<PAGE>
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, 1997 COMMISSION FILE NO. 0-10736
MGI PHARMA, INC.
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1364647
----------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 300E, Opus Center
9900 Bren Road East
Minnetonka, Minnesota 55343
- ------------------------------------------ -----------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 612/935-7335
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]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 16, 1998 was approximately $65,178,553 (based on the
closing price of such stock as reported by The Nasdaq Stock Market on such
date).
The number of shares outstanding of each of the Registrant's classes of
common stock, as of March 16, 1998, was: Common Stock, $.01 par value;
14,215,380 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to General Instruction G the responses to Items 10, 11, 12 and 13
of Part III of this report are incorporated herein by reference to certain
information contained in the Registrant's definitive Proxy Statement for its
1998 Annual Meeting of Shareholders to be held on May 12, 1998.
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PART I
ITEM 1. BUSINESS
GENERAL
MGI PHARMA, INC. ("MGI" or "the Company") is a human pharmaceutical company
that acquires, develops and markets differentiated, specialty pharmaceutical and
medical products for therapeutic markets of unmet need.
During 1997, its primary business activities were (i) marketing
pharmaceutical products in the United States, (ii) developing potential new
pharmaceutical products, and (iii) identifying potential product acquisition
candidates for both development and marketing opportunities. Commercial efforts
focused on marketing Salagen(R) Tablets (philocarpine hydrochloride), sales of
which increased 44 percent over the previous year. The Company also marketed
Didronel(R) I.V. Infusion (etidronate disodium), which continued to lose market
share during 1997. Clinical development efforts included submitting a
supplemental new drug application ("sNDA") for a second indication of Salagen(R)
Tablets as a treatment for dry mouth symptoms associated with Sjogren's
Syndrome; conducting Phase IV post-marketing studies for the initial, approved
indication of Salagen(R) Tablets; advancing the initial Phase I clinical study
with MGI 114, one of a new category of anti-cancer agents that have the
potential to treat solid tumors, and initiating a second Phase I study with the
drug as well as conducting several preclinical animal studies. The Company also
continued to work on manufacturing and related processes for its marketed and
development-stage products. Business development efforts resulted in a
promotional arrangement with Schein Pharmaceutical, Inc. for INFeD(R) (iron
dextran injection). During the year, MGI discontinued the development of
Dihydro-5-Azacytidine ("DHAC") and returned all rights to the product to the
licensor.
MGI currently markets its products through its own commercial organization
in the United States. The Company sells to pharmaceutical wholesalers in the
United States who distribute MGI's drugs to retail and hospital pharmacies. To
commercialize its products in foreign markets, MGI uses international
partnerships. MGI has agreements with three international pharmaceutical
companies to develop and market Salagen(R) Tablets for the European, Japanese
and Canadian markets, respectively, as well as distribution agreements with
three additional companies for the smaller markets of Taiwan, Israel and Korea.
MGI also has a marketing alliance for Didronel(R) I.V. Infusion in Canada, and a
development and marketing agreement for MGI 114 in Japan.
The Company was incorporated in Minnesota in November 1979. Its principal
executive offices are located at 9900 Bren Road East, Suite 300E,
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Minnetonka, Minnesota 55343, and its phone number is (612) 935-7335.
BUSINESS STRATEGY
The Company acquires, develops and markets differentiated, specialty
pharmaceutical and medical products for therapeutic markets of unmet need. To
date, MGI has focused on the oncology (cancer) and rheumatology markets, but it
intends to expand into other medical niches.
MGI focuses on medical niche markets because it believes such markets can
be reached effectively by a relatively small sales force. In the United States,
the number of physicians in a particular subspecialty is usually relatively
small and these physicians tend to be concentrated in major metropolitan areas.
Current trends in pharmaceutical detailing are expected to reduce the number of
pharmaceutical sales targets as decisions relating to use of prescription drugs
consolidate and become more centralized.
The Company believes that its ability to accomplish its long-term business
plan depends upon its success in acquiring new products to market and develop.
The Company is actively searching for new products to acquire, preferably
already marketable pharmaceutical products. This strategy uses one of MGI's key
assets -- its sales force -- and reduces MGI's risk of product failure since
under such a strategy the Company would only acquire products that are well past
the initial discovery stage. Such products generally have already passed
preliminary toxicity testing and have demonstrated some efficacy in humans. MGI
also focuses its efforts on small molecule products because they are generally
easier and less costly to make. MGI believes that acquiring products that meet
such requirements may allow it to reduce product development time frames, reduce
the research rejection rate due to safety and toxicity concerns, and achieve a
higher probability of product effectiveness. MGI believes there are a number of
pharmaceutical and medical products that meet these requirements available for
licensing from other pharmaceutical companies.
By using contract manufacturers to make its products, MGI also controls its
investment in capital. MGI believes there are a sufficient number of high
quality contract manufacturers available to fulfill its near-term production
needs for both clinical and commercial use. MGI intends to continue to utilize
contract manufacturing until it is necessary and economical to add internal
capacity.
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PRINCIPAL PRODUCTS
SALAGEN(R) TABLETS
Salagen(R) Tablets (pilocarpine hydrochloride) have been marketed in the
United States by MGI since 1994 as a treatment for radiation-induced xerostomia
(chronic dry mouth) in head and neck cancer patients. To further expand
potential revenues from Salagen(R) Tablets, MGI studied the drug's ability to
treat dry mouth associated with Sjogren's Syndrome, an autoimmune disease that
gradually destroys the moisture producing glands in the body. In February 1997,
MGI submitted a supplemental New Drug Application to the FDA for this second
indication and in February 1998, the FDA approved Salagen(R) Tablets as a
treatment for dry mouth symptoms associated with Sjogren's Syndrome.
Head and Neck Cancer Market
Radiation therapy used to treat head and neck cancers can permanently
damage salivary glands, resulting in significant chronic reduction of saliva
production. This reduction in saliva can result in pain, discomfort, difficulty
in eating and sleeping, rapid tooth decay, periodontal disease, oral infection
and severe halitosis. More than 25,000 head and neck cancer patients receive
radiation therapy annually, and currently, over 100,000 patients suffer from
this chronic condition in the U.S. Other therapies used to treat this condition
are generally considered by physicians and patients to be inadequate and are
limited to products that act as wetting agents such as water, lozenges, and
saliva substitutes. Salagen(R) Tablets work by stimulating the residual
functioning tissue in the damaged salivary glands to increase saliva production,
providing patients with a longer-term solution for chronic dry mouth.
Following the marketing launch of Salagen(R) Tablets in the head and neck
cancer market in 1994, the FDA required MGI to conduct several Phase IV studies
which the Company has either completed or is pursuing. These studies include (i)
a two-year carcinogenicity bioassay in rats; (ii) long-term clinical trials in
Sjogren's Syndrome patients to further clarify the relationship of baseline
salivary flow to the effect of Salagen(R) Tablet therapy as well as provide
additional safety data for 5 mg and 10 mg doses; and (iii) determination of the
metabolic clearance rate of Salagen(R) Tablets in a subset of patients with
renal and hepatic insufficiency.
Sjogren's Syndrome Market
Sjogren's Syndrome is a chronic autoimmune disorder in which the body's own
immune system attacks the moisture-producing glands, particularly the salivary
glands, causing them to lose their ability to produce adequate moisture.
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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).
Current therapies, including Salagen(R)Tablets, address symptoms of the
condition rather than its exact underlying cause, which is unknown. The decision
to initiate treatment as well as the intensity of therapy is directly related to
the severity of the patient's symptoms and level of patient complaints,
resulting in a potential prescription market for Salagen(R)Tablets of an
estimated 50,000 individuals.
DIDRONEL(R) I.V. INFUSION
Didronel(R) I.V. Infusion (etidronate disodium) is used to treat
hypercalcemia (elevation of blood calcium) of malignancy, which is the most
common life-threatening metabolic disorder associated with cancer. Hypercalcemia
causes mental confusion, nausea and vomiting, loss of kidney function, and, if
left untreated, death. The condition affects up to 20% 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 lung and breast tumors).
MGI purchased Didronel(R) I.V. Infusion from Procter & Gamble
Pharmaceutical, Inc. in January 1990 for the purpose of setting up MGI's sales
and marketing organization in advance of introducing a major product to the
market. Although sales of Didronel(R) I.V. Infusion have declined over the last
several years following the introduction of competing products, sales of this
product enabled MGI to establish its sales and marketing organization, develop
relationships with key oncologists across the United States, and build a
presence in the medical community.
INFED(R) IRON DEXTRAN INJECTION
In March 1997, MGI entered into a promotion agreement with Schein
Pharmaceutical, Inc. whereby MGI would market INFeD(R)(iron dextran injection,
USP 50 mg/ml) to the cancer market as a treatment for documented iron deficiency
anemia in patients for whom oral administration of iron is unsatisfactory or
impossible. Schein has been promoting INFeD(R)for iron deficiency anemia in the
renal dialysis market since 1994. MGI began actively marketing INFeD(R)in July
1997. In October 1997, MGI initiated clinical trials in cancer patients with
anemia to produce additional supportive data for the product's use in the
oncology marketplace.
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Schein and the Company believe that approximately one third of all cancer
patients suffer from anemia, with an estimated two thirds of these anemic
patients suffering from iron deficiency. Given that there are about 1.5 million
cases of cancer in the United States each year, the Company believes the number
of cancer patients suffering from iron deficiency to be about 300,000.
ACYLFULVENES
In September 1993, MGI acquired the rights to the acylfulvenes, a new
category of anti-cancer agents that have the potential to treat solid tumors,
including those that do not respond to or have become resistant to other
therapies. While still in the early stages of development, these compounds have
a novel mechanism of action that appears to inhibit the growth of tumor cells
without being excessively toxic to healthy cells. Laboratory and animal studies
with these agents have demonstrated their ability to kill many types of human
tumors growing in animals more effectively than currently marketed anti-cancer
agents.
During 1994, MGI made progress in the preclinical development of one
particular acylfulvene analog, MGI 114. Preclinical efficacy studies with this
analog showed impressive results against human tumors transplanted to mice,
especially non-small cell lung, breast, squamous cell carcinoma and colon
tumors. Dainippon Pharmaceutical Co., Ltd., MGI's Japanese partner for
acylfulvene development, replicated MGI's results in these tumor lines as well
as in others. Preclinical toxicity testing of MGI 114 began in late 1994 and is
ongoing.
An Investigational New Drug application was submitted to the FDA in
September 1995 and human Phase I clinical safety testing was initiated in
December 1995 and advanced throughout 1996 and 1997. MGI expects the first Phase
I study to continue in 1998 until such time that a maximum tolerated dose is
reached and a recommended dose for Phase II testing is established. The Company
also initiated a second Phase I trial with this drug during 1997 to broaden the
number of patients exposed to the drug and evaluate the effectiveness of a
different dosing schedule. The combined data from these Phase I trials will be
used to determine appropriate tumor targets and doses for entering Phase II
studies. In October 1996, the Company entered into a clinical trials agreement
with the National Cancer Institute ("NCI") under which NCI will sponsor and
oversee (at its own expense) clinical research using MGI 114 in its network of
designated cancer centers.
RESEARCH AND DEVELOPMENT
MGI maintains active development programs for new drug candidates for
possible future marketing opportunities. In doing so, MGI has incurred
significant research and development costs and anticipates more of the same in
the coming years. The Company's research and development expenses decreased 37
percent in
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1997 from 1996 after the submission of the sNDA for Salagen(R) Tablets in
February 1997. The 1997 costs were primarily related to the continuing Phase I
program for MGI 114. In 1998, MGI anticipates that research and development
spending will increase as the Company advances MGI 114 into the next Phase of
human clinical development. Supporting such research and development costs will
be increases in sales of Salagen(R) Tablets for Sjogren's Syndrome and funds
received from Dainippon Pharmaceutical, the Company's Japanese partner for the
acylfulvenes. Future research and development funds may be secured from
internally generated funds, debt or equity financings, joint ventures, strategic
alliances, co-promotion arrangements or other sources of capital. A merger or
acquisition may also be considered in order to expand the research and
development pipeline and allow for a greater mix of products to be introduced in
the market by the MGI sales force.
MANUFACTURING
MGI does not have and does not intend to develop facilities to manufacture
any of its drugs in the near future. The Company's marketed and development
stage pharmaceuticals are manufactured under various agreements with third party
manufacturers. MGI's manufacturing and quality assurance personnel do, however,
authorize, monitor, and approve virtually all aspects of the manufacturing
process. In-process and finished product inventories are analyzed through
independent testing laboratories and the results reviewed and approved by MGI
prior to release for distribution.
MGI generally carries at least one year of inventory of each of its
marketable products as safety stock. The Company tries to secure dual suppliers
for each product category whenever possible. The Company also has a policy to
fill orders by wholesalers on demand, and does not intend to carry a backlog of
orders at any time.
SALAGEN(R) TABLETS
MGI obtains pilocarpine hydrochloride, the active drug substance for the
manufacture of Salagen(R) Tablets, under a supply agreement with EM Industries,
Incorporated of Hawthorne, New York. The refined raw material is an extract from
plants grown and processed exclusively on carefully managed plantations in South
America. The Company believes that the supply of pilocarpine hydrochloride is
adequate for the foreseeable future. Salagen(R) Tablets are currently
manufactured at Boehringer Ingelheim Pharmaceutical, Inc. ("Boehringer") in
Danbury, Connecticut and at Global Pharm Inc. in Toronto, Ontario, Canada
pursuant to manufacturing contracts between MGI and each of those companies.
Boehringer has notified MGI that it will be discontinuing commercial
manufacturing at its Danbury, Connecticut facility and will discontinue
providing contract manufacturing services to third parties such as MGI, although
Boehringer will
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continue to provide contract manufacturing services to MGI through the
expiration of the Company's supply agreement in March 1998. In addition, MGI has
entered into a letter of agreement with Boehringer for continuation of
production of Salagen(R) Tablets through the end of 1998. The Company has
identified several alternative contract manufacturers for Salagen(R) Tablets to
replace Boehringer, but has not yet initiated any qualification work.
DIDRONEL(R) I.V. INFUSION
Pharmaceutical grade etidronate disodium for the manufacture of Didronel(R)
I.V. Infusion is obtained from Procter & Gamble Pharmaceuticals, Inc. in
Norwich, New York, under a supply agreement. The agreement provides for
automatic renewal for one-year terms unless either party gives written notice of
termination at least 180 days prior to the end of each calendar year.
Didronel(R) I.V. Infusion is currently manufactured at Taylor Pharmaceuticals, a
wholly owned subsidiary of Akorn, Inc. in Decatur, Illinois. Ben Venue
Laboratories, Inc. of Bedford, Ohio is an approved alternate contract
manufacturer of Didronel(R) I.V. Infusion.
OTHER MANUFACTURING AGREEMENTS
As a regular part of its business, MGI establishes from time to time
contract manufacturing arrangements for its development-stage pharmaceuticals.
These arrangements are typically short-term and generally include supply
agreements for the active pharmaceutical drug substance and development-scale
manufacturing contracts for the production of clinical supplies.
PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY
MGI intends to use patents and orphan drug designation to protect its
licensed technology. The term of a U.S. patent issued from an application filed
before June 8, 1995 is the longer of seventeen years from its issue date or
twenty years from its effective filing date. The term of a U.S. patent issuing
from an application filed after June 8, 1995 is twenty years from its effective
filing date. All of the allowed applications were filed prior to, or issued from
applications filed before June 8, 1995. The Drug Price and Competition and
Patent Term Restoration Act of 1984 (Public Law 98-417) and the Generic Animal
Drug and Patent Term Restoration Act (Public Law 100-670) 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 United States 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
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may receive. There can be no assurance that any issued patents will provide
competitive advantages for particular products or will not be challenged or
circumvented by competitors, or that any patent applications will be approved.
Orphan drugs are currently provided seven years market exclusivity for an
approved indication following approval to market by the FDA. Orphan drug
designation for the Company's products does not, however, insulate the Company
from other manufacturers attempting to develop an alternate drug for the
designated indication, or the designated drug for another, separate indication.
