8, 1995
is the longer of 17 years from its issue date or 20 years from its effective
filing date. The term of a U.S. patent issuing from an application filed on or
after June 8, 1995 is 20 years from its effective filing date. All of the U.S.
patents covering irofulven or its use were issued from applications filed before
June 8, 1995. The Drug Price and Competition and Patent Term Restoration Act of
1984, the Generic Animal Drug Act, and the Patent Term Restoration Act generally
provide that a patent relating to, among other items, a human drug product, may
be extended for a period of up to five years by the U.S. Commissioner of Patents
and Trademarks if the patented item was subject to regulatory review by the FDA
before the item was marketed. Under these acts, a product's regulatory review
period (which consists generally of the period from the time when the exemption
to permit clinical investigations becomes effective until the FDA grants
marketing approval for the product) forms the basis for determining the length
of the extension an applicant may receive. There can be no assurance that any
issued patents will be extended in term.
We have obtained extensive patent protection for irofulven and the other
acylfulvene analogs. Patent positions of pharmaceutical companies are generally
uncertain and involve complex legal and factual issues. Therefore, although we
believe our patents are valid, we cannot predict with any precision the scope or
enforceability of the claims allowed thereunder. In addition, there can be no
assurance that our patent applications will result in issued patents, that
issued patents will provide an adequate measure of protection against
competitive technology which could circumvent such patents, or that issued
patents would withstand review and be held valid by a court of competent
jurisdiction. Furthermore, there can be no assurance that any issued patents
will not be infringed or otherwise circumvented by others.
Orphan drugs are currently provided seven years of marketing exclusivity for an
approved indication following approval to market by the FDA. Orphan drug
designation for our products does not, however, insulate us from other
manufacturers attempting to develop an alternate drug for the designated
indication, or the designated drug for another, separate indication.
24
We also rely on trade secrets and continuing innovation that we seek to protect
with reasonable business procedures for maintaining trade secrets, including
confidentiality agreements with our collaborators, employees and consultants.
There can be no assurance that these agreements will not be breached, that we
will have adequate remedies for any breach or that our trade secrets and
proprietary know-how will not otherwise be known or be independently discovered
by competitors.
In addition to the patents which form the basis of the pharmaceutical focus of
this company, we also own four U.S. patents which claim maize plants that are
resistant to certain herbicides and that also claim methods for producing such
resistant plants. These patents were issued between 1988 and 1998. While these
patents have been licensed to BASF (originally licensed to American Cyanamid),
we may still incur expenses associated with any litigation, interference or
other administrative proceedings related to these patents.
Trademarks
We have obtained registration of the Salagen trademark in the United States and
certain foreign jurisdictions. In addition, we have been assigned the Hexalen
trademark in the United States and certain foreign jurisdictions and we use the
federally registered Didronel IV trademark under a license with Procter &
Gamble.
Competition
The pharmaceutical industry is intensely competitive, based mostly on product
performance and pricing. Many members of the industry have resources far greater
than we do, providing them with potentially greater flexibility in developing
and marketing their products. While we will seek to protect our products from
direct competition through filing patents, seeking marketing exclusivity under
the Orphan Drug Act, and maintaining technical information as trade secrets,
there is no way to protect us from competition from products with different
chemical composition or products made using different technology.
Cevimeline hydrochloride, owned by Snow Brand Pharmaceuticals, Inc. and marketed
by Daiichi Pharmaceuticals in the United States, was approved in January 2000 by
the FDA as a treatment for dry mouth symptoms associated with Sjogren's
syndrome. This competing product had obtained less than 30 percent of the value
of the saliva producing drug market in the United States by the end of 2002. We
cannot estimate what ultimate effect this competing compound will have on the
overall size of the Sjogren's syndrome market and future demand for Salagen
Tablets, but growth in sales of Salagen Tablets continued in 2002. A product
marketed by MedImmune, Inc., amifostine, was approved in June 1999 by the FDA
for reducing the incidence of radiation-induced dry mouth in post-operative head
and neck cancer patients. Salagen Tablets are approved in part for the treatment
of dry mouth symptoms resulting from radiation used to treat head and neck
cancer patients. Due to the more restricted patient population for amifostine,
as well as other factors such as price and invasive administration, we currently
believe that amifostine will not have a significant impact on sales of Salagen
Tablets. We are aware of other products currently under development that may
compete with Salagen Tablets.
The exclusivity period afforded by orphan drug status for Salagen Tablets as a
treatment for symptoms of radiation-induced xerostomia in head and neck cancer
patients ended in March 2001. Competitors could develop and introduce generic
drugs comparable to Salagen Tablets, or drugs or other therapies that address
the underlying causes of the symptoms that Salagen Tablets treat. There can be
no assurance that we will be successful in our plan to gain product specific
protection for each of our pharmaceuticals or that developments by others will
not render our products noncompetitive or obsolete.
25
Hexalen capsules are approved in the United States for the treatment of ovarian
cancer in patients with persistent or recurrent disease following first-line
therapy with certain other chemotherapies. Other chemotherapies are also used
for second-line treatment of ovarian cancer and are marketed by pharmaceutical
companies with greater resources than we have. Further, competitors could
develop and introduce generic drugs that are comparable to Hexalen capsules.
Upon approval to treat CINV, palonosetron would be the fourth 5-HT3 antagonist
approved for marketing in the United States. The companies that market the other
5-HT3 antagonists have far greater resources than we have. Further, there is no
certainty that the patent protection afforded palonosetron will be effective in
keeping generic equivalents from entering the market.
Many companies of all sizes, including large pharmaceutical companies as well as
specialized biotechnology companies, are developing cancer therapy drugs that
will compete with irofulven, if it is approved for sale. There are also a number
of products already on the market that will compete directly with irofulven if
it is approved. In addition, colleges, universities, governmental agencies and
other public and private research institutions will continue to conduct research
and may develop new cancer therapies which would render our cancer therapy drug
candidates obsolete or non-competitive. Many of our competitors in the cancer
therapy market also have substantially greater financial, research and
development, human and other resources than we do.
Government Regulation
Our research and marketing activities are subject to significant regulation by
numerous governmental authorities in the United States and other countries.
Pharmaceutical products intended for therapeutic use in humans are governed by
FDA regulations in the United States and by comparable regulations in foreign
countries. The process of completing clinical testing and obtaining FDA approval
for a new drug product requires a number of years and the expenditure of
substantial resources without any assurance that approval for marketing will be
granted.
The FDA has established mandatory procedures to regulate the manufacturing and
testing process regarding the identity, strength, quality and purity of a
product. Following initial formulation, the steps required before any new
prescription pharmaceutical product may be marketed in the United States include
(1) preclinical laboratory and animal tests; (2) submission to the FDA of an
investigational new drug application, or IND; (3) adequate and well-controlled
clinical trials to establish the safety and efficacy of the drug; (4) submission
of a new drug application, or NDA and (5) FDA review and approval of the NDA
prior to any commercial sale.
Preclinical studies are conducted in the laboratory and in animal model systems
to gain information on the drug's efficacy, mode of action, and to identify any
significant safety problems. The results of these studies are submitted to the
FDA as part of the IND. Testing in humans may commence 30 days after the IND has
been filed unless the FDA issues a clinical hold. Additional animal studies may
be performed throughout the development process.
A three-phase clinical program is usually required for FDA approval of a
pharmaceutical product, unless accelerated approval is granted. Phase 1 clinical
trials are conducted to determine the safety profile, including the safe dosage
range, metabolism and pharmacologic action of the product, and, if possible, to
gain early evidence on efficacy. Although most Phase 1 trials are conducted with
healthy volunteers, Phase 1 cancer trials are conducted with cancer patients.
Following establishment of a safe dose from Phase 1 studies, a Phase 2 clinical
program is conducted for dose-ranging and to assess the safety and efficacy of
the product in patients with the disease being studied. Phase 3 confirmatory
clinical trials are conducted on patients more representative of the intended
patient population in terms of medical
26
treatment, age groups, gender and ethnicity. Data from the larger Phase 3
program is to provide adequate statistical evidence of safety and efficacy
necessary to evaluate the overall benefit and risk relationship in the target
patient population. Phase 2 and Phase 3 trials are usually multi-center trials
in order to achieve greater statistical validity and to have data from a broader
patient population that is more representative of the intended patient group.
Phase 4, or post-approval trials, may be required under accelerated approval or
to provide additional data on safety or efficacy of the product.
Upon completion of clinical testing, and with data successfully demonstrating
that the product is safe and effective for a specific indication, an NDA may be
filed with the FDA. The NDA contains all the scientific evidence including
product formulation, manufacturing, control information, preclinical and
clinical data. FDA approval of the NDA is required before the applicant may
market the new product.
Even after initial FDA approval has been obtained, further studies may be
required to provide additional data on safety or efficacy for current
indications, or to obtain approval for uses other than those for which the
product was initially approved. Moreover, such approval may entail limitations
on the indicated uses for which a drug may be marketed. Even if FDA approval is
obtained, there can be no assurance of commercial success for any product.
Post-marketing testing may be required, and surveillance programs such as
reporting adverse events are required. The FDA may require withdrawal of an
approved product from the market if any significant safety issues arise while a
product is being marketed. In addition, before, during and after the process of
approval, our prescription drug products must all be manufactured in accordance
with current good manufacturing practices as set forth by the FDA. Marketing of
products is also regulated by the FDA.
