<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
Commission File Number: 0-10736
MGI PHARMA, INC.
----------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1364647
--------------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
Suite 300E, Opus Center
9900 Bren Road East
Minnetonka, Minnesota 55343 (612) 935-7335
--------------------------------------- -------------------------------
(Address of principal executive offices (Registrant's telephone number,
and zip code) including area code)
Indicate by check mark, whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 14,469,631 shares
---------------------------- ----------------------------------
(Class) (Outstanding at November 13, 1998)
<PAGE>
MGI PHARMA, INC.
FORM 10-Q INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - September 30, 1998
and December 31, 1997
Statements of Operations - Three Months and
Nine Months Ended September 30, 1998 and 1997
Statements of Cash Flows - Nine Months
Ended September 30, 1998 and 1997
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
MGI PHARMA, INC.
BALANCE SHEETS
(unaudited)
September 30, December 31,
1998 1997
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 5,529,896 $ 7,057,091
Short-term investments 9,466,499 7,998,832
Receivables, less allowances of
$101,283 and $84,215 2,179,402 1,073,993
Inventories 976,622 838,058
Prepaid expenses 93,340 184,280
----------- -----------
Total current assets 18,245,759 17,152,254
Equipment and furniture, at cost
less accumulated depreciation of
$997,613 and $808,720 596,415 618,862
Other assets 371,924 419,904
----------- -----------
Total assets $19,214,098 $18,191,020
=========== ===========
(Continued)
<PAGE>
BALANCE SHEETS
(Unaudited)
Page 2
September 30, December 31,
1998 1997
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 281,274 $ 384,428
Accrued expenses 2,513,136 2,331,016
Deferred revenue -- 450,000
Other current liabilities 45,822 6,255
------------ ------------
Total current liabilities 2,840,232 3,171,699
------------ ------------
Stockholders' equity:
Common stock, $.01 par value,
30,000,000 authorized shares,
14,456,056 and 14,195,563
Issued shares 144,561 141,956
Additional paid-in capital 90,312,347 89,222,575
Notes receivable from officers (56,999) (102,575)
Accumulated deficit (74,026,043) (74,242,635)
------------ ------------
Total stockholders' equity 16,373,866 15,019,321
------------ ------------
Total liabilities and
stockholders' equity $ 19,214,098 $ 18,191,020
============ ============
- -------------------------------------
See accompanying notes to financial statements.
<PAGE>
MGI PHARMA, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 3,274,112 $ 2,576,662 $ 9,163,357 $ 6,764,453
Promotion 125,000 0 625,000 0
Licensing 1,021,319 786,382 2,236,089 1,761,617
Interest and other 209,314 206,240 596,457 674,020
------------ ------------ ------------ ------------
4,629,745 3,569,284 12,620,903 9,200,090
------------ ------------ ------------ ------------
Costs and Expenses:
Cost of sales 216,026 205,439 716,531 596,872
Selling, general &
administrative 2,712,366 2,316,584 7,776,171 6,469,351
Research and
development 1,316,839 1,184,103 3,911,609 3,629,292
------------ ------------ ------------ ------------
4,245,231 3,706,126 12,404,311 10,695,515
------------ ------------ ------------ ------------
Net income (loss) $ 384,514 $ (136,842) $ 216,592 $ (1,495,425)
============ ============ ============ ============
Net income (loss) per common share:
Basic $ 0.03 $ (0.01) $ 0.02 $ (0.11)
Assuming dilution $ 0.03 $ (0.01) $ 0.01 $ (0.11)
Weighted average number
of common shares
outstanding:
Basic 14,452,288 14,135,191 14,330,574 14,108,178
Assuming dilution 15,019,806 14,135,191 14,847,538 14,108,178
</TABLE>
- -------------------------------------
See accompanying notes to financial statements.