Current patent and orphan drug status with respect to certain of MGI's
products are as follows:
- - Upon FDA approval of Salagen(R) Tablets for marketing on March 22, 1994,
MGI was granted orphan drug exclusivity for the head and neck cancer market
by the Office of Orphan Products Development of the FDA, thereby affording
seven years of exclusivity for Salagen(R) Tablets for that indication. Upon
FDA approval of Salagen(R) Tablets for treatment of the symptoms of dry
mouth resulting from Sjogren's Syndrome on February 11, 1998, MGI was
granted orphan drug exclusivity for the new indication by the Office of
Orphan Products Development of the FDA, thereby affording seven years of
exclusivity for Salagen(R) Tablets for that indication.
- - In April 1996, the U.S. Patent and Trademark Office notified the Company
that it would grant two patents covering MGI 114 and additional acylfulvene
analogs. In June and October 1996, these patents were issued to the
University of California, from which the Company holds an exclusive
license, covering MGI 114 and certain other acylfulvene analogs. These
patents complement two previously issued (both on August 8, 1995) U.S.
patents covering a method of using MGI 114 and other acylfulvene analogs to
inhibit certain tumor cell growth. The Company also has licensed, pending
or granted foreign patents on MGI 114 and its analogs in over 30 countries
worldwide. Patent applications covering an even broader base of acylfulvene
analogs are pending in the United States and foreign jurisdictions.
The Company has obtained trademark registration on the "Salagen" trademark
in the United States and certain foreign jurisdictions, and is seeking broad
trademark protection for "Salagen" worldwide. In addition, the Company uses the
federally registered "Didronel" trademark under a license agreement with Procter
& Gamble Pharmaceutical, Inc.
COMPETITION
The pharmaceutical industry is intensely competitive, based mostly on
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product performance and pricing. Many members of the industry have resources far
greater than MGI, providing them with potentially greater flexibility in
developing and marketing their products. Additionally, the biotechnology
industry may intensify competition as new developments are brought to market.
While the Company will seek to protect its 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
insulate the Company from competition from products with different chemical
composition or products made using different technology. There can be no
assurance that the Company will be successful in its plan to gain product
specific protection for each of its pharmaceuticals or that developments by
others will not render the Company's products noncompetitive or obsolete. The
pharmaceutical industry is also characterized by a large number of companies,
none of which have a major market share. Consolidation within the industry has
already become a means by which companies are expanding market share and
additional consolidation within the industry is expected.
Salagen(R) Tablets is the first systemic pharmacologic treatment for dry
mouth. Persons suffering from dry mouth in the past have used water, sugar-free
hard candies and lozenges and over-the-counter saliva substitutes to moisten
their mouths. The Company does not believe that any of these products are direct
competitors, but anticipates that they may be used in conjunction with
Salagen(R) Tablets.
GOVERNMENT REGULATION
In order to manufacture and market most health care products for human use,
approval of the FDA and comparable agencies in foreign countries must first be
obtained. The FDA has established mandatory procedures to regulate the
manufacturing and testing process to assure safety, potency and efficacy of the
final product. The procedure for seeking and obtaining FDA approval of a new
product involves many steps, including animal testing and clinical testing on
humans to determine safety, efficacy and potential toxicity. Even after initial
FDA approval has been obtained, further studies may be required to provide
additional data on safety and/or efficiency in order to obtain approval for uses
other than those for which the product was initially tested. The process of
seeking and obtaining FDA approval of a new product can take several years and
often involves the expenditure of substantial resources without any assurance
that approval for marketing will be granted. 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 and surveillance programs may also be required.
In addition, before, during and after the process of approval, the Company's
prescription drug products must all be manufactured in accordance with Good
Manufacturing Practices as set forth by the
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FDA. As the Company has expanded the reach of its products world-wide through
alliances such as those described earlier, the Company's products have become
subject to similar regulatory requirements of regulatory agencies comparable to
the FDA in other countries.
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 the Company include managed care initiatives, pharmaceutical buying
groups and formulary requirements. The Company is unable to predict when any
proposed health care reforms will be implemented, if ever, or the effect of any
implemented reforms on the Company's business.
Federal, state and local environmental laws and regulations do not
materially affect the Company's operations and the Company believes that it is
currently in material compliance with such applicable laws and regulations.
HUMAN RESOURCES
As of March 16, 1998, MGI had 65 full time employees. Of MGI's employees,
30 are engaged in the Company's marketing and selling effort, 19 are involved in
pharmaceutical development, including regulatory interaction and manufacturing,
and 16 are in other management or administrative positions. No employee of the
Company is represented by a labor union or is subject to a collective bargaining
agreement. The Company believes that its relations with its employees are
satisfactory.
EXPORT SALES
Although MGI provides bulk drug substance and marketable drug product (for
Salagen(R) Tablets) to its international partners and distributors, the dollar
amount relative to such transfers have, to date, been immaterial to MGI's
financial condition. The Company does have, and will continue to maintain,
appropriate international transfer prices for the sale of products to licensees
and distributors.
ITEM 2. PROPERTIES
The Company leases office space consisting of approximately 15,000 square
feet in the Opus Center complex located in Minnetonka, Minnesota for its
operations. The office lease will expire in September 1999. The Company believes
that its existing facilities will be adequate to meet its needs for the
foreseeable future.
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ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on The Nasdaq National Market under the
symbol "MOGN." As of March 16, 1997, the Company had approximately 980
shareholders of record and 14,215,380 shares of common stock outstanding. The
Company has not paid cash dividends on its common stock and has no present
intention of paying cash dividends on its common stock.
The following table sets forth the high and low last daily sales prices as
reported by Nasdaq for the periods indicated. Prices represent transactions
between dealers and do not reflect retail markups, markdowns, or commissions,
and may not necessarily represent actual transactions.
HIGH LOW
------ -----
1997
First quarter $5-1/2 $3-7/8
Second Quarter 4-3/4 3-1/2
Third Quarter 5-1/8 3-3/16
Fourth Quarter 5-9/16 3-1/2
1996
First quarter $5-7/8 $3-3/4
Second Quarter 6-5/8 3-5/8
Third Quarter 6-1/2 4-5/8
Fourth Quarter 5-3/8 4
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ITEM 6: SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
MGI PHARMA, INC.
STATEMENT OF OPERATIONS DATA:
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenues $ 13,310 $ 9,580 $ 13,283 $ 6,796 $ 3,778
Total costs and
expenses 15,095 16,202 15,897 16,493 15,501
-------- -------- -------- -------- --------
Net loss $ (1,785) $ (6,622) $ (2,614) $ (9,697) $(11,723)
======== ======== ======== ======== ========
Net loss per
common share (a) $ (.13) $ (.50) $ (.21) $ (.82) $ (1.03)
Weighted average shares
outstanding 14,116 13,179 12,509 11,784 11,415
</TABLE>
BALANCE SHEET DATA:
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash and investments $15,056 $17,888 $17,979 $16,637 $22,938
Total assets 18,191 20,163 20,515 20,284 25,641
Total liabilities 3,172 3,796 3,783 4,245 2,895
Common stockholders'
equity (b) 15,019 16,367 16,732 16,038 22,745
</TABLE>
(a) Basic and diluted loss per share amounts are identical as the effect of
potential common shares is antidilutive
(b) No common stock cash dividends have been declared or paid by the Company.
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ITEM 7: 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 differentiated specialty pharmaceutical and medical
products for therapeutic markets of unmet need. MGI's current product portfolio
is comprised of products that address special needs in the fields of oncology
and rheumatology, however, the company plans to expand its scope as it grows its
business. 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 majority of company sales. The company is commercializing its products
outside the United States through various alliances, and has agreements with
several international pharmaceutical companies to commercialize Salagen(R)
Tablets outside the U.S., including the major markets of Europe, Japan and
Canada. Current product development efforts include clinical and preclinical
studies for MGI 114, the lead compound in a family of promising anti-cancer
analogs, and continued clinical support of Salagen(R) Tablets. Exclusive rights
to MGI 114 and the other acylfulvene analogs were granted to Dainippon
Pharmaceutical Co., Ltd. under a cooperative development and commercialization
agreement in 1995.
RESULTS OF OPERATIONS
The company's net loss decreased 73 percent to $1,784,545 in 1997, following a
153 percent increase from $2,614,478 in 1995 to $6,621,747 in 1996. The
decreased loss from 1996 to 1997 resulted from increased sales and licensing
revenue, and decreased expenses. The increased loss from 1995 to 1996 resulted
primarily from realization of non-recurring licensing revenue in 1995.
Sales revenues increased 45 percent to $9,344,548 in 1997, following a 40
percent increase from $4,607,231 in 1995 to $6,459,550 in 1996. The increases
reflect increasing sales of Salagen(R) Tablets. Sales revenues were flat from
the 1997 third quarter to the 1997 fourth quarter, following a 29 percent
increase from the 1997 second quarter to the 1997 third quarter. The trend in
retail demand for Salagen(R) Tablets, as estimated using shipment activity from
wholesalers to pharmacies, has continued to grow. Approval of Salagen(R) Tablets
during February 1998 as a treatment for Sjogren's Syndrome symptoms should help
extend this growth trend. Future MGI sales revenues will fluctuate from quarter
to quarter, due to periodic adjustments in wholesaler buying patterns.
14
<PAGE>
Cost of sales increased 13 percent to $767,680 in 1997, following a 12 percent
decrease from $771,912 in 1995 to $677,610 in 1996. The 1997 increase resulted
from an increase in unit sales. Although unit sales increased in 1996 as well,
the decrease in cost of sales from 1995 to 1996 resulted from the impact of an
additional $140,000 provided for excess inventory in 1995. Additionally, the
product mix has continued to change, with increasing Salagen(R) Tablet sales and
declining DIDRONEL(R) I.V. Infusion sales. Management believes that cost of
sales as a percent of sales of approximately 10 percent should continue for its
current products.
Licensing revenue increased 42 percent to $3,090,375 in 1997, following a 72
percent decrease from $7,718,094 in 1995 to $2,170,460 in 1996. The increase
from 1996 to 1997 resulted primarily from receipt in 1997 of a $747,000
milestone payment from Kissei Pharmaceutical Co., Ltd., as a result of Kissei's
advancement of Salagen(R) Tablets into a Phase III human clinical program. The
decrease from 1995 to 1996 resulted from non-recurring licensing revenue in
1995, including a $3 million payment from DEKALB Genetics Corporation, in
conjunction with the transfer of certain non-core agricultural technology to
DEKALB, and a $1 million milestone payment from Chiron B.V., following approval
of Salagen(R) Tablets for marketing in the United Kingdom. In 1995, the company
also received nearly $3 million from Dainippon, in conjunction with granting the
license to develop and market acylfulvenes in Japan. However, the magnitude of
the 1996 decrease was lessened by $1,485,000 in recurring quarterly milestone
payments received from Dainippon. Future licensing revenues will likely
fluctuate between years and from one quarter to the next depending on current
partners' achievement of milestones and the amount of their recurring royalty
generating activities, and the timing of initiating additional licensing
relationships.
Interest and other income decreased 8 percent to $875,906 in 1997, following a 1
percent decrease from $957,785 in 1995 to $949,982 in 1996. The decrease from
1996 to 1997 resulted from a decrease in the average amount of funds available
for investment in 1997. This decrease was lessened by an increased investment
yield in 1997. The decrease in interest income from 1995 to 1996 resulted from a
decreased investment yield. This decrease was lessened by an increase in the
average amount of funds available for investment in 1996, reflecting the net
proceeds from the September 1996 issuance of common shares in a public stock
offering. Until the company achieves positive cash flow, the amount of funds
available for investment will continue to decline. Interest income would
correspondingly decline, if yields were to remain constant.
Research and development expense decreased 37 percent to $4,988,584 in 1997,
following an 8 percent increase from $7,266,597 in 1995 to
15
<PAGE>
$7,865,475 in 1996. The decrease from 1996 to 1997 resulted from reduced
spending for Salagen(R) Tablets, following submission of a supplemental New Drug
Application (sNDA) to the U.S. Food and Drug Administration in February 1997.
The increase from 1995 to 1996 resulted from increased development of Salagen(R)
Tablets in anticipation of the sNDA filing. Research and development spending is
expected to increase in 1998, when MGI 114, the lead acylfulvene analog, enters
the next stage of clinical development.
Selling, general and administrative expenses increased 22 percent to $9,339,110
in 1997, following a 2 percent increase from $7,487,413 in 1995 to $7,658,654 in
1996. The increase from 1996 to 1997 resulted from the completion of the
restructuring of the company's Sales and Marketing organization, which began in
1996, as well as promotion costs associated with the launch of
INFeD(R)(injectable iron dextran) in the third quarter of 1997. The company
began promoting INFeD(R) for use in cancer therapy in July 1997, under a
promotion agreement with Schein Pharmaceutical, Inc. Schein continues to own the
product and promote it for other uses. The increase from 1995 to 1996 resulted
from the start of the Sales and Marketing restructuring. Selling expenses are
expected to increase in 1998, especially in conjunction with the April 1, 1998
launch of Salagen(R) Tablets for treatment of Sjogren's syndrome symptoms.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the company had cash and investments of $15,055,923 and
working capital of $13,980,555 compared to $17,887,823 and $15,819,637,
respectively, at December 31, 1996. During the year ended December 31,
1997, the company used cash of $2,327,789 for 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
MGI 114, Salagen(R) Tablets and prospective products acquired from the company's
product acquistion strategy, the company plans to utilize cash provided from the
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 or debt issuances, or
it will manage the pace of developing its product candidates.
16
<PAGE>
The company has considered the effect of Year 2000 computer processing issues on
its internal computer systems and applications, and its external relationships.
The Year 2000 issue results from computer programs using two digits rather than
four digits to define the applicable year. Due to recent and ongoing upgrading
of these information systems for other business purposes, Year 2000 issues are
not expected to have any material affect on the company's business, financial
position, or results of operations.
CAUTIONARY STATEMENT
This document contains forward-looking statements within the meaning of the
federal securities laws. These statements include representations 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 a license acquisition strategy,
uncertainty of strategic alliances, and other risks and uncertainties detailed
from time to time in the company's filings with the Securities and Exchange
Commission, including Exhibit 99 to its Annual Report on Form 10-K for the year
ending December 31, 1997.
17
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BALANCE SHEETS
MGI PHARMA, INC.
December 31, December 31,
1997 1996
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents ............. $ 7,057,091 $ 8,220,569
Short-term investments ................ 7,998,832 9,667,254
Receivables, less allowances of $84,215
and $68,254 ......................... 1,073,993 1,079,970
Inventories ........................... 838,058 594,164
Prepaid expenses ...................... 184,280 53,436
----------- -----------
Total current assets ............... 17,152,254 19,615,393
Equipment and furniture, at cost
less accumulated depreciation of
$808,720 and $775,810 ................. 618,862 227,134
Other assets ............................ 419,904 320,517
----------- -----------
Total assets ............................ $18,191,020 $20,163,044
=========== ===========
(Continued)
18
<PAGE>
BALANCE SHEETS
Page 2
December 31, December 31,
1997 1996
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts Payable $ 384,428 $ 744,052
Accrued Expenses 2,331,016 3,043,993
Deferred Revenue 450,000 --
Other Current Liabilities 6,255 7,711
------------ ------------
Total current liabilities 3,171,699 3,795,756
------------ ------------
Stockholders' equity:
Common Stock, $0.01 Par Value,
30,000,000 Authorized Shares,
14,195,563 And 14,081,574
Issued And Outstanding Shares 141,956 140,816
------------ ------------
Additional paid-in capital 89,222,575 88,789,495
Notes receivable from officers (102,575) (104,933)
Accumulated deficit (74,242,635) (72,458,090)
------------ ------------
Total stockholders' equity 15,019,321 16,367,288
------------ ------------
Commitments (Note 5)
Total liabilities and
stockholders' equity $ 18,191,020 $ 20,163,044
------------ ------------
See accompanying notes to financial statements.
