<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended March 31, 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
incorporation or organization) identification number)
Suite 300E, Opus Center
9900 Bren Road East
Minnetonka, Minnesota 55343 (612) 935-7335
------------------------------- ------------------------------
(Address of principal executive (Registrant's telephone number,
offices 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 14,668,382 shares
---------------------------- -----------------------------
(Class) (Outstanding at May 14, 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 - March 31, 1999
and December 31, 1998 3
Statements of Operations - Three Months
Ended March 31, 1999 and 1998 5
Statements of Cash Flows - Three Months
Ended March 31, 1999 and 1998 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 16
PART II. OTHER INFORMATION
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MGI PHARMA, INC.
BALANCE SHEETS
(unaudited)
March 31, December 31,
1999 1998
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,558,684 $ 6,513,204
Short-term investments 11,980,351 10,568,061
Receivables, less allowances of
$121,091 and $97,960 2,276,202 1,410,539
Inventories 1,157,245 1,285,368
Prepaid expenses 409,574 329,953
----------- ------------
Total current assets 20,382,056 20,107,125
Equipment and furniture, at cost
less accumulated depreciation of
$1,116,204 and $1,062,405 488,476 540,084
Other assets 464,027 474,859
----------- ------------
Total assets $21,334,559 $ 21,122,068
=========== ============
(Continued)
3
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BALANCE SHEETS
(Unaudited)
Page 2
March 31, December 31,
1999 1998
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 723,850 $ 794,266
Accrued expenses 2,498,166 2,712,884
Deferred revenue -- 495,000
Other current liabilities 54,496 9,250
------------ ------------
Total current liabilities 3,276,512 4,011,400
------------ ------------
Stockholders' equity:
Common stock, $.01 par value,
30,000,000 authorized shares,
14,595,803 and 14,542,472
Issued shares 145,958 145,425
Additional paid-in capital 91,114,471 90,850,590
Notes receivable from officers (56,999) (56,999)
Accumulated deficit (73,145,383) (73,828,348)
------------ ------------
Total stockholders' equity 18,058,047 17,110,668
------------ ------------
Total liabilities and
stockholders' equity $ 21,334,559 $ 21,122,068
============ ============
See accompanying notes to financial statements.
4
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MGI PHARMA, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
----------------------------
1999 1998
----------- -----------
Revenues:
Sales $ 4,502,943 $ 2,628,952
Promotion 125,000 375,000
Licensing 871,716 621,160
Interest and other 194,523 186,645
----------- -----------
5,694,182 3,811,757
----------- -----------
Costs and Expenses:
Cost of sales 307,878 207,141
Selling, general and administrative 3,173,496 2,414,255
Research and development 1,460,905 1,237,408
----------- -----------
4,942,279 3,858,804
----------- -----------
Income (loss) before taxes $ 751,903 $ (47,047)
----------- -----------
Provision for income taxes 68,938 50,000
----------- -----------
Net income (loss) $ 682,965 $ (97,047)
=========== ============
Net income (loss) per common share:
Basic $ 0.05 $ (0.01)
Assuming dilution $ 0.04 $ (0.01)
Weighted average number of common shares:
Basic 14,574,929 14,207,435
Assuming dilution 15,475,494 14,207,435
See accompanying notes to financial statements.
5
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MGI PHARMA, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
-------------------------------
1999 1998
----------- ------------
OPERATING ACTIVITIES:
Net income (loss) $ 682,965 $ (97,047)
Adjustments for non-cash items:
Depreciation 53,799 59,965
Benefit plan contribution 48,666 34,941
Other 25,136 --
Change in operating assets and liabilities:
Receivables (865,663) (725,730)
Inventories 128,123 106,155
Prepaid expenses (79,621) 26,832
Accounts payable and accrued expenses (300,917) (186,367)
Deferred revenue (495,000) (450,000)
Other current liabilities 45,246 35,772
----------- -----------
Net cash used in operating activities (757,266) (1,195,479)
----------- -----------
INVESTING ACTIVITIES:
Purchase of investments (5,814,748) (5,877,268)
Maturity of investments 4,402,458 3,927,321
Purchase of equipment and furniture (2,191) (145,335)
Other (14,304) (39,240)
----------- -----------
Net cash used in investing activities (1,428,785) (2,134,522)
----------- -----------
FINANCING ACTIVITIES:
Issuance of shares under stock
plans 231,531 89,628
----------- -----------
Net cash provided by financing
activities 231,531 89,628
----------- -----------
Decrease in cash and cash equivalents (1,954,520) (3,240,373)
Cash and cash equivalents at
beginning of period 6,513,204 7,057,091
----------- -----------
Cash and cash equivalents at
end of period $ 4,558,684 $ 3,816,718
=========== ===========
See accompanying notes to financial statements.
6
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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 plans to 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 the majority of company 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 compound in a family of promising anti-cancer
analogs, 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.
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(2) Income (Loss) Per Common Share
Income (loss) per share for the three months ended March 31, 1999 and 1998 are
summarized in the following table:
<TABLE>
<CAPTION>
Three Months Ended March 31
-------------------------------------------------------------------------
1999 1998
------------------------------------- --------------------------------
Net Per Net Per
Income Share Income Share
(Loss) Shares Amount (Loss) Shares Amount
-------- ---------- -------- -------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Basic $682,965 14,574,929 $0.05 ($97,047) 14,207,435 ($0.01)
Effect of
dilutive stock options -- 900,565 ($0.01) -- -- --
-------- ---------- -------- -------- --------------------
Assuming dilution $682,965 15,475,494 $0.04 ($97,047) 14,207,435 ($0.01)
</TABLE>
For loss periods, basic and diluted share amounts are identical, as the effect
of potential common shares is antidilutive.
(3) Short-Term Investments
Because the company has the intent and ability to hold its investments to
maturity, they are considered held-to-maturity investments. As such, they are
stated at amortized cost, which approximates estimated fair value.
Held-to-maturity investments at March 31, 1999 and December 31, 1998 are
summarized in the following table:
1999 1998
----------- -----------
Corporate notes $ 5,977,924 $ 4,133,423
Commercial paper 4,991,056 6,434,638
Certificates of deposit 1,011,371 --
----------- -----------
$11,980,351 $10,568,061
=========== ===========
(4) Inventories
Inventories at March 31, 1999 and December 31, 1998 are summarized as
follows:
1999 1998
----------- -----------
Raw materials and supplies $ 83,016 $ 83,016
Work in process 48,803 531,952
Finished products 1,025,426 670,400
=========== ===========
$1,157,245 $1,285,368
=========== ===========
Inventories are stated at the lower of cost or market. Cost is determined on a
first-in, first-out basis.
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(5) Accrued Expenses
Accrued expenses at March 31, 1999, and December 31, 1998, are summarized in the
following table:
1999 1998
----------- -----------
Product return accrual $ 520,141 $ 467,547
Third party manufacturing 470,106 422,334
Product development commitments 446,252 446,429
Bonuses 222,717 536,683
Retirement plan contribution 59,545 204,619
Other accrued expenses 779,405 635,272
=========== ===========
$2,498,166 $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.