<PAGE>
MGI PHARMA, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
-------------------------------
1998 1997
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 216,592 ($ 1,495,425)
Adjustments for non-cash items:
Depreciation 188,893 127,842
Benefit plan contribution 100,292 95,787
Change in operating assets and liabilities:
Receivables (1,105,409) (505,554)
Inventories (138,564) (138,447)
Prepaid expenses 90,940 (152,523)
Accounts payable and accrued expenses 71,427 (1,768,696)
Deferred revenue (450,000) --
Other current liabilities 39,567 37,735
------------ ------------
Net cash used in operating activities (986,262) (3,799,281)
------------ ------------
INVESTING ACTIVITIES:
Purchase of investments (12,690,850) (11,771,378)
Maturity of investments 11,223,183 12,392,165
Purchase of equipment and furniture (166,446) (410,492)
Payments on notes receivable 45,576 2,358
Other 47,980 (78,356)
------------ ------------
Net cash provided by (used in) investing
activities (1,540,557) 134,297
------------ ------------
FINANCING ACTIVITIES:
Issuance of shares under stock
plans 999,624 105,119
------------ ------------
Net cash provided by financing
activities 999,624 105,119
------------ ------------
Decrease in cash and cash equivalents (1,527,195) (3,559,865)
Cash and cash equivalents at
beginning of period 7,057,091 8,220,569
------------ ------------
Cash and cash equivalents at
end of period $ 5,529,896 $ 4,660,704
============ ============
- ----------------------------------
See accompanying notes to financial statements.
<PAGE>
MGI PHARMA, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
---------------------
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 INFeD(R) and Salagen(R) Tablets.
Exclusive Japanese 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.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal, recurring adjustments)
considered necessary for fair presentation have been included. Interim results
may not be indicative of annual results. For further information, refer to the
financial statements and footnotes included in the company's report on Form 10-K
for the year ended December 31, 1997.
<PAGE>
(2) Income (Loss) Per Common Share
------------------------------
The company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128) in the fourth quarter of 1997. Earnings Per
Share for the three months and nine months ended September 30, 1998 and 1997 are
summarized in the following table:
<TABLE>
<CAPTION>
Three Months Ended September 30,
1998 1997
Net Per Net Per
Income Share Income Share
(Loss) Shares Amount (Loss) Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic
Net income (loss) $384,514 14,452,288 $0.03 ($136,842) 14,135,191 ($0.01)
Effect of
dilutive stock options -- 567,518 $0.00 -- -- --
--------------------------------- ----------------------------------
Assuming dilution
Net income (loss) $384,514 15,019,806 $0.03 ($136,842) 14,135,191 ($0.01)
Nine Months Ended September 30,
1998 1997
Net Per Net Per
Income Share Income Share
(Loss) Shares Amount (Loss) Shares Amount
------ ------ ------ ------ ------ ------
Basic
Net income (loss) $216,592 14,330,574 $0.02 ($1,495,425) 14,108,178 ($0.11)
Effect of
dilutive stock options -- 516,964 ($0.01) -- -- --
---------------------------------- ----------------------------------
Assuming dilution
Net income (loss) $216,592 14,847,538 $0.01 ($1,495,425) 14,108,178 ($0.11)
</TABLE>
For loss periods, basic and diluted share amounts are identical, as the effect
of potential common shares is antidilutive.
<PAGE>
(3) Short-Term Investments
----------------------
Because the company has the intent and ability to hold its investments to
maturity, they are considered held-to-maturity investments. As such, they are
stated at amortized cost, which approximates estimated fair value.
Held-to-maturity investments at September 30, 1998 and December 31, 1997 are
summarized in the following table:
1998 1997
---------- ----------
Commercial paper $7,380,162 $5,035,698
European certificates of deposit 1,047,285 2,091,522
Medium-term notes 1,039,052 871,612
---------- ----------
$9,466,499 $7,998,832
========== ==========
(4) Inventories
-----------
Inventories at September 30, 1998 and December 31, 1997 are summarized as
follows:
1998 1997
--------- ---------
Raw materials and supplies $ 461,742 $ 12,436
Work in process 73,661 662,337
Finished products 441,219 163,285
--------- ---------
$ 976,622 $ 838,058
========= =========
Inventories are stated at the lower of cost or market. Cost is determined on a
first-in, first-out basis.
(5) Accrued Expenses
----------------
Accrued expenses at September 30, 1998, and December 31, 1997, are summarized in
the following table:
1998 1997
---------- ----------
Product development commitments $ 711,383 $ 368,248
Bonuses 456,509 489,000
Product return accrual 440,374 305,044
Retirement plan contribution 151,374 177,249
Inventory in process 111,000 194,843
Other accrued expenses 642,496 796,632
---------- ----------
$2,513,136 $2,331,016
========== ==========
<PAGE>
(6) Promotion Revenue
-----------------
In March 1998, the company amended its promotion agreement with Schein
Pharmaceutical, Inc. for the promotion of INFeD(R) (iron dextran injection).