19
<PAGE>
STATEMENTS OF OPERATIONS
MGI PHARMA, INC.
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Revenues:
Sales $ 9,344,548 $ 6,459,550 $ 4,607,231
Licensing 3,090,375 2,170,460 7,718,094
Interest and other 875,906 949,982 957,785
------------ ------------ -------------
13,310,829 9,579,992 13,283,110
Costs and expenses:
Research and development 4,988,584 7,865,475 7,266,597
Cost of sales 767,680 677,610 771,912
Selling, general and
administrative 9,339,110 7,658,654 7,487,413
Amortization of
intangible assets -- -- 371,666
------------ ------------ ------------
15,095,374 16,201,739 15,897,588
------------ ------------ ------------
Net loss $ (1,784,545) $ (6,621,747) $ (2,614,478)
============ ============ ============
Net loss per common share (a) $ (0.13) $ (0.50) $ (0.21)
Weighted average number of
common shares outstanding 14,116,471 13,178,790 12,508,639
(a) Basic and diluted loss per share amounts are identical as the effect of
potential common shares is antidilutive.
See accompanying notes to financial statements.
20
<PAGE>
STATEMENTS OF CASH FLOWS
MGI PHARMA, INC.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,784,545) $ (6,621,747) $ (2,614,478)
Adjustments for non-cash items:
Depreciation and asset amortization 180,935 96,907 476,702
Deferred revenue amortization -- -- (777,778)
Benefit plan contribution 259,727 210,981 185,501
Other 15,154 -- (39,264)
Changes in operating assets and liabilities:
Receivables 5,977 (349,790) (245,327)
Inventories (243,894) 409,114 383,631
Prepaid expenses (130,844) (10,019) 552,329
Accounts payable and accrued expenses (1,078,843) 119,084 331,682
Deferred revenue 450,000 -- --
Other current liabilities (1,456) 386 19,435
------------ ------------ ------------
Net cash used in operating
activities (2,327,789) (6,145,084) (1,727,567)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of investments (15,688,037) (23,802,567) (21,469,232)
Maturity of investments 17,356,458 23,038,675 22,474,454
Purchase of equipment and furniture (572,663) (80,844) (4,066)
Payments on notes receivable 2,358 480,924 160,066
Other (99,387) (9,817) (94,038)
------------ ------------ ------------
Net cash provided by (used in)
investing activities 998,729 (373,629) 1,067,184
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of shares, net -- 5,497,611 2,837,687
Issuance of shares under employee
stock plans 165,582 166,102 170,259
------------ ----------- ------------
Net cash provided by financing
activities 165,582 5,663,713 3,007,946
------------ ----------- ------------
Increase (decrease) in cash and
cash equivalents (1,163,478) (855,000) 2,347,563
Cash and cash equivalents at
beginning of year 8,220,569 9,075,569 6,728,006
------------ ------------ ------------
Cash and cash equivalents at
end of year $ 7,057,091 $ 8,220,569 $ 9075,569
============ ============ ===========
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
STATEMENTS OF STOCKHOLDERS' EQUITY
MGI PHARMA, INC.
<TABLE>
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE TOTAL
COMMON PAID-IN FROM ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL OFFICERS DEFICIT EQUITY
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 $ 119,455 $ 79,706,292 $ (565,586) $(63,221,865) $ 16,038,296
Exercise of stock options,
16,847 shares 169 68,820 -- -- 68,989
Employee stock purchase plan,
31,746 shares 317 100,953 -- -- 101,270
Employee retirement savings plan
contribution, 37,471 shares 375 166,631 -- -- 167,006
Issuance of shares, 750,000 shares 7,500 2,830,187 -- -- 2,837,687
Note payment -- -- 133,504 -- 133,504
Net loss -- -- -- (2,614,478) (2,614,478)
------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1995 127,816 82,872,883 (432,082) (65,836,343) 16,732,274
Exercise of stock options,
15,746 shares 158 60,054 -- -- 60,212
Employee stock purchase plan,
28,203 shares 282 105,608 -- -- 105,890
Employee retirement savings plan
contribution, 44,325 shares 443 208,457 -- -- 208,900
Issuances of shares, 1,200,000 shares 12,000 5,485,611 -- -- 5,497,611
Other issuances, 11,692 shares 117 56,882 (56,999) -- --
Note payment -- -- 384,148 -- 384,148
Net loss -- -- -- (6,621,747) (6,621,747)
------------ ----------- ----------- ------------ -----------
BALANCE AT DECEMBER 31, 1996 140,816 88,789,495 (104,933) (72,458,090) 16,367,288
Exercise of stock options,
5,675 shares 57 39,869 -- -- 39,926
Employee stock purchase plan,
45,916 shares 459 140,351 -- -- 140,810
Employee retirement savings plan
contribution, 62,398 shares 624 252,860 -- -- 253,484
Note payment -- -- 2,358 -- 2,358
Net loss -- -- -- (1,784,545) (1,784,545)
------------ ------------ ------------- ------------- -------------
BALANCE AT DECEMBER 31, 1997 $ 141,956 $ 89,222,575 $ (102,575) $(74,242,635) $ 15,019,321
===========================================================================
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS MGI PHARMA, INC. (MGI or the company) is a
pharmaceutical company that acquires, develops and markets differentiated
specialty pharmaceutical and medical products for therapeutic markets of unmet
need. MGI's current product portfolio is comprised of products that address
special needs in the fields of oncology and rheumatology, however, the company
plans to expand its scope as it grows its business. 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 majority of company sales.
The company is commercializing its products outside the United States through
various alliances, and has agreements with several international pharmaceutical
companies to commercialize Salagen(R) Tablets outside the U.S., including the
major markets of Europe, Japan and Canada. Current product development efforts
include clinical and preclinical studies for MGI 114, the lead compound in a
family of promising anti-cancer analogs, and continued clinical support of
Salagen(R) Tablets. Exclusive rights to MGI 114 and the other acylfulvene
analogs were granted to Dainippon Pharmaceutical Co., Ltd. under a cooperative
development and commercialization agreement in 1995.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The company considers 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 time of purchase
are classified as short-term investments.
The company classifies short-term marketable security investments as
held-to-maturity investments because it has the intent and the ability to hold
its 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 and other income in the accompanying statements of operations.
CONCENTRATION OF CREDIT RISK Financial instruments that may subject the company
to significant concentrations of credit risk consist primarily of short-term
marketable security investments and trade receivables.
Cash in excess of current operating needs is invested 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.
The company grants credit primarily to pharmaceutical wholesale distributors
throughout the United States in the normal course of business. Customer credit
worthiness is routinely monitored and collateral is not normally required.
23
<PAGE>
INVENTORIES Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
INTANGIBLE ASSETS In connection with a product acquisition, the company
recognized intangible assets under the purchase method of accounting. The
acquired assets were recorded at their estimated fair market values as of the
date of acquisition, with the excess purchase price over these values recorded
as goodwill. These assets, including goodwill, were fully amortized at December
31, 1995.
SALES RECOGNITION Sales and related costs are recognized upon shipment of
product to customers. Sales are recorded net of provisions for returns,
discounts, Medicaid rebates and chargebacks.
LICENSING REVENUE RECOGNITION Licensing revenue is recognized when underlying
performance criteria for payment have been met and the company has an
unconditional right to such payment. Depending on a license agreement's terms,
recognition criteria may be satisfied upon achievement of milestones, passage of
time or product sales by the licensee. Payments received by the company in
excess of amounts earned are classified as deferred revenue.
STOCK BASED COMPENSATION The company applies the intrinsic value method
described in APB Opinion No. 25 in accounting for the issuance of stock
incentives to employees and directors and, accordingly, no compensation expense
has been recognized in the financial statements. Effective January 1, 1996, in
accordance with Statement of Financial Accounting Standards No. 123, Accounting
for Stock Based Compensation, pro forma information reflecting compensation cost
for such issuances is presented in the Stockholders' Equity footnote.
ADVERTISING AND PROMOTION EXPENSE Costs of advertising and promotion are
expensed as incurred and were $1,241,214, $1,012,727 and $1,163,320 in 1997,
1996 and 1995, respectively. The company does 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.
INCOME TAXES Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial carrying amounts
of existing assets and liabilities and their respective tax bases.
LOSS PER COMMON SHARE Effective December 31, 1997, the company adopted Statement
of Financial Accounting Standards No. 128, Earnings per Share. SFAS 128
simplifies the computation of earnings per share ("EPS") previously required by
replacing primary and fully diluted EPS with basic and diluted EPS. Under SFAS
128, basic EPS is calculated by dividing net earnings (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 based upon the weighted-average fair value of
24
<PAGE>
the company's common shares during the period. For each period presented, basic
and diluted loss per share amounts are identical, as the effect of potential
common shares is antidilutive.
USE OF ESTIMATES Preparation of financial statements in conformity with
generally accepted accounting principles 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 with the current year presentation.
2. SHORT-TERM INVESTMENTS
Held-to-maturity investments, stated at amortized cost, which approximates
estimated fair value, at December 31, 1997 and 1996 are summarized as follows:
1997 1996
---------- ----------
Commercial paper $5,035,698 $1,583,916
Certificates of deposit 2,091,522 2,052,786
Corporate notes 871,612 5,031,651
Bankers acceptance -- 998,901
---------- ----------
$7,998,832 $9,667,254
========== ==========
3. INVENTORIES
Inventories at December 31, 1997 and 1996 are summarized as follows:
1997 1996
-------- --------
Raw materials and supplies $ 12,436 $ 13,543
Work in process 662,337 107,080
Finished products 163,285 473,541
-------- --------
$838,058 $594,164
======== ========
4. ACCRUED EXPENSES
Accrued expenses at December 31, 1997 and 1996 are summarized as follows:
1997 1996
---------- ----------
Bonuses $ 489,000 $ 493,519
Product development commitments 368,248 1,615,397
Product return accrual 305,044 122,453
Inventory in process 194,843 --
Retirement plan contribution 177,249 110,374
Retirement commitment -- 243,721
Other accrued expenses 796,632 458,529
---------- ----------
$2,331,016 $3,043,993
========== ==========
5. LEASES
The company leases office space and computer software under noncancellable lease
agreements that contain renewal options and require the company to pay operating
costs, including property taxes, insurance and maintenance. Rent expense was
$396,092, $357,161 and
25
<PAGE>
$334,534 in 1997, 1996 and 1995, respectively. Future minimum lease payments
under noncancellable lease agreements approximate $352,634 for 1998, $264,476 in
1999, and $0 thereafter.
6. LICENSING ARRANGEMENTS
During 1995, MGI entered into a cooperative development and commercialization
agreement with Dainippon Pharmaceutical Co., Ltd., a Japanese pharmaceutical
company, whereby MGI granted Dainippon exclusive rights to its acylfulvenes in
Japan. Under this agreement, Dainippon is expected to make milestone payments
during the precommercial phase and MGI will participate in the commercial
success of the drug product in Japan by supplying Dainippon with bulk drug
substance. Quarterly license payments are scheduled to be received into 2000.
The precommercial phase will conclude upon receipt of approval to market the
first acylfulvene product in Japan and payment of the approval milestone by
Dainippon. In conjunction with this 1995 agreement, MGI issued 750,000 shares of
common stock to Dainippon and received net proceeds of $2.8 million from this
issuance. Additionally, in 1995, Dainippon made license payments to MGI
totalling nearly $3 million.
During 1994, MGI licensed exclusive rights to commercialize Salagen(R) Tablets
in Japan to Kissei Pharmaceutical Co., Ltd., a Japanese pharmaceutical company.
Kissei is scheduled to make certain milestone payments, with the final milestone
payment due upon its filing for product approval in Japan. MGI will participate
in the commercial success of the product through royalty payments based on
product sales in Japan. In conjunction with this 1994 license, MGI issued
217,054 shares of common stock to Kissei at a premium over market value. The
issuance premium of $1,166,667 was amortized evenly to licensing revenues
through December 31, 1995. Total proceeds of $3.5 million from the stock
issuance were used to supplement funding of MGI's clinical studies of Salagen(R)
Tablets as a treatment for Sjogren's syndrome symptoms. In 1997, a $747,000
milestone payment was received as a result of Kissei's advancement of Salagen(R)
Tablets into a Phase III human clinical program.
MGI has entered into licensing agreements for the commercialization of
Salagen(R) Tablets in Europe and Canada with Chiron B.V. and The Pharmacia &
Upjohn Company, respectively. Under these arrangements, MGI receives payments
based upon product sales in the respective territories. In addition, a
non-recurring $1 million milestone payment was received in 1995 from Chiron as a
result of approval in the first major market in Europe.
During 1995, MGI transferred certain noncore agricultural technology to DEKALB
Genetics Corporation. DEKALB made a one-time payment of $3 million to MGI
for these rights.
To build its product pipeline, the company acquires rights to develop and market
pharmaceuticals and medical 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
26
<PAGE>
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, 1997.
7. STOCKHOLDERS' EQUITY
PUBLIC STOCK OFFERING On September 9, 1996, the company issued 1,200,000 shares
of common stock at $5 per share in a public offering and received proceeds of
$5,497,611 (net of issuance expenses).
COMMON STOCK PURCHASE RIGHTS Until February 2, 1998, each share of the company's
common stock had one Common Stock Purchase Right (Right) attached. Each Right
entitled shareholders to buy one-half of one share of MGI common stock at an
initial exercise price of $12 (subject to adjustment). The Rights became
exercisable only if certain change in ownership control events occurred and the
company did not redeem the Rights. The Rights have expired without being
redeemed or exercised.
STOCK INCENTIVE PLANS Under stock incentive plans, designated persons (including
officers, directors and employees) have been or may be granted rights to acquire
company common stock. These rights include stock options and other equity
rights. At December 31, 1997, 3,309,026 shares of common stock remain reserved
for issuance, of which 1,237,876 shares remain available for grant.
Stock options become exercisable over varying periods and expire up to ten years
from date of grant. Options may be granted in the form of incentive stock
options or nonqualified stock options. The option price for incentive stock
options cannot be less than fair market value on the date of the grant. The
option price for nonqualified stock options may be set by the Board of
Directors.
Stock option activity in the three years ended December 31, 1997 is summarized
as follows:
NUMBER AVERAGE PRICE
OF SHARES PER SHARE
--------- --------------
Outstanding at December 31, 1994 1,187,242 $ 9.70
Granted 661,350 5.73
Exercised (16,847) 4.10
Canceled (210,692) 9.06
---------
Outstanding at December 31, 1995 1,621,053 8.23
Granted 908,707 4.70
Exercised (15,746) 3.82
Canceled (656,562) 7.25
---------
Outstanding at December 31, 1996 1,857,452 6.88
Granted 511,306 4.31
Exercised (5,675) 4.37
Canceled (291,933) 6.31
---------
Outstanding at December 31, 1997 2,071,150 $ 6.34
=========
27
<PAGE>
The following table summarizes information concerning options outstanding and
exercisable at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ------------------------------
WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------- ----------- ---- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$1.00 17,468 1.54 $1.00 17,468 $1.00
$3.12-$3.88 280,054 8.38 $3.71 51,179 $3.63
$4.00-$4.50 369,871 7.57 $4.32 200,664 $4.31
$4.57-$4.82 650,836 8.51 $4.77 323,768 $4.74
$4.87-$5.75 323,004 7.59 $5.51 169,861 $5.63
$6.00-$12.00 142,912 6.14 $10.53 126,296 $10.70
$12.37-$30.00 287,005 6.02 $14.23 224,755 $13.81
------------ -----------
Total 2,071,150 7.61 $6.34 1,113,991 $7.19
============ ===========
</TABLE>
OFFICER LOANS Loans to officers were made to facilitate the purchase of company
stock. The loans are full recourse, unsecured obligations. At December 31, 1997,
$102,575 of principal remains outstanding, which is payable upon demand.