(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 March 31, 1999, 3,225,166
shares of common stock remain reserved for issuance, of which 777,112 remain
available for grant. Options to purchase 2,448,054 shares of common stock were
outstanding, of which 1,319,119 were exercisable.
Options outstanding had a weighted average exercise price of $7.19 per share.
A loan to an officer was made to facilitate the purchase of company stock. The
loan is a full recourse, unsecured obligation. At March 31, 1999, $56,999 of
principal remains outstanding, which is payable upon demand.
9
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(8) Stockholders' Equity
Changes in selected stockholders' equity accounts for the three months ended
March 31, 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 50,000 500 231,031 --
Employee retirement savings
plan contribution 3,331 33 32,850 --
=========== ========== ============ =========
Balance at March 31, 1999 14,595,803 $145,958 $91,114,471 ($56,999)
=========== ========== ============ =========
</TABLE>
(9) Subsequent Events
Effective April 1, 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.
Under the terms of a separation agreement dated April 3, 1999, the duties of an
employee of the company were reduced in anticipation of the departure of the
employee by the end of 1999. The company will incur expense of $330,000 over the
last three quarters of 1999; $167,000 for services rendered during the period,
and $163,000 in non-cash compensation.
On April 19, 1999, the company entered into a lease agreement for new office
space, located near its current offices. The company expects to move 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 $ 178,000
2000 363,000
2001 441,000
2002 448,000
2003 455,000
Thereafter 720,000
-----------
$2,605,000
===========
10
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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 plans to 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 two copromoted products, Ridaura(R) (auranofin) and Luxiq(TM)
(betamethasone valerate) Foam, 0.12%. 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 90 percent of company
product sales. Didronel I.V. Infusion is used to treat hypercalcemia (elevated
blood calcium) in cancer patients. Under a promotion agreement with Connetics
Corporation, the company exclusively promotes Riduara and Luxiq in the
rheumatology market. Since Connetics continues to own and distribute Ridaura and
Luxiq, 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 compound in a family of novel
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 71 percent from $2,628,952 in the 1998 first quarter to
$4,502,943 in the 1999 first quarter. The increase reflects increasing sales of
Salagen Tablets from broader demand for the product, following FDA approval of
Salagen Tablets as a treatment of Sjogren's
11
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syndrome symptoms in February 1998. The company began promotion for this second
approved use of Salagen Tablets in April 1998.
Sales of Salagen Tablets in the United States provided 96 percent of
company-wide product sales in the 1999 first quarter. 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. U.S. sales of Salagen Tablets in the first
quarter of 1999 increased 18 percent compared to the previous quarter. This is
the second consecutive quarter-to-quarter increase of 18 percent. The company
believes that its recent quarter-to-quarter growth rate reflects a combination
of increased demand due to the approval of Salagen Tablets for a second
indication and wholesale buying patterns. This quarter-to-quarter growth rate,
if sustained, would result in sales growth that is double the rate of the
company's historical growth trend. However, current market survey data regarding
demand for Salagen Tablets supports sales growth comparable to the company's
historical experience. In the future, periodic adjustments in wholesaler buying
patterns may cause the company's sales revenues to fluctuate from quarter to
quarter relative to underlying product demand.
Promotion
Promotion revenue decreased 67 percent from $375,000 in the 1998 first quarter
to $125,000 in the 1999 first quarter. In March 1998, the company amended its
agreement with Schein for the promotion of INFeD. Under the terms of this
amendment, a minimum promotion fee was set at $125,000 per quarter. With this
amendment, the company began recognizing promotion fee revenue, resulting in the
recognition of $375,000 of promotion revenue in the first quarter of 1998. In
March 1999, the company concluded its promotion agreement with Schein with the
minimum quarterly promotion fee ending on March 31, 1999.
Future promotion revenue will be generated from the April 1, 1999, Ridaura(R)
and Luxiq(TM) promotion agreements, and is expected to meet, or slightly exceed,
$250,000 per quarter over the next several quarters.
Licensing
Licensing revenue increased 40 percent from $621,160 in the 1998 first quarter
to $871,716 in the 1999 first quarter. The increase is due primarily to
increased revenue from international Salagen Tablets relationships. However,
these increases 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.
Interest and other income increased 4 percent from $186,645 in the 1998 first
quarter to $194,523 in the 1999 first quarter. An increase in the average amount
of funds available for investment caused the increase in interest income in
1999. This increase was reduced by a decrease in the investment yield in 1999.
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Costs and Expenses
Cost of Sales
Cost of sales increased 49 percent from $207,141 in the 1998 first quarter to
$307,878 in the 1999 first quarter. The increase reflects increased unit sales.
Management believes that cost of sales as a percent of product sales should
continue near its recent annual range of 7 to 10 percent for its current
products. Quarterly changes in product mix may cause this measure to fluctuate.
Selling, general and administrative
Selling, general and administrative expenses increased 31 percent from
$2,414,255 in the 1998 first quarter to $3,173,496 in the 1999 first quarter.
The increase results from increased selling and promotion costs to support
Salagen Tablets as a treatment for symptoms of dry mouth from Sjogren's
syndrome. Selling, general and administrative expenses in 1999 are expected to
be greater than 1998 primarily due to planned expansion of promotional efforts
of Salagen Tablets for treatment of Sjogren's syndrome symptoms.
Research and development
Research and development expense increased 18 percent from $1,237,408 in the
1998 first quarter to $1,460,905 in the 1999 first quarter. The increase
reflects increasing costs for the development of MGI 114. 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. Enrollment in
these studies increased in 1999. These studies will begin to 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 in 1999 as the
development effort for MGI 114 continues to expand.
Net income (loss)
Net income of $682,965 in the first quarter of 1999 compares to a net loss of
$97,047 in the first quarter of 1998. The net income for 1999 was due to an
increase in total revenues of 49 percent, associated with an increase in costs
and expenses of 28 percent, compared to 1998.
Liquidity and Capital Resources
At March 31, 1999, the company had cash and investments of $16,539,035 and
working capital of $17,105,544 compared with $17,081,265 and $16,095,725,
respectively, at December 31, 1998. For the quarter ended March 31, 1999, the
company used $686,712 of cash to fund operating activities, resulting primarily
from an increase in receivables from increased product sales.
13
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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 has 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 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 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
scheduled for replacement or upgrade.
The amount of further remediation work required to address Year 2000 problems is
not expected to be 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. However, the
company must further modify some of its existing hardware and software in order
for its computer systems
14
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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
infrastructure disruptions in areas such as utilities, communications,
transportation, banking and government.
The total estimated cost for resolving the company's Year 2000 issues is
approximately $740,000, of which approximately $580,000 has been spent through
March 31, 1999. This total cost estimate includes the cost of replacing
non-compliant systems 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
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 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
15
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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.