Under the terms of this amendment, a minimum promotion fee was set at $125,000
per quarter from July 1, 1997, to December 31, 1998.
(7) Stock Incentive Plans
---------------------
Under stock incentive plans, designated persons (including officers, directors
and employees) are granted rights to acquire company common stock. These rights
include stock options and other equity rights. At September 30, 1998, 3,092,166
shares of common stock remain reserved for issuance, of which 835,768 remain
available for grant. Options to purchase 2,256,398 shares of common stock were
outstanding, of which 1,212,720 were exercisable. Options outstanding had a
weighted average exercise price of $6.25 per share.
Loans to officers were made to facilitate the purchase of company stock. The
loans are full recourse, unsecured obligations. At September 30, 1998, $56,999
of principal remains outstanding, which is payable upon demand.
(8) Stockholders' Equity
--------------------
Changes in selected stockholders' equity accounts were as follows:
<TABLE>
<CAPTION>
Notes
Common Stock Additional receivable
----------------------- paid-in from
Shares Par value capital officers
----------------------- ----------- ----------
<S> <C> <C> <C> <C>
NINE MONTHS ENDED
SEPTEMBER 30, 1998:
Balance at December 31, 1997 14,195,563 $141,956 $89,222,575 ($102,575)
Exercise of stock options 224,322 2,243 928,996 --
Employee retirement savings
plan contribution 16,058 161 92,593 --
Employee stock purchase plan 20,113 201 68,183 --
Note payments -- -- -- 45,576
---------- -------- ----------- ---------
Balance at September 30, 1998 14,456,056 $144,561 $90,312,347 ($ 56,999)
========== ======== =========== ==========
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
- --------
MGI PHARMA, INC. (MGI or the company) is a pharmaceutical company that acquires,
develops and markets 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 INFeD(R) and Salagen(R) Tablets.
Exclusive Japanese 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 income of $384,514 in the 1998 third quarter compares with a
net loss of $136,842 in the 1997 third quarter. For the nine month period ended
September 30, 1998, net income of $216,592 compares to a net loss of $1,495,425
in the corresponding 1997 period. Achievement of profitability in the 1998
periods was due to increases in total revenues of 30% and 37% for the quarter
and first nine months, respectively, compared to increases in total costs and
expenses of 15% and 16% for the quarter and first nine months, respectively.
Sales revenue increased 27% from $2,576,662 in the 1997 third quarter to
$3,274,112 in the 1998 third quarter, and increased 35% from $6,764,453 in the
nine month period ended September 30, 1997 to $9,163,357 in the corresponding
1998 period. The increases reflect increased sales of Salagen(R) Tablets
resulting from broader demand following the April marketing launch of Salagen(R)
Tablets for the treatment of Sjogren's syndrome symptoms, a second indication
for the drug that was approved by the U.S. FDA in February 1998. Although total
sales revenue was flat from the 1998 second quarter to the 1998 third quarter,
U.S. Salagen(R) Tablets sales revenues increased 6% during that period. Future
MGI sales revenues may fluctuate from quarter to quarter, due to periodic
adjustments in wholesale buying patterns.
<PAGE>
Cost of sales increased 5% from $205,439 in the 1997 third quarter to $216,026
in the 1998 third quarter, and increased 20% from $596,872 in the nine month
period ended September 30, 1997 to $716,531 in the corresponding 1998 period.
The increases are primarily due to increased unit sales volume in 1998.
Management believes that cost of sales as a percent of sales of approximately
10% should continue for its current products.
In March 1998, the company amended its promotion agreement with Schein
Pharmaceutical, Inc. for the promotion of INFeD(R) (iron dextran injection).
Under the terms of this amendment, a minimum promotion fee was set at $125,000
per quarter from July 1, 1997, to December 31, 1998, resulting in the
recognition of $625,000 of promotion revenue through the end of the third
quarter of 1998.