EMPLOYEE STOCK PURCHASE PLAN Under the company's employee stock purchase plan,
substantially all employees may purchase shares of common stock at the end of
semiannual purchase periods at a price equal to the lower of 85% 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% of
regular pay. No compensation expense results from the plan. Shares issued under
the plan were 45,916, 28,203 and 31,746 at average prices of $3.07, $3.76 and
$3.19 per share in 1997, 1996 and 1995, respectively. At December 31, 1997,
26,609 shares remain reserved for future issuance under the plan.
FAIR VALUE OF STOCK PLANS The company applies APB Opinion No. 25 in accounting
for its stock incentive plans for designated persons and, accordingly, no
compensation cost has been recognized in the financial statements for employee
and director stock options granted under its stock plans in the financial
statements. Had the company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123, the company's net
loss would have increased to the pro forma amounts shown below:
28
<PAGE>
1997 1996 1995
---- ---- ----
Net loss:
As reported $(1,784,545) $(6,621,747) $(2,614,478)
Pro forma $(2,679,700) $(7,787,810) $(3,101,513)
Net loss per common share:
As reported $ (0.13) $ (0.50) $ (0.21)
Pro forma $ (0.19) $ (0.59) $ (0.25)
Pro forma net loss only reflects options granted in 1997, 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the options' vesting period
and compensation cost for options granted prior to January 1, 1995 is not
considered.
The per share weighted-average fair value of stock options granted during 1997,
1996 and 1995 was $2.22, $2.27 and $2.64, respectively, on the date of grant,
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
1997 1996 1995
---- ----- ------
Expected dividend yield 0% 0% 0%
Risk-free interest rate 5.40% 6.50% 6.25%
Annualized volatility 0.52 0.45 0.47
Expected life, in years 5 5 5
RETIREMENT SAVINGS PLAN The company's retirement savings plan conforms to
Section 401(k) of the Internal Revenue Code and participation is available to
substantially all employees. Under the savings plan, participants may contribute
a percentage of their eligible compensation for investment in company common
stock or other investment vehicles. The company matches a portion of employees'
contributions and may also make discretionary contributions ratably to all
eligible employees. Company contributions are made in the form of company common
stock and become fully vested when an employee attains five years of service.
Contribution expense was $259,727, $210,981 and $185,501 in 1997, 1996 and 1995,
respectively. The company had 289,448 shares reserved for future issuance under
the savings plan at December 31, 1997.
29
<PAGE>
PREFERRED STOCK At December 31, 1997, 10,000,000 shares of preferred stock
remain issuable. Issuance is subject to Board of Directors' action.
8. MONEY PURCHASE RETIREMENT PLAN
The company sponsors a money purchase retirement plan covering substantially all
employees. Under the plan, the company contributes a percentage of participating
employees' eligible compensation. Company contributions resulted in expense of
$154,615, $126,564 and $139,717 in 1997, 1996 and 1995, respectively.
9. INCOME TAXES
The company incurred losses for both book and tax purposes in each year of the
three-year period ended December 31, 1997, and, accordingly, no income taxes
were provided. Effective tax rates differ from statutory federal income tax
rates in the years ended December 31, 1997, 1996 and 1995 as follows:
1997 1996 1995
---- ---- ----
Statutory federal income tax rate (35.0)% (35.0)% (35.0)%
Valuation allowance increase 13.5 23.6 44.3
Research activities credit (2.7) 1.9 (7.9)
State income taxes, net of federal
benefit (2.5) (2.5) (2.5)
Net operating loss expiration 22.9 10.6 0.0
Other 3.8 1.4 1.1
--------------------------
0.0% 0.0% 0.0%
==========================
30
<PAGE>
Deferred taxes as of December 31, 1997 and 1996 consist of the following:
1997 1996
---- ----
Deferred tax assets:
Receivable allowances $ 31,581 $ 25,596
Inventory allowances 64,312 144,930
Product return allowance 114,392 45,920
Miscellaneous accrued expenses 50,828 142,207
Net operating loss carryforward 28,684,299 28,393,513
Research credit carryforward 2,022,772 1,975,055
Alternative minimum tax credit
carryforward 48,295 48,295
------------ ------------
31,016,479 30,775,516
Less valuation allowance (30,997,459) (30,756,986)
------------ ------------
$ 19,020 $ 18,530
============ ============
Deferred tax liabilities:
Tax depreciation greater than $ 19,020 $ 18,530
book
At December 31, 1997, the company had net operating loss carryforwards of
approximately $76,000,000 for federal income tax purposes, which begin to expire
in 1998. Additionally, the company had research credit carryforwards of
approximately $2,023,000, which begin to expire in 1998. The net change in the
valuation allowance for the years ended December 31, 1997 and 1996 was an
increase of $240,473 and $1,564,854, respectively.
31
<PAGE>
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of quarterly financial results in the years ended
December 31:
FIRST SECOND THIRD FOURTH
-------- -------- -------- -------
(in thousands, except per share amounts)
1997
Total revenues $ 2,879 $ 2,752 $ 3,569 $ 4,111
Net loss (536) (823) (137) (289)
Loss per common share $ (0.04) $ (0.06) $ (0.01) $ (0.02)
Weighted average shares 14,089 14,099 14,135 14,141
1996
Total revenues $ 2,117 $ 2,259 $ 2,229 $ 2,975
Net income loss (804) (1,255) (1,983) (2,581)
Loss per common share $ (0.06) $ (0.10) $ (0.15) $ (0.18)
Weighted average shares 12,784 12,796 13,096 14,030
Loss per common share is computed based upon the weighted average number of
shares outstanding during each period. Basic and diluted loss per share amounts
are identical as the effect of potential common shares is antidilutive.
32
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
MGI PHARMA, INC.:
We have audited the accompanying balance sheets of MGI PHARMA, INC. as of
December 31, 1997 and 1996, and the related statements of operations, cash flows
and stockholders' equity for each of the years in the three-year period ended
December 31, 1997. 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 generally accepted auditing
standards. 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, 1997 and 1996, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 6, 1998
33
<PAGE>
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" on pages 2 through 6 of the Company's Proxy
Statement for its 1998 Annual Meeting of Shareholders, to be held on May 12,
1998 (the "Proxy Statement"), is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the heading "Executive Compensation" on
pages 7 through 15 of the Proxy Statement is incorporated herein by reference,
other than the subsection thereunder entitled "Report of Compensation Committee
on Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the heading "Security Ownership of Certain
Beneficial Owners and Management" on pages 17 through 18 of the Proxy Statement
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the heading "Certain Transactions" on
page 18 of the Proxy Statement is incorporated herein by reference.
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE IN THIS
(a) 1. FINANCIAL STATEMENTS ANNUAL REPORT
-------------------- -------------
Balance Sheets at
December 31, 1997 and 1996 18
Statements of Operations
for the Years Ended December 31,
1997, 1996 and 1995 20
Statements of Cash Flows
for the Years Ended December 31,
1997, 1996 and 1995 21
Statements of Stockholders'
Equity for the Years Ended December 31,
1997, 1996 and 1995 22
Notes to Financial Statements 23
Independent Auditors' Report 33
2. FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report on
Financial Statement Schedule 51
Schedule II - Valuation and Qualifying Accounts 52
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.
35
<PAGE>
3. EXHIBITS
EXHIBIT NO.
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 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 December31,
1994).
*10.6 1982 Incentive Stock Option Plan (Incorporated by reference to Exhibit
10.5 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
36
<PAGE>
*10.7 Stock Acquisition Assistance Loan Program (Incorporated by reference to
Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
*10.8 1997 Stock Incentive Plan (Incorporated by reference to Exhibit 10.8 to
the Company's Annual Report on Form 10-K for the year ended December 31,
1996).
10.9 [Reserved]
*10.10 Termination Agreement, dated as of January 1, 1992, with Charles C.
Muscoplat (Incorporated by reference to Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994).
*10.11 Termination Agreement, dated as of January 1, 1992, with James V. Adam
(Incorporated by reference to Exhibit 10.10 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994).
*10.12 Termination Agreement, dated as of January 1, 1992, with Lori-jean Gille
(Incorporated by reference to Exhibit 10.13 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.)
*10.13 Termination Agreement, dated as of July 10, 1995, with Jon C. Lee
(Incorporated by reference to Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.)
*10.14 Termination Agreement, dated as of April 29, 1996, with Charles N.
Blitzer (Incorporated by reference to Exhibit 10.16 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996).
*10.15 Stock Purchase and Loan Agreement, dated May 14, 1996, between the
Company and Charles N. Blitzer (Incorporated by reference to Exhibit
10.17 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.16 Lease Agreement, dated August 7, 1989, with ALSCOR Investors Joint
Venture, as amended by that certain Amendment to Office Lease, dated
October 30, 1989, with ALSCOR Investors Joint Venture (Incorporated by
reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994).
10.17 Second Amendment to Office Lease, dated May 3, 1991 between the Company
and ALSCOR Investors Joint Venture (Incorporated by reference
37
<PAGE>
to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.18 Third Amendment to Office Lease, dated September 23, 1992 between the
Company and ALSCOR Investors Joint Venture (Incorporated by reference to
Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.19 Fourth Amendment to Office Lease, dated September 23, 1992 between the
Company and ALSCOR Investors Joint Venture (Incorporated by reference to
Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.20 Fifth Amendment to Office Lease, dated March 10, 1995 between the Company
and ALSCOR Investors Joint Venture (Incorporated by reference to Exhibit
10.15 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
10.21 Sixth Amendment to Office Lease, dated March 21, 1997 between the Company
and ALSCOR Investors Joint Venture (Incorporated by reference to Exhibit
10.23 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.22 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).
**10.23 Supply and License Agreement, dated March 19, 1992, among E Merck Fine
Chemicals Division, EM Industries and the Company (filed herewith).
10.24 Supply Agreement, dated December 21, 1993, between the Company and
Boehringer Ingelheim Pharmaceutical, Inc. (Incorporated by reference to
Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.25 Development, Marketing and Cooperation Agreement, dated October23, 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).
10.26 Manufacturing Agreement, dated December 12, 1995, between the Company and
Global Pharm Inc. (Incorporated by reference to Exhibit
38
<PAGE>
10.25 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
**10.27 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 Income (Loss) Per Common Share (filed herewith).
23 Consent of KPMG Peat Marwick LLP (filed herewith).
24 Powers of Attorney (filed herewith).
27 Financial Data Schedule (filed herewith).
99 Cautionary Statements under the Private Securities Litigation Reform Act
of 1995 (filed herewith).
* Items that are management contracts or compensatory plans or arrangements
required to be filed as an exhibit pursuant to Item 14(c) of this Form
10-K.
** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as
amended, confidential portions of Exhibits 10.23 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
The Company filed no reports on Form 8-K during the quarter ended
December 31, 1997.
39
<PAGE>
MGI PHARMA, INC. RETIREMENT SAVINGS PLAN
The following financial statements and schedules of the Company's Retirement
Savings Plan are included herein in lieu of filing a Form 11-K for such plan,
pursuant to General Instruction F to Form 10-K and Rule 15d-21:
PAGE IN THIS
ANNUAL REPORT
-------------
Statements of Net Assets Available for
Participants at December 31, 1997 and 1996 41
Statements of Changes in Net Assets Available
for Participants in the years ended December 31,
1997 and 1996 42
Notes to Financial Statements 44
Schedule 1 - Schedule of Investments Held at
End of Plan Year 48
Schedule 2 - Reportable Transactions 49
40
<PAGE>
STATEMENTS OF NET ASSETS AVAILABLE FOR PARTICIPANTS
MGI PHARMA, INC. Retirement Savings Plan
(unaudited)
December 31,
1997 1996
----------- -----------
Investments at fair value:
Shares of registered investment companies:
Invesco Stable Value $ 210,030 $ 183,800
Vanguard Group:
Fixed Income, GNMA 103,992 72,550
Primecap 284,334 --
Index 500 40,109 --
World, International Growth 235,539 228,750
Fidelity Investments:
Puritan 559,287 274,097
Retirement Growth -- 267,475
MGI PHARMA, INC. common stock 755,951 532,160
Participant notes receivable 46,010 48,284
--------- ---------
2,235,252 1,607,116
Receivables:
Contributions receivable:
Employer 156,747 137,033
Employees -- --
---------- ---------
156,747 137,033
Cash 12,169 14,125
---------- ----------
Net assets available for participants $2,404,168 $1,758,274
========== ==========
See accompanying notes to financial statements.
41
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PARTICIPANTS
MGI PHARMA, INC. Retirement Savings Plan
(unaudited)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------------------------
SHARES OF REGISTERED INVESTMENT COMPANIES
-------------------------------------------------------------------------
VANGUARD GROUP FIDELITY INVESTMENTS
INVESCO ------------------------------------------ --------------------- MGI
STABLE FIXED INCOME WORLD INTL RETIREMENT COMMON
VALUE GNMA PRIMECAP INDEX 500 GROWTH PURITAN GROWTH STOCK
-------- ------------ -------- --------- ---------- ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS:
Investment income:
Net appreciation (depreciation)
in fair value of investments $ -- $ 2,056 $ 4,030 $ 1,754 $(15,085) $ 39,541 $ 47,148 $(78,734)
Dividends 13,479 6,380 7,687 564 16,290 37,481 914 --
Interest -- -- -- -- -- -- -- --
------- -------- -------- ------- -------- ------- -------- --------
13,479 8,436 11,717 2,318 1,205 77,022 48,062 (78,734)
------- -------- -------- ------- -------- ------- -------- --------
Contributions:
Employer -- -- -- -- -- -- -- 110,861
Participants 28,403 12,829 28,997 7,315 74,306 76,532 49,487 38,262
------- -------- -------- ------- -------- ------- -------- --------
28,403 12,829 28,997 7,315 74,306 76,532 49,487 149,123
------- -------- -------- ------- -------- ------- -------- --------
Total additions 41,882 21,265 40,714 9,633 75,511 153,554 97,549 70,389
------- -------- -------- ------- -------- ------- -------- --------
Distributions -- -- (1,029) -- (834) (7,343) (4,747) (7,746)
Transfers between funds, net (15,652) 10,177 244,649 30,476 (67,888) 138,979 (360,277) 161,148
------- -------- -------- ------- -------- ------- -------- --------
Net increase (decrease) 26,230 31,442 284,334 40,109 6,789 285,190 (267,475) 223,791
Net assets available for
participants:
Beginning of year 183,800 72,550 -- -- 228,750 274,097 267,475 532,160
------- -------- -------- ------- -------- ------- -------- --------
End of year $210,030 $103,992 $284,334 $40,109 $235,539 $559,287 $ -- $755,951
======= ======== ======== ======= ======== ======== ======== ========
</TABLE>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------
PARTICIPANT
NOTES OTHER TOTAL
----------- ----- -------
ADDITIONS TO NET ASSETS:
Investment income:
Net appreciation (depreciation)
in fair value of investments $ -- $ -- $ 710
Dividends -- -- 82,795
Interest 4,252 -- 4,252
------ -------- ----------
4,252 -- 87,757
------ -------- ----------
Contributions:
Employer -- 156,747 267,608
Participants -- 8,835 324,966
------ -------- ----------
-- 165,582 592,574
------ -------- ----------
Total additions 4,252 165,582 680,331
------ -------- ----------
Distributions -- -- (21,699)
Transfers between funds, net (6,526) (147,824) (12,738)
------ -------- ----------
Net increase (decrease) (2,274) 17,758 645,894
Net assets available for
participants:
Beginning of year 48,284 151,158 1,758,274
------ -------- ----------
End of year $46,010 $168,916 $2,404,168
====== ======== ==========
See accompanying notes to financial statements.