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.
16
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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:
10.1 Ridaura Promotion Agreement, dated April 1, 1999, between the
company and Connetics Corporation
*10.2 Luxiq Promotion Agreement, dated April 1, 1999, between the
company and Connetics Corporation
27 Financial Data Schedule
99 Cautionary Statements
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the three months ended
March 31, 1999.
* Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934
confidential portions of Exhibit 10.2 have been deleted and
filed separately with the Securities and Exchange Commission
pursuant to a request for confidential treatment
17
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MGI PHARMA, INC.
Date: May 14, 1999 By: /s/ William C. Brown
------------------------------
William C. Brown, Vice President,
Finance (principal financial and
accounting officer)
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MGI PHARMA, INC.
Quarterly Report on Form 10-Q
for the
Quarter Ended March 31, 1999
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
10.1 Ridaura Promotion Agreement, dated April 1, 1999, between the
company and Connetics Corporation
*10.2 Luxiq Promotion Agreement, dated April 1, 1999, between the
company and Connetics Corporation
27 Financial Data Schedule
99 Cautionary Statements
* Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, confidential
portions of Exhibit 10.2 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
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EXHIBIT 10.1
PROMOTION AGREEMENT
THIS PROMOTION AGREEMENT is effective as of April 1, 1999 by and between
Connetics Corporation ("Connetics") and MGI Pharma, Inc. ("MGI").
B A C K G R O U N D
A. Connetics has marketing rights in the United States to a pharmaceutical
product known as Ridaura(R).
B. MGI has experience and expertise in the marketing of rheumatological
products and other pharmaceutical products administered, dispensed and
prescribed primarily by the same health care professionals who are expected to
administer, dispense and prescribe Ridaura(R).
C. MGI has a professional sales force that calls on physicians and other
health care professionals in order to promote various MGI products.
D. Connetics desires to enhance its marketing of Ridaura(R) in the United
States by enlisting the support and participation of MGI and the MGI Sales Force
(as defined below) in the marketing effort.
NOW, THEREFORE, in consideration of the Background and the mutual promises
contained in this Agreement, Connetics and MGI agree as follows:
A G R E E M E N T
ARTICLE 1
DEFINITIONS
"Affiliate" means in respect of either party any corporation or business
entity controlled by, controlling, or under common control with Connetics or
MGI, respectively. For this purpose "control" means the direct or indirect
beneficial ownership of at least fifty percent (50%) of the voting stock of, or
at least fifty percent (50%) interest in the income of, such corporation or
other business entity, or such other relationship as, in fact, constitutes
actual control.
"Best Efforts" means those efforts that would be made by a reasonably
prudent business person acting in good faith in the exercise of reasonable
commercial judgment.
"Call" means a presentation of the Product by a professional sales
representative to a physician or other health care professional or organization
licensed to administer, dispense or prescribe prescription drugs during a visit
which is for the purpose of actively promoting the sale of the Product.
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"Coordinator" means the person appointed by each of Connetics and MGI in
accordance with Section 3.1.
"Cost of Goods" shall mean shall mean the cost of Product manufactured in
final form by or on behalf of Connetics, including without limitation, all
direct and indirect costs for material, labor and production overhead included
in manufacturing, producing and supplying Products in the Territory, royalties
paid to third parties, distribution costs, and freight and other transportation
costs, including insurance charges, and duties, tariffs, sales and excise taxes
and other governmental charges based directly on sales turnover or delivery of
such Product and actually paid and allowed by Connetics, all calculated in
accordance with U.S. generally accepted accounting principles.
"Effective Date" means the date first written above.
"FDA" means the United States Food and Drug Administration.
"Good Cause" means (a) the material failure of the other party to comply
with its material obligations contained in this Agreement. Material obligations
include, without limitation, the failure of MGI to provide the full level of
detailing and promotional support required under Articles 2 and 4 for a period
of five (5) consecutive quarters, or the failure of Connetics to make the
payments required by Section 5.1; or (b) the filing of a petition by or against
the other party under any bankruptcy, insolvency or similar law (which petition
is not dismissed within sixty (60) days after filing); the appointment of a
receiver for the other party's business or property; or the other party's making
of a general assignment for the benefit of its creditors; or (c) any force
majeure event as defined in Section 11.6 affecting the other party beyond the
other party's control that lasts for a period of at least six (6) months and
which is of sufficient intensity to interrupt or prevent the carrying out of the
totality of such other party's material obligations under this Agreement during
such period.
"Gross Margin" means Net Sales less Cost of Goods.
"Inability to Supply" shall have the meaning set forth in Section 6.4.
"Joint Marketing Team" means the committee appointed pursuant to Section
3.2 of this Agreement.
"MGI Physicians" means physicians specializing in rheumatology or internal
medicine.
"MGI Sales Force" means all of the Representatives employed by MGI.
"NDA" means the new drug application (including supplements) for the
Product submitted to the FDA (which MGI has the right to audit at any time).
"Net Sales" shall mean the gross amounts invoiced by Connetics for Product
in the Territory in accordance with U.S. generally accepted accounting
principles, less the following amounts directly chargeable to such Products: (a)
customary trade, quantity or cash discounts and rebates, actually allowed and
taken; (b) allowances for estimated returns, rebates and chargebacks; (c)
uncollectible amounts; and (d) recalls.
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"Product" means the disease-modifying antirheumatic drug product (DMARD),
trade name Ridaura(R), as described in the product specifications of the NDA, as
it may be amended from time to time including any improvements thereto.
"Product Information" means the dossier, regulatory status and information,
data and results of clinical and other trials and investigations relating to the
Product, including the NDA and right of cross-reference to the NDA, together
with all other information relating to the specification of the Product and
information relating to the manufacture (including method, conditions, and
process equipment), testing (including quality control standards, assay methods
and stability studies), storage and use of the Product now or hereafter during
the term of this Agreement in the possession or under the control of Connetics.
"Promotion Plan" means a plan developed by the Joint Marketing Team for the
detailing and promotion of the Product in the Territory, and shall include
promotional strategies, detailing plans, pricing and budgets for promotional
activities (including the development of materials for the detailing and
promotion of the Product) for each defined detailing period in which MGI
participates during the Term of this Agreement.
"Proprietary Information" means any information of value to either party,
not generally known to the public, including (but not limited to):
(a) the Product Information; the development status of the Product;
Product indications and modes of administration; technical
information, such as clinical, biological, manufacturing,
pharmaceutical and characterizing data; and know-how;
(b) business information, such as reports; records; markets; customer
lists; supplier lists; marketing and sales plans; financial
information; costs; and pricing information; and
(c) pharmacoeconomic analyses, if any, conducted by Connetics with respect
to the Product.
"Quarter" means a calendar quarter.
"Representatives" means sales representatives employed by MGI for detailing
the Product in the Territory to MGI Physicians.