The orphan drug provisions of the Federal Food, Drug, and Cosmetic Act provide
incentives to drug and biologics manufacturers to develop and manufacture drugs
for the treatment of rare diseases or conditions, currently defined as a disease
or condition that affects fewer than 200,000 individuals in the U.S. or, for a
disease or condition that affects more than 200,000 individuals in the U.S.,
where the sponsor does not realistically anticipate that revenue generated from
sales of the product will exceed the cost of its development. Under these
provisions, a manufacturer of a designated orphan product can seek tax benefits,
and the holder of the first FDA approval of a designated orphan product will be
granted a seven-year period of marketing exclusivity for that product for the
orphan indication. While the marketing exclusivity of an orphan drug would deter
other sponsors from obtaining approval of the same compound for the same
indication, it would not prevent other types of drugs from being approved for
the same indication.
The health care industry is changing rapidly as the public, government, medical
professionals and the pharmaceutical industry examine ways to broaden medical
coverage while controlling health care costs. Potential approaches that may
affect us include managed care initiatives, pharmaceutical buying groups,
formulary requirements, various proposals to offer an expanded Medicare
prescription benefit and efforts to regulate the marketing and pricing of
pharmaceuticals, including oncology products. We are unable to predict when any
proposed health care reforms will be implemented, if ever, or the effect of any
implemented reforms on our business.
Federal, state and local environmental laws and regulations do not materially
affect our operations and we believe that we are currently in material
compliance with such applicable laws and regulations.
Employees
As of February 19, 2003, we had 161 employees. Of our employees, 90 are engaged
in our marketing, selling and manufacturing effort, 49 are involved in
pharmaceutical development, including regulatory affairs and product
formulation, and 22 are in other management or administrative positions. None of
our
27
employees is represented by a labor union or is subject to a collective
bargaining agreement. We believe that our relations with our employees are
satisfactory.
Available Information
Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are
available free of charge through MGI's website (www.mgipharma.com) as soon as
reasonably practicable after we electronically file the material with, or
furnish it to, the Securities and Exchange Commission.
Item 2. Properties
We currently lease approximately 75,000 square feet of office space for our
current headquarters in Bloomington, Minnesota for approximately $119,000 per
month. The initial term of this lease expires in May 2008, with two options for
renewal, each for an additional three-year period. We also lease approximately
27,000 square feet of office space (our former headquarters) in Bloomington,
Minnesota, for $27,000 per month. The initial term of this lease expires in July
2005, with an option for renewal. We have subleased this former headquarter
space and we do not expect to recognize future expense related to this lease.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
28
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Our common stock trades on the Nasdaq National Market under the symbol "MOGN."
As of March 17, 2003, we had 832 shareholders of record and 25,343,718 shares of
common stock outstanding. We have never paid cash dividends on our common stock
and have no present intention of paying cash dividends on our common stock.
The following table lists the high and low trading prices for our common stock
as reported by the Nasdaq National Market during the quarters listed. Prices
represent transactions between dealers and do not reflect retail markups,
markdowns, or commissions, and may not necessarily represent actual
transactions.
High Low
--------------- ---------------
2001
First Quarter $ 21.38 $ 7.50
Second Quarter 12.95 8.00
Third Quarter 16.15 9.25
Fourth Quarter 16.50 12.10
2002
First Quarter $ 17.05 $ 12.88
Second Quarter 14.75 6.01
Third Quarter 8.74 4.68
Fourth Quarter 9.40 5.84
On December 2, 2002, we consummated the sale of convertible subordinated notes
and warrants to purchase shares of our common stock pursuant to a convertible
note and warrant purchase agreement, dated as of November 27, 2002 (the
"Purchase Agreement"), with Deerfield Partners, L.P. and Deerfield International
Limited (together, the "Investors"). Under the terms of the Purchase Agreement,
we issued to the Investors subordinated notes in an aggregate principal amount
of $21 million and convertible into an aggregate of 2,571,428 shares of common
stock at conversion prices ranging from $7.00 to $10.50 per share. Each of the
notes has a term of five years and bears interest at the rate of 3% per year
payable semi-annually. We also issued to the Investors warrants to purchase,
during a five-year period, an aggregate of up to 400,000 shares of our stock at
exercise prices of $8.75 and $10.50 per share. Pursuant to the terms of the
Purchase Agreement, we are precluded from raising additional capital at less
than $9.00 per share, until the earliest to occur of our anticipated disclosure
of Phase 3 palonosetron data in June 2003, or December 31, 2003. A registration
statement registering the resale of the shares underlying the notes and warrants
was filed with the Securities and Exchange Commission and declared effective in
December 2002.
29
Item 6. Selected Financial Data
Year Ended December 31,
-----------------------------------------------------------------------------
1998 1999 2000 2001 2002
------------ ------------ ------------- ------------- -------------
(in thousands, except per share data)
Statement of Operations Data:
Revenues:
Sales .................................. $ 12,945 $ 18,643 $ 21,333 $ 30,022 $ 25,402
Licensing .............................. 3,342 4,955 3,109 2,932 2,801
Promotion .............................. 756 1,088 770 -- --
------------ ------------ ------------- ------------- -------------
17,043 24,686 25,212 32,954 28,203
Costs and expenses:
Cost of sales .......................... 939 1,209 1,627 3,633 3,240
Selling, general and
administrative ....................... 10,989 12,713 18,295 28,463 28,827
Research and development ............... 5,302 6,677 17,241 36,101 32,214
Amortization ........................... -- -- 98 1,182 1,182
------------ ------------ ------------- ------------- -------------
17,230 20,599 37,261 69,379 65,463
------------ ------------ ------------- ------------- -------------
Income (loss) from operations ............ (187) 4,087 (12,049) (36,425) (37,260)
Interest income .......................... 806 966 2,146 1,600 1,279
Interest expense ......................... -- -- -- -- (83)
------------ ------------ ------------- ------------- -------------
Income (loss) before taxes and
cumulative effect of change in
accounting principle ................... 619 5,053 (9,903) (34,825) (36,064)
Provision for income taxes ............... 205 321 148 -- --
------------ ------------ ------------- ------------- -------------
Net income (loss) before cumulative
effect of change in accounting
principle .............................. 414 4,732 (10,051) (34,825) (36,064)
Cumulative effect of change in
accounting principle ................... -- -- (9,403) -- --
------------ ------------ ------------- ------------- -------------
Net income (loss) ........................ $ 414 $ 4,732 $ (19,454) $ (34,825) $ (36,064)
============ ============ ============= ============= =============
Net income (loss) per common
share:
Basic:
Income (loss) before effect of
accounting change ................... $ 0.03 $ 0.32 $ (0.63) $ (1.74) $ (1.44)
Cumulative effect of accounting
change .............................. -- -- (0.59) -- --
------------ ------------ ------------- ------------- -------------
Net income (loss) ...................... $ 0.03 $ 0.32 $ (1.22) $ (1.74) $ (1.44)
============ ============ ============= ============= =============
Assuming dilution:
Income (loss) before effect of
accounting change ................... $ 0.03 $ 0.30 $ (0.63) $ (1.74) $ (1.44)
Cumulative effect of accounting
change .............................. -- -- (0.59) -- --
------------ ------------ ------------- ------------- -------------
Net income (loss) ...................... $ 0.03 $ 0.30 $ (1.22) $ (1.74) $ (1.44)
============ ============ ============= ============= =============
Weighted average number of
common shares outstanding:
Basic .................................. 14,368 14,742 15,990 19,985 25,110
Assuming dilution ...................... 14,966 15,633 15,990 19,985 25,110
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Balance Sheet Data:
Cash, cash equivalents and marketable investments .... $ 17,081 $ 24,151 $ 29,899 $ 77,712 $ 60,473
Working capital ...................................... 16,096 23,240 26,042 63,182 49,999
Total assets ......................................... 21,122 28,974 52,744 92,668 80,774
Total liabilities .................................... 4,011 4,329 26,698 28,733 44,171
Accumulated deficit .................................. (73,828) (69,097) (88,551) (123,37) (159,440)
Total stockholders' equity ........................... 17,111 24,644 26,046 68,935 36,604
30
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
MGI PHARMA, INC. is an oncology-focused biopharmaceutical company that acquires,
develops and commercializes proprietary pharmaceutical 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. These products include Salagen(R) Tablets (pilocarpine
hydrochloride), Hexalen(R) (altretamine) capsules, and Didronel(R) (etidronate
disodium) I.V. infusion. 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
Sjogren's syndrome, an autoimmune disease that damages the salivary glands.
Sales of Salagen Tablets in the United States accounted for 88 percent of our
product sales during 2002. Hexalen capsules, which we began selling after we
acquired the product from MedImmune, Inc. in November 2000, is an orally
administered chemotherapeutic agent approved in the United States for treatment
of refractory ovarian cancer patients. Didronel I.V. infusion is approved for
the treatment of hypercalcemia (elevated blood calcium) in late-stage cancer
patients. We rely on third parties to manufacture our commercialized and
development stage products.
In April 2001, we obtained the exclusive U.S. and Canadian license and
distribution rights to palonosetron, a cancer supportive care product candidate
for the prevention of chemotherapy-induced nausea and vomiting. The U.S. Food
and Drug Administration accepted the filing of the New Drug Application for
palonosetron on November 26, 2002. Our current product development efforts
include preclinical and clinical trials for irofulven, our novel anti-cancer
agent with demonstrated activity in a variety of cancers and a unique mechanism
of action. We are also developing MG98 and inhibitors of DNA methyltransferase
for North American markets. DNA methyltransferase is an enzyme that has been
associated with uncontrolled tumor growth. We also provide ongoing clinical
support of Salagen Tablets.
31
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, 6
and 7 to the financial statements. The majority of our revenue relates to
product sales. We recognize product sales revenue upon shipment to wholesalers.
