<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1997
----------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to __________
Commission File Number: 0-10736
-------
MGI PHARMA, INC.
----------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1364647
- ---------------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
Suite 300E, Opus Center
9900 Bren Road East
Minnetonka, Minnesota 55343 (612) 935-7335
- ---------------------------------------- ----------------------------------
(Address of principal executive offices (Registrant's telephone number,
and zip code) including area code)
Indicate by check mark, whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 14,100,108 shares
- --------------------------------- -----------------------------------
(Class) (Outstanding at April 30, 1997)
<PAGE>
FORM 10-Q INDEX
MGI PHARMA, INC.
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - March 31, 1997
and December 31, 1996
Statements of Operations - Three Months
Ended March 31, 1997 and 1996
Statements of Cash Flows - Three Months
Ended March 31, 1997 and 1996
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
SIGNATURES
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
BALANCE SHEETS
MGI PHARMA, INC.
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- ------------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 5,834,495 $ 8,220,569
Short-term investments 9,645,813 9,667,254
Receivables, less allowances of
$79,413 and $68,254 1,401,968 1,079,970
Inventories, net 459,891 594,164
Prepaid expenses 194,680 53,436
----------- -----------
Total current assets 17,536,847 19,615,393
Equipment and furniture, at cost
less accumulated depreciation of
$804,306 and $775,810 514,473 227,134
Other assets 317,712 320,517
----------- -----------
Total assets $18,369,032 $20,163,044
=========== ===========
</TABLE>
(Continued)
<PAGE>
BALANCE SHEETS
(Unaudited)
Page 2
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 711,319 $ 744,052
Accrued expenses 1,727,578 3,043,993
Other current liabilities 50,944 7,711
------------ ------------
Total current liabilities 2,489,841 3,795,756
------------ ------------
Stockholders' equity:
Common stock, $.01 par value,
30,000,000 authorized shares,
14,091,665 and 14,081,574
issued shares 140,917 140,816
Additional paid-in capital 88,834,742 88,789,495
Notes receivable from officers (102,575) (104,933)
Accumulated deficit (72,993,893) (72,458,090)
------------ ------------
Total stockholders' equity 15,879,191 16,367,288
------------ ------------
Total liabilities and
stockholders' equity $ 18,369,032 $ 20,163,044
============ ============
</TABLE>
_____________________________________
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS
MGI PHARMA, INC.
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Sales $2,190,390 $1,328,788
Licensing 454,929 548,760
Interest and other 233,868 239,040
---------- ----------
2,879,187 2,116,588
---------- ----------
Costs and Expenses:
Research and development 1,061,597 1,165,704
Cost of sales 237,052 147,140
Selling, general and administrative 2,116,341 1,607,251
---------- ----------
3,414,990 2,920,095
---------- ----------
Net loss $ (535,803) $ (803,507)
========== ==========
Net loss per common share $ (0.04) $ (0.06)
Weighted average number of
common shares outstanding 14,089,380 12,784,257
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS
MGI PHARMA, INC.
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (535,803) $ (803,507)
Adjustments for non-cash items:
Depreciation and asset amortization 28,496 24,580
Benefit plan contribution 35,356 30,345
Change in operating assets and liabilities:
Receivables (321,998) 175,183
Inventories 134,273 92,377
Prepaid expenses (141,244) (105,007)
Accounts payable and accrued expenses (1,363,928) (1,356,779)
Other current liabilities 43,233 23,154
----------- -----------
Net cash used in operating activities (2,121,615) (1,919,654)
----------- -----------
INVESTING ACTIVITIES:
Purchase of investments (7,755,589) (7,950,581)
Maturity of investments 7,777,030 5,824,931
Purchase of equipment and furniture (315,835) (30,943)
Payments on notes receivable 2,358 480,924
Other 2,805 (640)
----------- -----------
Net cash used in investing
activities (289,231) (1,676,309)
----------- -----------
FINANCING ACTIVITIES:
Issuance of shares under stock
plans 24,772 ---
----------- -----------
Net cash provided by financing
activities 24,772 ---
----------- -----------
Decrease in cash and cash equivalents (2,386,074) (3,595,963)
Cash and cash equivalents at
beginning of period 8,220,569 9,075,569
----------- -----------
Cash and cash equivalents at
end of period $ 5,834,495 $ 5,479,606
=========== ===========
</TABLE>
_______________________________
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
MGI PHARMA, INC.