"Territory" means the United States of America, including its territories
and possessions.
"Visit" means a visit by a professional sales representative to a physician
or other health care professional or organization licensed to administer,
dispense or prescribe prescription drugs for the purpose of actively promoting
the sale of products.
"Year" means the period beginning with a given anniversary of the Effective
Date and ending at the end of the day before the next anniversary of that date.
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ARTICLE 2
GRANTS AND OBLIGATIONS
Section 2.1. Grant to MGI. Connetics hereby grants to MGI, during the Term
of this Agreement, the exclusive right to detail and promote the Product in the
Territory to MGI Physicians. During the Term of this Agreement, neither
Connetics nor an Affiliate of Connetics will authorize, or grant the right to,
any third party the rights to detail, promote, or market the Product in the
Territory as are granted to MGI hereunder, without MGI's prior written consent
which may be granted in MGI's sole discretion.
Section 2.2. MGI's Obligations. Subject to the provisions of and during the
Term of this Agreement, MGI shall use its Best Efforts to detail and promote the
Product in the Territory to MGI Physicians according to the Promotion Plan and
in such manner and with such expedition as MGI itself would have adopted in
detailing and promoting a product of its own invention, including but not
limited to the use of its trained and qualified Sales Force to make Calls on
physicians and other persons and organizations licensed to administer, dispense
and prescribe prescription drugs with respect to the Product. Subject to the
obligations set forth in Section 2.3 and Article 4, and in particular Sections
4.3 and 4.5, nothing in this Agreement is intended to prevent MGI from marketing
and/or promoting other products either during the term of this Agreement or
thereafter.
Section 2.3. Competition. During the term of this Agreement, MGI will not
promote products that directly compete with the Product. The Joint Marketing
Team will review and approve promotional materials of related products to
prevent direct promotion of MGI products against the Product. Subject to the
first sentence of this Section, MGI may promote other products, including
DMARDS, during the term of this Agreement and thereafter.
ARTICLE 3
GOVERNANCE
Section 3.1. Coordinator. Connetics and MGI shall each appoint an
authorized and knowledgeable representative ("Coordinator") to direct
communications. Each party will promptly notify the other as to the name of the
individual so appointed. Each party may replace its Coordinator at any time,
upon prompt written notice to the other party.
Section 3.2. Joint Marketing Team. Within thirty (30) days following the
Effective Date, the Coordinators shall establish a "Joint Marketing Team"
consisting of representatives of Connetics and representatives of MGI appointed
by the respective Chief Executive Officers of each party. The Joint Marketing
Team will be directed by Connetics' Coordinator and will meet from time to time,
at mutually agreeable times and locations but in any event at least two (2)
times in each calendar year, to discuss and coordinate the joint promotion and
detailing of the Product in the Territory and the strategies and programs that
should be developed to maximize sales of the Product. By way of example, the
Joint Marketing Team shall develop and implement the Promotion Plan, and guide
all continuing joint promotion and detailing efforts with respect to the Product
in the Territory. Connetics will have the final responsibility, with the
cooperation and assistance of MGI, for developing promotion and detailing
strategies with respect to the Product, and for developing promotional and
detailing materials. Each party shall bear its own costs associated with its
participation in the Joint Marketing Team.
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Section 3.3. Promotion Plan. From time to time, but in no event less than
once a year, the Joint Marketing Team shall develop and formulate a written
Promotion Plan for specified periods, which shall set forth promotion and
detailing strategies relating to the Product.
Section 3.4. Recommendations. Each party shall have the right to comment
upon and make recommendations to the other party regarding the other party's
activities under this Agreement, which recommendations the other party shall
thoroughly evaluate and consider, taking into account the other party's
expertise and experience with pharmaceutical products in the Territory.
Section 3.5. Decisions. It is expressly understood and agreed that the
Joint Marketing Team shall be led by a Connetics' representative with MGI's
participation. In the event of a disagreement among the members of the Joint
Marketing Team, the matter shall promptly be referred to the Senior Vice
President, Commercial Operations of Connetics and the Vice President, Marketing
and Sales of MGI for resolution; if the matter is still not resolved, it shall
promptly be referred to the Presidents of Connetics and MGI for resolution. If
the two Presidents cannot reach agreement, in light of the fact that Connetics
owns the Product and the regulatory approvals relating to the Product, Connetics
shall have the right to resolve any such disagreement, including without
limitation any disagreement regarding the following subjects:
(a) promotional material that Connetics considers, in its reasonable
judgment, inconsistent with the labeling of the Product or with a
regulatory submission pertaining to the Product;
(b) communications with the FDA concerning the Product, including but not
limited to the reporting of adverse events associated with use of the
Product;
(c) any decisions regarding programs and financial expenditures; and
(d) any proposed recall of the Product.
Section 3.6. Pricing. Connetics will establish the ex-factory price for the
Product. Connetics shall at its sole discretion establish all future factory
prices for the Product. Connetics may offer and sell the Product at prices below
the established or published ex-factory prices to wholesalers whenever Connetics
considers that such pricing is necessary to obtain the business of certain
customers.
ARTICLE 4
PRODUCT PROMOTION
Section 4.1. Promotion. Subject to Connetics' leadership of the Joint
Marketing Team, MGI shall have the obligations set forth in Section 2.2 for
detailing and promoting the Product in the Territory. Except as set forth in the
following sentence, Connetics shall bear all direct costs and expenses incurred
by Connetics and MGI in connection with the promotion of the Product in the
Territory. Except as otherwise determined by the Joint Marketing Team, MGI shall
bear all costs and expense related directly to the MGI Sales Force (e.g.,
salaries, incentive compensation, bonuses,
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benefits, cars, travel and entertainment expenses, etc.) and associated MGI
personnel for all purposes, including attending training sessions related to the
Product; the cost of any conference facilities etc. reserved in connection with
the training of MGI's Sales Force if that training is not held in conjunction
with Connetics Sales Force Training; personnel costs of MGI's continuing medical
education ("CME") staff; MGI's personnel and travel costs associated with
meetings and conventions; and any promotional materials that MGI prepares.
Connetics will provide up to $500,000 for marketing and sales support for the
Product in the first Year. Thereafter, the amount provided by Connetics for
marketing and sales support shall be determined by the Joint Marketing Team. All
such amounts for marketing and sales support shall be expended as determined by
the Joint Marketing Team in accordance with the Promotion Plan.
Section 4.2. Promotional Activities. The Joint Marketing Team shall advise
Connetics regarding promotional activities with respect to the Product, which
may include, without limitation, the following: journal advertising, direct mail
to physicians and pharmacies, advertising agency fees, promotional literature,
Sales Force detailing aids, creative and advertising preparation, CME speaker
programs (subject to Section 4.1), exhibits, symposia, audio- and
videocassettes, clinical evaluation programs as agreed upon by the Joint
Marketing Team, and marketing support trials (limited to comparative clinical
studies against competitive products intended for differentiation of the Product
during detailing and promotion).