Licensing revenue increased 30% from $786,382 in the 1997 third quarter to
$1,021,319 in the 1998 third quarter, and increased 27% from $1,761,617 in the
nine month period ended September 30, 1997, to $2,236,089 in the corresponding
1998 period. The increases are primarily due to increased royalties from
international Salagen(R) Tablets activities and a scheduled increase in
quarterly payments from Dainippon. Future licensing revenues will likely
fluctuate between years and from one quarter to the next depending on the
achievement of milestones by the company's partners, their level of recurring
royalty generating activities, and the timing of initiating additional licensing
relationships.
Interest and other income increased 1% from $206,240 in the 1997 third quarter
to $209,314 in the 1998 third quarter, but decreased 12% from $674,020 in the
nine month period ended September 30, 1997, to $596,457 in the corresponding
1998 period. The yield on investments in 1998 for both the quarter and the nine
month period are lower than the corresponding 1997 periods. However, the
quarterly increase is a result of an increase in the average amount of funds
available for investment between the quarters. Until the company maintains
positive cash flow, funds available for investments would decline. Interest
income would correspondingly decline, assuming yields remain constant.
Selling, general and administrative expenses increased 17% from $2,316,584 in
the 1997 third quarter to $2,712,366 in the 1998 third quarter, and increased
20% from $6,469,351 in the nine month period ended September 30, 1997, to
$7,776,171 in the corresponding 1998 period. The increases result primarily from
increased selling and promotion costs in conjunction with the April 1998 launch
of Salagen( Tablets as a treatment for symptoms of dry mouth from Sjogren's
syndrome.
Research and development expense increased 11% from $1,184,103 in the 1997 third
quarter to $1,316,839 in the 1998 third quarter, and increased 8% from
$3,629,292 in the nine month period ended September 30, 1997 to $3,911,609 in
the corresponding 1998 period. The increases reflect increased spending for the
development of MGI 114, the lead
<PAGE>
acylfulvene analog, with decreased spending for Salagen( Tablets following the
February 1997 submission of a supplemental New Drug Application (sNDA) to the
U.S. Food and Drug Administration. Research and development spending is expected
to increase in the fourth quarter of 1998 and in the first half of 1999 as
development effort for MGI 114 accelerates.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1998, the company had cash and cash equivalents and investments
of $14,996,395 and working capital of $15,405,527 compared to $15,055,923 and
$13,980,555, respectively, at December 31, 1997. During the nine month period
ended September 30, 1998, the company used cash of $986,262 to fund its
operating activities, and received cash of $999,624 from its financing
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 through the
company's product acquisition 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.
Year 2000
- ---------
Many currently installed computer systems and software are coded to accept only
two-digit entries in the date code fields. These date code fields will need to
accept four-digit entries to distinguish 21st century dates from 20th century
dates. This problem could result in system failures or miscalculations causing
disruptions of business operations (including, among other things, a temporary
inability to process transactions, send invoices or engage in other similar
business activities). As a result, many companies' computer systems and software
will need to be upgraded or replaced in order to comply with Year 2000
requirements. The potential global impact of the Year 2000 problem is not known,
and, if not corrected in a timely manner, could affect the company and the U.S.
and world economy generally.
The company has formed a project team (consisting of representatives from its
representative departments) to address internal and external Year 2000 issues.
The company's internal computer systems are being reviewed to assess and
remediate Year 2000 problems. The company's assessment of internal systems
includes its information technology ("IT"), as well as non-IT systems (those
systems containing embedded
<PAGE>
technology in the form of microprocessors or other similar circuitry). The
company's Year 2000 compliance program includes the following phases:
identifying systems that need to be modified or replaced; carrying out
remediation work to modify existing systems or convert to new systems; and
conducting validation testing of systems and applications to ensure compliance.
The company is currently in the second and third phases of this program. Those
systems that have been replaced or modified are being tested. Other systems are
on schedule for replacement or upgrade.
The amount of remediation work required to address Year 2000 problems is not
expected to be extensive. The company has replaced certain of its financial and
operational systems in the last several years, and management believes that the
new equipment and software substantially addresses Year 2000 issues. However,
the company will be required to modify some of its existing hardware and
software in order for its computer systems to function properly in the Year 2000
and thereafter. The company estimates that it will complete its Year 2000
compliance program for all its significant internal systems no later than
October 1, 1999.