(Unaudited)
(1) Basis of Presentation
---------------------
MGI PHARMA, INC. (MGI or the company) is a pharmaceutical company that acquires,
develops and markets innovative and differentiated products for niche markets of
unmet medical need. The company is primarily focused on products that treat
cancer or improve the quality of life for cancer patients. It intends to expand
into the rheumatology market upon approval of Salagen(R) Tablets as a treatment
of symptoms associated with Sjogren's Syndrome. The company markets its
products to physicians throughout the United States, with sales made to
pharmaceutical wholesalers for distribution to the ultimate consumers of company
products. Sales of Salagen(R) Tablets account for the vast majority of company
sales. The company is commercializing its products outside the United States
through various alliances, and has agreements with several pharmaceutical
companies to commercialize Salagen(R) Tablets internationally, including the
major markets of Europe, Japan and Canada. Exclusive rights to MGI 114 for
Japan were granted to Dainippon Pharmaceutical Co., Ltd. under a cooperative
development and commercialization agreement in 1995. Product development
efforts include development of MGI 114 and DHAC, and continued clinical support
of Salagen(R) Tablets.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal, recurring
accruals) considered necessary for fair presentation have been included.
Interim results may not be indicative of annual results. For further
information, refer to the financial statements and footnotes included in the
company's report on Form 10-K for the year ended December 31, 1996.
<PAGE>
(2) Loss Per Common Share
---------------------
Loss per common share is based upon the weighted average number of shares
outstanding during each period. Common stock equivalents are not included as
their effect is antidilutive.
(3) Short-Term Investments
----------------------
Because the company has the intent and ability to hold its investments to
maturity, they are considered held-to-maturity investments. As such, they are
stated at amortized cost, which approximates estimated fair value. Held-to-
maturity investments at March 31, 1997, are summarized in the following table:
<TABLE>
<CAPTION>
<S> <C>
European certificates of deposit $2,064,713
Commercial paper 3,517,721
Medium-term notes 4,063,379
----------
$9,645,813
==========
</TABLE>
(4) Inventories
-----------
Inventories at March 31, 1997, and December 31, 1996, are summarized in the
following table:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Raw materials and supplies $ 25,856 $ 25,856
Work in process 51,437 107,080
Finished goods 767,359 847,710
Valuation allowance (384,761) (386,482)
--------- ---------
Total $ 459,891 $ 594,164
========= =========
</TABLE>
Inventories are stated at the lower of cost or market. Cost is determined on a
first-in, first-out basis.
(5) Accrued Expenses
----------------
Accrued expenses at March 31, 1997, and December 31, 1996, are summarized in the
following table:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Product development commitments $ 618,008 $1,615,397
Bonuses 174,425 493,519
Retirement commitment 171,068 243,721
Other accrued expenses 764,077 691,356
---------- ----------
$1,727,578 $3,043,993
========== ==========
</TABLE>
<PAGE>
(6) Stock Incentive Plans
---------------------
Under stock incentive plans, designated persons (including officers, directors
and employees) are granted rights to acquire company common stock. These rights
include stock options and other equity rights.
At March 31, 1997, 2,269,945 shares of common stock remain reserved for
issuance, of which 220,279 remain available for grant. Options to purchase
2,049,666 shares of common stock were outstanding, of which 1,067,048 were
exercisable. Options outstanding had a weighted average exercise price of $6.63
per share.
Loans to officers were made for the purchase of stock, exercise of options and
payment of associated tax obligations. The loans are full recourse, unsecured
obligations and are payable on demand. At March 31, 1997, $102,575 of principal
remains outstanding, and is presented as "Notes receivable from officers" within
stockholders' equity in the accompanying balance sheets.