Section 4.3. MGI Sales Force. Subject to the provisions of Section 4.5,
during the Term of this Agreement, MGI shall use its Best Efforts to commit, as
of the Effective Date, no fewer than 24 full-time equivalent Representatives to
the detailing and promotion of the Product consistent with MGI's obligations
under the Promotion Plan. Any variation with respect to MGI's commitment under
this Section 4.3 must be approved by the Joint Marketing Team.
Section 4.4. Sales Force Vacancies. MGI may incur vacancies in its
marketing territories relating to the transfer, resignation and/or termination
of its Representatives assigned to the detailing and promotion of the Product
under this Agreement. MGI shall use Best Efforts to fill any such vacancies soon
as possible after such vacancy occurs. No vacancy shall modify the overall
obligations of Section 4.5.
Section 4.5. Call Requirements. MGI shall be obligated to use its Best
Efforts to deliver detailing and promotion of the Product during seventy-five
percent (75%) of the Visits actually made by the MGI Sales Force to MGI
Physicians in the Territory. In the event MGI fails to perform its obligations
under this Section 4.5 such that Connetics has Good Cause to terminate this
Agreement, Connetics' remedy shall be limited to the provisions set forth in
Section 11.4(b).
Section 4.6. Management of Sales Forces. The MGI Sales Force shall be
directed by the senior management of MGI, subject to the Promotion Plan
developed by the Joint Marketing Team. Connetics shall not have any
responsibility for the hiring, firing or compensation of MGI's employees or for
any employee costs or benefits associated therewith.
Section 4.7. Promotion Activity Reporting.
(a) MGI shall provide Connetics with a detailed report within thirty (30)
days after the end of each fiscal quarter during the Term of this
Agreement, describing the specific
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detailing and promotion activities undertaken by its Sales Force
during such fiscal quarter. MGI warrants and represents that it will
maintain records of Calls made by its Sales Force and that the records
will accurately represent the number of Calls made.
(b) Connetics shall be entitled to audit the source data and documents
that MGI used to compile such reports during normal business hours and
at Connetics' expense. Accordingly, during the term of this Agreement
and for three (3) years after such records are reported to Connetics
pursuant to Section 4.7(a), MGI shall maintain such records in
sufficient detail to permit Connetics to determine the specific
detailing and promotion activities undertaken by its Sales Force
during the term of this Agreement. Connetics shall have the right to
nominate an independent firm reasonably acceptable to the MGI to
verify records of MGI and the calculation of the specific detailing
and promotion activities undertaken by its Sales Force under Section
4.7(a) of this Agreement during the time period MGI is required to
maintain such records hereunder. Such verification shall be conducted
during normal business hours, and Connetics shall bear the fees and
expenses of the accountants performing such verification. The
accountants appointed pursuant to this Section shall not be authorized
to disclose to Connetics any information other than the accuracy or
inaccuracy of the item(s) to be verified.
Section 4.8. Promotional Materials. Connetics shall create and develop
promotional materials relating to the Product for distribution to independent
third parties. The Joint Marketing Team will establish the copy platform for all
promotional materials and will agree on tactical programs. Subject to the
restrictions on trademark usage in Article 8, MGI may create and develop
promotional materials related to the Product using and based on, materials
created by or for Connetics; provided, however, that MGI will not publish or
distribute any such promotional material (or other material) with respect to the
Product that the Joint Marketing Team has not approved. The Joint Marketing team
will determine whether the expenses incurred by MGI in creating such materials
shall be reimbursed out of the marketing and sales support budget for that year
(as referenced in Section 4.1).
Section 4.9. Exchange of Information. During the Term of and subject to any
other provision of this Agreement, each party will provide the other with any
information or summaries of information relevant to the promotion of the Product
(including but not limited to market research data, information concerning
competitive products, physician communications, and the like) within a
reasonable time after such information becomes known to the party. Such
information shall be considered confidential or proprietary and therefore
subject to Section 11.1.
Section 4.10. Training Materials. Connetics shall train the MGI Sales Force
to detail and promote the Product in the Territory commencing on April 11, 1999
in Minneapolis, Minnesota and at such other places to be agreed by the parties.
Except as expressly stated herein, MGI shall bear its expenses associated with
training its Sales Force. Connetics shall provide MGI with initial Product
training materials, as well as any Product training materials developed
subsequent to the initial Product training materials, which MGI shall reproduce
and distribute to its Sales Force at MGI's own expense. After the Effective
Date, the Joint Marketing Team shall develop programs to monitor, test and
otherwise ensure that the MGI Sales Force is sufficiently knowledgeable about
the Product and other information contained in Connetics' training materials.
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ARTICLE 5
CONSIDERATION
Section 5.1. Consideration to MGI. For so long as MGI is conducting
detailing and promotion activities pursuant to and in accordance with this
Agreement, Connetics shall compensate MGI pursuant to Subsections (a) and (b)
below:
(a) Connetics will pay to MGI $250,000 per Quarter as follows:
(i) Within thirty (30) days after receiving documentation from MGI
sufficient to support that MGI made at least 3,750 Calls in the
Quarter, Connetics shall pay the $250,000 for that Quarter.
(ii) For the second Quarter of 1999, Connetics shall pay MGI $250,000
regardless of the number of Calls that MGI makes during such Quarter,
provided that MGI documents the number of Calls it does make in such
Quarter.
(iii) In any Quarter after the second Quarter of 1999 in which MGI
fails to make 3,750 Calls, Connetics shall be entitled to withhold
payment for such Quarter, subject to the "cure" mechanism described in
paragraph (iv) and (v) below, which is different depending on the
number of Quarters that this Agreement has been in effect.
(iv) For each of the third and fourth Quarters of 1999 and the first
Quarter of 2000, if MGI makes 3,750 Calls in that Quarter, Connetics
shall pay MGI $250,000, except that if MGI makes fewer than 3,750
Calls in any such Quarter, and does not make up the shortfall in the
following Quarter, then no amount shall be paid in the following
Quarter.
(v) Beginning with the second Quarter of 2000, the number of Calls
made by MGI in each Quarter shall be calculated by averaging the
number of Calls made on MGI Physicians over the current and preceding
three Quarters, and if the rolling four-Quarter average is less than
3,750 Calls per Quarter, Connetics shall withhold the $250,000 for
that Quarter.
(b) Connetics will pay to MGI on an annual basis (net of any payments or
credit due by MGI under this Agreement):
(i) fifty percent (50%) of the Gross Margin on Net Sales of
Product equal to or exceeding $7,500,000 in each Year; or
(ii) zero percent (0%) of the Gross Margin on Net Sales of
Product less than $7,500,000 in each Year.
