<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, 1999
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 number)
incorporation or organization)
6300 West Old Shakopee Road
Suite 110
Bloomington, Minnesota 55438 (612) 346-4700
--------------------------------------- --------------------------------
(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 14,939,240 shares
-------------------------------- -----------------------------------------
(Class) (Outstanding at November 10, 1999)
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MGI PHARMA, INC.
FORM 10-Q INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - September 30, 1999
and December 31, 1998 3
Statements of Operations - Three Months and
Nine Months Ended September 30, 1999 and 1998 5
Statements of Cash Flows - Nine Months
Ended September 30, 1999 and 1998 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security 19
Holders
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
MGI PHARMA, INC.
BALANCE SHEETS
(unaudited)
September 30, December 31,
1999 1998
----------- -----------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 5,568,341 $ 6,513,204
Short-term investments 13,641,456 10,568,061
Receivables, less allowances of
$119,037 and $97,960 3,036,953 1,410,539
Inventories 1,041,948 1,285,368
Prepaid expenses 213,310 329,953
----------- -----------
Total current assets 23,502,008 20,107,125
Equipment and furniture, at cost
less accumulated depreciation of
$782,134 and $1,062,405 984,819 540,084
Other assets 435,207 474,859
----------- -----------
Total assets $24,922,034 $21,122,068
=========== ===========
(Continued)
3
<PAGE>
BALANCE SHEETS
(Unaudited)
Page 2
September 30, December 31,
1999 1998
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 569,871 $ 794,266
Accrued expenses 2,827,670 2,712,884
Deferred revenue -- 495,000
Other current liabilities 53,820 9,250
------------ ------------
Total current liabilities 3,451,361 4,011,400
------------ ------------
Stockholders' equity:
Common stock, $.01 par value,
30,000,000 authorized shares,
14,900,180 and 14,542,472
Issued shares 149,002 145,425
Additional paid-in capital 92,903,194 90,850,590
Notes receivable from officers -- (56,999)
Accumulated deficit (71,581,523) (73,828,348)
------------ ------------
Total stockholders' equity 21,470,673 17,110,668
------------ ------------
Total liabilities and
stockholders' equity $ 24,922,034 $ 21,122,068
============ ============
- -------------------------------------
See accompanying notes to financial statements.
4
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MGI PHARMA, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 4,271,847 $ 3,274,112 $13,528,969 $ 9,163,357
Promotion 250,000 125,000 625,000 625,000
Licensing 1,290,046 1,071,319 3,198,829 2,386,089
Interest and other 270,403 209,314 675,692 596,457
----------- ----------- ----------- -----------
6,082,296 4,679,745 18,028,490 12,770,903
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of sales 258,882 216,026 821,441 716,531
Selling, general and administrative 2,923,887 2,712,366 9,667,086 7,776,171
Research and development 1,871,292 1,316,839 5,078,917 3,911,609
----------- ----------- ----------- -----------
5,054,061 4,245,231 15,567,444 12,404,311
----------- ----------- ----------- -----------
Income before taxes 1,028,235 434,514 2,461,046 366,592
----------- ----------- ----------- -----------
Provision for income taxes 75,565 50,000 214,221 150,000
----------- ----------- ----------- -----------
Net income $ 952,670 $ 384,514 2,246,825 216,592
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.06 $ 0.03 $ 0.15 $ 0.02
Assuming dilution $ 0.06 $ 0.03 $ 0.14 $ 0.01
Weighted average number of
common shares outstanding:
Basic 14,818,854 14,452,288 14,681,292 14,330,574
Assuming dilution 15,732,835 15,019,806 15,586,710 14,847,538
</TABLE>
- ------------------------------------------------------------------------------
See accompanying notes to financial statements.
5
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MGI PHARMA, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
------------------------------
1999 1998
------------ ------------
OPERATING ACTIVITIES:
Net income $ 2,246,825 $ 216,592
Adjustments for non-cash items:
Depreciation 197,853 188,893
Benefit plan contribution 117,261 100,292
Stock option acceleration 162,953 --
Other 110,951 --
Change in operating assets and liabilities:
Receivables (1,626,414) (1,105,409)
Inventories 243,420 (138,564)
Prepaid expenses 116,643 90,940
Accounts payable and accrued expenses (110,116) 71,427
Deferred revenue (495,000) (450,000)
Other current liabilities 44,570 39,567
------------ ------------
Net cash provided by (used in) operating
activities 1,008,946 (986,262)
------------ ------------
INVESTING ACTIVITIES:
Purchase of investments (15,464,561) (12,690,850)
Maturity of investments 12,391,166 11,223,183
Purchase of equipment and furniture (672,519) (166,446)
Payments on notes receivable 56,999 45,576
Other (41,368) 47,980
------------ ------------
Net cash used in investing activities (3,730,283) (1,540,557)
------------ ------------
FINANCING ACTIVITIES:
Issuance of shares under stock
plans 1,776,474 999,624
------------ ------------
Net cash provided by financing
activities 1,776,474 999,624
------------ ------------
Decrease in cash and cash equivalents (944,863) (1,527,195)
Cash and cash equivalents at
beginning of period 6,513,204 7,057,091
------------ ------------
Cash and cash equivalents at
end of period $ 5,568,341 $ 5,529,896
============ ============
- ----------------------------------
See accompanying notes to financial statements.