(7) Stockholders' Equity
--------------------
Changes in selected stockholders' equity accounts were as follows:
<TABLE>
<CAPTION>
Notes
Common stock Additional receivable
------------------------ paid-in from
Shares Par value capital officers
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1996:
Balance at December 31, 1995 12,781,608 $127,816 $82,872,883 $(432,082)
Employee retirement savings
plan contribution 2,803 28 18,468 --
Note payments -- -- -- 384,148
---------- -------- ----------- ---------
Balance at March 31, 1996 12,784,411 $127,844 $82,891,351 $ (47,934)
========== ======== =========== =========
THREE MONTHS ENDED MARCH 31, 1997:
Balance at December 31, 1996 14,081,574 $140,816 $88,789,495 $(104,933)
Exercise of stock options 5,675 57 24,715 --
Employee retirement savings
plan contribution 4,416 44 20,532 --
Note payments -- -- -- 2,358
---------- -------- ----------- ---------
Balance at March 31, 1997 14,091,665 $140,917 $88,834,742 $(102,575)
========== ======== =========== =========
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
- --------
MGI PHARMA, INC. (MGI or the company) is a pharmaceutical company that acquires,
develops and markets innovative and differentiated products for niche markets of
unmet medical need. The company is primarily focused on products that treat
cancer or improve the quality of life for cancer patients. It intends to expand
into the rheumatology market upon approval of Salagen(R) Tablets as a treatment
of symptoms associated with Sjogren's syndrome. The company currently markets
its products to physicians throughout the United States, with sales made to
pharmaceutical wholesalers for ultimate delivery to patients through drug
distribution channels. Sales of Salagen(R) Tablets comprise the vast majority
of company sales. The company is commercializing its products outside the
United States through various alliances, and has agreements with several
pharmaceutical companies to commercialize Salagen(R) Tablets internationally,
including the major markets of Europe, Japan and Canada. Exclusive rights to MGI
114 for Japan were granted to Dainippon Pharmaceutical Co., Ltd. under a
cooperative development and commercialization agreement in 1995. Product
development efforts include development of MGI 114 and DHAC, and continued
clinical support of Salagen(R) Tablets.
Results of Operations
- ---------------------
The company's net loss of $535,803 in the 1997 first quarter compares with a net
loss of $803,507 in the 1996 first quarter. The smaller 1997 net loss was due
to increased sales revenue, partially reduced by increased selling expenses.
Sales revenue increased 65% from $1,328,788 in the 1996 first quarter to
$2,190,390 in the 1997 first quarter. The 1997 increase reflects expanding
sales of Salagen(R) Tablets, partially reduced by continuation of the long-term
decline in sales of DIDRONEL(R) I.V. Infusion. Quarter-to-quarter sales
revenues increased 8% in the 1997 first quarter, following a 32% increase in the
1996 fourth quarter. MGI sales revenues will fluctuate from quarter to quarter,
due to periodic adjustments in wholesale buying patterns. The trend in retail
demand for Salagen(R) Tablets, as estimated using shipment activity from
wholesalers to pharmacies, has continued to grow.
Cost of sales increased 61% from $147,140 in the 1996 first quarter to $237,052
in the 1997 first quarter. The 1997 increase was due to increased sales of
Salagen(R) Tablets. Management believes that cost of sales as a percent of sales
of approximately 10% should continue for its current products.
Licensing revenue decreased 17% from $548,760 in the 1996 first quarter to
$454,929 in the 1997 first quarter. The 1997 decrease was primarily due to the
timing of the royalties related to non-core agricultural technology. The
magnitude of the decrease was lessened by the scheduled increase in quarterly
milestone payments from Dainippon Pharmaceutical Co., Ltd. Future licensing
revenues will likely fluctuate between years and from one quarter to the next
depending on the achievement of milestones by the company's partners, their
level of recurring royalty generating activities, and the timing of initiating
additional licensing relationships.
<PAGE>
Interest and other income decreased 2% from $239,040 in the 1996 first quarter
to $233,868 in the 1997 first quarter. The 1997 decrease was due to a decrease
in the average amount of funds available for investment in 1997, partially
reduced by an increased yield on investments. Until the company achieves
positive cash flow, funds available for investments will continue to decline.