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 allowances for product returns, cash discounts, and other
rebates. To determine our estimates for product returns and other allowances, we
use a combination of historical data and an estimate of future activity. Our
estimates are sometimes made with limited data, and are therefore reviewed
periodically and subject to change.
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 significant
revenue amounts (approximately $9.8 million at December 31, 2002) 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.
Revenues
Sales: Sales revenue increased 41 percent from $21,333,229 in 2000, to
$30,021,813 in 2001, but decreased 15 percent to $25,402,300 in 2002. 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 increase in sales revenue from 2000 to
2001 reflects increased revenue from Salagen Tablets, resulting from an increase
in demand, an increase in stocking of inventory by wholesalers and retail
pharmacies, and an increase in selling price. The increase in sales revenue also
32
reflects revenue from Hexalen capsules, which we purchased from MedImmune Inc.
in November 2000, with sales commencing in December 2000, and active field
promotion commencing in March 2001.
The decrease in sales revenue from 2001 to 2002 reflects decreased revenue from
Salagen Tablets, resulting from a draw-down of wholesaler inventory amounts,
partially reduced 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. A reduction of wholesaler inventories occurred throughout the
first half of 2002. In the second half of 2002, sales realigned with underlying
demand, which grew approximately 5 percent from 2001 to 2002, as measured by
prescription growth. Sales of Salagen Tablets in the United States provided 96
percent of our sales revenue in 2000, 87 percent in 2001, and 88 percent in
2002. We expect sales revenue for our currently marketed products for 2003 to
range from $28 million to $30 million. Sales revenue for palonosetron is
expected to range from $40 million to $55 million for the first 12-month period
following launch of the product.
Promotion: Promotion revenue was $769,874 in 2000. We did not recognize any
promotion revenue in 2001 or 2002. The change in promotion revenue reflects
changes in our product promotion relationships. In 2000, we were promoting
products under agreements with Pharmacia Corporation for Azulfidine EN-tabs(R)
and Connetics Corporation for Ridaura(R) and Luxiq(R). Under the Ridaura
agreement, we recognized $750,000 in 2000, based on achieving certain sales call
activity. The agreements for Ridaura and Luxiq concluded in the third quarter of
2000. We did not recognize any revenue for Luxiq during the term of the
agreement. We concluded the Azulfidine-EN Tabs agreement in the first half of
2001, without the recognition of any promotion fee revenue. We do not expect any
promotion revenue in 2003.
Licensing: Licensing revenue decreased six percent from $3,109,470 in 2000 to
$2,932,007 in 2001, and decreased four percent to $2,801,189 in 2002. In 2000,
the Company adopted Staff Accounting Bulletin No. 101 (SAB 101), "Revenue
Recognition in Financial Statements" and recorded a cumulative effect of this
change in accounting principle for previously received, non-refundable licensing
payments. This resulted in a $9.4 million one-time, non-cash charge and a
corresponding increase in deferred revenue effective as of the beginning of
2000. This deferred amount is being amortized into license revenue over the
expected periods of benefit for the related collaborative arrangements.
Licensing revenue is a combination of deferred revenue amortization from
licensing arrangements and from royalties that are recognized when the related
sales occur. In 2000, we received milestone payments of $830,000 from Kissei
related to the development of Salagen Tablets in Japan, $750,000 from Novartis
Ophthalmics AG related to the licensing of Salagen Tablets in Europe, and
$650,000 from Dainippon related to acylfulvene rights in Japan. 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 $918,778, $841,258 and
$794,384 of amortized deferred revenue in 2000, 2001 and 2002, respectively,
related to all payments received under these license agreements.
We will recognize the December 31, 2002 unamortized balance of $9,828,222 from
our license agreements into licensing revenue over the expected periods of
benefit for the related collaborative arrangements. In the first quarter of
2003, Dainippon and MGI agreed to terminate their collaborative acylfulvene
license agreement in August 2003. Under SAB 101, all remaining unamortized
licensing revenue for Dainippon will be amortized into license revenue in 2003.
For 2003, we expect to amortize $7,386,972 of deferred revenue into licensing
revenue. This includes $7,141,972 related to the Dainippon agreement, of which
$6,867,280 is expected to be recognized in the third quarter of 2003.
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
33
termination of licensing arrangements. We expect licensing revenue for 2003,
including approximately $7 million related to the Dainippon agreement, to be
approximately $9.5 million.
Costs and Expenses
Cost of sales: Cost of sales as a percent of sales was eight percent for 2000,
12 percent for 2001 and 13 percent for 2002. The increases result from a change
in our product mix, including the addition of Hexalen capsules to our oncology
product portfolio, and an increase in production costs. We believe that cost of
sales as a percent of product sales for our currently marketed products for 2003
will range from 10 to 15 percent.
Selling, general and administrative: Selling, general and administrative
expenses increased 56 percent from $18,294,757 in 2000 to $28,463,387 in 2001,
and increased one percent to $28,827,337 in 2002. The increase from 2000 to 2001
resulted primarily from increased costs related to our expanded business
objectives, such as costs associated with the expansion of our U.S. based sales
force, costs related to commencement of active field promotion in March 2001 of
Hexalen capsules and Mylocel Tablets, costs associated with the growth in the
number of corporate-based associates, and increased facility costs in
conjunction with our move to a new office location in the second quarter of
2001.
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. 2002 also includes $515,766 in expense related to a
reduction in our workforce in the second quarter of 2002. As described in Note
13 to the financial statements, we used a related party for consulting services
prior to 2002. $172,000 and $101,000 of related party consulting costs are
included in selling, general and administrative expense for 2000 and 2001,
respectively. We expect selling, general and administrative expenses for 2003 to
be approximately $49 million. The increase from 2002 is primarily a result of
expenses related to the potential launch of palonosetron in the second half of
2003.
Research and development: Research and development expense increased 109 percent
from $17,241,217 in 2000 to $36,101,373 in 2001, but decreased 11 percent to
$32,213,635 in 2002. All three periods include non-recurring license payments:
$5.7 million in 2000 related to our license agreement with MethylGene Inc., $13
million in 2001 related to our license agreement for palonosetron, and $14
million in 2002 related to our license agreement for palonosetron. Exclusive of
non-recurring license payments, research and development expense increased 104
percent from $11,266,217 in 2000 to $23,035,123 in 2001, but decreased 21
percent to $18,163,635 in 2002.
Excluding non-recurring license payments, the increase from 2000 to 2001
reflected the expanded development of irofulven, our novel anti-cancer agent,
and expenses related to the development of MG98 and inhibitors of DNA
methyltransferase under a license that began in the third quarter of 2000. The
decrease from 2001 to 2002 represents decreased spending for irofulven. In April
2002, we stopped our Phase 3 trial of irofulven in advanced-stage,
gemcitabine-refractory pancreatic cancer patients. We are currently conducting a
series of clinical trials designed to evaluate the efficacy and safety of
irofulven administered as a single chemotherapy agent or in combination with
marketed chemotherapy agents for the treatment of patients with solid tumor
cancers who are generally refractory to current therapies. The decrease in
irofulven spending was partially offset by $775,278 in expense related to a
reduction in our workforce in the second quarter of 2002. We expect research and
development expense for 2003 to range
34
from $28 million to $30 million, including an $11 million non-recurring license
payment that will become due upon the approval of the NDA for palonosetron.
Interest Income
Interest income decreased 25 percent from $2,145,553 in 2000 to $1,600,363 in
2001, and decreased 20 percent to $1,278,645 in 2002. The decreases are a result
of decreases in the investment yields, partially reduced by increases in the
average amount of funds available for investment. 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. Interest income
for 2003 will fluctuate depending on the timing of cashflows and changes in
interest rates for marketable securities.
Interest Expense
We recognized interest expense of $83,130 in 2002 related to our issuance of
convertible debt in the fourth quarter of 2002. We had no debt in 2000 or 2001.
We expect interest expense for 2003 to be approximately $1 million, of which
$630,000 will be paid using cash. The non-cash portion of interest expense is
primarily related to the issuance of warrants in conjunction with the issuance
of our convertible debt (See Note 8 to the financial statements).
Tax Expense
The tax amount for 2000 reflects the 10 percent foreign tax rate on licensing
payments received. There is no provision for tax expense in 2001 or 2002, due to
the net loss of $35 million in 2001 and the net loss of $36 million in 2002. Our
ability to achieve profitable operations is dependent upon our successful launch
of palonosetron, and therefore, we continue to maintain a valuation allowance
against our deferred tax assets.
Net Loss
We had a net loss of $19,453,822 in 2000, which includes a non-cash charge of
$9,402,643 relating to the adoption of SAB 101. We had a net loss of $34,825,322
in 2001, and a net loss of $36,063,792 in 2002. The increased net loss from 2000
to 2001 reflects a 31 percent increase in revenues from 2000 to 2001, and an 86
percent increase in costs and expenses from 2000 to 2001, including a 109
percent increase in research and development. The increased 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. During the next several years, we expect
to direct our efforts towards activities intended to grow long-term revenues,
including the continued development and launch of palonosetron and continued
development of irofulven and other product candidates. Increased spending on
these initiatives will likely result in substantial net losses until after our
successful launch of palonosetron. We expect our net loss for 2003 to be
approximately $44 million, excluding any favorable net contribution from the
potential product launch of palonosetron.
Liquidity and Capital Resources
At December 31, 2002, we had cash and marketable investments of $60,472,901 and
working capital of $49,999,430, compared with $77,712,480 and $63,181,509,
respectively, at December 31, 2001. For the year ended December 31, 2002, we
received gross proceeds of $21,000,000 from the issuance of convertible notes
and warrants, $700,517 in cash from issuance of shares under stock award plans,
and $550,000 in cash as a deposit from one of our international partners. We
used $37,556,472 of cash to fund our operating activities. In addition,
$4,000,000 of restricted cash was used to pay a palonosetron
35
milestone. We also paid the final installment of $1,200,000 related to the
acquisition of Hexalen capsules, and purchased $653,029 in equipment and
furniture.