6
<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 products. MGI's
current product portfolio is comprised of products that address special needs in
the fields of oncology and rheumatology, however, the company may expand its
scope as its business grows. The company promotes products directly to
physicians throughout the United States using its own specialty sales force. As
is common in the pharmaceutical industry, domestic sales are made to
pharmaceutical wholesalers for further distribution through pharmacies to the
ultimate consumers of the company's products. U.S. sales of Salagen(R) Tablets
(pilocarpine hydrochloride) account for substantially all of the company's
sales. The company intends to commercialize all of its products outside the
United States through various alliances, as it has for Salagen Tablets. The
company has agreements with several international pharmaceutical companies to
commercialize Salagen 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 drug in a family of potential
anti-cancer analogs known as the acylfulvenes, and continued clinical support of
Salagen Tablets. Exclusive rights in Japan 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. Certain prior year amounts have been
reclassified to conform with current year presentation. 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, 1998.
7
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(2) Income Per Common Share
Income per share for the three month and nine month periods ended September 30,
1999 and 1998 are summarized in the following table:
<TABLE>
<CAPTION>
Three Months Ended 1999 1998
-------------------------------- -------------------------------
September 30 Per Per
Net Share Net Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic $ 952,670 14,818,854 $0.06 $ 384,514 14,452,288 $0.03
Effect of
dilutive stock options -- 913,981 -- -- 567,518 --
-----------------------------------------------------------------
Assuming dilution $ 952,670 15,732,835 $0.06 $ 384,514 15,019,806 $0.03
<CAPTION>
Nine Months Ended 1999 1998
-------------------------------- -------------------------------
September 30 Per Per
Net Share Net Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic $2,246,825 14,681,292 $0.15 $ 216,592 14,330,574 $0.02
Effect of
dilutive stock options -- 905,418 ($0.01) -- 516,964 ($0.01)
-----------------------------------------------------------------
Assuming dilution $2,246,825 15,586,710 $0.14 $ 216,592 14,847,538 $0.01
</TABLE>
(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, 1999 and December 31, 1998 are
summarized in the following table:
Short-Term Investments
1999 1998
----------------- ----------------
Commercial paper $6,682,542 $6,434,638
Corporate notes 4,891,836 4,133,423
Certificates of deposit 2,067,078 --
----------------- ----------------
$13,641,456 $10,568,061
================= ================
8
<PAGE>
(4) Inventories
Inventories at September 30, 1999 and December 31, 1998 are summarized as
follows:
1999 1998
--------------- ---------------
Raw materials and supplies $11,898 $83,016
Work in process 315,419 531,952
Finished products 714,631 670,400
--------------- ---------------
$1,041,948 $1,285,368
=============== ===============
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, 1999, and December 31, 1998, are summarized in
the following table:
1999 1998
------------ ------------
Product development commitments $804,978 $446,429
Product return accrual 474,861 467,547
Bonuses 466,348 536,683
Retirement and separation agreement 232,500 --
Retirement plan contribution 152,758 204,619
Third party manufacturing -- 422,334
Other accrued expenses 696,225 635,272
------------ ------------
$2,827,670 $2,712,884
============ ============
(6) Promotion Revenue
In March 1999, the company and Schein Pharmaceutical, Inc. concluded their
agreement for the promotion of INFeD(R) (iron dextran injection). The company
recognized a final quarterly promotion fee of $125,000 in the first quarter of
1999.
In April 1999, the company entered into promotion agreements with Connetics
Corporation for the promotion of Ridaura(R) (auranofin) and Luxiq(TM)
(betamethasone valerate) Foam, 0.12%. Under the terms of the agreements, the
company will promote Ridaura and Luxiq to the rheumatology market in the United
States. For Ridaura, the company will receive $250,000 per quarter for making a
specified number of sales calls, plus a split of gross margin produced from
annual sales greater than $7.5 million. For Luxiq, the company will receive a
split of product contribution from sales of Luxiq in the rheumatology market.
Minimum terms for the Ridaura and Luxiq agreements are 18 months and 30 months
respectively.
9
<PAGE>
In July 1999, the company entered into an agreement with Pharmacia & Upjohn for
the co-promotion of Azulfidine EN-tabs(R) (sulfasalazine delayed release
tablets, USP) Enteric-coated. Under the terms of the agreement, MGI began
promoting Azulfidine EN-tabs to the rheumatology market in the United States in
September 1999. MGI will earn promotion revenue based on its ability to increase
sales of Azulfidine EN-tabs(R). The Azulfidine EN-tabs(R) co-promotion agreement
has an initial term of three and one-half years from the co-promotion marketing
launch.
(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, 1999, 3,140,554
shares of common stock remain reserved for issuance, of which 939,533 remain
available for grant. Options to purchase 2,201,021 shares of common stock were
outstanding, of which 1,226,830 were exercisable. Options outstanding had a
weighted average exercise price of $7.63 per share.
(8) Stockholders' Equity
Changes in selected stockholders' equity accounts for the nine months ended
September 30, 1999, were as follows:
<TABLE>
<CAPTION>
Common stock Additional Note receivable
------------------------- paid-in from
Shares Par value capital officer
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 14,542,472 $ 145,425 $90,850,590 ($ 56,999)
Exercise of stock options 336,999 3,370 1,686,203 --
Employee retirement savings
plan contribution 10,557 106 116,648 --
Employee stock purchase plan 10,152 101 86,800 --
Note payment -- -- -- 56,999
Stock option acceleration -- -- 162,953 --
----------- --------- ----------- -----------
Balance at September 30, 1999 14,900,180 $ 149,002 $92,903,194 $ 0
=========== ========= =========== ===========
</TABLE>
10
<PAGE>
(9) Commitments
On April 19, 1999, the company entered into a lease agreement for replacement
office space, located near its then current facility. The company moved to the
new location in the third quarter of 1999. The lease has a six-year term, with
an option to extend the lease for an additional four years. Under the terms of
the lease, the company is required to pay rent, real estate taxes, and operating
costs. Future minimum lease payments for this lease agreement are as follows:
Remainder of 1999 $89,000
2000 363,000
2001 441,000
2002 448,000
2003 455,000
Thereafter 720,000
-----------
$2,516,000
===========
11
<PAGE>
Item 2.