Interest income would correspondingly decline, assuming yields remain constant.
Research and development expense decreased 9% from $1,165,704 in the 1996 first
quarter to $1,061,597 in the 1997 first quarter. The 1997 decrease reflects
declining spending for Salagen(R) Tablets, in conjunction with submission of a
supplemental New Drug Application (sNDA) to the U.S. Food and Drug
Administration during the 1997 first quarter. Research and development spending
is expected to remain near the 1996 rate throughout 1997, as development effort
for Salagen(R) Tablets diminishes following submission of the sNDA, but
increases for MGI 114 and DHAC.
Selling, general and administrative expenses increased 32% from $1,607,251 in
the 1996 first quarter to $2,116,341 in the 1997 first quarter. The 1997
increase was due to full staffing of the company's sales force in the 1997 first
quarter, following restructuring during 1996. Selling expense is expected to
remain near recent quarterly levels throughout 1997.
Liquidity and Capital Resources
- -------------------------------
At March 31, 1997, the company had cash and cash equivalents and investments of
$15,480,308 and working capital of $15,047,006 compared to $17,887,823 and
$15,819,637, respectively, at December 31, 1996. During the three month period
ended March 31, 1996, the company used cash of $2,121,615 to fund its operating
activities.
Cash in excess of current operating needs is invested in marketable securities
in accordance with the company's 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.
Substantial amounts of capital are required for pharmaceutical development and
commercialization efforts. For continued development and commercialization of
its products, the company plans to utilize cash provided from growth in sales of
Salagen(R) Tablets, collaborative arrangements and existing liquid assets. If
these sources of capital are insufficient, the company will seek other sources
of funding, including additional equity issuances, or it will manage the pace of
developing its product candidates.
Cautionary Statement
- --------------------
This Form 10-Q contains forward-looking statements within the meaning of federal
securities laws. These statements 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
cause such differences include, but are not limited to, dependence on sales of
Salagen(R) Tablets, dependence on license acquisition strategy, uncertainty of
strategic alliances, and other risks
<PAGE>
and uncertainties detailed from time to time in the Company's filings with the
Securities and Exchange Commission, including Exhibit 99 to this Form 10-Q.
<PAGE>
MGI PHARMA, INC.
PART II - OTHER INFORMATION
Item 5. Other Information
- --------------------------
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the company is hereby filing cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in forward looking statements of the
company made by, or on behalf of the company. See Exhibit 99 to this report.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) LISTING OF EXHIBITS:
11 Computation of Net Loss Per Common Share
27 Financial Data Schedule
99 Cautionary Statements
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the three months ended March
31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MGI PHARMA, INC.
Date: May 2, 1997 By: /s/ James V. Adam
-----------------------------
James V. Adam, Vice President,
Chief Financial Officer
(authorized signatory and
principal financial officer)
<PAGE>
MGI PHARMA, INC.
Quarterly Report on Form 10-Q
for the
Quarter Ended March 31, 1997
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 Restated Articles of Incorporation (Incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-2,
File No. 33-40763).
3.2 Restated Bylaws of the Company, as amended to date (Incorporated by
reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994).
4.1 Specimen certificate for shares of Common Stock of the Company
(Incorporated by reference to Exhibit 4.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994).
4.2 Rights Agreement, dated as of January 19, 1988, between the Company
and Norwest Bank Minneapolis, National Association (including the
form of Right Certificate attached as Exhibit A thereto)
(Incorporated by reference to Exhibit 4.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994).
10.1 Promotion Agreement, dated March 11, 1997, between the Company and
Schein Pharmaceutical, Inc. (Incorporated by reference to Exhibit
10.29 to the Company's Annual Report on Form 10-K for the year ended
December 31,1996).
11 Computation of Net Loss per Common Share
27 Financial Data Schedule
99 Cautionary Statements
</TABLE>
<PAGE>
Exhibit 11
COMPUTATION OF NET LOSS PER COMMON SHARE
MGI PHARMA, INC.