42
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PARTICIPANTS
MGI PHARMA, INC. Retirement Savings Plan
(unaudited)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------------
SHARES OF REGISTERED INVESTMENT COMPANIES
-------------------------------------------------------------------------
VANGUARD GROUP FIDELITY INVESTMENTS
INVESCO -------------------------- --------------------- MGI
STABLE FIXED INCOME WORLD INTL RETIREMENT COMMON
VALUE GNMA GROWTH PURITAN GROWTH STOCK
------------ ------------ -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Additions to net assets:
Investment income:
Net appreciation (depreciation)
in fair value of investments $ -- $ (1,485) $ 21,351 $ 5,395 $(12,960) $ (32,648)
Dividends 12,395 5,054 9,769 29,909 32,434 --
Interest -- -- -- -- -- --
---------- --------- ---------- ---------- --------- ----------
12,395 3,569 31,120 35,304 19,474 (32,648)
---------- --------- ---------- ---------- --------- ----------
Contributions:
Employer -- -- -- -- -- 78,195
Participants 29,845 9,355 41,378 56,247 63,944 25,196
---------- --------- ---------- ---------- --------- ----------
29,845 9,355 41,378 56,247 63,944 103,391
---------- --------- ---------- ---------- --------- ----------
Total additions 42,240 12,924 72,498 91,551 83,418 70,743
---------- --------- ---------- ---------- --------- ----------
Distributions (64,650) (14,692) (114,055) (44,124) (29,160) (113,496)
Transfers between funds, net (109,091) (11,184) 62,891 42,823 7,785 68,127
---------- --------- ---------- ---------- --------- ----------
Net increase (decrease) (131,501) (12,952) 21,334 90,250 62,043 25,374
Net assets available for
participants:
Beginning of year 315,301 85,502 207,416 183,847 205,432 506,786
---------- --------- ---------- ---------- --------- ----------
End of year $ 183,800 $ 72,550 $ 228,750 $ 274,097 $267,475 $ 532,160
========== ========= ========== ========== ========= ==========
</TABLE>
<TABLE>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------
PARTICIPANT
NOTES OTHER TOTAL
----------- -------- ----------
<S> <C> <C> <C>
Additions to net assets:
Investment income:
Net appreciation (depreciation)
in fair value of investments $ -- $ -- $ (20,347)
Dividends -- -- 89,561
Interest 4,406 -- 4,406
------- --------- ------------
4,406 -- 73,620
------- --------- ------------
Contributions:
Employer -- 137,033 215,228
Participants -- -- 225,965
------- --------- ------------
-- 137,033 441,193
------- --------- ------------
Total additions 4,406 137,033 514,813
------- --------- ------------
Distributions (4,530) -- (384,707)
Transfers between funds, net 30,834 (92,185) --
------- --------- ------------
Net increase (decrease) 30,710 44,848 130,106
Net assets available for
participants:
Beginning of year 17,574 106,310 1,628,168
------- --------- ------------
End of year $48,284 $151,158 $1,758,274
======== ========= ============
</TABLE>
See accompanying notes to financial statements.
43
<PAGE>
NOTES TO FINANCIAL STATEMENTS
MGI PHARMA, INC. Retirement Savings Plan
(unaudited)
1. DESCRIPTION OF PLAN
The following description of the MGI PHARMA, INC. Retirement Savings Plan
(the "Plan") provides only general information. Participants should refer
to the Summary Plan Description for a more complete description of the
Plan's provisions. The plan is a defined contribution retirement savings
plan sponsored by MGI PHARMA, INC. ("MGI"). It conforms to Section 401(k)
of the Internal Revenue Code and therefore defers income taxes on
qualifying contributions and Plan earnings. The Plan benefits eligible
employees by accumulating retirement assets during their working careers
through employee participation in a systematic savings and investment
program to which MGI also contributes. The Plan is administered by an
Administrative Committee appointed for that purpose by MGI's Board of
Directors and all Plan administrative costs are currently borne by MGI.
At December 31, 1997, 61 employees were participants in the Plan. The Plan
is available to every employee of MGI who completes six months of
employment, is at least 21 years old, and is scheduled for at least 1,000
hours of service annually. Eligible employees may participate in the Plan
through: (1) contributions of up to 10% of their compensation; (2) employer
matching contributions equal to 50% of employee contributions, up to 6% of
an employee's compensation; (3) employer discretionary contributions; and
(4) employee rollover contributions. Contributions are subject to certain
limitations.
Employee contributions and related earnings are directed by the participant
into available investment options and are fully vested at all times.
Employer contributions are in the form of MGI common stock. At December 31,
1997, employer directed balances totaled $570,932 of the MGI common stock
fund. Employer contributions are 20% vested after completion of two years
of employment, 40% after three years, 75% after four years and 100% after
five years. Employer discretionary contributions are allocated to a
participant's account based upon his/her pro rata share of total recognized
compensation during the year. Forfeitures are used to reduce the amount of
MGI's contributions to the Plan.
44
<PAGE>
A participant's account may mature and be distributed upon the occurrence
of one of the following: (1) death, (2) retirement, (3) the attainment of
70-1/2 years of age, (4) termination of employment, (5) termination of the
Plan or (6) upon certain MGI "change in control" events. Distributions may
be a lump sum of cash and MGI common stock held in a participant's account.
Investments
The following investment alternatives are available to
participants:
Registered Investment Companies Funds:
Invesco Funds Group: Stable Value - The INVESCO Retirement Trust
Stable Value Fund ("Stable Value Fund") seeks to provide a high level
of current income while preserving principal, primarily by investing
in a diversified portfolio of investment contracts with insurance
companies, banks or other financial institutions. An investment
contract is an agreement to provide a specific rate of return for a
period of time. Risk in these contracts relates to the financial
performance of the issuing entity and in certain cases a portfolio of
marketable securities securing the investment.
Vanguard Group: Fixed Income, GNMA - The GNMA portfolio is part of the
Fixed Income Securities Fund, a no-load, open-end, diversified fund
that seeks to provide a high level of current income while maintaining
a high level of principal protection and liquidity. The portfolio
invests at least 80% of its assets in Government National Mortgage
Association ("GNMA" or "Ginnie Mae") pass-through mortgage backed
certificates representing part ownership of a pool of mortgage loans.
The mortgage loans underlying GNMA certificates are guaranteed by the
full faith and credit of the U.S. Government.
Primecap Fund - The Vanguard/PRIMECAP Fund, Inc. is an open-end
diversified investment company that seeks to provide long-term growth
of capital by investing principally in common stocks. Dividend income
is incidental to this objective. The Fund selects stocks primarily on
the basis of above-average earnings growth potential and quality of
management.
Vanguard Index 500 - Vanguard Index 500 portfolio is part of the
Vanguard Index Trust, an open-end investment company that includes six
separate, diversified mutual fund portfolios. The Index 500
45
<PAGE>
portfolio seeks to track the performance of the Standard and Poor's
500 Composite Stock Price Index, which emphasizes stocks of large U.S.
companies.
World, International Growth - The International Growth Portfolio is
part of the World Fund, a no load, open end, diversified equity
security fund. The portfolio seeks to provide long-term capital growth
by investing primarily in equity securities of growth companies
located outside the United States.
Fidelity Investments:
Puritan - The Puritan fund is an open-end, diversified security fund
that seeks to primarily provide income by investing in common stocks,
preferred stocks and bonds.
Retirement Growth - The Retirement Growth fund is an open-end,
diversified securities fund that seeks long-term capital growth by
investing primarily in common stocks. It may realize capital gains
without regard to shareholders' current tax liability since it is
designed for investors in tax qualified retirement plans.
MGI PHARMA, INC. common stock - MGI PHARMA, INC. (the Plan Sponsor) common
stock is publicly traded, with trades reported on the NASDAQ National
Market System. MGI is a pharmaceutical company that acquires, develops and
markets differentiated specialty pharmaceutical and medical products for
therapeutic markets of unmet medical need. MGI has not paid, and has no
present intention of paying cash dividends on its common stock.
PARTICIPANT NOTES RECEIVABLE
Participants may borrow from their accounts a minimum of $1,000 up to the
lesser of $50,000 or one-half of their balances. Loan transactions are
treated as transfers between the relevant investment fund and the
Participant Notes fund. Loan terms generally cannot exceed five years. The
loans are secured by balances in the participant's accounts and bear
interest fixed at 1% above the prime rate upon initiation of the loan.
Principal and interest is paid by monthly or more frequent installments.
2. Summary of Accounting Policies
Basis of Accounting
The financial statements of the Plan are prepared under the accrual method
of accounting.
46
<PAGE>
INVESTMENT VALUATION AND INCOME RECOGNITION
Plan investments are stated at fair value. Shares of registered investment
companies are valued at quoted market prices that represent the net asset
value of shares held by the Plan at year-end. Company stock is valued at
its quoted market price of $3.8125 and $4.25 per share at December 31, 1997
and 1996, respectively. Participant notes receivable are valued at cost
which approximates fair value.
Purchases and sales of securities are recorded on a trade-date basis.
Interest income is recorded on the accrual basis. Dividends are recorded on
the ex-dividend date. Investment income is allocated to participants'
accounts based upon their pro rata share of the respective investment
balance during the income period.
PAYMENT OF BENEFITS
Benefits are recorded when paid.
3. FEDERAL INCOME TAXES
The Plan received a tax qualification letter from the Internal Revenue
Service stating that it is a qualified plan under the Internal Revenue Code
("IRC"), and therefore the associated trust is exempt from federal income
taxes. Following the qualification letter, the Plan administration believes
operation of the Plan has been performed in a manner to maintain compliance
with the applicable requirements of the IRC.
4. PARTY-IN-INTEREST TRANSACTIONS
The Plan engaged in transactions involving the acquisition or disposition
of units of participation in collective investment funds of the Trustee,
which is a party-in-interest with respect to the Plan. These transactions
are not considered "prohibited transactions" under ERISA and are for
short-term investment of cash balances pending reinvestment.
5. PLAN TERMINATION
Although it has not expressed any intent to do so, the Company has the
right under the Plan to discontinue its contributions at any time and to
terminate the Plan subject to the provisions of ERISA. In the event of Plan
termination, participants will become 100 percent vested in their accounts.
47
<PAGE>
Schedule 1
SCHEDULE OF INVESTMENTS HELD AT END OF PLAN YEAR
MGI PHARMA, INC. Retirement Savings Plan
December 31, 1997
(unaudited)
Number of Fair Market
Description shares/units Cost Value
- ----------- ------------ ---------- ------------
Shares of registered
investment companies:
Invesco Stable Value 210,030 $ 210,030 $ 210,030
Vanguard Group:
Fixed Income, GNMA 9,970 99,904 103,992
Primecap Fund 7,186 280,672 284,334
Index 500 445 38,443 40,109
World, International Growth 14,371 229,665 235,539
Fidelity Investments:
Puritan 28,859 510,662 559,287
MGI PHARMA, INC. common stock 198,287 34,166 755,951
Participant notes receivable 46,010 46,010 46,010
----------- ---------
Total $1,449,552 $2,235,252
=========== =========
48
<PAGE>
Schedule 2
REPORTABLE TRANSACTIONS
MGI PHARMA, INC. Retirement Savings Plan
Year ended December 31, 1997
(unaudited)
<TABLE>
<CAPTION>
Total Total Total Dollar Total Dollar
Number Number Value of Value Net Gain
Description of Purchases of Sales Purchases of Sales or (Loss)
- -------------- ------------ -------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Shares of registered investment
companies:
Invesco Stable Value 86 10 50,176 24,890 -0-
Vanguard Group:
Fixed Income, GNMA 64 3 30,307 1,394 23
Primecap Fund 46 7 280,680 4,612 376
Index 500 40 4 38,438 2,378 83
World, International Growth 83 13 150,091 135,616 (6,428)
Fidelity Investments:
Puritan 89 27 276,552 45,053 3,468
Retirement Growth 45 11 -0- 366,578 47,148
MGI PHARMA, INC. common stock 28 11 346,893 32,058 (5,449)
</TABLE>
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 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 27, 1998 MGI PHARMA, INC.
By /S/ CHARLES N. BLITZER
------------------------------------
Charles N. Blitzer, President, 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 date indicated.
SIGNATURE TITLE
- --------- -----
Charles N. Blitzer President, Chief )
Executive Officer )
(principal executive )
officer) and Director )
)
William C. Brown* Vice President, )
Finance )
(principal financial )
and accounting officer) )
) By /S/ CHARLES N. BLITZER
Frederick W. Armstrong* Director ) ------------------------
) Charles N. Blitzer
) Pro se and as
Charles E. Austin* Director ) Attorney-in Fact*
)
David E. Collins* Director )
)
Hugh E. Miller* Director ) Dated: March 27, 1998
)
Joseph S. Frelinghuysen* Director )
)
Timothy G. Rothwell* Director )
)
Lee J. Schroeder* Director )
* By Power of Attorney filed with this report as Exhibit 24 hereto.
50
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
MGI PHARMA, INC.:
Under date of February 6, 1998, we reported on the balance sheets of MGI PHARMA,
INC., as of December 31, 1997 and 1996, and the related statements of
operations, cash flows, and stockholders' equity for each of the years in the
three-year period ended December 31, 1997, as contained in the 1997 Annual
Report to Shareholders. These financial statements and our report thereon are
included in the annual report on Form 10-K for the year 1997.
In connection with our audits of the aforementioned financial statements, we
also have audited the related financial statement schedule as listed in the
accompanying index. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth herein.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 6, 1998
51
<PAGE>
Schedule II
MGI PHARMA, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
----------------------------------
BALANCE AT CHARGED TO
BEGINNING COSTS OTHER BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS(1) END OF PERIOD
- ------------------------------ ---------- ------------- -------- ------------- -------------
Year ended December 31, 1997
<S> <C> <C> <C> <C> <C>
DEDUCTED FROM ASSET ACCOUNTS:
ACCOUNTS RECEIVABLE ALLOWANCE $ 68,254 $214,410 $ -- $198,449 $ 84,215
YEAR ENDED DECEMBER 31, 1996
DEDUCTED FROM ASSET ACCOUNTS:
ACCOUNTS RECEIVABLE ALLOWANCE $160,535 $152,795 $ -- $245,076 $ 68,254
YEAR ENDED DECEMBER 31, 1995
DEDUCTED FROM ASSET ACCOUNTS:
ACCOUNTS RECEIVABLE ALLOWANCE $146,606 $114,157 $ -- $100,228 $160,535
</TABLE>
(1) DISCOUNTS BY CUSTOMERS, OR WRITE-OFF OF UNCOLLECTIBLE ACCOUNTS, NET OF
RECOVERIES.
52
<PAGE>
EXHIBIT INDEX
MGI PHARMA, INC.
Annual Report on Form 10-K
For
Year Ended December 31, 1997
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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 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).
<PAGE>
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 1982 Incentive Stock Option Plan (Incorporated by reference to Exhibit
10.5 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
10.7 Stock Acquisition Assistance Loan Program (Incorporated by reference to
Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.8 1997 Stock Incentive Plan (Incorporated by reference to Exhibit 10.8 to
the Company's Annual Report on Form 10-K for the year ended December 31,
1996).
10.9 [Reserved]
10.10 Termination Agreement, dated as of January 1, 1992, with Charles C.
Muscoplat (Incorporated by reference to Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994).
10.11 Termination Agreement, dated as of January 1, 1992, with James V. Adam
(Incorporated by reference to Exhibit 10.10 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994).
10.12 Termination Agreement, dated as of January 1, 1992, with Lori-jean Gille
(Incorporated by reference to Exhibit 10.13 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.)
10.13 Termination Agreement, dated as of July 10, 1995, with Jon C. Lee
(Incorporated by reference to Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.)
10.14 Termination Agreement, dated as of April 29, 1996, with Charles N.
Blitzer (Incorporated by reference to Exhibit 10.16 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996). 10.15
Stock Purchase and Loan Agreement, dated May 14, 1996, between the
Company and Charles N. Blitzer (Incorporated by reference to Exhibit
10.17 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
<PAGE>
10.15 Stock Purchase and Loan Agreement, dated May 14, 1996, between the
Company and Charles N. Blitzer (Incorporated by reference to Exhibit
10.17 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.16 Lease Agreement, dated August 7, 1989, with ALSCOR Investors Joint
Venture, as amended by that certain Amendment to Office Lease, dated
October 30, 1989, with ALSCOR Investors Joint Venture (Incorporated by
reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994).