- -------
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 products. MGI's
current product portfolio is comprised of products that address special needs in
the fields of cancer and rheumatology, however, the company may expand its scope
as its business grows.
The company promotes products directly to physicians in the United States using
its own specialty sales force. These products include company-owned Salagen(R)
Tablets (pilocarpine hydrochloride) and Didronel(R) I.V. Infusion (etidronate
disodium), and three copromoted products, Ridaura(R) (auranofin), Luxiq(TM)
(betamethasone valerate) Foam, 0.12%, and Azulfidine EN-tabs(R) (sulfasalazine
delayed release tablets, USP). Salagen Tablets are approved in the United States
for two indications: symptoms of radiation-induced dry mouth in head and neck
cancer patients, and the symptoms of dry mouth associated with Sjogren's
syndrome, an autoimmune disease that damages the salivary glands. Sales of
Salagen Tablets in the United States account for more than 95 percent of company
product sales. Didronel I.V. Infusion is used to treat hypercalcemia (elevated
blood calcium) in cancer patients. Copromoted products continue to be owned and
distributed by the copromotion partners, so MGI recognizes promotion fee
revenue, rather than product sales revenue for these products. Outside the
United States, MGI commercializes its products through various alliances, and
has agreements with several international pharmaceutical companies to
commercialize Salagen Tablets in Europe, Japan and Canada.
The company's current product development efforts include clinical and
preclinical studies for MGI 114, the lead drug in a family of potential
anti-cancer analogs known as acylfulvenes. Exclusive rights in Japan to MGI 114
and the other acylfulvene analogs were granted to Dainippon under a development
and commercialization agreement in 1995. The company also provides ongoing
clinical support of Salagen Tablets.
Results of Operations
Revenues
- --------
Sales
Sales revenues increased 30 percent from $3,274,112 in the 1998 third quarter to
$4,271,847 in the 1999 third quarter, and increased 48 percent from $9,163,357
in the nine month period ended September 30, 1998, to $13,528,969 in the
corresponding 1999 period. The increases reflect increasing sales of Salagen
Tablets from broader demand for the
12
<PAGE>
product, following FDA approval of Salagen Tablets as a treatment of Sjogren's
syndrome symptoms in February 1998.
Sales of Salagen Tablets in the United States provided 97 percent of
company-wide product sales in both the 1999 third quarter, and in the nine month
period ended September 30, 1999. As is common in the pharmaceutical industry,
the company's domestic sales are made to pharmaceutical wholesalers for further
distribution through pharmacies to the ultimate consumers of the company's
products. Although U.S. sales of Salagen Tablets decreased 10 percent from the
second quarter of 1999 to the third quarter of 1999, this decrease follows a 6
percent increase from the first quarter of 1999 to the second quarter of 1999,
and an 18 percent increase from the fourth quarter of 1998 to the first quarter
of 1999. The company believes that the current quarter-to-quarter decrease is a
result of wholesale pipeline inventory adjustments, and moderating demand for
the product. Additional months of trend information is needed to assess how much
the prior long-term annual growth rate of around 40 percent has moderated.
Additionally, sales of Salagen Tablets may be negatively affected by the
approval of alternative treatments for conditions currently treated by Salagen
Tablets. A competing product, Ethyol(R) (amifostine), was approved in June 1999
by the FDA for treatment of radiation-induced dry mouth only in post-operative
head and neck cancer patients. Salagen Tablets are approved for the treatment of
dry mouth symptoms resulting from radiation used to treat head and neck cancer
patients, and for dry mouth symptoms associated with Sjogren's syndrome. Due to
the more restricted patient population for Ethyol, as well as other factors such
as price and invasive administration, the company currently believes that Ethyol
will not have a major impact on sales of Salagen Tablets. Other potential
competitive compounds are in various stages of development, including a compound
to treat the symptoms of Sjogren's syndrome, which was submitted to the FDA for
approval in the second half of 1998. At this time, the company is unable to
estimate what effect, if any, these development compounds will have on the
future demand for Salagen Tablets.
Promotion
Promotion revenue increased 100 percent from $125,000 in the 1998 third quarter
to $250,000 in the 1999 third quarter, but remained constant at $625,000 in the
nine month period ended September 30 for both 1998 and 1999. These comparisons
reflect promotion revenue from differing product relationships between 1998 and
1999. In 1998, the company was promoting INFeD(R) under an agreement with Schein
Pharmaceutical. In 1999, the company concluded its promotional activities with
Schein, and entered into promotion agreements with Connetics Corporation for the
promotion of Ridaura(R) and Luxiq(TM).
Under the Schein agreement, the company earned a minimum promotion fee of
$125,000 per quarter, plus an additional fee of $250,000 in the first quarter of
1998 resulting from an amendment to the contract. The company concluded its
promotional activity with Schein at the end of the first quarter of 1999. Under
the Connectics agreement, the company is
13
<PAGE>
recognizing a minimum of $250,000 per quarter for the promotion of Ridaura.
After September 1999, the company will begin recognizing promotion revenue from
the co-promotion of Azulfidine EN-tabs(R), under an agreement with Pharmacia &
Upjohn.