(Unaudited)
The following information is required in computations of primary and fully
diluted loss per common share for each period:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Loss:
Net loss $ (535,803) $ (803,507)
Common shares:
Adjusted weighted shares
outstanding (a) 14,089,380 12,784,257
Loss per common share:
Net loss $ (0.04) $ (0.06)
</TABLE>
(a) Net loss per common share shown on the face of the statements of operations
is the equivalent of a simple capital structure presentation since it excludes
common stock equivalents as their effect is antidilutive. There are no pro forma
fully diluted share outstanding adjustments, so primary and fully diluted share
amounts are identical.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying balance sheet of MGI PHARMA, INC. as of March 31, 1997, and the
related statement of operations for the quarter ended March 31, 1997 and is
qualified in its entirety by reference to such financial statements:
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> $5,834,495
<SECURITIES> 9,645,813
<RECEIVABLES> 1,401,968
<ALLOWANCES> 79,413
<INVENTORY> 459,891
<CURRENT-ASSETS> 17,536,847
<PP&E> 514,473
<DEPRECIATION> 804,306
<TOTAL-ASSETS> 18,369,032
<CURRENT-LIABILITIES> 2,489,841
<BONDS> 0
0
0
<COMMON> 15,879,191
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 18,369,032
<SALES> 2,190,390
<TOTAL-REVENUES> 2,879,187
<CGS> 237,052
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,061,597
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (535,803)
<INCOME-TAX> 0
<INCOME-CONTINUING> (535,803)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (535,803)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
<PAGE>
Exhibit 99
MGI PHARMA, INC.
QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 1997
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a new "safe
harbor" for forward looking statements to encourage companies to provide
prospective information without fear of litigation so long as those statements
are identified as forward looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in the statement. The company desires to
take advantage of these new "safe harbor" provisions and is filing this Exhibit
99 in order to do so. Accordingly, the company hereby identifies the following
important factors which could cause the company's actual results to differ
materially from any such results which may be projected, forecast, estimated or
budgeted by the company in forward looking statements made by the company from
time to time in reports, proxy statements, registration statements and other
written communications, or in oral forward looking statements made from time to
time by the company's officers and agents.
LACK OF PROFITABLE OPERATIONS
The company's revenues have not been sufficient to offset all the expenses
involved in operating a pharmaceutical company including research, development
and production. The company had net losses of $535,803 for the quarter ended
March 31, 1997, and $2,614,478 for the year ended 1996. At March 31, 1997 the
company had an accumulated deficit of $72,993,893. To the extent the company is
unable to achieve profitability, its ability to continue its operations will
depend upon its ability to secure additional funds from other sources. Revenue
may display significant variations due to the impact of new contract and
licensing arrangements, the completion or termination of those contracts and
arrangements and the timing and amounts of milestone payments. The company's
profitability will be dependent on its success in developing, obtaining
regulatory approvals for, and effectively marketing its products. There can be
no assurance as to whether the company will be able to achieve and sustain
profitability.
DEPENDENCE ON SALES OF SALAGEN(R) TABLETS
The company derives substantially all of its product revenues from the sale of
Salagen(R) Tablets. For the quarter ended March 31, 1997, U.S. sales of
Salagen(R) Tablets were $1,912,598, representing 87% of total product sales for
the period. In 1996, annual U.S. sales of Salagen(R) Tablets were $5,926,681,
representing 92% of 1996 product sales. Accordingly, any factor adversely
affecting sales of Salagen(R) Tablets could have a material adverse effect on
the company's business, financial condition and results of operations. Although
orphan drug status was awarded to Salagen(R) Tablets by the U.S. Food and Drug
Administration (the FDA) as a treatment of xerostomia induced by radiation
therapy, the seven years of market exclusivity provided by orphan designation
expires in March 2001. Moreover, the company
<PAGE>
anticipates that sales of its other product, DIDRONEL(R) I.V. Infusion, which
represented 5% and 7% of product sales for the quarter ended March 31, 1997 and
for 1996, respectively, will continue to decline in the future due to the
introduction of competitive products.