Significant cash use in 2003 will be required to fund operating activities, pay
$11 million to Helsinn Healthcare upon approval by the FDA of the NDA for
palonosetron, and pay $4.3 million to Dainippon following the termination of our
licensing agreement. Substantial amounts of capital are required for
pharmaceutical development and commercialization efforts. For continued
development and commercialization of our product candidates and marketed
products, and the acquisition and development of additional product candidates,
we plan to utilize cash provided from product sales, collaborative arrangements
and existing liquid assets. We will seek other sources of funding, including
additional equity or debt issuances as appropriate. Excluding the potential
favorable effect on cash of palonosetron product sales, we expect cash use for
2003 to be approximately $50 million, which includes cash required to launch and
promote palonosetron. We have no arrangements or covenants that would trigger
acceleration of our lease obligations or long-term liabilities. Under the terms
of our convertible debt agreement, we are precluded from raising additional
capital at less than $9.00 per share, until the earliest to occur of our
anticipated disclosure of Phase 3 palonosetron data in June 2003, or December
31, 2003.
Our liquidity is affected by a variety of factors, including sales of our
products, the pace of our research and development programs, the in-licensing of
new products and our ability to raise additional debt or equity capital. As
identified in our risk factors, adverse changes that affect our continued access
to the capital markets, continued development and expansion of our product
candidates, and future demand for our marketed products would affect our longer
term liquidity. We believe we have sufficient liquidity and capital resources to
fund all known cash requirements through December 31, 2003. If the approval of
palonosetron is delayed from our expectations, we may not have sufficient
capital to continue operations as planned. Our significant future,
noncancellable, contractual commitments, including the anticipated payment to
Helsinn upon approval by the FDA, are summarized in the following table:
- -----------------------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter
---- ---- ---- ---- ---- ----------
Lease Payments $ 1,859,000 $1,879,000 $1,754,000 $1,482,000 $ 1,504,000 $630,000
Approval of
palonosetron payment 11,000,000 -- -- -- -- --
Dainippon Payment 4,300,000 -- -- -- -- --
Convertible Debt -- -- -- -- 21,000,000 --
----------- ---------- ---------- ---------- ----------- ---------
Total $17,159,000 $1,879,000 $1,754,000 $1,482,000 $22,504,000 $630,000
- -----------------------------------------------------------------------------------------------------------
36
Selected Quarterly Operating Results
The following table shows our unaudited financial information for each of the
quarters in the two year period ended December 31, 2002. In our opinion, this
unaudited quarterly information has been prepared on the same basis as the
audited financial statements and includes all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the
information for the quarters presented, when read in conjunction with the
financial statements and notes included elsewhere in this annual report. We
believe that quarter-to-quarter comparisons of our financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
Three months ended
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
2001 2001 2001 2001 2002 2002 2002 2002
---- ---- ---- ---- ---- ---- ---- ----
(in thousands except per share data)
Revenues:
Sales $ 6,984 $ 10,161 $ 5,993 $ 6,884 $ 5,303 $ 4,649 $ 8,223 $ 7,227
Licensing 592 851 957 532 499 1,038 824 440
------- -------- ------- -------- ------- -------- ------- --------
7,576 11,012 6,950 7,416 5,802 5,687 9,047 7,667
------- -------- ------- -------- ------- -------- ------- --------
Cost and expenses:
Cost of sales 789 1,032 757 1,055 686 757 950 847
Selling, general & administrative 6,493 7,283 6,552 8,135 7,170 7,340 6,640 7,677
Research and development 3,554 18,189/a/ 5,807 8,551 4,263 9,792/b/ 4,508 13,651/c/
Amortization 295 296 296 295 296 295 295 296
------- -------- ------- -------- ------- -------- ------- --------
11,131 26,800 13,412 18,036 12,415 18,184 12,393 22,471
------- -------- ------- -------- ------- -------- ------- --------
Loss from operations (3,555) (15,788) (6,462) (10,620) (6,613) (12,497) (3,346) (14,804)
Interest income 436 378 415 371 320 243 401 315
Interest expense -- -- -- -- -- -- -- (83)
------- -------- ------- -------- ------- -------- ------- --------
Net loss $(3,119) $(15,410) $(6,047) $(10,249) $(6,293) $(12,254) $(2,945) $(14,572)
======= ======== ======= ======== ======= ======== ======= ========
Net loss per common share:
Basic and diluted:
Basic $ (0.19) $ (0.81) $ (0.29) $ (0.44) $ (0.25) $ (0.49) $ (0.12) $ (0.58)
Assuming dilution $ (0.19) $ (0.81) $ (0.29) $ (0.44) $ (0.25) $ (0.49) $ (0.12) $ (0.58)
Weighted average number of common
shares:
Basic 16,533 18,988 20,987 23,348 25,034 25,063 25,164 25,177
Assuming dilution 16,533 18,988 20,987 23,348 25,034 25,063 25,164 25,177
___________
a. Includes $13 million in license payments for palonosetron.
b. Includes $4 million in license payments for palonosetron.
c. Includes $10 million in license payments for palonosetron.
Cautionary Statement
This document contains forward-looking statements within the meaning of federal
securities laws that may include statements regarding intent, belief or current
expectations of the Company and its management. These forward-looking statements
are not guarantees of future performance and involve a number of risks and
uncertainties that may cause the Company's actual results to differ materially
from the results discussed in these statements. Factors that might affect our
results include, but are not limited to, the ability of palonosetron or our
other product candidates to be proven safe and effective in humans, to receive
marketing authorizations from regulatory authorities and to ultimately compete
successfully with other therapies, continued sales of Salagen Tablets,
development or acquisition of additional products, reliance on contract
manufacturing, changes in strategic alliances, continued access to capital,
37
and other risks and uncertainties detailed from time to time in the Company's
filings with the Securities and Exchange Commission, including Exhibit 99.1 to
this annual report on Form 10-K for the year ended December 31, 2002. We do not
intend to update any of the forward-looking statements after the date of the
annual report to conform them to actual results.
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 $605,000 based on our cash, cash equivalents and
short-term marketable investment balances at December 31, 2002.
38
Item 8. Financial Statements and Supplementary Data
MGI PHARMA, INC.
Balance Sheets
December 31, December 31,
2001 2002
------------------ -----------------
ASSETS:
- -------
Current assets:
Cash and cash equivalents ..................................... $ 40,699,408 $ 52,933,393
Cash - restricted ............................................. 4,000,000 --
Short-term marketable investments ............................. 30,006,144 7,539,508
Receivables, less allowances of $117,397 and $109,276 ......... 1,829,654 3,042,698
Inventories ................................................... 1,500,054 1,779,413
Prepaid expenses .............................................. 246,739 448,559
------------------ -----------------
Total current assets ........................................ 78,281,999 65,743,571
Equipment, furniture and leasehold improvements, at cost less
accumulated depreciation of $1,322,559 and $2,121,915 ....... 3,325,334 3,110,938
Long-term marketable investments .............................. 3,006,928 --
Long-term equity investments .................................. 6,800,000 6,800,000
Intangible assets, at cost less accumulated amortization of
$1,280,476 and $2,462,455 ................................... 5,811,394 4,629,415
Other assets .................................................. 442,368 490,329
------------------ -----------------
Total assets .................................................. $ 97,668,023 $ 80,774,253
================== =================
(continued)
39
MGI PHARMA, INC.
Balance Sheets
December 31, December 31,
2001 2002
------------------ ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
- ------------------------------------
Current liabilities:
Accounts payable .................................................... $ 1,674,412 $ 1,904,297
Accrued expenses .................................................... 12,609,838 8,725,323
Deposit payable ..................................................... -- 4,300,000
Deferred revenue .................................................... 794,383 794,383
Other current liabilities ........................................... 21,857 20,138
------------------ ----------------
Total current liabilities ......................................... 15,100,490 15,744,141
Noncurrent liabilities:
Convertible debt, face value of $21,000,000 net of warrant cost
and issuance costs of $1,708,851 .................................. -- 19,291,149
Long-term deposit payable ........................................... 3,750,000 --
Deferred revenue .................................................... 9,828,223 9,033,839
Other noncurrent liabilities ........................................ 54,599 101,589
------------------ ----------------
Total noncurrent liabilities ...................................... 13,632,822 28,426,577
------------------ ----------------
Total liabilities ................................................. 28,733,312 44,170,718
Stockholders' equity:
Preferred stock, 10,000,000 authorized and unissued shares .......... -- --
Common stock, $0.01 par value, 30,000,000 and 70,000,000
authorized shares, 25,005,050 and 25,236,906 issued and
outstanding shares .................................................. 250,051 252,369
Additional paid-in capital .......................................... 192,060,653 195,919,707
Unearned compensation - restricted shares ........................... -- (128,756)
Accumulated deficit ................................................. (123,375,993) (159,439,785)
------------------ ----------------
Total stockholders' equity ........................................ 68,934,711 36,603,535
------------------ ----------------
Total liabilities and stockholders' equity .......................... $ 97,668,023 $ 80,774,253
================== ================
_______________________
See accompanying notes to financial statements.
40
MGI PHARMA, INC.