Licensing
Licensing revenue increased 20 percent from $1,071,319 in the 1998 third quarter
to $1,290,046 in the 1999 third quarter, and increased 34 percent from
$2,386,089 in the nine month period ended September 30, 1998, to $3,198,829 in
the corresponding 1999 period. The increases are due to an increase in royalties
on technology from the company's former agricultural business, an increase in
revenue from international Salagen Tablets relationships, and a scheduled
increase in quarterly licensing payments from Dainippon for continuing
acylfulvene rights in Japan. However, the increases from international partners
for Salagen Tablets were not reflective of underlying product demand and may not
be recurring. The company is committed to improving the promotion of Salagen
Tablets in Europe. Until this is achieved, only modest year-to-year increases in
Salagen Tablets related licensing income are expected. In addition, future
licensing revenues will likely fluctuate between years and from one quarter to
another depending on the achievement of milestones by the company or its
partners, the level of recurring royalty generating activities, and the timing
of initiating additional licensing relationships. Quarterly licensing payments
from Dainippon are scheduled to conclude with a $100,000 payment in the second
quarter of 2000.
Interest and other
Interest and other income increased 29 percent from $209,314 in the 1998 third
quarter to $270,403 in the 1999 third quarter, and increased 13 percent from
$596,457 in the nine month period ended September 30, 1998, to $675,692 in the
corresponding 1999 period. An increase in the average amount of funds available
for investment caused the increases in interest income for both the quarter and
nine month period comparisons. The increase for the nine month period was
reduced by a decrease in the investment yield in 1999.
Costs and Expenses
- ------------------
Cost of Sales
Cost of sales increased 20 percent from $216,026 in the 1998 third quarter to
$258,882 in the 1999 third quarter, and increased 15 percent from $716,531 in
the nine month period ended September 30, 1998, to $821,441 in the corresponding
1999 period. Both changes reflect increased unit sales. Management believes that
cost of sales as a percent of product sales should continue near its recent
annual range of 5 to 9 percent for its current products. Quarterly changes in
product mix may cause this measure to fluctuate.
14
<PAGE>
Selling, general and administrative
Selling, general and administrative expenses increased 8 percent from $2,712,366
in the 1998 third quarter to $2,923,887 in the 1999 third quarter, and increased
24 percent from $7,776,171 in the nine month period ended September 30, 1998 to
$9,667,086 in the corresponding 1999 period. The increases result from increased
selling and promotion costs to support Salagen Tablets as a treatment for
symptoms of dry mouth from Sjogren's syndrome, $525,000 in expenses associated
with non-recurring retirement and separation agreements, relocation and
recruiting expenses for the Executive Vice President, and costs related to
moving the company to a new office location. As such, selling, general and
administrative expenses in 1999 are expected to be greater than 1998.
Research and development
Research and development expense increased 42 percent from $1,316,839 in the
1998 third quarter to $1,871,292 in the 1999 third quarter, and increased 30
percent from $3,911,609 in the nine month period ended September 30, 1998, to
$5,078,917 in the corresponding 1999 period. The increases reflect increasing
costs for the development of MGI 114, the lead anti-cancer drug in MGI's
acylfulvene family of potential anti-cancer analogs. During 1998, development of
MGI 114 transitioned from Phase I to Phase II clinical studies. Enrollment in
three MGI sponsored Phase II studies began in 1998, and has increased throughout
1999. These studies will evaluate the efficacy of MGI 114 for the treatment of
patients with prostate, pancreatic or ovarian tumors. In addition, MGI continued
to provide clinical supplies of MGI 114 to the National Cancer Institute for
NCI's clinical studies of MGI 114. Research and development spending is expected
to increase as the development effort for MGI 114 continues to expand.
Net income
Net income of $384,514 in the third quarter of 1998 compares to net income of
$952,670 in the third quarter of 1999. Net income of $216,592 in the nine month
period ended September 30, 1998, compares to net income of $2,246,825 in the
corresponding 1999 period. The increases are due to increases in total revenues
of 30 percent and 41 percent for the third quarter and nine month period,
respectively, compared to 1998. Costs and expenses increased 19 percent and 26
percent for the third quarter and nine month period, respectively, compared to
1998.
Liquidity and Capital Resources
At September 30, 1999, the company had cash and investments of $19,209,797 and
working capital of $20,050,647 compared with $17,081,265 and $16,095,725,
respectively, at December 31, 1998. For the nine month period ended September
30, 1999, the company received $1,776,474 in cash from issuance of shares under
stock award plans, and generated $1,008,946 of cash from its operating
activities.
15
<PAGE>
Cash in excess of current operating needs is invested in money market
instruments 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 Tablets and products acquired through the company's product
acquisition strategy, the company plans to utilize cash provided from growth in
product sales, collaborative arrangements and existing liquid assets. The
company may also seek other sources of funding, including additional equity or
debt issuances, or may manage the pace of developing its product candidates. The
company anticipates that current cash and investments are sufficient to fund
existing operations for at least two years.
Year 2000
Worldwide, 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. Unless it is resolved, 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 need to be upgraded or replaced in
order to comply with Year 2000 requirements. The extent of potential global
impact of the Year 2000 problem is uncertain. However, if not corrected in a
timely manner, it could affect national economies generally, and MGI
specifically.
The company formed a project team (consisting of representatives from its
various departments) to address internal and external Year 2000 issues. The
company's internal computer systems were being reviewed to assess and remediate
Year 2000 problems. The company's assessment of internal systems included its
information technology (IT), as well as non-IT systems (those systems containing
embedded technology in the form of microprocessors or other similar circuitry).