DEPENDENCE ON LICENSE AND ACQUISITION STRATEGY
The company has adopted a license and acquisition strategy to build its product
pipeline and expects to increase its sales over time through a series of
strategic acquisitions of new pharmaceutical product opportunities which the
company can develop and market. The company's strategy for growth is dependent
upon its continued ability to identify and acquire new pharmaceutical products
targeted at niche markets which can be promoted through the company's existing
marketing and distribution channels. Because the company does not engage in
proprietary research and development of new products, it must rely upon the
willingness of others to sell or license pharmaceutical product opportunities to
the company. Other companies, including those with substantially greater
financial, marketing and sales resources, are competing with the company to
acquire such products. There can be no assurance that the company will be able
to acquire rights to additional products on acceptable terms, if at all. The
failure of the company to acquire additional products or to promote or market
commercially successful products would have a material adverse effect on the
company's future business, financial condition and results of operations.
Further, the marketing strategy, distribution channels and levels and bases of
competition with respect to newly acquired products may be different than those
of the company's current products and there can be no assurance that the company
will be able to compete favorably in those product categories.
UNCERTAINTY OF STRATEGIC ALLIANCES
The company's strategy for the exploitation of foreign markets for its products
is to enter into strategic alliances with various multinational and foreign
pharmaceutical companies. The company has entered into alliances with various
companies related to the marketing of Salagen(R) Tablets and the development of
the acylfulvenes. Revenues from strategic alliances include milestone payments
and royalty payments. Licensing was $454,929 for the quarter ended March 31,
1997 and $2,170,460 for 1996, comprising 16% and 23%, respectively, of total
revenues. Future licensing revenues will likely fluctuate from quarter to
quarter and year to year depending on the achievement of milestones by the
company's partners, the amount of royalty generating activities, and the timing
of initiating additional licensing relationships. Additionally, royalties are
based on sales in local currencies and, therefore, the U.S. Dollar value of such
royalties will fluctuate with currency exchange rates. Although the company
believes that its partners in these alliances have an economic motivation to
perform their contractual responsibilities, the amount and timing of resources
to be devoted to these activities are not within the control of the company.
Moreover, the terms of these alliances generally provide that they may be
terminated prior to their expiration under circumstances that may also be
outside the control of the company. The early termination of one or more of
these strategic alliances could adversely affect the company's business,
financial condition and results of operations. There can also be no assurance
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that the company will be able to negotiate additional strategic alliances on
acceptable terms or that such alliances will be successful.
UNCERTAINTY OF ACCESS TO CAPITAL
The company may need to raise additional funds to acquire or license additional
products, to fund operating losses until such time as the company achieves
sustained profitability, to support the marketing and sales of additional
products and to obtain necessary working capital. The company may seek
additional funding through public and private financing, including equity
financing. Adequate funds for these purposes, whether through the financial
markets or from other sources, may not be available when needed or on terms
acceptable to the company. Insufficient funds may cause the company to delay,
scale back, or abandon some or all of its product acquisition and licensing
programs or marketing.
DEPENDENCE ON SOLE SUPPLIER
The company relies on E. Merck Fine Chemicals Division as its sole supplier of
pilocarpine hydrochloride, the active pharmaceutical ingredient necessary for
the manufacture of Salagen(R) Tablets. The company believes that E. Merck Fine
Chemicals Division produces the substantial majority of the worldwide supply of
Good Manufacturing Practices (GMP) grade pilocarpine hydrochloride, and that
there is no other producer of pilocarpine hydrochloride with a significant
portion of the worldwide supply. The processing facility and raw material
requirements for the production of pilocarpine hydrochloride present significant
barriers to entry of new producers in this market. Although the company
believes that it would be able to procure adequate supplies of pilocarpine
hydrochloride on a timely basis from an alternate source, the company has not
identified an alternate source and disruptions in supplies would have a material
adverse effect on the company's business, financial condition and results of
operations.
RELIANCE ON THIRD-PARTY MANUFACTURERS
The company does not have manufacturing facilities and is currently relying on
two third-party manufacturers for production of Salagen(R) Tablets. The company
intends to continue to rely on others to manufacture its products, including any
products that it may acquire, and has no plans to establish any manufacturing
operations. Manufacture of the company's products is subject to GMP
regulations, prescribed by the FDA or other standards prescribed by the
appropriate regulatory agency in the country of use. There can be no assurance
that the company's current manufacturers will comply with all applicable
regulatory standards, or that the company would be able to identify an
alternative third-party manufacturer on terms acceptable to the company or on
any terms.