STATEMENTS OF OPERATIONS
Year Ended December 31,
-----------------------------------------------------------------
2000 2001 2002
------------------ ------------------ -------------------
Revenues:
Sales .......................................... $ 21,333,229 $ 30,021,813 $ 25,402,300
Licensing ...................................... 3,109,470 2,932,007 2,801,189
Promotion ...................................... 769,874 -- --
------------------ ------------------ -------------------
25,212,573 32,953,820 28,203,489
------------------ ------------------ -------------------
Costs and expenses:
Cost of sales .................................. 1,626,833 3,632,767 3,239,845
Selling, general and administrative ............ 18,294,757 28,463,387 28,827,337
Research and development ....................... 17,241,217 36,101,373 32,213,635
Amortization ................................... 98,498 1,181,978 1,181,979
------------------ ------------------ -------------------
37,261,305 69,379,505 65,462,796
------------------ ------------------ -------------------
Loss from operations .............................. (12,048,732) (36,425,685) (37,259,307)
Interest income ................................... 2,145,553 1,600,363 1,278,645
Interest expense .................................. -- -- (83,130)
------------------ ------------------ -------------------
Loss before taxes and cumulative effect of
change in accounting principle ................. (9,903,179) (34,825,322) (36,063,792)
Provision for income taxes ........................ 148,000 -- --
------------------ ------------------ -------------------
Loss before cumulative effect of change in
accounting principle ........................... (10,051,179) (34,825,322) (36,063,792)
Cumulative effect of change in accounting
principle ...................................... (9,402,643) -- --
------------------ ------------------ -------------------
Net loss .......................................... $ (19,453,822) $ (34,825,322) $ (36,063,792)
================== ================== ===================
Net loss per common share:
Basic:
Loss before effect of accounting change ...... $ (0.63) $ (1.74) $ (1.44)
Cumulative effect of accounting change ....... (0.59) -- --
------------------ ------------------ -------------------
Net loss ..................................... $ (1.22) $ (1.74) $ (1.44)
================== ================== ===================
Assuming dilution:
Loss before effect of accounting change ...... $ (0.63) $ (1.74) $ (1.44)
Cumulative effect of accounting change ....... (0.59) -- --
------------------ ------------------ -------------------
Net loss ..................................... $ (1.22) $ (1.74) $ (1.44)
================== ================== ===================
Weighted average number of common shares
outstanding:
Basic .......................................... 15,990,459 19,985,192 25,110,023
Assuming dilution .............................. 15,990,459 19,985,192 25,110,023
_____________________________________
See accompanying notes to financial statements.
41
MGI PHARMA, INC.
STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------------------------------
2000 2001 2002
------------------ ------------------ -------------------
Operating activities:
Net loss ............................................ $ (19,453,822) $ (34,825,322) $ (36,063,792)
Adjustments for non-cash items:
Cumulative effect of change in accounting
principle ...................................... 9,402,643 -- --
Stock issuance for palonosetron license .......... -- 2,999,992 --
Depreciation and intangible amortization ......... 451,369 1,876,327 2,048,260
Benefit plan contribution ........................ 315,993 836,507 949,381
Financing transaction costs ...................... -- 516,604 --
Noncash consulting payments ...................... 42,510 189,747 66,962
Deferred rent .................................... -- 54,599 46,990
Stock option term modification ................... -- -- 216,064
Amortization of restricted stock expense ......... -- -- 110,688
Amortization of non-cash financing charges ....... -- -- 28,963
Other ............................................ 11,292 100,852 13,443
Changes in operating assets and liabilities: ........
Receivables ...................................... (378,561) 976,808 (1,213,044)
Inventories ...................................... (480,584) (23,779) (279,359)
Prepaid expenses ................................. (5,672,337) 5,579,521 (201,820)
Accounts payable and accrued expenses ............ 4,227,952 4,388,684 (2,483,105)
Deferred revenue ................................. 816,222 (91,259) (794,384)
Other current liabilities ........................ 5,090 446 (1,719)
----------------- ----------------- ------------------
Net cash used in operating activities ............... (10,712,233) (17,420,273) (37,556,472)
----------------- ----------------- ------------------
Investing activities:
Purchase of investments ............................. (42,069,003) (49,472,664) (9,360,720)
Maturity of investments ............................. 39,103,255 35,326,665 34,834,284
Acquisition of Hexalen(R)capsules ................... (1,200,000) (4,800,000) (1,200,000)
Purchase of minority investment in MethylGene ....... (3,800,000) (3,000,000) --
Purchase of equipment, furniture and leasehold
improvements ..................................... (836,248) (2,588,234) (653,029)
Other ............................................... (65,855) (32,255) (60,260)
----------------- ----------------- ------------------
Net cash provided by (used in) investing
activities .......................................... (8,867,851) (24,566,488) 23,560,275
----------------- ----------------- ------------------
Financing activities:
Proceeds from issuance of shares, net ............... 16,448,138 72,117,460 --
Proceeds from issuance of convertible debt, net ..... -- -- 20,950,157
Restricted cash ..................................... -- (4,000,000) 4,000,000
Receipt of deposit payable .......................... 1,550,000 2,200,000 550,000
Issuance of shares under stock plans ................ 4,364,412 1,336,995 700,517
Other ............................................... -- -- 29,508
----------------- ----------------- ------------------
Net cash provided by financing activities ........... 22,362,550 71,654,455 26,230,182
----------------- ----------------- ------------------
Increase in cash and cash equivalents ............... 2,782,466 29,667,694 12,233,985
Cash and cash equivalents at beginning of year ...... 8,249,248 11,031,714 40,699,408
----------------- ----------------- ------------------
Cash and cash equivalents at end of year ............ $ 11,031,714 $ 40,699,408 $ 52,933,393
================= ================= ==================
Supplemental disclosure of cash flow information:
Cash paid for income taxes ..................... $ 176,975 $ 2,000 $ 7,495
Cash paid for interest ......................... $ 0 $ 0 $ 0
_________________________________
See accompanying notes to financial statements.
42
MGI PHARMA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Unearned
Additional compensation Total
paid-in - restricted Accumulated stockholders'
Common stock capital shares deficit equity
------------- ------------- --------------- -------------- --------------
Balance at December 31, 1999 ...... $ 149,796 $ 93,591,432 $ -- $ (69,096,849) $ 24,644,379
Issuance of 1,000,000 shares ...... -- -- -- -- --
Exercise of stock options,
503,036 shares ................. 5,030 4,046,784 -- -- 16,448,138
Employee stock purchase plan,
25,077 shares .................. 251 312,347 -- -- 4,051,814
Other issuances, 1,255 shares ..... 13 42,497 -- -- 42,510
Net loss .......................... -- -- -- (19,453,822) (19,453,822)
------------- ------------- --------------- -------------- --------------
Balance at December 31, 2000 ...... $ 165,090 $ 114,431,198 $ -- $ (88,550,671) $ 26,045,617
Issuance of 4,000,000 shares ...... 40,000 29,128,655 -- -- 29,168,655
Issuance of 3,025,000 shares ...... 30,250 31,086,712 -- -- 31,116,962
Issuance of 900,000 shares ........ 9,000 11,822,843 -- -- 11,831,843
Issuance for technology
license, 297,338 shares ........ 2,973 2,997,019 -- -- 2,999,992
Exercise of stock options,
175,885 shares ................. 1,759 861,138 -- -- 862,897
Employee retirement plan
contribution, 38,226 shares .... 383 553,235 -- -- 553,618
Employee stock purchase plan,
45,457 shares .................. 455 473,643 -- -- 474,098
Financing transaction costs ....... -- 516,604 -- -- 516,604
Other issuances, 14,136 shares .... 141 189,606 -- -- 189,747
Net loss .......................... -- -- -- (38,825,322) (34,825,322)
------------- ------------- --------------- -------------- --------------
Balance at December 31, 2001 ...... $ 250,051 $ 192,060,653 $ -- $ (123,375,993) $ 68,934,711
Exercise of stock options,
16,475 shares .................. 165 93,393 -- -- 93,558
Employee retirement plan
contribution, 72,536 shares .... 725 920,181 -- -- 920,906
Employee stock purchase plan
106,561 shares ................. 1,065 605,893 -- -- 606,958
Stock option term modification .... -- 214,744 -- -- 214,744
Restricted stock issuance,
34,702 shares .................. 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 shares ..... 16 97,775 -- -- 97,791
Net loss .......................... -- -- -- (36,063,792) (36,063,792)
------------- ------------- --------------- -------------- --------------
Balance at December 31, 2002 ...... $ 252,369 $ 195,919,707 $ (128,756) $ (159,439,785) $ 36,603,535
============= ============= =============== ============== ==============
______________________________
See accompanying notes to financial statements.
43
MGI PHARMA, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
MGI PHARMA, INC. (MGI or the Company) 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. These products include Salagen Tablets (pilocarpine
hydrochloride), Hexalen (altretamine) capsules, and Didronel (etidronate
disodium) I.V. infusion. 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
Sjogren's syndrome, an autoimmune disease that damages the salivary glands.
Sales of Salagen Tablets in the United States accounted for 88 percent of
product sales during 2002. Hexalen capsules, which we began selling after we
acquired the product from MedImmune, Inc. in November 2000, is an orally
administered chemotherapeutic agent approved in the United States for treatment
of refractory ovarian cancer patients. Didronel I.V. infusion is approved for
the treatment of hypercalcemia (elevated blood calcium) in late-stage cancer
patients. We rely on third parties to manufacture our commercialized and
development stage products.