The company's Year 2000 compliance program included 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 has completed its compliance program.
The amount of remediation work required to address Year 2000 problems was not
extensive. The company has replaced most of its financial and operational
systems in the last several years, and management believes that the new
equipment and software substantially address Year 2000 issues. Additionally, the
company modified some of its existing hardware and software in order for its
computer systems to function properly in the Year 2000 and thereafter.
16
<PAGE>
In addition, the company has requested 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. Contacts
have also been 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
infrastructure disruptions in areas such as utilities, communications,
transportation, banking and government.
The company has spent approximately $738,000 through September 30, 1999, to
upgrade its information technology systems. In part, these upgrades were to
resolve Year 2000 issues. This total cost includes the cost of replacing
non-compliant systems in cases where the company has accelerated plans to
replace such systems. As of September 30, 1999, the company believes that all of
the its systems are Year 2000 compliant. The company does not expect to incur
any additional material costs related to Year 2000 issues.
Based on its assessments to date, the company believes it will not experience
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 developed a contingency plan to provide for continuity of operation
in the event of certain problem scenarios. Assuming no major 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 further 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 Tablets, the ability to develop MGI 114 into an approved and
successfully marketed chemotherapy agent, 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 this Form 10-Q.
17
<PAGE>
Item 3.
- -------
Quantitative and Qualitative Disclosures About Market Risk
The company does not have operations subject to risks of material foreign
currency fluctuations, nor does it use derivative financial instruments in its
operations or investment portfolio. The company places its investments in
instruments that meet high credit quality standards, as specified in the
company's investment policy guidelines. The company does not expect any material
loss with respect to its investment portfolio or exposure to market risks
associated with interest rates.
18
<PAGE>
MGI PHARMA, INC.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None
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:
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, 1999.
19
<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 10, 1999 By: /s/ William C. Brown
------------------------------------
William C. Brown,
Chief Financial Officer
20
<PAGE>
MGI PHARMA, INC.
Quarterly Report on Form 10-Q
for the
Quarter Ended September 30, 1999
EXHIBIT INDEX
-------------
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
99 Cautionary Statements
<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, 1999, AND THE
RELATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,568,341
<SECURITIES> 13,641,456
<RECEIVABLES> 3,036,953
<ALLOWANCES> 119,037
<INVENTORY> 1,041,948
<CURRENT-ASSETS> 23,502,008
<PP&E> 984,819
<DEPRECIATION> 782,134
<TOTAL-ASSETS> 24,922,034
<CURRENT-LIABILITIES> 3,451,361
<BONDS> 0
0
0
<COMMON> 21,470,673
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 24,922,034
<SALES> 13,528,969
<TOTAL-REVENUES> 18,028,490
<CGS> 821,441
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,078,917
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,461,046
<INCOME-TAX> 214,221
<INCOME-CONTINUING> 2,246,825
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,246,825
<EPS-BASIC> .15
<EPS-DILUTED> .14
</TABLE>
<PAGE>
Exhibit 99
MGI PHARMA, INC.
Report on Form 10-Q
September 30, 1999
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 "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 "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.
We have a history of losses and may not be profitable in the future.
For many years, our revenues have not been sufficient to offset all of our
expenses. Although we had net income of $2,246,825 for the first nine months of
1999, and $414,287 for the year of 1998, we have had net losses in previous
years. At September 30, 1999, we had an accumulated deficit of approximately
$71.6 million. Our profitability in the future will depend on many factors,
including:
o our ability to increase sales of Salagen(R) Tablets,
o the level of investment required to conduct Phase II and III trials and
commercialize MGI 114, and
o the costs incurred and revenues generated in bringing any newly acquired
products to market.
The development of MGI 114 is expected to require a substantial increase in our
research and development expenditures. There is a risk that we will not be able
to sustain profitability in the future.
<PAGE>
Substantially all of our product revenues come from Salagen Tablets.
We derive substantially all of our product revenues from the sale of Salagen
Tablets. In the first nine months of 1999, our U.S. sales of Salagen Tablets
were $13.1 million, representing 97 percent of our total product sales and 73
percent of our total revenue. In 1998, our annual U.S sales of Salagen Tablets
were $12.3 million, representing 95 percent of our total product sales and 70
percent of our total revenue. Any factor adversely affecting sales of Salagen
Tablets could have a material adverse effect on our business, financial
condition and results of operations. Such factors could be the expiration in
March 2001 of orphan drug protection for Salagen Tablets as a treatment for the
symptoms of radiation induced xerostomia in head and neck cancer patients, or
approval of competing products. A competing product, Ethyol(R) (amifostine), was
approved in June 1999 by the FDA for treatment of radiation-induced dry mouth in
post-operative head and neck cancer patients. The approval of Salagen Tablets is
for the treatment of dry mouth symptoms in head and neck cancer patients who
have received radiation, and for the treatment of Sjogren's syndrome symptoms.
Due to the more restricted patient population, as well as other factors such as
price and invasive administration of drug, the company currently believes that
Ethyol is not expected to have a major impact on sales of Salagen Tablets. Other
potential competitive compounds are in various stages of development, including
a compound to treat the symptoms of Sjogren's syndrome, which was submitted to
the FDA for approval in the second half of 1998. At this time, the company is
unable to estimate what effect, if any, these development compounds will have on
the future demand for Salagen Tablets.
Our future success depends on our ability to identify and acquire new products.