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Section 5.2. Payment Terms. Within thirty (30) days after the close of each
Quarter during the Term of this Agreement, Connetics shall submit to MGI an
accounting of the Gross Margin on Net Sales of the Product in the Territory and
itemizing all deductions under the definitions of Gross Margin and Net Sales for
such Quarter and for the Year to date, and calculating the compensation due MGI
for such Year under Section 5.1(b). At the time of submitting each accounting,
Connetics shall submit to MGI all payments due thereunder.
Section 5.3. Audit Rights. During the term of this Agreement and for three
(3) years thereafter Connetics shall keep full and accurate financial and
accounting records in accordance with U.S. generally accepted accounting
principles and shall maintain such records in sufficient detail to permit
calculation of the compensation payable to MGI pursuant to Section 5.1(b). MGI
shall have the right to nominate an independent firm of certified public
accountants reasonably acceptable to Connetics to verify the records of
Connetics and the calculation of the payment due under Section 5.1 of this
Agreement. Such verification shall be conducted during normal business hours,
and MGI shall bear the fees and expenses of the accountants performing such
verification. The accountants appointed pursuant to this Section shall not be
authorized to disclose to MGI any information other than the accuracy or
inaccuracy of the item(s) to be verified. If the audit reveals that Connetics
has over-reported for the period of the audit, MGI shall immediately remit to
Connetics any refund due and interest calculated from the payment date on such
overpayment at the then-current prime rate. If the audit reveals that Connetics
has under-reported for the period of the audit, Connetics shall immediately
remit to MGI any balance owing and interest calculated from the date on such
overdue amount at the then-current prime rate. In addition, if the audit reveals
that Connetics under-reported and underpaid by more than 10%, Connetics shall be
responsible for paying the accountants' fees in connection with the audit.
ARTICLE 6
MANUFACTURING AND DISTRIBUTION
Section 6.1. Supply of Product. Connetics shall have the sole
responsibility, financially and otherwise, for manufacturing the Product, either
directly or through one or more contractors (including Affiliates of Connetics),
receiving and processing orders, distributing the Product to customers, and
handling Product inventory and receivables. Connetics shall bear all costs of
such activities, including without limitation all third party royalties
(including all payments due to SmithKline Beecham) and cost of goods. Connetics
shall use its Best Efforts to insure, but cannot guarantee, that sufficient
stock of the Product will be available in its inventory to promptly fill orders
from the trade based on reasonable non-binding forecasts to be provided by the
Joint Marketing Team at the beginning of each quarter during the Term of this
Agreement for that fiscal quarter and the following three (3) fiscal quarters.
Section 6.2. Monthly Reporting. In order to aid the Joint Marketing Team to
provide the forecast to be provided under Section 6.1, Connetics within thirty
(30) days after the end of a given calendar month (or within a reasonable time
after it becomes available) will provide the Coordinators with a written report
for that calendar month. This report will set forth, if available, the quantity
and dollar amounts of Net Sales and Cost of Goods for the given month, including
any deductions taken and corresponding comparisons for the previous year.
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Section 6.3. Orders. If, for any reason, MGI receives orders for the
Product, MGI shall forward such orders to Connetics as soon as practicable.
Section 6.4. Failure to Supply Product. MGI understands and acknowledges
that only one (1) contractor (a party not an Affiliate of Connetics) is
currently approved by the FDA to manufacture the Product. If Connetics is at any
time unable to supply the Product to be sold under this Agreement, which failure
may be due to the failure of a contract manufacturer to meet its obligations to
supply Product to Connetics ("Inability to Supply"), such failure will be
treated as a force majeure condition under Section 11.6; provided, however, (i)
MGI's obligations hereunder to promote and detail the Product shall be suspended
for the period of such Inability to Supply, and (ii) Connetics shall to pay to
MGI $250,000 for any Quarter in which Connetics experiences an Inability to
Supply up to a maximum of two consecutive Quarters, notwithstanding any contrary
terms in Section 5.1(a).
ARTICLE 7
REGULATORY AFFAIRS AND MEDICAL INQUIRY
Section 7.1. FDA Approval. Connetics will maintain ownership of such
approval and file any supplements to it. Connetics shall file, own and maintain
in its name any and all regulatory and formulary submissions pertaining to the
Product and any and all regulatory and formulary approvals that may be issued
with respect to the Product.
Section 7.2. Complaint Handling. Connetics shall have the sole right and
responsibility, and shall bear all costs related thereto, to take such actions
as may be necessary, in accordance with accepted business practices and legal
requirements, to obtain and maintain the authorization and/or ability to market
the Product in the Territory, including without limitation the following:
(a) responding to customer and medical complaints relating to the quality,
strength or purity of the Product, and MGI agrees that it shall
promptly refer any such complaints that it receives to Connetics;
(b) handling all returns of the Product (if the Product is returned to MGI
it shall be shipped to Connetics at a location to be provided by
Connetics, with any reasonable or authorized shipping or other
documented out-of-pocket costs to be paid by Connetics), and MGI and
Connetics shall each advise their customers generally that they should
make returns to Connetics; and
(c) handling all recalls of the Product (at Connetics' request, MGI will
assist Connetics in receiving the recalled Product, and any documented
out-of-pocket costs incurred by MGI with respect to participating in
such recall shall be reimbursed by Connetics).
Section 7.3. Adverse Event Reporting Requirements. Connetics shall be
solely responsible for submitting Adverse Event Reports to the FDA, except to
the extent (if at all) that MGI may be required by law to make such reports
itself. During the Term of this Agreement, MGI shall promptly forward to
Connetics at the address set forth in Section 11.3 any reports MGI
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receives of adverse events (distinguished as serious and non-serious by FDA
regulations), concerning side effects, injury, toxicity or sensitivity reaction
including unexpected increased incidence and severity associated with commercial
or clinical uses, studies, investigations or test with the Product (animal or
human), throughout the world, whether or not determined to be attributable to
the Product. For purposes of this Section 7.3, "promptly" means as soon as
practicable, but in no event later than (a) five business days for serious
adverse events after receipt of complete information regarding such events, or
(b) thirty calendar days for non-serious adverse events after receipt of
complete information regarding such events. Connetics shall transmit adverse
event reports to MGI on a periodic basis, but no less often than once every six
(6) months; provided, however, that Connetics shall promptly notify MGI of any
adverse event report requiring the cessation or substantial alteration of
detailing activities by the MGI Sales Force. MGI shall hold all such
communications in the strictest confidence and subject to the terms of Section
11.1 of this Agreement.
Section 7.4. Communications with Government Agencies. Connetics shall have
the sole right and responsibility and shall bear all costs related to
communications with any government agencies to satisfy their requirements
regarding the authorization and/or continued authorization to market the Product
in commercial quantities in the Territory. MGI shall promptly notify Connetics
of any inquiry or other communication that it receives from the FDA concerning
the Product. Connetics shall be primarily responsible for all communications
with the FDA (and state equivalent agencies) concerning the Product, including
but not limited to reporting adverse events and responding to any inquiries
concerning advertising, detailing or promotional materials. MGI, however, shall
be able to communicate with the any such governmental agency regarding the
Product if:
(a) such communication is necessary to comply with the terms of this
Agreement or the requirements of any law, governmental order or
regulation; or
(b) MGI, if practical, made a request of such agency to communicate with
Connetics instead, and such agency refused such request; provided,
however, that before making any communication under this Section 7.4,
MGI shall give Connetics notice as soon as possible of MGI's intention
to make such communications, and Connetics shall be permitted, if
practical, to accompany MGI, take part in any such communications and
receive copies of all such communications.