In April 2001, we obtained the exclusive U.S. and Canadian license and
distribution rights to palonosetron, a cancer supportive care product candidate
for the prevention of chemotherapy-induced nausea and vomiting. The U.S. Food
and Drug Administration accepted the filing of the New Drug Application for
palonosetron on November 26, 2002. Our current product development efforts also
include preclinical and clinical trials for irofulven, our novel anti-cancer
agent with demonstrated activity in a variety of cancers and a unique mechanism
of action. We are also developing MG98 and inhibitors of DNA methyltransferase
for North American markets. DNA methyltransferase is an enzyme that has been
associated with uncontrolled tumor growth. We also provide ongoing clinical
support of Salagen Tablets.
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.
44
We grant credit primarily to pharmaceutical wholesale distributors throughout
the United States in the normal course of business. Three wholesalers accounted
for approximately 91 percent of Company sales in 2002. Customer
credit-worthiness is routinely monitored and collateral is not normally
required.
Concentration of Supply Risk We depend on a single supplier to provide the
active ingredient for Salagen Tablets, which accounted for 88 percent of the our
product sales during 2002. 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.
Inventories Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
Long-term Equity Investments We own a $6,800,000, approximately 13 percent,
minority investment in MethylGene Inc., a privately owned Canadian
biopharmaceutical company. An investment of $3,800,000 was made in conjunction
with the initial licensing of North American rights to MG98 and other product
candidates in 2000. An additional $3,000,000 was invested in 2001. This minority
investment is carried at cost. The valuation of this minority investment is
periodically reviewed for impairment based upon the results of operations and
financial position of MethylGene, as well as the value of any sales of its
shares.
Sales Revenue Recognition Sales and related costs are recognized upon shipment
of product to customers. Sales are recorded net of provisions for pricing
adjustments, collection discounts and product returns.
Promotion Revenue Recognition Promotion revenue is recognized when the service
has been performed or product sales have occurred which result in a fixed and
determinable promotion fee being payable to us without a right to refund. Under
promotion arrangements, the other party to the agreement recognizes product
sales and we recognize promotion revenue.
Licensing Revenue Recognition We implemented Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements" (SAB 101), in the fourth quarter
of 2000 with retroactive effect to January 1, 2000. Under SAB 101, 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 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. Further, we recognize
royalties on product sales and support services provided to strategic partners
in licensing revenue when the related sales or provision of services occur.
Prior to the implementation of SAB 101, we recognized licensing revenue when
underlying performance criteria for payment had been met and when we had an
unconditional right to such payment. Depending on a license agreement's terms,
recognition criteria may have been satisfied upon achievement of milestones,
passage of time or product sales by the licensee.
We recorded a one-time, non-cash charge and corresponding increase in deferred
revenue of $9.4 million as a result of the cumulative effect of the adoption of
SAB 101 as of January 1, 2000. Amounts previously
45
recognized as revenue, but deferred as a result of the implementation of SAB
101, will be amortized into future license revenue over the expected period of
benefit from these collaborative arrangements. We recognized $841,258 and
$794,384 of amortized deferred revenue in 2001 and 2002, respectively. At
December 31, 2002, the Company has an unamortized deferred revenue balance of
$9,828,222. (See Note 18).
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:
2000 2001 2002
-------------- -------------- --------------
Net loss, as reported ($19,453,822) ($34,825,322) ($36,063,792)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards (5,402,375) (9,083,811) (7,278,836)
------------ ------------ ------------
Pro forma net loss ($24,856,197) ($43,909,133) ($43,342,628)
============ ============ ============
Net loss per common share:
As reported basic and diluted ($1.22) ($1.74) ($1.44)
Pro forma basic and diluted ($1.55) ($2.20) ($1.73)
The per share weighted-average fair value of stock options granted during 2000,
2001 and 2002 was $14.03, $9.00 and $5.17, respectively, on the date of grant,
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
2000 2001 2002
------------ ------------ -------------
Expected dividend yield 0% 0% 0%
Risk-free interest rate 4.80% 4.30% 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 $2,824,053, $4,933,137 and $2,773,810 in 2000,
2001 and 2002, 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.
46
Research and Development Research and development costs are expensed as
incurred. Costs of inlicensing payments for product candidates that have not yet
been sold commercially are expensed as research and development.
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.
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.
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 SFAS 142, "Goodwill and Other Intangible Assets",
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Amortization of goodwill, including goodwill in past
business combinations, will therefore cease upon adoption of SFAS 142. The
adoption of SFAS 142 on January 1, 2002 did not have any impact of the financial
position or results of operations of the Company because the identifiable
intangible assets will continue to be amortized.
SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets",
addresses the financial accounting and reporting for the impairment of
long-lived assets. The adoption of SFAS 144 on January 1, 2002, did not have any
impact on the financial position or 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)
or with a disposal of long-lived assets. 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
47
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 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others", requires companies to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The Company plans to adopt
FIN 45 for guarantees issued or modified after December 31, 2002. The Company
does not expect the adoption of FIN45 to have any impact on the financial
position or results of operations of the Company.
EITF 00-21, "Revenue Arrangements with Multiple Deliverables", 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 Company will adopt EITF 00-21 for qualifying
transactions after June 30, 2003.
48
2. 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, 2001 and 2002 are summarized as follows:
2001 2002
-------------- -------------
Corporate notes $16,107,596 $4,458,921
Certificates of deposit -- 3,080,587
Commercial paper 13,898,548 --
-------------- -------------
$30,006,144 $7,539,508
============== =============
Long-term marketable investments at December 31, 2001 consisted of certificates
of deposit which matured in January 2003.
3. Inventories
Inventories at December 31, 2001 and 2002 are summarized as follows:
2001 2002
------------- -------------
Raw materials and supplies $ 50,458 $ 89,757
Work in process 445,429 520,092
Finished products 1,004,167 1,169,564
------------- -------------
$1,500,054 $1,779,413
============= =============
4. Accrued Expenses
Accrued expenses at December 31, 2001 and 2002 are summarized as follows:
2001 2002
-------------- --------------
Product development commitments $4,503,281 $1,717,380
Bonuses 1,774,916 1,540,439
Product return accrual 963,430 1,109,913
Lease accrual 983,271 415,309
Hexalen capsules business purchase obligation 1,200,000 --
Other accrued expenses 3,184,940 3,942,282
-------------- --------------
$12,609,838 $8,725,323
============== ==============
49
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 January 2001, we executed a lease agreement for
new office space, beginning in May 2001. At December 31, 2002, we have an
accrual of $415,309 for lease obligations for the former office space in excess
of estimated sublease rental income. Rent expense was $455,364, $2,233,988 and
$1,205,027 in 2000, 2001 and 2002, respectively.
Gross future minimum lease payments under noncancellable leases, including both
the current and former office spaces, are as follows:
2003 $1,859,000
2004 1,879,000
2005 1,754,000
2006 1,482,000
2007 1,504,000
Thereafter 630,000
-----------
Less: Expected receipt on sublease (745,000)
-----------
Net lease obligations $8,363,000
===========
6. Licensing Arrangements
Technology Out-License Arrangements
During 1995, MGI entered into a cooperative development and commercialization
agreement with Dainippon Pharmaceutical Co., Ltd., whereby MGI granted Dainippon
an exclusive license to develop and commercialize acylfulvenes, including
irofulven, in Japan. Dainippon granted MGI an irrevocable, exclusive,
royalty-free license allowing MGI to use any technology or data developed by
Dainippon relating to the acylfulvenes. Dainippon and MGI mutually agreed in the
first quarter of 2003 to terminate this agreement in August 2003. Under the
agreement, Dainippon paid initial and continuing quarterly milestone payments
totaling $11.1 million through April 2000. From April 2000 through January 1,
2002, $4.3 million in deposit payments were received from Dainippon, which we
will repay to Dainippon in August 2003. (See Note 18 of the financial
statements.)
Under a November 1994 license agreement with Pharmacia Corporation, MGI granted
an exclusive, royalty-bearing license to develop and commercialize Salagen
Tablets in Canada. Pharmacia granted MGI an irrevocable, non-exclusive,
royalty-free license allowing MGI to use any technology or data developed by
Pharmacia. Pharmacia paid MGI a $75,000 initial fee and agreed to pay MGI
royalties equal to a percentage of Pharmacia's net Salagen Tablet sales
revenues, subject to annual minimum requirements. MGI also agreed to supply
Pharmacia's requirement of Salagen Tablets until the termination of the license
agreement with Pharmacia. In addition, MGI agreed to pay Pharmacia royalties if
MGI promotes 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.
50
In December 1994, MGI entered into a license agreement with Kissei
Pharmaceutical Co., Ltd., a pharmaceutical company in Japan. Under the terms of
the agreement, MGI granted an exclusive, royalty-bearing license to develop and
commercialize Salagen Tablets in Japan. Kissei granted back to MGI an
irrevocable, non-exclusive, royalty-free license allowing MGI to use any
technology or data developed by Kissei related to Salagen Tablets. Through
December 31, 2002 we have received all $2.5 million of the required license fees
and milestone payments. Kissei paid MGI 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 MGI royalties equal to a percentage of Kissei's Salagen
Tablets net sales revenue. 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, MGI entered into a license agreement with Novartis Ophthalmics AG
under which MGI granted Novartis an exclusive, royalty-bearing license to
develop and commercialize Salagen Tablets in Europe, Russia and certain other
countries. Novartis granted MGI an irrevocable, non-exclusive, royalty-free
license allowing MGI to use any technology developed by Novartis related to
Salagen Tablets. In addition, MGI simultaneously entered into a supply agreement
with Novartis pursuant to which MGI 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 net 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 net 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 its product pipeline, the Company acquires rights to develop and market
pharmaceutical products from others. Under this approach, the Company may be
required to pay up-front, development services and milestone fees. In addition,
the Company may be required to pay royalties on net sales upon marketing the
products. Within a period of time after providing notice, the Company generally
may terminate its licenses. All material, noncancellable commitments were
recognized as of December 31, 2002.