Our future success depends on our ability to identify and acquire new products
targeted at niche markets that we can promote through our marketing and
distribution channels. Because we do not engage in basic research or drug
discovery, we must rely upon the willingness of others to sell or license
product opportunities to us. Other companies, including some with substantially
greater financial, marketing and sales resources, are competing with us to
acquire such products. We may not be able to acquire rights to additional
products on acceptable terms, if at all. If we fail to acquire additional
products or fail to promote or market commercially successful products, our
future business, financial condition and results of operations would be
materially and adversely affected. In addition, the marketing strategy,
distribution channels and bases of competition of newly acquired products may be
different than those of our current products. There is a risk that we will not
be able to compete favorably in those product categories.
<PAGE>
We depend on foreign partners to sell our products outside of the United States.
Our strategy for deriving revenues from sales of our products in foreign markets
is to enter into marketing alliances with multinational and foreign
pharmaceutical companies. We have entered into alliances with various companies
related to the marketing of Salagen Tablets in foreign markets. We have entered
into an agreement with Dainippon for the development and commercialization of
MGI 114 in Japan. We are seeking a development and commercialization partner for
MGI 114 in Europe. Revenues from strategic alliances typically include milestone
payments and payments based on product sales. Our continued relationships with
strategic partners are dependent in part on the successful achievement of
development milestones. If we or our partners do not achieve these milestones,
or we are unable to enter into agreements with our partners to modify their
terms, our business could be adversely affected.
Licensing revenue was $3.2 million or 18 percent of total revenues in the first
nine months of 1999, and $3.1 million or 18 percent of annual total revenues in
1998. Future licensing revenues will likely fluctuate from quarter to quarter
and year to year depending on:
o the achievement of milestones by us or our partners,
o the amount of product sales and royalty generating activities, and
o the timing of initiating additional licensing relationships.
Additionally, some royalties are based on sales in foreign currencies. Thus the
U.S. dollar value of such royalties will fluctuate with currency exchange rates.
Although we believe that our partners in these alliances have an economic
motivation to perform their contractual responsibilities, we cannot fully
control the amount and timing of resources they devote to these activities. The
terms of these alliances generally provide that they may be terminated prior to
their expiration under circumstances that may be outside our control. The early
termination of one or more of these strategic alliances could materially and
adversely affect our business, financial condition and results of operations.
There is a risk that we will not be able to negotiate additional strategic
alliances on acceptable terms or that such alliances will not be successful.
We will need additional capital to grow our business.
We may need to raise additional funds for various reasons including the
following:
<PAGE>
o to acquire or license additional products,
o to develop products we have acquired,
o to support the marketing and sales of additional products,
o to obtain necessary working capital, and
o to fund operating losses.
We may seek additional funding through public and private financing, including
equity and debt financing. Adequate funds for these purposes may not be
available when needed or on terms acceptable to us. Insufficient funds may cause
us to delay, scale back, or abandon some or all of our product acquisition and
licensing programs and product development programs.
Substantially all of the worldwide supply of the active ingredient in Salagen
Tablets is produced by one company.
We rely on the Fine Chemicals Division of Merck KGaA as our sole and exclusive
supplier of pilocarpine hydrochloride, the active pharmaceutical ingredient in
Salagen Tablets. We believe that Merck KGaA produces substantially all of the
worldwide supply of pharmaceutical grade pilocarpine hydrochloride. To our
knowledge, there is no other producer of pilocarpine hydrochloride with a
significant portion of the worldwide supply. The Company believes the processing
facility and raw material requirements for the production of pilocarpine
hydrochloride would make it difficult for any new producers to enter this
market. Although the company might be able to procure adequate supplies of
pilocarpine hydrochloride from an alternate source, we have not qualified such a
source. A disruption in our supply of pilocarpine hydrochloride from Merck KGaA
could have a material adverse effect on our business, financial condition and
results of operations.
We have no manufacturing facility. We depend on third-party manufacturers to
produce Salagen Tablets.
We do not have manufacturing facilities and we rely on one third-party
manufacturer for the production of Salagen Tablets. We intend to continue to
rely on others to manufacture our products, including any products that we may
acquire, and we have no plans to establish manufacturing facilities. Manufacture
of our products is subject to "good manufacturing practices" regulations,
prescribed by the U.S. Food and Drug Administration or other standards
prescribed by the appropriate regulatory agency in the country of use. There is
a risk that our current manufacturer of Salagen Tablets will not comply with all
applicable regulatory standards, and that we might not be able to identify
another third-party manufacturer on terms acceptable to us, or any other terms.
<PAGE>
MGI 114 may not be safe or effective in humans.
Although we have commenced Phase II human clinical testing of MGI 114, further
research and development, including extensive human clinical testing, will be
required prior to submission of a regulatory application for commercial sale of
MGI 114. There is a risk that this research and development will not be
successful and will not result in a product that will qualify for approval by
regulatory authorities for commercial sale. Clinical testing of a pharmaceutical
product is subject to approvals by various governmental regulatory authorities.
There is a risk that domestic and foreign regulatory authorities may not allow
us to conduct planned additional clinical testing of MGI 114. There is also a
risk that, if permitted, such additional clinical testing will not prove that
MGI 114 is safe and effective to the extent necessary to permit us to obtain
marketing approvals from regulatory authorities. In addition, results obtained
in preclinical studies or in Phase I and Phase II human clinical trials are not
necessarily indicative of results that will be obtained in subsequent or more
extensive testing and commercial experience.
Clinical trials are complex and unpredictable and may produce unexpected
results.