10.17 Second Amendment to Office Lease, dated May 3, 1991 between the Company
and ALSCOR Investors Joint Venture (Incorporated by reference to Exhibit
10.12 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
10.18 Third Amendment to Office Lease, dated September 23, 1992 between the
Company and ALSCOR Investors Joint Venture (Incorporated by reference to
Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.19 Fourth Amendment to Office Lease, dated September 23, 1992 between the
Company and ALSCOR Investors Joint Venture (Incorporated by reference to
Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.20 Fifth Amendment to Office Lease, dated March 10, 1995 between the
Company and ALSCOR Investors Joint Venture (Incorporated by reference to
Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.21 Sixth Amendment to Office Lease, dated March 21, 1997 between the
Company and ALSCOR Investors Joint Venture (Incorporated by reference to
Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996).
10.22 Trademark License Agreement, dated as of December 31, 1989, between the
Company and Norwich Eaton
<PAGE>
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).
**10.23 Supply and License Agreement, dated March 19, 1992, among E Merck Fine
Chemicals Division, EM Industries and the Company (filed herewith).
10.24 Supply Agreement, dated December 21, 1993, between the Company and
Boehringer Ingelheim Pharmaceutical, Inc. (Incorporated by reference to
Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.25 Development, Marketing and Cooperation Agreement, dated October23, 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).
10.26 Manufacturing Agreement, dated December 12, 1995, between the Company
and Global Pharm 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).
**10.27 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 Income (Loss) Per Common Share (filed herewith).
23 Consent of KPMG Peat Marwick LLP (filed herewith).
24 Powers of Attorney (filed herewith).
27 Financial Data Schedule (filed herewith).
99 Cautionary Statements under the Private Securities Litigation Reform Act
of 1995 (filed herewith).
** Pursuant to Rule 24b-2 of the Securities Exchange
<PAGE>
Act of 1934, as amended, confidential portions of Exhibits 10.23 and
10.27 have been deleted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment.
<PAGE>
Exhibit 10.23
SUPPLY AND LICENSE AGREEMENT
This is an Agreement, made and effective as of the 19th day of March, 1992
by and between E. Merck Fine Chemicals Division, a German corporation having its
principal place of business at Frankfurter StraBe 250, D-6100 Darmstadt 1,
Germany, EM Industries, Incorporated, a New York corporation, having its
principal place of business at 5 Skyline Drive, Hawthorne, New York, 10532
(collectively herein "LICENSOR") and MGI PHARMA, INC., a Minnesota corporation,
having its principal place of business at Suite 300E Opus Center, 9900 Bren Road
East, Minneapolis, Minnesota 55343 ("LICENSEE").
BACKGROUND
LICENSOR is an established chemical and pharmaceutical company which has
substantial experience in the development and manufacture of pharmaceutical
products for a variety of purposes. Through its Fine Chemicals Division,
LICENSOR supplies a variety of active drug substances to the pharmaceutical
industry.
One of LICENSOR's (and its AFFILIATES') pharmaceutical products is
pilocarpine, which is currently marketed by LICENSOR on a world-wide basis for
use as an active drug substance in a dose form applied directly to the eye for
ophthalmic indications, primarily for the treatment of glaucoma.
LICENSEE is an emerging specialty pharmaceutical company that is focused on
developing and marketing medically important compounds to physician specialist
markets. In pursuit of its corporate goals, LICENSEE selects pharmaceutical
products for development that are well into the developmental stage and which
satisfy certain efficacy and safety standards.
LICENSOR has agreed to supply pilocarpine to LICENSEE so as to allow
LICENSEE to manufacture, or have manufactured on its behalf, and to sell ORAL
PRODUCT (as defined hereinafter) containing pilocarpine and LICENSEE wishes to
purchase pilocarpine pursuant to the terms and conditions set forth in this
AGREEMENT.
In connection with the purchase of pilocarpine from LICENSOR by LICENSEE,
LICENSOR has agreed to grant to LICENSEE exclusive world-wide rights to
LICENSOR's pilocarpine product for use in ORAL PRODUCT containing pilocarpine,
as well as to grant to LICENSEE the exclusive world-wide rights to certain
KNOW-HOW (as defined hereinafter) connected with such pilocarpine.
1
<PAGE>
THE AGREEMENT
LICENSEE and LICENSOR, intending to be legally bound and in consideration
of LICENSEE's acquisition of certain rights to LICENSOR's products and the
agreement of LICENSEE to purchase certain products from LICENSOR during the TERM
of this AGREEMENT, have agreed as follows. All references to LICENSOR herein
includes LICENSOR's AFFILIATES (as defined in this AGREEMENT) and LICENSOR is
entering into this AGREEMENT with the intention of legally binding its
AFFILIATES to the terms and conditions of this AGREEMENT.
ARTICLE I
DEFINITIONS
The following capitalized terms, whether used in the singular, plural or
possessive, shall have the following meanings, only:
1.1 "PRODUCT" means pilocarpine drug substance, as described and defined in
the Type II Drug Master File No. 8453 and all other derivative forms of
pilocarpine including pilocarpine base and pilocarpine nitrate.
1.2 "NEW PRODUCT" shall mean the pilocarpine drug substance that is
described and defined by the specification set forth in Attachment A hereto,
pursuant to the requirements of Section 2.2 of this AGREEMENT.
1.3 "ORAL PRODUCT" means any oral or other systemic dose form drug product,
other than dose forms applied directly to the eye for ophthalmic indications,
containing (or anticipated to contain) pilocarpine drug substance, including
derivative forms (e.g., pilocarpine base and salts) of pilocarpine drug
substance, whether now existing or developed in the future.
1.4 "DMF" means Drug Master File or similar file submitted to a regulatory
agency that describes manufacturing processes and specifications for a drug
substance to be referenced by manufacturers of finished drug product.
1.5 "KNOW-HOW" means all proprietary data of LICENSOR relating to PRODUCT
or NEW PRODUCT, including the data contained in the information package that
documents the manufacture and control of PRODUCT or NEW PRODUCT, including any
DMF relating to pilocarpine drug substance, which is required to support NDA and
similar regulatory filings in the TERRITORY for ORAL PRODUCT.
2
<PAGE>
1.6 "TERRITORY" means all of the countries in the world, with no
exceptions.
1.7 "FDA" means the United States Food and Drug Administration and its
various subdivisions or any successors thereto.
1.8 "AGREEMENT" means this Agreement, including its Attachments.
1.9 "EXCLUSIVE TERM" means that time period ending ten (10) years after
sales of ORAL PRODUCT have occurred in the United States of America, in the
Europe Economic Community and in Japan or (ii) December 31, 2007, whichever date
is earlier, unless earlier terminated pursuant to the provisions of ARTICLE X of
this AGREEMENT; provided that, unless early termination pursuant to ARTICLE X
occurs, the TERM of this AGREEMENT may be extended for successive five (5) year
periods, upon the mutual agreement of LICENSEE and LICENSOR.
1.10 "NON-EXCLUSIVE TERM" means perpetual after the end of the EXCLUSIVE
TERM, although some of the terms, conditions and limitations will expire as set
forth herein, and except as early termination is permitted in ARTICLE X of this
AGREEMENT.
1.11 "PRIMARY MARKETS" means the United States of America, Canada, Great
Britain, France, Japan, Italy and Germany.
1.12 "AFFILIATES" mean a company directly or indirectly controlling,
controlled by or under common control with one of the parties hereto. A company
is controlled by ownership of more than forty percent (40%) of the stock having
the right to vote for directors or persons performing a function similar to
directors thereof.
ARTICLE II
GRANT OF LICENSE, RELATED RIGHTS AND COVENANTS
2.1 EXCLUSIVE RIGHT TO PURCHASE NEW PRODUCT AND PRODUCT FOR USE AS ORAL
PRODUCT: LICENSOR hereby grants to LICENSEE for the EXCLUSIVE TERM of this
AGREEMENT, the sole and exclusive right to purchase NEW PRODUCT for any and all
purposes in the TERRITORY. LICENSOR hereby agrees not to knowingly sell or
otherwise supply PRODUCT to any party other than LICENSEE for the testing,
development, manufacturing, registration or marketing of an ORAL PRODUCT.
3
<PAGE>
2.2 SEPARATE DESIGNATION AND PRODUCT NUMBER FOR NEW PRODUCT: LICENSOR
agrees to submit to the FDA and other regulatory authorities as appropriate and
as requested by LICENSEE, a new product specification for NEW PRODUCT intended
for use in ORAL PRODUCT, consistent with the Product Release Specifications
(based on data available to LICENSOR and additional data received from LICENSEE)
set forth in Attachment A, which is attached hereto and made a part hereof (the
"NEW PRODUCT SPECIFICATION"). LICENSOR further agrees to keep all information
relating to the NEW PRODUCT SPECIFICATION created pursuant to this Section 2.2
confidential, except as permitted under the terms of this AGREEMENT and except
to the extent that disclosure of information relating to such NEW PRODUCT
SPECIFICATION is required by law.
2.3 EXCLUSIVE RIGHT TO NEW PRODUCT AND DMF: LICENSOR hereby grants to
LICENSEE for the EXCLUSIVE TERM of this AGREEMENT, the sole and exclusive right
to have access to and to otherwise use the NEW PRODUCT SPECIFICATION created
pursuant to the terms of Section 2.2 for any purpose in the TERRITORY. LICENSOR
further agrees that it shall not allow, permit, license or otherwise authorize
any third party from November 11, 1991 and during the EXCLUSIVE TERM of this
AGREEMENT to have access to or to otherwise use any DMF relating to pilocarpine
drug substance to gain FDA or other regulatory approval in any jurisdiction to
market any ORAL PRODUCT in the TERRITORY, and shall take any and all action
necessary to prevent any third party from relying on or making use of any such
DMF relating to pilocarpine drug substance in any FDA or other regulatory
filings seeking regulatory approval to market ORAL PRODUCT. LICENSEE understands
that LICENSOR has issued prior to November 11, 1991, DMF letters of
authorization or their equivalent to certain companies for certain countries. A
complete list of these letters of authorization is included in Attachment B.
LICENSOR agrees to issue letters to the appropriate regulatory agencies that
revoke previous DMF authorizations and that issue new authorizations for use of
pilocarpine to be applied directly to the eye for ophthalmic indications only.
LICENSOR further agrees not to grant additional DMF letters of authorization (or
their equivalent) after November 11, 1991 unless such letters specifically
restrict use of the DMF to drug products applied directly to the eye for
ophthalmic indications.
2.4 EXCLUSIVE RIGHT TO KNOW-HOW: LICENSOR hereby grants to LICENSEE for the
EXCLUSIVE TERM of this AGREEMENT, the sole and exclusive right to have access to
and to otherwise use KNOW-HOW to gain FDA or other regulatory approval to market
ORAL PRODUCT in the TERRITORY. LICENSOR further agrees that it shall not allow,
permit, license or otherwise authorize any third party during the EXCLUSIVE TERM
of this AGREEMENT to have access to or to otherwise use KNOW-HOW to gain FDA or
other regulatory approval to test, evaluate or market any ORAL PRODUCT in the
TERRITORY, and
4
<PAGE>
shall take any and all action necessary to prevent any third party from relying
on or making use of such KNOW-HOW in any FDA or other regulatory filings
relating to the marketing of ORAL PRODUCT. Notwithstanding the provisions of
this Section 2.4, LICENSOR retains the right to use the same KNOW-HOW for use in
connection with other LICENSOR products which are not used as, or in the
manufacture of, ORAL PRODUCTS as defined in Section 1.3 of this AGREEMENT.
2.5 RIGHT TO IMPROVEMENTS: LICENSEE shall also have rights, as granted
under Sections 2.1 and 2.4, to all improvements in PRODUCT and NEW PRODUCT and
in KNOW-HOW related to ORAL PRODUCT made or acquired by LICENSOR. Such
improvements shall be included under this AGREEMENT as if they were part of the
PRODUCT, NEW PRODUCT or KNOW-HOW from the date of the signing of this AGREEMENT.
2.6 CONFIDENTIALITY: Any unpublished KNOW-HOW to be transferred from
LICENSOR to LICENSEE shall be treated by LICENSEE as "confidential information"
and LICENSEE shall take reasonable precautions to minimize the risk of any
unauthorized use or disclosure of such confidential information. LICENSEE's
obligations of confidentiality under this Section 2.6 shall not apply:
(a) to information which is now or hereafter becomes public knowledge
through no fault of LICENSEE;
(b) to information which LICENSEE already had in its possession prior to
the date on which the know-how was first transferred to LICENSEE by
LICENSOR;
(c) to information which LICENSEE lawfully acquires from any third party
free of any obligation of confidentiality;
(d) to any information from and after two years following termination of
this AGREEMENT; and
(e) to any information which LICENSEE is legally required to disclose.
2.7 LICENSOR ASSISTANCE IN SECURING REGULATORY APPROVALS: LICENSOR shall
provide reasonable assistance, information and data to LICENSEE to assist
LICENSEE in complying with FDA and other similar registration requirements in
the TERRITORY; LICENSOR further agrees to assist LICENSEE in responding to
inquiries from the FDA and other regulatory authorities in the TERRITORY
relating to PRODUCT, NEW PRODUCT or to ORAL PRODUCT; provided, however, that
information that LICENSOR deems to be confidential may be communicated directly
to the appropriate regulatory agency on a confidential
5
<PAGE>
basis, at LICENSOR's option, for purposes of satisfying LICENSOR's obligations
under this Section 2.7.
2.8 COVENANT NOT TO FORM COMPETING BUSINESS: LICENSOR agrees and covenants
that during the EXCLUSIVE TERM of this AGREEMENT, it shall not take any action
to form a separate business or to transfer any KNOW-HOW or related information
to a separate entity for the purpose of evading the obligations and terms of
this AGREEMENT. LICENSOR acknowledges that the formation of any such separate
business, the submission and maintenance of an existing or additional Drug
Master File number and designation for ORAL PRODUCT (other than as required
under the provisions of Section 2.2 of this AGREEMENT), the transfer of any
KNOW-HOW in contravention of this AGREEMENT or the taking of any action contrary
to the terms and the intentions of this AGREEMENT, would constitute a material
breach of this AGREEMENT and would cause LICENSEE irreparable harm.
2.9 RETAINED RIGHTS OF LICENSOR: Nothing in this AGREEMENT shall in any way
be construed to limit or restrict LICENSOR's free and unfettered rights to sell
PRODUCT for any use not covered in Section 2.1 of this AGREEMENT or to in any
way restrict or limit LICENSOR's rights to use its DMFs (other than for the NEW
PRODUCT SPECIFICATION created pursuant to Section 2.2 of this AGREEMENT) for any
purpose other than the purposes set forth in Section 2.3 of this AGREEMENT.
2.10 COVENANT TO PURSUE PRIMARY MARKETS: (a) LICENSEE covenants and agrees
that it shall diligently pursue approval for marketing of at least one ORAL
PRODUCT with the FDA. LICENSEE further agrees that, no later than four (4) years
following the effective date of this AGREEMENT, it will diligently pursue
similar marketing approval of at least one ORAL PRODUCT in each of the countries
which comprise the PRIMARY MARKETS.
(b) In the event that LICENSEE fails to secure marketing approval for one
ORAL PRODUCT in the United States within six (6) years of the signing of this
AGREEMENT, the licenses granted under this AGREEMENT shall become non-exclusive
in the United States (but only with respect to the United States and not with
respect to any other country in the TERRITORY) upon sixty (60) days written
notice from LICENSOR to LICENSEE and the licensee fees contemplated under the
provisions of Section 5.1 hereof shall no longer be due and payable by LICENSEE.
(c) (i) In the event that no marketing approval is granted within ten (10)
years following the effective date of this AGREEMENT for, at least one ORAL
PRODUCT in the countries which comprise the PRIMARY MARKETS (other than the
United States), as required under the provisions of Section 2.10(a), then
LICENSOR may (upon sixty (60) days written notice from LICENSOR to LICENSEE)
6
<PAGE>
convert the licenses granted under this Article II into non-exclusive licenses
with respect to the country or countries in which LICENSEE has not received
marketing approval (but only with respect to such countries). At such time as
the licenses granted under Article II become non-exclusive with respect to any
country or countries in the PRIMARY MARKETS, the license fees contemplated under
the provisions of Section 5.1 hereof shall no longer be due and payable for such
country or countries.