In August 2000, MGI 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, MGI 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 MGI 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 exchange, MGI agreed to make
initial payments to MethylGene aggregating $5.7 million and agreed to purchase
up to $6 million of research services from MethylGene. Milestone payments are
payable to MethylGene based on achievement of development milestones for MG98
and other DNA methyltransferase inhibitors. MGI also agreed to pay royalties on
annual net sales revenue related to MG98 and other DNA methyltransferase
inhibitors. The term of the License Agreement extends until the later of the
expiration of the last-to-expire patent that MGI has licensed or ten years after
the first commercial sale of any
51
licensed product. Either party may terminate the License Agreement in the event
of a breach or bankruptcy by the other party. In addition, after the License
Agreement has been in effect for two years, MGI may terminate the agreement on a
licensed-product-by-licensed-product basis for any reason upon 90 days notice to
MethylGene.
In January 2001, MGI entered into an agreement with Barr Laboratories, Inc. for
the exclusive marketing and distribution rights for Mylocel(TM) 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. MGI began marketing and
distributing Mylocel Tablets in March 2001. Under the terms of the agreement,
Barr Laboratories receives royalty payments based upon the product contribution
derived from MGI's sale of product. MGI terminated this agreement effective
April 2002.
In April 2001, MGI obtained the exclusive U. S. and Canadian oncology license
and distribution rights for palonosetron from Helsinn Healthcare SA.
Palonosetron is a 5-HT3 antagonist with an extended half-life for the prevention
of chemotherapy-induced nausea and vomiting. The U.S. Food and Drug
Administration accepted the filing of the New Drug Application for palonosetron
on November 26, 2002. The $11 million in upfront payments made by MGI were
funded using the $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
MGI's common shares delivered in April 2001. A $2 million milestone was paid in
October 2001, a $4 million milestone was paid in April 2002, and a $10 million
milestone was paid in December 2002. A final milestone payment of $11 million
will become payable upon marketing approval of palonosetron in the United
States.
7. Promotion Revenue
In 2001, we concluded our promotion agreement with Pharmacia for the
co-promotion of Azulfidine EN-tabs(R) (sulfasalazine delayed release tablets,
USP) Enteric-coated. We did not recognize any promotion revenue under this
agreement.
In September 2000, we concluded our promotion agreement with Connetics
Corporation for the promotion of Ridaura. Under the terms of the agreement, we
recognized $750,000 in minimum royalties through September 30, 2000 for making a
minimum number of sales calls related to this rheumatology product.
52
8. Convertible Debt
In December 2002, MGI issued $21 million of 3.0 percent convertible subordinated
notes due December 1, 2007. Interest is payable semi-annually on June 1 and
December 1 of each year, commencing on June 1, 2003. The notes are convertible
into 2,571,428 shares of MGI 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. The notes are redeemable at MGI's
option after December 3, 2005, provided that the closing price of MGI's stock is
at or in excess of 125% of the conversion price for 15 days during any 20-day
trading period, and subject to the holder's right to convert the notes prior to
such redemption. Under the terms of the agreement, we are precluded from raising
capital at less than $9.00 per share, until the earliest to occur of our
anticipated disclosure of Phase 3 palonosetron data in June 2003, or December
31, 2003.
In addition, MGI issued warrants (See Note 10 to the financial statements), for
purchase during the five-year period of the agreement of up to 400,000 shares of
MGI 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, are 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 is summarized as follows:
2002
-------------
Convertible notes $21,000,000
Warrants (1,659,838)
Issuance costs (49,013)
-------------
$19,291,149
=============
9. 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.
10. Stockholders' Equity
Stock Offerings
In May 2000, we completed a public offering of 1,000,000 newly issued shares of
common stock at $18 per share. Our net proceeds, after fees and expenses, were
$16,448,138.
53
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.
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, 2002, shares issued and shares available under stock incentive
plans are as follows:
Shareholder Total
Approved Other For All
Plans Plans Plans
-------------- ------------- --------------
Shares issuable under outstanding options 4,102,182 27,055 4,129,237
Shares available for future issuance 1,490,656 -- 1,490,656
-------------- ------------- --------------
Total 5,592,838 27,055 5,619,893
============== ============= ==============
Average exercise price for outstanding options $11.53 $10.14 $11.52
============== ============= ==============
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.
54
Stock option activity in the three years ended December 31, 2002 is summarized
as follows:
Number of Average Price
Shares Per Share
-------------- -----------------
Outstanding at December 31, 1999 2,104,134 $ 7.56
Granted 713,040 20.76
Exercised (503,036) 8.05
Canceled (50,372) 13.08
-------------
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
=============
The following table summarizes information concerning options outstanding and
exercisable at December 31, 2002:
Options Options
Outstanding Exercisable
------------------------------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Price Outstanding Life Price Exercisable Price
- -------------------------- ---------------- -------------- --------------- ---------------- ------------
$3.38-$4.75 522,982 4.14 $ 4.18 522,982 $ 4.18
$4.81-$7.10 416,020 5.69 $ 5.74 263,895 $ 5.14
$7.30 618,000 9.43 $ 7.30 0 $ 0.00
$7.75-$10.25 651,222 7.95 $ 9.94 210,692 $ 9.57
$10.33-$14.45 573,365 5.83 $12.07 400,984 $12.11
$14.50-$16.44 517,798 7.25 $16.28 229,299 $16.40
$16.45-$16.75 614,700 8.02 $16.75 159,874 $16.75
$17.13-$51.50 215,150 7.39 $29.65 105,330 $30.01
--------------- ---------------
Total 4,129,237 7.06 $11.52 1,893,056 $10.57
=============== ===============
55
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 APB25. Shares issued under the
plan were 25,077, 45,457 and 106,561 at average prices of $12.47, $10.43 and
$5.70 per share in 2000, 2001 and 2002, respectively. At December 31, 2002,
149,883 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. Plus, 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 $500,627, $1,204,388 and
$1,506,874 in 2000, 2001 and 2002, respectively, of which $315,993, $836,507 and
$949,381 was made in our common stock in 2000, 2001 and 2002, respectively. We
had 106,032 shares reserved for future issuance under the retirement plan at
December 31, 2002.
Preferred Stock At December 31, 2002, 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 8 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. The warrants expire on December 1,
2007. At December 31, 2002, warrants to purchase 400,000 shares of common stock
were outstanding.
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 vest
in 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.
Other At December 31, 2002, 100,000 shares remain registered for sale from shelf
registration statements that were filed for 5 million shares with the Securities
and Exchange Commission. These remaining shares pertain to an option that we
granted to Ramius Securities to purchase 100,000 shares of our common stock at
prices ranging from $16.95 to $24.72 per share. This option, which expires on
February 28, 2003, relates to a financing facility with Ramius Securities, LLC,
and Ramius Capital Group, LLC. Upon depletion of the shares available from the
shelf registration, and absent current plans to utilize the Ramius financing
facility, we expensed all deferred financing costs related to this facility in
the fourth quarter of 2001. We recognized a non-cash charge of $516,604 in
selling, general and administrative expense for the value of the stock option as
determined at the initiation of the financing facility.
56
11. Income Taxes
The provision for income taxes differs from statutory federal income tax rates
in the years ended December 31, 2000, 2001 and 2002 as follows:
2000 2001 2002
--------------- --------------- ---------------
Statutory federal income tax rate ($3,466,113) ($12,188,863) ($12,622,327)
Foreign tax 97,680 -- --
Valuation allowance change 3,857,787 14,248,690 17,731,938
Research activities credit (255,380) (791,797) (477,636)
Orphan drug credit (993,878) (1,868,469) (5,436,649)
State income taxes, net of federal benefit (247,579) (870,633) (649,148)
Nondeductible items -- -- 196,725
Net operating loss expiration 1,052,891 1,193,570 334,127
Other 102,592 277,502 922,970
--------------- --------------- ---------------
$ 148,000 $ 0 $ 0
=============== =============== ===============
Deferred taxes as of December 31, 2001 and 2002 consist of the following:
2001 2002
------------------------- -------------------------
Deferred tax assets:
Receivable allowances $ 44,024 $ 40,213
Inventory allowances 116,472 6,163
Product return allowance 361,286 408,448
Miscellaneous accrued expenses 480,068 399,486
Deferred revenue 3,983,478 3,616,786
Amortization of intangibles 288,107 543,710
Net operating loss carryforward 43,014,788 55,203,486
Research credit carryforward 3,392,378 3,870,014
Orphan drug credit 3,983,734 9,420,383
Alternative minimum tax credit carryforward 100,270 100,270
------------------------- -------------------------
55,764,605 73,608,959
Less valuation allowance (55,589,132) (73,337,567)
------------------------- -------------------------
$ 175,473 $ 271,392
========================= =========================
Deferred tax liabilities:
Tax depreciation greater than book $ 175,473 $ 271,392
========================= =========================
We maintain a valuation allowance to fully reserve against our deferred tax
assets due to uncertainty over the ability to realize these assets. As of
December 31, 2001 and December 31, 2002, the valuation allowances were
$55,589,132 and $73,337,567, respectively. Of these amounts, $4,835,626 for the
year ended December 31, 2001, and $4,852,125 for the year ended December 31,
2002, 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.
57
At December 31, 2002, the expiration dates and amounts of our carryforward
losses and credits for federal income tax purposes are as follows:
Amounts Expiring
------------------------------------------------------
Net Operating Research Orphan Drug
Years Losses Credits Credits
----- ---------------- ---------------- ----------------
2003-2005 $ 11,061,253 $ 340,936 $ --
2006-2010 42,741,231 1,350,418 --
2011-2015 9,041,345 354,232 735,030
2016-2022 87,165,645 1,824,428 8,685,353
---------------- ---------------- ----------------
$150,009,474 $3,870,014 $9,420,383
================ ================ =======-========
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 Section 382 and 383. Subsequent equity changes could further limit
the utilization of these net operating losses and credits.