Before obtaining regulatory approvals for the commercial sale of any product
under development, including MGI 114, we must demonstrate through preclinical
studies and clinical trials that the product is safe and effective for use in
each target indication. The results from preclinical animal studies and early
clinical trials may not be predictive of results that will be obtained in larger
scale testing. There is a risk that clinical trials will not demonstrate the
safety and efficacy of a product. The failure to adequately demonstrate the
safety and efficacy of a therapeutic product could substantially delay or
prevent regulatory approval of the product. There is a risk that unacceptable
toxicities or side effects will occur at any time in the course of human
clinical trials or commercial use of any product. The appearance of unacceptable
toxicities or side effects could interrupt, limit, delay or abort the
development of a product or, if previously approved and launched, necessitate
its withdrawal from the market. A number of companies in the biotechnology
industry have suffered significant setbacks in advanced clinical trials, even
after experiencing promising results in early animal and human testing. The rate
of completion of clinical trials is dependent upon, among other factors, the
rate of patient enrollment. Patient enrollment is a function of many factors,
including:
o the size of the patient population,
o the nature of the protocol requirements,
o the diversion of patients to other trials or marketed therapies,
<PAGE>
o the company's ability to recruit and manage clinical centers and associated
trials,
o the proximity of patients to clinical sites, and
o the eligibility criteria for the study.
Factors, such as unacceptable toxicities and delays in planned patient
enrollment, may result in increased costs and delays or termination of clinical
trials prior to completion. Clinical trials generally must meet requirements for
institutional review board oversight and informed consent, as well as regulatory
agency prior review, oversight and good clinical practice requirements. Even
after being approved by the FDA or foreign regulatory authorities, products may
later exhibit adverse effects that prevent their widespread use or necessitate
their withdrawal from the market. There is always a risk that any product under
development may not be safe when administered to humans.
MGI has fewer resources than most of its competitors.
Competition in the pharmaceutical industry is intense. Most of our competitors
are large, multinational pharmaceutical companies that have considerably greater
financial, sales, marketing and technical resources than we do. Most of our
present and potential competitors also have dedicated research and development
capabilities that may allow them to develop new or improved products that
compete with our products. Other pharmaceutical companies are developing
products which, if and when approved by the FDA, will compete directly with
Salagen Tablets in one or both indications. Our competitors could also develop
and introduce generic drugs comparable to Salagen Tablets, or drugs or other
therapies that address the underlying causes of the symptoms which Salagen
Tablets treat. If a product developed by a competitor is more effective than our
product, or priced less than our product, then our business, financial condition
and results of operations could be materially and adversely affected.
Our success depends on our ability to keep up with rapid technological changes
in the pharmaceutical industry.
The pharmaceutical industry has experienced rapid and significant technological
change. We expect that pharmaceutical technology will continue to develop
rapidly. Our future success will depend, in large part, on our ability to
develop and maintain a competitive position. Technological development by others
may result in our products becoming obsolete before they are marketed or before
we recover any of our development and commercialization expenses incurred with
respect to such products. In addition, alternative therapies or new medical
treatments could alter existing treatment regimens, and thereby reduce the need
for one or more of our
<PAGE>
products, which would materially and adversely affect our business, financial
condition and results of operations.
Intellectual property protection may be difficult to obtain or ineffective. We
may not be able to protect adequately our patents and proprietary rights.
Our ability to compete effectively with other companies will depend, in part, on
our ability to maintain the proprietary nature of our products. We were awarded
orphan drug status for Salagen Tablets as a treatment for the symptoms of
xerostomia induced by radiation therapy in head and neck cancer patients and for
the symptoms of dry mouth associated with Sjogren's syndrome. Orphan designation
provides market exclusivity for seven years after the product is registered. We
hold an exclusive license on patents covering acylfulvene proprietary rights
including (1) acylfulvene analogs, including MGI 114 and use of MGI 114, as an
anti-tumor agent; (2) the method of treating tumors using other analogs; and (3)
synthetic methods for preparing acylfulvenes. There is a risk that:
o others will independently develop proprietary technologies and processes
that are the same as or substantially equivalent to ours,
o we will not be able to obtain patents for future products,
o current or future, issued or licensed patents or know-how will not afford
us adequate protection against competitors with similar technologies or
processes, or
o others will infringe upon or design around our patents.
We could incur substantial costs in defending suits brought against us based on
our patents or in bringing suits to protect our patents or patents we license.
We also protect our proprietary technology and processes in part by
confidentiality agreements with our collaborative partners, employees and
consultants. There is a risk that:
o these confidentiality agreements will be breached,
o we will not have adequate remedies for any breach of these agreements,
o our trade secrets will otherwise become known, or
o our trade secrets will be independently discovered by competitors.
Our operating results may fluctuate significantly.
Our results of operations may fluctuate significantly from period to period due
to a variety of factors including:
o changing demand for our current products,
<PAGE>
o the introduction of new products,
o the pattern of licensing and royalty revenues,
o expenditures incurred to acquire or license and promote additional
products,
o interruptions in or availability of supply by third-party manufacturers,
o changes in sales and marketing expenditures, and
o the pace of our development programs.
Because our operating expenses are based on anticipated sales levels, variations
in the timing of revenue could cause significant fluctuations in operating
results from period to period and may result in unanticipated earnings
shortfalls or losses. Our 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. There is always a risk that we will not be successful in maintaining
profitability and avoiding losses in any future period.
We may not receive regulatory approvals required to sell our products in the
United States and abroad.