(ii) The provisions of Section 2.10(c)(i) notwithstanding, LICENSEE shall
have the right, within fifteen (15) days of receiving notice from LICENSOR of
its intent to convert the licenses under this Article II into non-exclusive
licenses for any country or countries in the PRIMARY MARKETS (other than the
United States), to submit the issue of exclusivity to an arbitrator, under the
provisions of Section 11.5 of this Agreement. If the arbitrator determines that
LICENSEE has diligently pursued marketing approval in such country or countries
and marketing approval has not been granted through no fault of LICENSEE, then
LICENSOR shall not be entitled to convert the licenses granted with respect to
such countries into non-exclusive licenses for so long as LICENSEE continues to
diligently pursue marketing approval in such country.
2.11 RIGHTS UPON END OF EXCLUSIVE TERM: The rights and licenses granted by
LICENSOR to LICENSEE under this ARTICLE II shall, upon the end of the EXCLUSIVE
TERM of this AGREEMENT and the commencement of the NON-EXCLUSIVE TERM of this
AGREEMENT, become non-exclusive rights and licenses of LICENSEE with respect to
any country or countries in the TERRITORY for which the EXCLUSIVE TERM has
ended.
ARTICLE III
AGREEMENTS TO PURCHASE AND SUPPLY PRODUCT
3.1 SUPPLY OBLIGATIONS: Subject to the provisions of Section 11.9 (Force
Majeure) of this AGREEMENT, LICENSOR hereby agrees that it will, during the
EXCLUSIVE TERM and the NON-EXCLUSIVE TERM of this AGREEMENT, manufacture for and
supply to LICENSEE, LICENSEE's requirements of PRODUCT and NEW PRODUCT for use
in the TERRITORY. LICENSOR shall be solely responsible for:
(a) Manufacturing, processing, packaging testing, releasing and shipping of
PRODUCT and NEW PRODUCT in a manner consistent with then current Good
Manufacturing Practices, as defined in Title 21 of the United States Code
of Federal Regulations ("CFR") or similar requirements, so as to ensure
that PRODUCT and NEW PRODUCT
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<PAGE>
shall be suitable for use as a pharmaceutical ingredient for oral
consumption as a human therapeutic; provided, that, this Section shall not
be construed to require LICENSOR to comply with any amendments to such Good
Manufacturing Practices that are adopted after the effective date of this
AGREEMENT and which would, in the reasonable business judgment of LICENSOR,
create an unreasonable economic burden on LICENSOR in attempting to comply
with such amendments; LICENSOR agrees to consult with LICENSEE in the event
that LICENSOR determines compliance with new procedures imposes an
unreasonable economic burden in order to allow LICENSOR and LICENSEE to
attempt to develop a mutually acceptable solution that enables LICENSOR to
continue to comply with Good Manufacturing Practices;
(b) LICENSOR shall immediately notify LICENSEE of any and all emergency
changes, and shall provide sufficient advance notification of planned
changes (so as to allow LICENSEE to satisfy all then-current legal,
regulatory, and quality assurance requirements), to LICENSOR's
manufacturing, testing, and control of PRODUCT and NEW PRODUCT. LICENSOR
warrants that any and all such changes shall be in strict compliance with
FDA and all other applicable laws and regulations; and
(c) LICENSOR, at its cost, shall maintain a six (6) month supply of
LICENSEE's requirements of NEW PRODUCT, and/or PRODUCT, as appropriate, at
all times, based on LICENSEE's quarterly forecasts for future sales.
3.2 PURCHASE OBLIGATIONS: During the EXCLUSIVE TERM of this AGREEMENT,
LICENSEE will purchase all of its and its sublicensees' requirements of PRODUCT
and NEW PRODUCT from LICENSOR. LICENSEE hereby covenants and agrees that it
shall, during the EXCLUSIVE TERM of this AGREEMENT, use its reasonable efforts
consistent with the exercise of its best judgment to secure the registration,
and the subsequent marketing of ORAL PRODUCT in the PRIMARY MARKETS. LICENSEE,
during the EXCLUSIVE TERM of this AGREEMENT, shall diligently investigate and
pursue the registration, and subsequent marketing, of ORAL PRODUCT in such other
countries in the TERRITORY (outside of the PRIMARY MARKETS) as it deems
reasonable in its best judgment.
3.3 PRICE: The price of PRODUCT and NEW PRODUCT, inclusive of all packaging
and handling charges, payable by LICENSEE shall be equal to the price (in the
respective market or country of purchase) for comparable volumes of PRODUCT sold
by LICENSOR for use in ophthalmic products.
8
<PAGE>
Actual quantities and delivery dates of PRODUCT and NEW PRODUCT shall be as
specified in firm purchase orders submitted by LICENSEE, and LICENSOR shall make
delivery of each order at the time and place specified by LICENSEE.
3.4 TERMS AND CONDITIONS: (a) LICENSOR represents and warrants that PRODUCT
and NEW PRODUCT supplied by it to LICENSEE under this AGREEMENT will conform to
the Product Release Specifications for such PRODUCT or NEW PRODUCT. Except for
the warranties set forth in Article VI hereof, the guarantees set forth in
Section 3.4(d) hereof and the warranty set forth in this Section 3.4(a),
LICENSOR makes no other representation and warranty of any kind with regard to
its products. LICENSOR hereby disclaims any implied warranties, including
without limitation, the implied warranties of merchantability and fitness for a
particular purposes. LICENSOR shall not, under any circumstances, be liable for
incidental or consequential damages of any kind. LICENSEE assumes all risk and
liability for loss or damage resulting from storage, handling, use or sales of
PRODUCT or NEW PRODUCT, provided that this sentence shall not be construed to
imply any additional liability to LICENSOR by LICENSEE other than as
specifically agreed to under the provisions of Section 8.2 of this AGREEMENT.
(b) LICENSOR shall ship PRODUCT or NEW PRODUCT F.O.B. Hawthorne, New York
in accordance with the quantities, delivery dates, and delivery and shipping
instructions specified in LICENSEE's purchase orders. In the event that LICENSEE
designates no carrier or if the designated carrier is not available or not
feasible, then LICENSOR shall select a reasonable alternative mode of shipment.
LICENSOR's responsibility shall be to deposit the ordered PRODUCT or NEW PRODUCT
with the carrier within the shipping periods specified, and LICENSOR shall not
be liable for late delivery if so accomplished. Title and risk of loss shall
pass to LICENSEE upon delivery to the carrier for shipment.
(c) The prices agreed to herein do not include the costs of any taxes,
licenses, permits, fees or tariffs which may be levied by any government or
governmental agency on the sale or transport of PRODUCT or NEW PRODUCT
hereunder. LICENSOR shall invoice LICENSEE and LICENSEE shall pay when so
invoiced, any such taxes, licenses, permits, fees or tariffs which are paid by
LICENSOR.
(d) LICENSOR guarantees that no PRODUCT or NEW PRODUCT delivered by
LICENSOR under this AGREEMENT will be adulterated or misbranded within the
meaning of the United States Food, Drug and Cosmetic Act, or within the meaning
of any other applicable law in which the definition of adulteration or
misbranding are substantially the same as those contained in the Food, Drug and
Cosmetic Act, as such laws are constituted and effective at the time of such
shipment or delivery, or as an article which may not, under the provisions of
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<PAGE>
Sections 404 or 505 of such Act be introduced into interstate commerce.
(e) (i) LICENSEE may reject any PRODUCT or NEW PRODUCT supplied hereunder
which does not conform to the Product Release Specifications for such PRODUCT or
NEW PRODUCT, provided that such non-conformance is not due to any failure by
LICENSEE or its agents, representatives or customers to handle, maintain, or
store PRODUCT or NEW PRODUCT as required by labeling or the Product Release
Specifications therefore. LICENSEE shall provide written notice to LICENSOR
which shall specify the reason for such rejection.
(ii) At the request and expense of LICENSOR, LICENSEE shall return
defective PRODUCT or NEW PRODUCT, or a representative sample thereof, to
LICENSOR for testing. Should LICENSOR's test results reasonably confirm the
PRODUCT's or NEW PRODUCT's non-conformance with Product Release Specifications,
LICENSOR shall replace all non-conforming PRODUCT or NEW PRODUCT at no expense
to LICENSEE. Should LICENSOR's test results fail to confirm PRODUCT=s or NEW
PRODUCT's non-conformance, and should LICENSOR and LICENSEE fail to otherwise
resolve the dispute over conformance to Product Release Specifications, the
parties shall submit the PRODUCT or NEW PRODUCT, or a representative sample
thereof, to a mutually acceptable laboratory along with mutually agreeable
interrogatories to be answered by such laboratory. The determination of the
laboratory regarding the PRODUCT's or NEW PRODUCT's conformance or
non-conformance to the Product Release Specifications shall be binding upon
LICENSOR and LICENSEE. The nonprevailing party shall pay all laboratory costs in
connection with the dispute.
ARTICLE IV
SUBLICENSING BY LICENSEE
4.1 RIGHT TO SUBLICENSE: Upon the prior written consent of LICENSOR, which
consent shall not be unreasonably withheld, LICENSEE shall have the right to
sublicense others to use all or any part of the rights herein conveyed to
LICENSEE under the terms of this AGREEMENT within the TERRITORY. A sublicensee
of LICENSEE under this AGREEMENT shall be entitled to all of the rights and
privileges afforded to LICENSEE and shall be subject to all of the obligations
and commitments to LICENSOR arising under the terms of this AGREEMENT. All fees
and expenses associated with such sublicenses shall be borne solely by LICENSEE.
4.2 NOTICE TO SUBLICENSEES: LICENSOR agrees to give notice to all
Sublicensees pursuant to this ARTICLE IV of the proposed early termination of
this AGREEMENT, pursuant to the provisions of Section 10.2, at the same time as
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<PAGE>
LICENSOR notifies LICENSEE of such proposed termination under Section 10.2
hereof.
ARTICLE V
LICENSE FEE
5.1 LICENSE FEE: During the EXCLUSIVE TERM of this AGREEMENT, LICENSEE
shall pay LICENSOR for the rights granted by LICENSOR to LICENSEE pursuant to
ARTICLE II of this AGREEMENT, a fee equal to *** of the purchase price for
PRODUCT and NEW PRODUCT purchased by LICENSEE pursuant to Section 3.4 of this
AGREEMENT (the "License Fee"). The License Fee payable pursuant to this Section
5.1 shall be payable contemporaneously with payments made for PRODUCT and NEW
PRODUCT under the terms of Section 3.4. LICENSOR shall identify the License Fee
payable pursuant to this Section 5.1 as a separate line item on each invoice for
the purchase of PRODUCT and NEW PRODUCT by LICENSEE under this AGREEMENT.
5.2 GENERIC COMPETITION: (a) If at any time during the EXCLUSIVE TERM of
this AGREEMENT, LICENSEE shall encounter any form of generic competition of an
ORAL PRODUCT with LICENSEE's ORAL PRODUCT in any country that comprises the
LICENSEE'S PRIMARY MARKETS, and such generic competition results in a loss of
twenty percent (20%) or greater market share or a twenty percent (20%) or
greater price decrease for LICENSEE's ORAL PRODUCT or PRODUCTS in such country
in the PRIMARY MARKETS, then the Licensee Fee payable pursuant to Section 5.1 of
this AGREEMENT shall no longer be due and payable for such country in the
PRIMARY MARKETS.
(b) No License Fee payable under Section 5.1 shall be assessed, pursuant to
the provisions of this Section 5.2, commencing with the first purchase order
submitted by LICENSEE after LICENSEE notifies LICENSOR of the occurrence of an
event under this Section 5.2. LICENSEE agrees to provide such information as is
reasonably requested by LICENSOR to document the amount of PRODUCT purchased for
such country in the PRIMARY MARKETS in order to determine the amount of the
License Fee due under Section 5.1.
5.3 ELECTION TO TERMINATE EXCLUSIVE LICENSE: In the event that no License
Fee is payable for any country in the PRIMARY MARKETS under the provisions of
Section 5.2, LICENSEE may, upon thirty (30) days written notice to LICENSOR,
elect to cease paying the License Fee for any other country or countries in the
TERRITORY. Upon such an election by LICENSEE, the provisions of this AGREEMENT
granting exclusive rights to LICENSEE during the EXCLUSIVE TERM of this
AGREEMENT shall become NON-EXCLUSIVE rights with respect to any
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
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country in the TERRITORY in which no License Fee is paid pursuant to the
provisions of this Section 5.3.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF LICENSOR
6.1 TITLE AND INTEREST: LICENSOR owns or exclusively holds title and
interest to and all rights to use, free and clear of all liens, claims and
restriction, and to sell, convey and transfer PRODUCT, NEW PRODUCT and KNOW-HOW
in the TERRITORY and the grant of the Licenses and the other agreements made
herein by LICENSOR do not infringe upon the right or claimed right of any person
under or with respect to any of the above.
6.2 POWER; DUE AUTHORIZATION: The execution, delivery and performance by
LICENSOR of this AGREEMENT have been authorized by proper corporate action and
are within its corporate powers. This AGREEMENT constitutes the legal, valid and
binding obligation of LICENSOR, which is enforceable against LICENSOR in
accordance with its terms, except as limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
affecting enforcement of creditors' rights or by general principles of equity.
6.3 LEGAL COMPLIANCE: LICENSOR warrants that the manufacture of PRODUCT and
NEW PRODUCT and all of its other activities conducted in connection with the
AGREEMENT shall be in strict compliance with all applicable FDA Good
Manufacturing Practices, comparable laws and regulations of other jurisdictions,
and other applicable laws, regulations and rules. LICENSEE shall be provided
with detailed information as to any and all actions taken by LICENSOR which
involve, any contacts made by or with the FDA or other comparable regulatory
bodies in other jurisdictions, to the extent that such actions or contacts
affect LICENSEE's use of PRODUCT or NEW PRODUCT.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF LICENSEE
7.1 POWER; DUE AUTHORIZATION: The execution, delivery and performance by
LICENSEE of this AGREEMENT have been authorized by proper corporate action and
are within its corporate powers. This AGREEMENT constitutes the legal, valid and
binding obligation of LICENSEE, which is enforceable against LICENSEE in
accordance with its terms, except as limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
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<PAGE>
affecting enforcement of creditors' rights or by general principles of equity.
7.2 LEGAL COMPLIANCE: LICENSEE warrants that any and all uses, including
the manufacture of ORAL PRODUCT, that it makes of PRODUCT or NEW PRODUCT
acquired from LICENSOR under the terms of this AGREEMENT shall fully comply with
the rules and regulations of the FDA and any other applicable regulatory agency
with jurisdiction over LICENSEE and any ORAL PRODUCT manufactured and marketed
by LICENSEE in the TERRITORY.
ARTICLE VIII
INDEMNIFICATION
8.1 INDEMNIFICATION BY LICENSOR: LICENSOR shall defend, indemnify and hold
LICENSEE harmless against any claim, demand or liability whatsoever (including
reasonable attorney's fees) arising out of:
(a) a breach of the warranties and representations contained in ARTICLE VI
hereof; or
(b) a breach of any License granted under the terms of this AGREEMENT by
LICENSOR; or
(c) a claim of patent or copyright infringement related to PRODUCT or NEW
PRODUCT in the form in which it is sold to LICENSEE;
provided, that, any liability of LICENSOR arising as a result of a breach of the
warranty made pursuant to the provisions of Section 3.4(a) hereof shall be
limited to the purchase price of such PRODUCT or NEW PRODUCT (including the
portion of the license fee paid pursuant to the provisions of Section 5.1 hereof
in connection with such amount of PRODUCT or NEW PRODUCT) which does not conform
to the Product Release Specifications set forth in this AGREEMENT.