12. Income (Loss) Per Common Share
Income (loss) per share for the years ended December 31, 2000, 2001 and 2002 is
based on weighted average shares outstanding as summarized in the following
table:
Year Ended December 31, 2000 2001 2002
- ----------------------- ---------------- ---------------- -----------------
Weighted-average shares -- basic 15,990,459 19,985,192 25,110,023
Effect of dilutive stock options -- -- --
Effect of convertible debt -- -- --
------------------------------------------------------
Weighted-average shares -- assuming dilution 15,990,459 19,985,192 25,110,023
================ ================ =================
Potentially dilutive securities are excluded from the calculation because their
inclusion in a calculation of net loss per share would have been anti-dilutive
include options of 2,263,766, 3,384,328, and 4,129,237 for 2000, 2001 and 2002,
respectively, and convertible debt and warrants of 2,971,428 in 2002. (See Note
8 to the financial statements).
13. 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 $172,000, $101,000 and $0 in 2000, 2001 and
2002, respectively. Transactions with Boston Healthcare were in the ordinary
course of business at prices comparable to transactions with other companies.
58
14. 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,
2000, 2001 and 2002 are as follows:
2000 2001 2002
------------- ------------- -------------
United States $23,259,190 $30,573,044 $25,690,947
Europe 200,832 681,446 797,804
Japan 1,154,315 701,033 680,029
Other foreign 598,236 998,297 1,034,709
------------- ------------- -------------
$25,212,573 $32,953,820 $28,203,489
============= ============= =============
Other foreign areas include Australia, Canada, Colombia, Egypt, Hong Kong
(Peoples' Republic of China), Israel, Korea, Singapore and Taiwan.
15. Product Acquisition
On November 21, 2000, MGI acquired certain assets and assumed certain
liabilities related to the business associated with the product Hexalen capsules
from MedImmune Oncology, Inc. The $7,091,870 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 and $342,589 were included in Hexalen cost of sales in
2001 and 2002, respectively.
16. Research and Development Expense
Research and development expense for the years ended December 31, 2000, 2001 and
2002 consists of the following:
2000 2001 2002
------------- ------------- -------------
License payments $ 5,975,000 $13,066,250 $14,050,000
Other research and development 11,266,217 23,035,123 18,163,635
------------- ------------- -------------
$17,241,217 $36,101,373 $32,213,635
============= ============= =============
17. 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. The remaining accrual balance of
$445,269 at December 31, 2002 related to severance obligations will be
completely paid by the end of the second quarter of 2003.
59
18. Subsequent Event
In the first quarter of 2003, Dainippon Pharmaceutical Co. Ltd. and MGI agreed
to terminate their license to develop and commercialize the acylfulvenes in
Japan effective August 2003. MGI will repay $4,300,000 of deposit payments in
cash in August 2003. As a result of the early termination of the agreement, MGI
will recognize the remaining unamortized deferred revenue of $7,141,972 into
licensing revenue during 2003, including $6,867,280 in the third quarter of
2003.
60
INDEPENDENT AUDITORS' REPORT
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 2001, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2002. 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 auditing standards generally
accepted in the United States of America. 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 2001, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
Minneapolis, Minnesota
February 11, 2003
61
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the headings "Election of Directors" and
"Executive Officers of the Company" of our Proxy Statement for our 2003 Annual
Meeting of Shareholders, to be held on May 13, 2003 (the "Proxy Statement"), is
incorporated herein by reference.
Item 11. Executive Compensation
The information contained under the heading "Executive Compensation" of the
Proxy Statement is incorporated herein by reference, other than the subsection
thereunder entitled "Report of Compensation Committee."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the headings "Equity Compensation Plans" and
"Security Ownership of Certain Beneficial Owners and Management" of the Proxy
Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
None.
Item 14. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including
our Chief Executive Officer, Charles N. Blitzer, and our Chief Financial
Officer, William C. Brown, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-14(c) under the Exchange Act) as of a date (the "Evaluation Date") within 90
days prior to the filing date of this report. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures were effective in timely
alerting them to the material information relating to us required to be included
in our periodic SEC filings.
(b) Changes in Internal Controls
There were no significant changes made in our internal controls during the
period covered by this report, or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of our evaluation.
62
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Page in this
(a) 1. Financial Statements Annual Report
-------------------- -------------
Balance Sheets at
December 31, 2001 and 2002 39
Statements of Operations
for the Years Ended December 31,
2000, 2001 and 2002 41
Statements of Cash Flows
for the Years Ended December 31,
2000, 2001 and 2002 42
Statements of Stockholders'
Equity for the Years Ended December 31,
2000, 2001 and 2002 43
Notes to Financial Statements 44
Independent Auditors' Report 61
2. Financial Statement Schedules
-----------------------------
Independent Auditors' Report on
Financial Statement Schedule 71
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).
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).
63
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).
64
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).
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 5,
2000, by and between the Company and MethylGene, Inc. (Incorporated by
reference to Exhibit 10.1 to the
65
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).
23 Consent of KPMG LLP.
99.1 Cautionary Statements under the Private Securities Litigation Reform
Act of 1995.
99.2 Certification of Charles N. Blitzer Pursuant to 18 U.S.C. (S) 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.3 Certification of William C. Brown Pursuant to 18 U.S.C. (S) 1350, as
adopted pursuant to
66
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 and 10.27 have been deleted and filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment.
(b) Reports on Form 8-K
We filed a report on Form 8-K on December 4, 2002 reporting the sale of
convertible subordinated notes and warrants to purchase shares of Company common
stock pursuant to a convertible note and warrant purchase agreement, dated as of
November 27, 2002 with Deerfield Partners, L.P. and Deerfield International
Limited.
67
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 18, 2003 MGI PHARMA, INC.
By /s/ Charles N. Blitzer
---------------------------------------
Charles N. Blitzer, Chairman of the Board,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report 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/ Charles N. Blitzer Chairman of the Board, Chief
- ---------------------------------
Charles N. Blitzer Executive Officer (principal March 18, 2003
executive officer) and Director
/s/ William C. Brown Executive Vice President, Chief
- ---------------------------------
William C. Brown Financial Officer and Secretary
(principal financial and accounting March 18, 2003
officer)
/s/ Andrew J. Ferrara Director
- ---------------------------------
Andrew J. Ferrara March 18, 2003
/s/ Edward W. Mehrer Director March 18, 2003
- ---------------------------------
Edward W. Mehrer
/s/ Hugh E. Miller Director
- ---------------------------------
Hugh E. Miller March 18, 2003
/s/ David B. Sharrock Director
- ---------------------------------
David B. Sharrock March 18, 2003
/s/ Lee J. Schroeder Director
- ---------------------------------
Lee J. Schroeder March 18, 2003
/s/ Arthur L. Weaver Director March 18, 2003
- ---------------------------------
Arthur L. Weaver, M.D.
68
CERTIFICATIONS
I, Charles N. Blitzer, certify that:
1. I have reviewed this annual report on Form 10-K of MGI PHARMA,
INC.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons fulfilling the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Charles N. Blitzer
-----------------------------------------
Charles N. Blitzer
Chairman of the Board and Chief Executive
Officer
Dated: March 18, 2003
69
CERTIFICATIONS
I, William C. Brown, certify that:
1. I have reviewed this annual report on Form 10-K of MGI PHARMA,
INC.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(c) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
(d) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
(e) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons fulfilling the
equivalent function):
(f) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(g) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ William C. Brown
-----------------------------------------
William C. Brown
Executive Vice President, Chief Financial
Officer and Secretary
Dated: March 18, 2003
70
INDEPENDENT AUDITORS' REPORT
ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Shareholders
MGI PHARMA, INC.:
Under date of February 11, 2003, we reported on the balance sheets of MGI
PHARMA, Inc. as of December 31, 2002 and 2001, and the related statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2002, as included in MGI PHARMA, Inc.'s
Annual Report on Form 10-K for the fiscal year ended December 31, 2002. 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 11, 2003
71
Schedule II
MGI PHARMA, INC.
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged to
Beginning Costs and Other Deductions End of
Description of Period Expenses Accounts (1) Period
------------- ------------- ------------- ------------- -------------
Year ended December 31, 2000
Deducted from asset accounts:
Accounts receivable
allowance ................... $ 128,771 $ 470,283 $ -- $ 440,475 $ 158,579
Year ended December 31, 2001
Deducted from asset accounts:
Accounts receivable
allowance ................... $ 158,579 $ 670,963 $ -- $ 712,145 $ 117,397
Year ended December 31, 2002
Deducted from asset accounts:
Accounts receivable
allowance ................... $ 117,397 $ 585,638 $ -- $ 593,759 $ 109,276
(1) Discounts by customers, or write-off of uncollectible accounts, net of
recoveries.
72
EXHIBIT INDEX
MGI PHARMA, INC.
Annual Report on Form 10-K
For
Year Ended December 31, 2002
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).
73
*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).
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).
74
**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 5,
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).
75
*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).
23 Consent of KPMG LLP.
99.1 Cautionary Statements under the Private Securities Litigation Reform
Act of 1995.
99.2 Certification of Charles N. Blitzer Pursuant to 18 U.S.C. (S) 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.3 Certification of William C. Brown Pursuant to 18 U.S.C. (S) 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 and 10.27 have been deleted and filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment.
76