Government regulation in the United States and abroad is a significant factor in
the development, production and marketing of our products. Prior to marketing,
each of our products must undergo an extensive regulatory approval process
conducted by the FDA in the United States and by comparable agencies in other
countries. The approval process can take many years and require the expenditure
of substantial resources. There is a risk that any product we develop will not
be approved by the FDA or any foreign regulatory authority in a timely manner,
if at all. Generally, only a very small percentage of newly discovered
pharmaceutical compounds that enter preclinical development are approved for
sale. Once a product is approved for sale, the company must submit any labeling,
advertising and promotional materials to the FDA for review. There is a risk
that the FDA will prohibit use of the marketing materials in the form we desire,
which could have a material adverse effect on our business, financial condition
and results of operations.
We depend on external laboratories and medical institutions to conduct our
preclinical and clinical testing. This research must comply with good clinical
and laboratory practices required by the FDA. The data obtained from production,
and preclinical and clinical testing are subject to varying interpretations that
could delay, limit or prevent regulatory approval. We also may encounter delays
or rejection due to (1) changes in FDA personnel or policy during the period of
development, or (2) changes in the requirements for regulatory review of each
submitted New Drug Application. Even if the FDA approves the marketing
application of a product, such
<PAGE>
approval may entail commercially unacceptable limitations on the uses, or
"indications," for which a product may be marketed. 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 a
product's side effects.
An FDA approved product and its manufacturer are subject to continual regulatory
review. The discovery of previously unknown problems with a product may result
in restrictions or sanctions on such product or manufacturer, including the
withdrawal of the product from the market. Most changes in the manufacturing
procedures we use for our approved products, including a change in manufacturer,
will require the prior approval of the FDA. This could have an adverse effect
upon our ability to continue the commercialization or sale of a product.
Our success depends in part on our ability to obtain adequate prices for our
products and the availability to the users of our products of reimbursement from
third party payors.
Our profitability will depend in part on (1) the price we are able to charge for
our products and (2) the availability of adequate reimbursement for our products
from third-party payors, such as government entities, private health insurers
and managed care organizations. Third-party payors are increasingly challenging
the pricing of medical products and services. There is much uncertainty as to
the pricing flexibility pharmaceutical companies will have with respect to newly
approved health care products. In the United States, we expect that there will
continue to be a number of federal and state proposals to implement government
control of pricing and profitability of prescription pharmaceuticals. Cost
controls, if mandated by a government agency, could decrease the price that we
receive for our current or future products. Cost controls could also prevent the
recovery of potentially substantial development costs and an appropriate profit
margin. This would have a material adverse effect on our business, financial
condition and results of operations.
There is also much uncertainty about the reimbursement status of health care
products. Federal and state regulations govern or influence the reimbursement
status of health care products in many situations. Although third-party
reimbursement is not currently an issue for us, there is a risk that
reimbursement will not be available in the future for our products, or that such
third-party reimbursement will not be adequate. If government entities and other
third-party payors do not provide adequate reimbursement levels for our
products, our business, financial condition and results of operations would be
materially, adversely affected. A number of legislative and regulatory proposals
aimed at changing the nation's health care system have been proposed in recent
years. Although we
<PAGE>
cannot predict whether any of these proposals will be adopted, or the effect
that any such proposal may have on our business, these proposals, if enacted,
could have a material adverse effect on our business, financial condition and
results of operations. In certain countries, the sales price of a product must
also be approved after marketing approval is granted. There is a risk that we
will not be able to obtain satisfactory prices in foreign markets even if we
obtain marketing approval from foreign regulatory authorities.
We face product liability risks and our existing insurance may not be adequate
to cover any claims.
We face exposure to product liability claims in the event that the use of our
product is alleged to have harmed someone. Although we have taken, and continue
to take, what we believe are appropriate precautions, there is a risk that we
will not be able to avoid significant product liability exposure. We currently
have product liability insurance in the amount of $15 million per occurrence and
in the aggregate for the year. There is a risk that our insurance will not be
sufficient to cover any potential claims. There is also a risk that adequate
insurance coverage will not be available in the future on commercially
reasonable terms, if at all. The successful assertion of an uninsured product
liability or other claim against us would have a material adverse affect our
business, financial condition and results of operations.
We could be required to issue a product recall.
Product recalls may be issued at our discretion, at the discretion of the FDA,
the U.S. Federal Trade Commission or other government agencies having regulatory
authority for product sales. Product recalls may occur due to disputed labeling
claims, manufacturing issues, quality defects or other reasons. Although none of
our products have been recalled, we cannot assure you that product recalls will
not occur in the future. We do not carry any insurance to cover the risk of a
product recall. Any product recall could materially adversely affect our
business, financial condition and results of operations.
Our stock price is volatile.
The market price of our common stock, like securities of other small companies,
has fluctuated significantly in recent years and is likely to fluctuate in the
future, regardless of our operating performance. The market price of our common
stock may be significantly affected by many factors, including:
o announcements regarding commercial products, patents or proprietary rights,
o the progress of clinical trials or government regulation,
<PAGE>
o public concern as to the safety of drugs,
o the issuance of securities analysts' reports,
o fluctuations in our financial performance from period to period, and
o general market conditions.
We may experience problems related to year 2000 issues.
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 us and the U.S. and world
economy generally.
We have spent approximately $738,000 through September 30, 1999, to upgrade our
information technology systems. In part, these upgrades were to resolve our Year
2000 issues. As of September 30, 1999, we believe that all of our systems are
Year 2000 compliant.
We do not expect to incur any material additional costs related to Year 2000
issues.
Based on our assessments to date, we believe we 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 us, a shutdown of our operations at our headquarters could occur for
the duration of the disruption.