8.2 INDEMNIFICATION BY LICENSEE: LICENSEE shall defend, indemnify and hold
LICENSOR harmless against any claim, demand or liability whatsoever (including
reasonable attorney's fees) arising out of:
(a) a breach of the warranties and representations contained in ARTICLE VII
hereof; or
(b) the marketing or sale of ORAL PRODUCT by LICENSEE in the TERRITORY,
provided, that, the provisions of this Section 8.2(b) shall not apply if
such claim, demand or liability arises because PRODUCT or
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NEW PRODUCT supplied to LICENSEE under the terms of this AGREEMENT does not
conform to the Product Release Specifications set forth in Attachment A
hereto.
ARTICLE IX
NOTICES
9.1 NOTICES: All notices, requests, demands, and other communications
provided for herein shall be in writing, shall be in English, and shall be
deemed to have been duly given if made by hand delivery, by facsimile
transmission, by overnight courier or by registered or certified mail (postage
prepaid and return receipt requested) to the parties at the following address
(or at such other address for a party as shall be specified by it by like
notice):
IF TO LICENSOR:
EM Industries, Incorporated E. Merck Fine Chemicals Division
Fine Chemicals Division Frankfurter StraBe 250
5 Skyline Drive D-6100 Darmstadt 1, Germany
Hawthorne, New York 10532
Attention: Georg Schneider
Attention: Volker Schmitt Marketing & Sales
Group Vice President Manager
Pharmaceutical Industry
Fax No.: (914) 592-9469 Fax No.: (O 61 51) 78 13 33
IF TO LICENSEE:
with a copy to:
MGI PHARMA, INC. Cecil C. Schmidt, Esq.
Suite 300E, Opus Center Merchant & Gould
9900 Bren Road East 1000 Norwest Center
Minneapolis, Minnesota 55343-9667 St. Paul, Minnesota 55101
Attention: Vice President, General Counsel
Fax No.: (612) 935-0468 Fax No.: (612) 298-1160
14
<PAGE>
ARTICLE X
DEFAULT AND TERMINATION
10.1 FULL FORCE AND EFFECT: This AGREEMENT shall be in full force and
effect during the EXCLUSIVE TERM and the NON-EXCLUSIVE TERM of this AGREEMENT,
as set forth in Sections 1.09 and 1.10 hereof, unless terminated at an earlier
date pursuant to the terms of Sections 10.2 or 10.3 hereof. The early
termination of this AGREEMENT pursuant to the provisions of this ARTICLE X shall
not relieve a defaulting party hereunder from any liabilities existing prior to
termination in law or in equity as a result of such default, and the
non-defaulting party shall be entitled to seek damages or equitable relief as
appropriate under the circumstances.
10.2 EARLY TERMINATION BY LICENSOR: LICENSOR may, at its election,
terminate this AGREEMENT immediately upon written notice to LICENSEE, without
refunding to LICENSEE any payments already received under the terms of this
AGREEMENT:
(a) If any payment required by this AGREEMENT to be made by LICENSEE shall
not be made when due and such default shall continue unremedied for ninety
(90) days after written notice thereof given by LICENSOR; or
(b) If LICENSEE shall make or suffer to exist any default, other than a
payment default under the provisions of Section 10.2(a) of this AGREEMENT,
on its part under the provisions of this AGREEMENT, and such other default
shall continue unremedied for ninety (90) days after written notice thereof
given by LICENSOR.
10.3 EARLY TERMINATION BY LICENSEE: LICENSEE may, at its election,
terminate this AGREEMENT immediately upon written notice to LICENSOR:
(a) If LICENSOR shall make or suffer any material default on its part under
the provisions of this AGREEMENT, and such default shall continue
unremedied for sixty (60) days after notice thereof given to LICENSOR by
LICENSEE; or
(b) If LICENSOR shall choose to not comply with amendments or modifications
to Good Manufacturing Practices, under Title 21 of CFR, pursuant to the
provisions of Section 3.l(a) of this AGREEMENT, although such noncompliance
is not deemed to be a breach of the AGREEMENT under the terms of Section
3.l(a).
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10.4 POST-TERMINATION RIGHTS: The early termination of this AGREEMENT
pursuant to the provisions of Sections 10.2 or 10.3 of this ARTICLE, shall not:
(a) relieve either party of any liability accrued prior to the date of
termination;
(b) except in the case of early termination of this AGREEMENT as a result
of an intentional default on the part of LICENSEE pursuant to the
provisions of Section 10.2 of this AGREEMENT, affect any sublicenses
granted to third parties by LICENSEE under this AGREEMENT and such
sublicenses shall continue in full force and effect for the term of such
sublicense, provided, that, such sublicensees comply with the provisions of
this AGREEMENT in each and every respect as such provisions apply to the
sublicensee;
(c) affect the continued operation or enforcement or any provision of this
AGREEMENT which by its express terms is to survive termination; and
(d) if such early termination occurs pursuant to the provisions of Section
10.3(a) hereof, the licenses granted to LICENSEE under Sections 2.3 and 2.4
of this AGREEMENT under the terms and conditions specified therein shall
from the date of such early termination become non-exclusive perpetual,
paid-up licenses, free of any further License Fee.
ARTICLE XI
GENERAL PROVISIONS
11.1 ENTIRE AGREEMENT: This AGREEMENT constitutes the entire understanding
between the parties hereto with respect to the Licenses and rights herein
granted and replaces all other agreements concerning PRODUCT or NEW PRODUCT
which may have previously existed between the parties hereto or their prior
parties in interest, whether written or oral. This AGREEMENT can be amended or
modified only by a written instrument signed by both LICENSOR and LICENSEE.
11.2 HEADINGS: Section and article headings used in this AGREEMENT have no
legal significance and are used solely for convenience of reference.
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<PAGE>
11.3 BINDING NATURE; ASSIGNABILITY: This AGREEMENT shall be binding upon
and enure to the benefit of and be enforceable against the parties hereto and
their respective successors, including the resultant entity of any merger,
consolidation or reorganization. This AGREEMENT may not be assigned by either
party without the prior written consent of the other party to this AGREEMENT,
except that it may be transferred to an AFFILIATE or the successor to the entire
business of a party hereto.
11.4 CHOICE OF LAW: This AGREEMENT shall in all respects be governed by,
and enforced and interpreted in accordance with, the laws of the State of New
York, except with respect to its rules relating to conflicts of law.
11.5 ARBITRATION: All disputes arising out of or relating to this AGREEMENT
(including any questions of fraud or questions concerning the validity or
enforceability of this AGREEMENT or any of the rights herein conveyed) shall be
settled by arbitration, to be held in Minneapolis, Minnesota if demanded by
LICENSOR and in White Plains, New York if demanded by LICENSEE. Such arbitration
shall be held before one arbitrator in accordance with the then-existing
Commercial Rules of the American Arbitration Association. All arbitration
proceedings shall be conducted in English. The arbitrator shall have knowledge
of and experience in dealing with the pharmaceutical industry. The arbitration
shall be speedily concluded with the hearing to take place within ninety (90)
days of the date on which the American Arbitration Association receives a demand
for arbitration, and the award shall be rendered in writing within thirty (30)
days after the conclusion of the hearing. Judgment upon the award rendered by
the arbitrator shall be binding upon the parties hereto and may be entered in
any court having jurisdiction. Specific performance and injunctive relief may be
ordered by the award. Costs and attorney fees shall be paid as the Arbitrators'
award shall specify. As the sole exception to arbitration, each party shall have
the right to obtain injunctive relief, only, from any court having jurisdiction
so as to preserve that party's rights for resolution in any pending or imminent
arbitration proceedings, but no such injunction shall prohibit or postpone such
arbitration proceedings and the injunctions may be modified or vacated as a
result of the arbitration award. This Paragraph 11.5 shall survive any
termination of this AGREEMENT.
11.6 SEVERABILITY: Each and every provision of this AGREEMENT shall be
deemed valid, legal and enforceable in all jurisdictions to the fullest extent
possible. Any provision of this AGREEMENT that is determined to be invalid,
illegal or unenforceable in any jurisdiction shall, as to that jurisdiction, be
adjusted and reformed rather than voided, if possible, in order to achieve the
intent of the parties. Any provision of this AGREEMENT that is determined to be
invalid, illegal or unenforceable in any jurisdiction which cannot be adjusted
and reformed shall, for the purposes of that jurisdiction, be voided. Any
adjustment, reformation or voidance of any provision of this AGREEMENT shall
only be effective in the
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<PAGE>
jurisdiction requiring such adjustment or voidance, without affecting in any way
the remaining provisions of this AGREEMENT in such jurisdiction or adjusting,
reforming, voiding or rendering that provision or any other provision of this
AGREEMENT invalid, illegal or unenforceable in any other jurisdiction.
11.7 COUNTERPARTS: This AGREEMENT may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11.8 EXPENSES: Except to the extent otherwise provided in this AGREEMENT,
each party shall pay for its own legal, accounting and other similar expenses
incurred in connection with the transactions contemplated by this AGREEMENT,
whether or not such transactions are consummated.
11.9 FORCE MAJEURE: Neither party shall be responsible or liable to the
other hereunder for failure or delay in performance of this AGREEMENT due to any
war, fire, accident, or other casualty, unavoidable shortage of raw materials,
or any labor disturbance, civil unrest or disturbance, or Act of God, or any
other contingency beyond such party's reasonable control. In the event of the
applicability of this Section, the party affected shall use its best efforts to
eliminate, cure, and overcome any such causes and to resume performance of its
obligation at the earliest date.
IN WITNESS WHEREOF, LICENSOR and LICENSEE have caused this AGREEMENT to be
executed on the date above written.
EM INDUSTRIES, INCORPORATED E. MERCK FINE CHEMICALS
DIVISION
By /S/ V. SCHMITT E.H. ROTHOUSE By /S/ M. HEYL G. SCHNEIDER
----------------------------- ----------------------------
3/24/92 3/25/92 ppa. ppa.
its GROUP VP GENERAL MANAGER its
----------------------------- ----------------------------
Fine Chemicals Division
Darmstadt, 03/19/92
MGI PHARMA, INC.
By MARK A. KING 3/31/92
-----------------------------
its VICE PRESIDENT, BUSINESS OPERATIONS
------------------------------------
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ATTACHMENT A
Specification For NEW PRODUCT
PILOCARPINE HYDROCHLORIDE, USP, DAB, PH Eur, BP, JP
FOR MANUFACTURING PHARMACEUTICAL PRODUCTS
FOR ***
ANALYTICAL DATA SPECIFICATION
- --------------- -------------
***
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
19
<PAGE>
ATTACHMENT B
Companies Authorized To Access DMF Information By Country
APPLIED WITH
------------
***
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
20
<PAGE>
Exhibit 11
Computation of Net Loss Per Common Share
MGI PHARMA, INC.
(Unaudited)
The following information is required in computations of basic and diluted
loss per common share in each year ended December 31:
Year Ended December 31,
--------------------------------------------
1997 1996 1995
---- ---- ----
LOSS:
Loss $(1,784,545) $(6,621,747) $(2,614,478)
COMMON SHARES:
Adjusted weighted shares
outstanding 14,116,471 13,178,790 12,508,639
LOSS PER COMMON SHARE:
Net loss (a) $ (0.13) $ (0.50) (0.21)
(a) Basic and diluted loss per share amounts are identical as the effect of
potential common shares is antidilutive.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders MGI PHARMA, INC.:
We consent to incorporation by reference in the Registration Statements (Nos.
2-80845, 2-92340, 2-94654, 33-13785, 33-23098, 33-23099, 33-37254, 33-42341,
33-65026, 33-65032, 33-79024 and 333-38453) on Form S-8 of MGI PHARMA, INC., of
our reports dated February 6, 1998, relating to the balance sheets of MGI
PHARMA, INC. as of December 31, 1997 and 1996, and the related statements of
operations, cash flows, stockholders' equity and the related financial statement
schedule for each of the years in the three-year period ended December 31, 1997,
which reports are included in the annual report on Form 10-K of MGI PHARMA, INC.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 27, 1998
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Charles N. Blitzer and Lori-jean
Gille, and each of them, his true and lawful attorneys-in-fact and agents, each
acting alone, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign an Annual Report
on Form 10-K of MGI PHARMA, INC., and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE
- --------- ----- ----
Charles N. Blitzer President and Chief Executive March 4, 1998
Officer (Principal Executive
Officer and Director)
William C. Brown Vice President, Finance March 27, 1998
(Principal Financial and
Accounting Officer)
Frederick W. Armstrong Director March 9, 1998
Charles E. Austin Director March 27, 1998
David E. Collins Director March 8, 1998
Joseph S. Frelinghuysen, Jr. Director March 9, 1998
Hugh E. Miller Director March 7, 1998
Timothy G. Rothwell Director March 27, 1998
Lee J. Schroeder Director March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING BALANCE SHEET OF MGI PHARMA, INC. AS OF DECEMBER 31, 1997, AND THE
RELATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,057,091
<SECURITIES> 7,998,832
<RECEIVABLES> 1,073,993
<ALLOWANCES> 84,215
<INVENTORY> 838,058
<CURRENT-ASSETS> 17,152,254
<PP&E> 618,862
<DEPRECIATION> 808,720
<TOTAL-ASSETS> 18,191,020
<CURRENT-LIABILITIES> 3,171,699
<BONDS> 0
0
0
<COMMON> 15,019,321
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 18,191,020
<SALES> 9,344,548
<TOTAL-REVENUES> 13,310,829
<CGS> 767,680
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,988,584
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,784,545)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,784,545)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,784,545)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
<PAGE>
Exhibit 99
MGI PHARMA, INC.
ANNUAL REPORT ON FORM 10-K
DECEMBER 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 $1,784,545 and $6,621,747 for the
years ended 1997 and 1996, respectively. At December 31, 1997 the company had an
accumulated deficit of $74,242,635. If 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. As such, 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 1997 and 1996, U.S. sales of Salagen(R) Tablets were
$8,557,526 and $5,926,681, respectively, representing 92% of total product sales
in each year. 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. One such factor could be the
expiration of orphan drug protection for Salagen(R) Tablets as a treatment for
radiation induced xerostomia in head and neck cancer patients in March 2001. The
company anticipates that sales of its other product, DIDRONEL(R) I.V. Infusion,
will continue to represent a minor portion of total product sales.
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 and medical product opportunities
that the company can immediately market, or develop and market. The company's
strategy for growth is dependent upon its continued ability to
<PAGE>
identify and acquire new products targeted at niche markets that can be promoted
through the company's marketing and distribution channels. Because the company
does not engage in proprietary research of new products, it must rely upon the
willingness of others to sell or license 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 international 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 acylfulvene family of compounds, including MGI 114. Revenues
from strategic alliances typically include milestone payments and royalty
payments. Licensing revenue was $3,090,375 for 1997 and $2,170,460 for 1996,
comprising 23% of total revenues in each year. 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 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 and
debt 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
<PAGE>
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 manufacturing
facilities. 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 and medical products is highly
competitive. Many of the company's competitors are large, multinational
pharmaceutical companies that have considerably greater financial, sales,
marketing and technical resources than those of the company. Additionally, many
of the company's present and potential competitors 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 continual product development and technological change. The
company's products could be rendered obsolete or uneconomical by the development
of new products 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 in head and neck cancer patients. 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
<PAGE>
independently develop proprietary technologies and processes that 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
products, 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 that 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 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 ever approved for sale.
The company depends on external laboratories and medical institutions to conduct
its preclinical and clinical testing. This research must comply with good
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
<PAGE>
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 PRICING AND REIMBURSEMENT
The profitability of the company will depend in part on the availability of
adequate reimbursement for the company's products from 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.
<PAGE>
DEPENDENCE UPON CERTAIN KEY MANAGEMENT The future success of the company is
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.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the company's common stock, like securities of other small
companies, has fluctuated significantly in recent years and is likely to
fluctuate in the future, regardless of the company's operating performance. 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.