INTENSE COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE
The manufacture and sale of pharmaceuticals is highly competitive. Many of the
company's competitors are large, multinational pharmaceutical companies which
have considerably greater financial, sales, marketing and technical resources
than those of the company. Additionally, many of the company's present and
potential competitors
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have research and development capabilities that may allow such competitors to
develop new or improved products that may compete with the company's products.
The pharmaceutical industry is characterized by rapid product development and
technological change. The company's pharmaceuticals could be rendered obsolete
or uneconomical by the development of new pharmaceuticals to treat the
conditions addressed by the company's products, or as the result of
technological advances affecting the cost of production. There can be no
assurance that the company will be able to compete effectively, that additional
competitors will not enter the market, or that competition will not have a
material adverse effect on the company's business, financial condition and
results of operations.
PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY
The company's ability to compete effectively with other companies will depend,
in part, on its ability to maintain a proprietary nature for its products. The
company was awarded orphan drug status for Salagen(R) Tablets as a treatment for
xerostomia induced by radiation therapy. Orphan designation provides seven
years market exclusivity after product registration. The company holds an
exclusive license on two broad-based patents covering MGI 114 and other analogs
in the company's family of acylfulvenes, a new class of potential anti-cancer
compounds.
There can be no assurance that the company will be able to obtain patents for
future products or that current or future issued or licensed patents or know-how
will afford protection against competitors with similar technologies or
processes, or that any such patents will not be infringed upon or designed
around by others. In addition, there can be no assurance that others will not
independently develop proprietary technologies and processes which are the same
as or substantially equivalent to those of the company. The company could also
incur substantial costs in defending itself in suits brought against it based on
such patents or in bringing suits to protect such patents or patents licensed by
the company against infringement. Additionally, the company protects its
proprietary technology and processes in part by confidentiality agreements with
its collaborative partners, employees and consultants. There can be no
assurance that these agreements will not be breached, that the company will have
adequate remedies for any breach, or that the company's trade secrets will not
otherwise become known or independently discovered by competitors.
FLUCTUATIONS IN OPERATING RESULTS
The company's results of operations may vary from period to period due to a
variety of factors including continuing demand for the company's products, the
introduction of new products, the continued stream of licensing and royalty
revenues, expenditures incurred to acquire or license and promote additional
pharmaceuticals, interruptions in or availability of supply by third-party
manufacturers, the introduction of new products by the company or its
competitors, changes in sales and marketing expenditures and general economic
and industry conditions which affect customer demand. Because the company's
operating expenses are based on anticipated sales levels, variations in the
timing of recognition of revenue could cause significant
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fluctuations from period to period and may result in unanticipated earnings
shortfalls or losses. There can be no assurance that the company will be
successful in maintaining or improving its profitability or avoiding losses in
any future period.
GOVERNMENT REGULATION
Government regulation in the United States and abroad is a significant factor in
the development, production, and marketing of the company's products. Prior to
marketing, each of the company's products must undergo an extensive testing and
regulatory approval process conducted by the FDA and by comparable agencies in
other countries. The testing and approval process can take several years and
require the expenditure of substantial resources, and there can be no assurance
that any product that the company may develop will be approved by the FDA or any
foreign regulatory authority in a timely manner, if at all. Generally, only a
very small percentage of newly discovered pharmaceutical compounds that enter
preclinical development are approved for sale.
The company depends on external laboratories and medical institutions to conduct
its preclinical and clinical testing. This research must comply with clinical
and laboratory practices required by the FDA. The data obtained from
preclinical and clinical testing are subject to varying interpretations that
could delay, limit or prevent regulatory approval. In addition, delays or
rejection may be encountered based upon changes in FDA personnel or policy for
drug approval during the period of development and by changes in the
requirements for regulatory review of each submitted New Drug Application (NDA).