Section 7.5. Medical Inquiries. MGI shall refer to Connetics all medical
questions or inquiries relating to the Product directed to MGI's Sales Force,
except that Adverse Event Reports shall be handled as set forth in Section 7.3.
MGI's medical inquiry personnel shall instruct individuals who contact MGI or
MGI's Sales Force to direct medical inquiries directly to Connetics.
Section 7.6. Post-Market Studies. Connetics shall be responsible for, and
bear the cost of, conducting any clinical study required by the FDA to maintain
the NDA for the Product or establish any new indication or dosage form of the
Product. MGI shall not conduct any clinical study nor incur any expenses in
anticipation of conducting any such study. The cost of any such study conducted
by Connetics shall not be considered advertising, detailing or promotional
expenses for purposes of this Agreement. Conversely, the cost of clinical
evaluation programs and marketing support trials meeting the requirement of
Section 4.2 shall be considered promotional expenses for purposes of this
Agreement.
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ARTICLE 8
INTELLECTUAL PROPERTY
Section 8.1. Trademark License. Connetics hereby grants to MGI a
non-exclusive, royalty-free license to use the following trademarks for the
advertising, promotion, marketing, distribution and sale of Product in the
Territory:
Ridaura(R)
Connetics (name and logo)
c-globe design (logo)
In using the trademarks in materials it generates, MGI shall display the marks
in a style or size of print distinguishing the mark from any accompanying
wording or text.
Section 8.2. Marking. During the Term of this Agreement and if permitted by
FDA regulations, all advertising, detailing and promotional materials related to
the Product may include both Connetics' name and logo and MGI's name and logo in
a manner approved by the Joint Marketing Team. Neither party will acquire any
rights in the other party's name or logo on account of its use in advertising,
detailing and promotional materials for the Product. Nothing in this Agreement
shall be construed to give either party any rights to use the other party's name
or logo outside of the Territory or other than in accordance with this
Agreement. Neither party shall distribute information that bears the name of the
other party unless the information meets the requirements of this Section, or
the other party has consented in writing to the use of its name on the
information, except that MGI shall be permitted to distribute and use all
materials (in any form) provided or previously approved by Connetics or the
Joint Marketing Committee.
Section 8.3. Ownership. All proprietary features constituting the trade
dress of the Product, including but not limited to the shape and color of the
bottle, cap, label design, the size and configuration of the units in cartons,
etc., shall belong exclusively to Connetics. Except as expressly set forth in
this Section 8.3, Connetics shall own all copyrights to all advertising,
detailing, promotional and training materials as well as all other written
materials, audiotapes, videotapes, or other copyrightable materials that are
created during the Term of this Agreement in connection with the advertising,
detailing, marketing and promotion of the Product, and MGI will and does waive
all rights in and to any and all such materials. To the extent necessary,
Connetics will contract with, and make all arrangements with, any and all third
parties for the creation of any such materials. Connetics shall, and does
hereby, grant to MGI a royalty-free license to use and reproduce such materials
solely in conjunction with its performance of services pursuant to this
Agreement, which license MGI shall not assign or transfer. Any copyrights on
promotional and training materials made by or on behalf of MGI and funded solely
by MGI shall be owned by MGI. MGI hereby grants to Connetics a perpetual,
non-exclusive, royalty-free license under such copyrights to reproduce, use and
sell such promotional and training material.
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ARTICLE 9
REPRESENTATIONS AND WARRANTIES
Section 9.1. Representations and Warranties of Connetics. Connetics hereby
represents and warrants to MGI as follows:
(a) Connetics has the corporate power and authority to execute and deliver
this Agreement and to perform its obligations thereunder, and the
execution, delivery and performance of this Agreement have been duly
authorized by Connetics.
(b) Connetics has the right to grant to MGI the rights and licenses
granted under this Agreement.
(c) To the best of Connetics' knowledge, there are no pending or
threatened legal claims relating to the Product, and there is no
infringement or threatened infringement of a third party's patent
rights with respect to any use or sale of Product in the Territory.
Section 9.2. Representation and Warranty of MGI. MGI hereby represents and
warrants to Connetics that MGI has the corporate power and authority to execute
and deliver this Agreement and to perform its obligations thereunder, and the
execution, delivery and performance of the Agreement have been duly authorized
by MGI.
Section 9.3. Disclaimer of Warranties. TO THE MAXIMUM EXTENT PERMITTED BY
APPLICABLE LAW, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT,
CONNETICS MAKES NO WARRANTY WITH RESPECT TO ANY TECHNOLOGY, GOODS, SERVICES,
RIGHTS, OR OTHER SUBJECT MATTER OF THIS AGREEMENT AND HEREBY DISCLAIMS ALL
WARRANTIES, CONDITIONS OR REPRESENTATIONS OF ANY KIND, EXPRESS OR IMPLIED,
INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF PERFORMANCE,
MERCHANTABILITY, SATISFACTORY QUALITY, FITNESS FOR A PARTICULAR PURPOSE OR
NON-INFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS.
Section 9.4. Disclaimer of MGI. Connetics acknowledges that MGI disclaims
any warranty, representation or guarantee that MGI's promotion and detailing of
the Product as permitted hereunder will generate any particular level of actual
prescriptions, or any increase in sales of the Product, as a result of Calls or
Visits made to MGI Physicians.
ARTICLE 10
INDEMNIFICATION
Section 10.1. Connetics Indemnity.
(a) Connetics agrees to indemnify and hold harmless MGI, its Affiliates,
and their respective officers, directors, employees and agents from
and against any and all damages, claims, liabilities, demands,
charges, suits, penalties, costs, expenses and obligations to third
parties incurred or arising in connection with (i) the manufacture,
advertising, promotion, sale, import or use of the Product, including
without
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limitation, product liability and intellectual property infringement
claims, or (ii) breach of any warranty, representation or covenant of
Connetics contained in this Agreement; provided, however, Connetics'
obligations to indemnify MGI in any action related to a claim that the
Product infringes the intellectual property of a third party shall be
limited to the amount of actual damages awarded to such third party by
a court or arbitrator, as the case may be, and to the reasonable costs
and expenses (including reasonable attorney's fees) of MGI, its
Affiliates, and their respective officers, directors, employees and
agents in connection with such action. Connetics shall have no
indemnification obligation under this Section 10.1(a) for any claim(s)
arising from (a) any modifications to the Product by MGI where
liability would not have occurred by for such modifications or (b) the
negligence or wrongful act of MGI, its officers, agents or employees,
including without limitation (i) the detailing and/or promotion of the
Product in a manner that is inconsistent with the FDA approval
pertaining to the Product, or (ii) representation or statement
regarding the Product which is inconsistent with the specifications or
product label claims by MGI or an Affiliate, assignee, distributor or
representative of MGI.