In addition, the company is requesting assurances from its major suppliers that
they are addressing the Year 2000 issue and that products purchased by the
company from such suppliers will function properly in the Year 2000. Also,
contacts are being made with the company's major customers. These actions are
intended to help mitigate the possible external impact of the Year 2000 problem.
However, it is impossible to fully assess the potential consequences in the
event service interruptions from suppliers occur or in the event that there are
disruptions in such infrastructure areas as utilities, communications,
transportation, banking and government.
The total estimated cost for resolving the company's Year 2000 issues is
approximately $660,000, of which approximately $505,000 has been spent through
September 30, 1998. The total cost estimate includes the cost of replacing
non-compliant systems as a remediation cost in cases where the company has
accelerated plans to replace such systems. Estimates of Year 2000 costs are
based on numerous assumptions, and there can be no assurance that the estimates
are correct or that actual costs will not be materially greater than
anticipated.
Based on its assessments to date, the company believes it will not experience
any material disruption as a result of Year 2000 problems in internal processes,
information processing or interface with major customers, or with processing
orders and billing. However, if certain critical third-party providers, such as
those providing product distribution, banking, contract manufacturing,
electricity, water or telephone service, experience difficulties resulting in
disruption of service to the company, a shutdown of the company's operations at
its Minnesota headquarters could occur for the duration of the disruption. The
company has not yet developed a contingency plan to provide for continuity of
operation in the event of various problem scenarios, but it will assess the need
to develop such a plan based on the outcome of its validation phase of its Year
2000 compliance program and the results of surveying its major suppliers and
customers. Assuming no major
<PAGE>
disruption in service from utility companies or other critical third-party
providers, the company believes that it will be able to manage its total Year
2000 transition without any material effect on the company's results of
operations or financial condition.
Cautionary Statement
- --------------------
This Form 10-Q contains forward-looking statements within the meaning of federal
securities laws. These statements include statements regarding intent, belief,
or current expectations of the Company and its management. These forward-looking
statements are not guarantees of future performance and involve a number of
risks and uncertainties that may cause the Company's actual results to differ
materially from the results discussed in these statements. Factors that might
cause such differences include, but are not limited to, dependence on sales of
Salagen(R) Tablets, dependence on a license acquisition strategy, Year 2000
compliance issues, 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 this Form_10-Q.
<PAGE>
MGI PHARMA, INC.
PART II - OTHER INFORMATION
Item 5. Other Information
- --------------------------
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the company is hereby filing cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in forward looking statements of the
company made by, or on behalf of the company. See Exhibit 99 to this report.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) LISTING OF EXHIBITS:
11 Computation of Net Loss Per Common Share
27 Financial Data Schedule
99 Cautionary Statements
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the three months ended
September 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MGI PHARMA, INC.
Date: November 13, 1998 By: /s/ William C. Brown
----------------------------------
William C. Brown, Vice President,
Finance (principal financial and
accounting officer)
<PAGE>
MGI PHARMA, INC.
Quarterly Report on Form 10-Q
for the
Quarter Ended September 30, 1998
EXHIBIT INDEX
-------------
Exhibit
Number Description
------ -----------
11 Computation of Net Loss per Common Share
27 Financial Data Schedule
99 Cautionary Statements
<PAGE>
Exhibit 11
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
MGI PHARMA, INC.
(unaudited)
The following information is required in computations of basic and diluted loss
per common share for each period:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Income (Loss): $ 384,514 $ (136,842) $ 216,592 $ (1,495,425)
Common shares:
Adjusted weighted
shares outstanding:
Basic 14,452,288 14,135,191 14,330,574 14,108,178
Assuming dilution 15,019,806 14,135,191 14,847,538 14,108,178
Net Income (Loss) per
common share:
Basic $ 0.03 $ (0.01) $ 0.02 $ (0.11)
Assuming dilution $ 0.03 $ (0.01) $ 0.01 $ (0.11)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING BALANCE SHEET OF MGI PHARMA, INC. AS OF SEPTEMBER 30, 1998, AND THE
RELATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,529,896
<SECURITIES> 9,466,499
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<PAGE>
Exhibit 99
MGI PHARMA, INC.
QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 1998
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.