Moreover, even if the FDA approves the marketing application of a product, such
approval may entail commercially unacceptable limitations on the uses, or
"indications," for which a product may be marketed, and further studies may be
required to provide additional data on product safety or effectiveness. The FDA
also requires post-marketing adverse event surveillance programs to monitor the
product's side effects.
An FDA approved product and its manufacturer are subject to continual regulatory
review and the later discovery of previously unknown problems with a product or
manufacturer may result in restrictions or sanctions on such product or
manufacturer, including the withdrawal of such product from the market. Most
changes in the manufacturing procedures used by the company for the company's
approved products and any change in manufacturer will require the approval of
the FDA prior to their implementation which could have an adverse effect upon
the company's ability to continue the commercialization or sale of a product.
In certain countries, the sales price of a product must also be approved after
marketing approval is granted. No assurance can be given that satisfactory
prices can be obtained in foreign markets even if marketing approval is granted
by foreign regulatory authorities.
UNCERTAINTIES RELATED TO PHARMACEUTICAL PRICING AND REIMBURSEMENT
The profitability of the company will depend in part on the availability of
adequate reimbursement for the company's products from
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third-party payors, such as government entities, private health insurers and
managed care organizations. Third-party payors are increasingly challenging the
pricing of medical services and products. Although third-party reimbursement is
not currently an issue for the company, there can be no assurance that
reimbursement will be available in the future for the company's new or existing
products, or that such third-party reimbursement will be adequate. If adequate
reimbursement levels are not provided by government entities and other third-
party payors for the company's products, the company's business, financial
condition and results of operations would be materially adversely affected.
Further, a number of legislative and regulatory proposals aimed at changing the
nation's health care system have been proposed in recent years. While the
company cannot predict whether any such proposals will be adopted, or the effect
that any such proposal may have on its business, such proposals, if enacted,
could have a material adverse effect on the company's business, financial
condition and results of operations.
POTENTIAL PRODUCT LIABILITY; LIMITED INSURANCE COVERAGE
The company faces exposure to product liability claims in the event that the use
of its product is alleged to have resulted in adverse effects. Such risk exists
even with respect to those products that are manufactured in regulated and
licensed facilities or otherwise possess regulatory approval for commercial
sale. While the company has taken, and continues to take, what it believes are
appropriate precautions, there can be no assurance that it will avoid
significant product liability exposure. The company currently has product
liability insurance in the amount of $10 million per occurrence and in the
aggregate for the year. Although to date the company has not been the subject of
any product liability claims, there can be no assurance that such insurance will
be sufficient to cover potential claims. Further, there can be no assurance that
adequate insurance coverage will be available in the future on commercially
reasonable terms, if at all, or that a product liability claim would not
materially adversely affect the company's business, financial condition and
results of operations.
RISK OF PRODUCT RECALL
Product recalls may be issued at the discretion of the company, the FDA, the U.
S. Federal Trade Commission or other government agencies having regulatory
authority for product sales, and may occur due to disputed labeling claims,
manufacturing issues, quality defects or other reasons. Although none of the
company's products have been recalled, no assurance can be given that product
recalls will not occur in the future. Any product recall could materially
adversely affect the company's business, financial condition and results of
operations.
DEPENDENCE UPON CERTAIN KEY MANAGEMENT
The future success of the company is largely dependent upon a number of key
management personnel. The loss of the services of one or more key employees, or
the inability of the company to attract and retain skilled management and
marketing and sales personnel in the future, could have a material adverse
effect on the company's business, financial condition and results of operations.
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POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the company's common stock, like securities of other small
pharmaceutical companies, has fluctuated significantly in recent years and is
likely to fluctuate in the future. From time to time the market for securities
has also experienced significant price and volume fluctuations that are
unrelated to the operating performance of such companies. In addition,
announcements by the company or others regarding commercial products, patents or
proprietary rights, the progress of clinical trials or government regulation,
public concern as to the safety of drugs, the issuance of securities analysts'
reports and general market conditions may each have a significant effect on the
market price of company common stock. Fluctuations in financial performance
from period to period also may have a significant impact on the market price of
company common stock.