UNCERTAIN PROFITABILITY FROM OPERATIONS
For many years, revenues have not been sufficient to offset all the expenses
involved in operating a pharmaceutical company including research, development
and production. Although the company had net income of $384,514 for the nine
months ended September 30, 1998, the company had a net loss of $1,784,545 for
the year ended 1997, as well as losses for the previous seven years. At
September 30, 1998 the company had an accumulated deficit of $74,026,043. If the
company is unable to sustain 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.
Profitability will be dependent on the company's 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 the nine months ended September 30, 1998, U.S. sales of
Salagen(R) Tablets were $8,603,210, representing 94% of total product sales for
the period. In 1997, annual U.S. sales Salagen(R) Tablets were $8,557,526
representing 92% of 1997 product sales. Accordingly, any factor adversely
affecting sales of Salagen(R) Tablets could have a material adverse effect on
the company's business, financial condition and results of operations. 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.
<PAGE>
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 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 basic research or drug discovery, 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.
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 $2,236,089 for the nine months ended September
30, 1998, and $3,090,375 for 1997, comprising 18% and 23%, respectively, of
total revenues in each period. 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
<PAGE>
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 Merck KGaA Special and 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
Merck KGaA Special and Fine Chemicals Division produces the substantial majority
of the worldwide supply of pharmaceutical 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 qualified 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
<PAGE>
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
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, the pace of
development programs, 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
<PAGE>
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 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.
<PAGE>
POTENTIAL PRODUCT LIABILITY; LIMITED INSURANCE COVERAGE
The company faces exposure to product liability claims in the event that the use
of its product is alleged to have resulted in adverse effects. Such risk exists
even with respect to those products that are manufactured in regulated and
licensed facilities or otherwise possess regulatory approval for commercial
sale. While the company has taken, and continues to take, what it believes are
appropriate precautions, there can be no assurance that it will avoid
significant product liability exposure. The company currently has product
liability insurance in the amount of $10 million per occurrence and in the
aggregate for the year. Although to date the company has not been the subject of
any product liability claims, there can be no assurance that such insurance will
be sufficient to cover potential claims. Further, there can be no assurance that
adequate insurance coverage will be available in the future on commercially
reasonable terms, if at all, or that a product liability claim would not
materially adversely affect the company's business, financial condition and
results of operations.
RISK OF PRODUCT RECALL
Product recalls may be issued at the discretion of the company, the FDA, the U.
S. Federal Trade Commission or other government agencies having regulatory
authority for product sales, and may occur due to disputed labeling claims,
manufacturing issues, quality defects or other reasons. Although none of the
company's products have been recalled, no assurance can be given that product
recalls will not occur in the future. Any product recall could materially
adversely affect the company's business, financial condition and results of
operations.
DEPENDENCE UPON CERTAIN KEY MANAGEMENT
The future success of the company is 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.
YEAR 2000
Many currently installed computer systems and software are coded to accept only
two-digit entries in the date code fields. These date code fields will need to
accept four-digit entries to distinguish 21st century dates from 20th century
dates. This problem could result in system failures or
<PAGE>
miscalculations causing disruptions of business operations (including, among
other things, a temporary inability to process transactions, send invoices or
engage in other similar business activities). As a result, many companies'
computer systems and software will need to be upgraded or replaced in order to
comply with Year 2000 requirements. The potential global impact of the Year 2000
problem is not known, and, if not corrected in a timely manner, could affect the
company and the U.S. and world economy generally.
The total estimated cost for resolving the company's Year 2000 issues is
approximately $660,000, of which approximately $505,000 has been spent through
September 30, 1998. The total cost estimate includes the cost of replacing
non-compliant systems as a remediation cost in cases where the company has
accelerated plans to replace such systems. Estimates of Year 2000 costs are
based on numerous assumptions, and there can be no assurance that the estimates
are correct or that actual costs will not be materially greater than
anticipated.
Based on its assessments to date, the company believes it will not experience
any material disruption as a result of Year 2000 problems in internal processes,
information processing or interface with major customers, or with processing
orders and billing. However, if certain critical third-party providers, such as
those providing product distribution, banking, contract manufacturing,
electricity, water or telephone service, experience difficulties resulting in
disruption of service on the company, a shutdown of the company's operations at
its Minnesota headquarters could occur for the duration of the disruption.