(b) MGI shall give Connetics prompt written notice of the receipt of any
claim or the commencement of any action, suit or proceeding for which
MGI may seek indemnification under Section 10.1(a) (individually or
collectively, referred to hereafter as an "Action"), and Connetics
shall assume the defense of the Action; provided that, MGI complies
with any good faith request made by Connetics for assistance in such
defense; and provided further that:
(i) MGI shall have the right at any time to participate in any
such Action with counsel of its own choice at MGI's sole
expense;
(ii) if MGI elects for Connetics to defend the Action, then
MGI's counsel may participate in all discussions, but shall
not be entitled to appear in any legal or judicial
proceeding relating to the Action;
(iii) if Connetics fails to assume the defense within a
reasonable time, MGI may assume such defense, and the
reasonable fees and expenses of MGI's attorneys will be
covered by the indemnity provided for in Section 10.1; and
(iv) if a conflict with respect to legal representation arises
which cannot be resolved, and MGI is not prepared to waive
such conflict, then MGI shall have the right to obtain
separate legal counsel at Connetics' expense; provided,
however, Connetics shall have no obligation to pay MGI's
expenses in connection with MGI obtaining separate legal
counsel in any Action brought by Connetics against MGI or
any Action brought by MGI against Connetics.
Nothing in the foregoing discussion shall give either party the
right or authority to settle any Action on behalf of the other
party without the other party's written consent.
(b) Limitation of Liability. EXCEPT FOR (A) ANY LOSS, LIABILITY, DAMAGE OR
OBLIGATION ARISING OUT OF OR RELATING TO THE
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DISCLOSURE OF CONFIDENTIAL INFORMATION PURSUANT TO SECTION 11.1 OR (B)
THE INDEMNITY OBLIGATIONS OF CONNETICS SET FORTH IN SECTION 10.1
(EXCLUDING INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS), OR AS OTHERWISE
EXPRESSLY SET FORTH IN THIS AGREEMENT, IN NO EVENT SHALL EITHER PARTY
HAVE ANY LIABILITY TO THE OTHER PARTY OR ANY OTHER THIRD PARTY FOR ANY
LOST OPPORTUNITY OR PROFITS, COSTS OF PROCUREMENT OF SUBSTITUTE GOODS
OR SERVICES, OR FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE
OR SPECIAL DAMAGES ARISING OUT OF THIS AGREEMENT, UNDER ANY CAUSE OF
ACTION OR THEORY OF LIABILITY (INCLUDING NEGLIGENCE), AND WHETHER OR
NOT SUCH PARTY TO THIS AGREEMENT HAS BEEN ADVISED OF THE POSSIBILITY
OF SUCH DAMAGE. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY
FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
Section 10.2. MGI Indemnity.
(a) MGI agrees to indemnify and hold harmless Connetics, its Affiliates,
and their respective officers, directors, employees and agents from
and against any and all damages, claims, liabilities, demands,
charges, suits, penalties, costs, expenses and obligations to third
parties arising from the negligence or wrongful act of MGI, its
officers, agents or employees, including without limitation the
detailing and/or promotion of the Product in a manner that is
inconsistent with the FDA approval pertaining to the Product.
(b) Connetics shall give prompt written notice of the receipt of any claim
or the commencement of any action, suit or proceeding for which
Connetics may seek indemnification under Section 10.2(a), and MGI
shall assume the defense thereof; provided, however, that Connetics
shall be entitled to participate in any such action, suit or
proceeding with counsel of its own choice, but at its own expense. If
MGI fails to assume the defense within a reasonable time, Connetics
may assume such defense, and the reasonable fees and expenses of its
attorneys will be covered by the indemnity provided for in Section
10.2. No such claim, action, suit or proceeding shall be compromised
or settled in any manner that might adversely affect the interests of
MGI without the prior written consent of MGI.
Section 10.3. Indemnity Disputes. In the event that both parties claim
indemnification for the same claim, action, suit or proceeding, the provisions
of Sections 10.1 and 10.2 shall apply, except that the cost of defense shall be
shared equally pending final resolution, at which time the party found to be
entitled to indemnification shall also be entitled to reimbursement for any
amount paid by it as defense costs, in addition to other amounts recoverable
under Sections 10.1 and 10.2, as the case may be.
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ARTICLE 11
GENERAL TERMS AND CONDITIONS
Section 11.1. Confidentiality.
(a) In order to facilitate this Agreement it will be necessary for the
parties to exchange certain Proprietary Information. Each party agrees
to retain the Proprietary Information of the other party in strict
confidence and not to disclose or transfer the Proprietary Information
to any party or use the Proprietary Information other than as
authorized by the terms of this Agreement or otherwise in writing by
the discloser. The parties acknowledge that such Proprietary
Information can constitute "inside information" for securities
purposes and the responsibility to refrain from any unauthorized
disclosure, trading or other such use. Each party represents to the
other that it maintains policies and procedures designed to prevent
unauthorized disclosure of its own Proprietary Information. All
employees of a party performing services under this Agreement shall be
subject to agreements prohibiting the disclosure of Proprietary
Information except on the terms permitted in this Agreement.
(b) These obligations of confidentiality and non-use shall not apply to
Proprietary Information: (a) that was previously known to the
recipient as evidenced by recipient's written records, (b) that is
lawfully obtained by recipient from a source independent of the
disclosing party, (c) that is now or becomes public knowledge other
than by breach of this Agreement, or (d) that is legally required to
be disclosed under federal or state law, provided that the party or
its Affiliate required to make the disclosure takes reasonable steps,
consistent with protection it would seek for its own confidential
information, to prevent the Proprietary Information from becoming
public.
(c) Each party shall have the right to disclose the Proprietary
Information of the other to those of its Affiliates that need the
Proprietary Information for the purposes of this Agreement, provided
that each such Affiliate agrees to be bound to the other party by the
provisions of this Article 11 and the disclosing party guarantees the
performance under this Agreement of any such Affiliate.
(d) These obligations of confidentiality and non-use shall survive the
expiration or termination of this Agreement.
Section 11.2. Arbitration and Applicable Law. Any dispute, controversy or
claim arising out of or relating to this Agreement, or the breach or termination
of this Agreement, shall be settled by arbitration in accordance with the rules
of the American Arbitration Association then in effect. Judgment upon the award
rendered by the arbitrators may be entered in any court having jurisdiction. In
any arbitration pursuant to this Section 11.2, the award shall be rendered by a
majority of the members of a board of arbitration consisting of three members,
one being appointed by each party and the third being appointed by mutual
agreement of the two arbitrators appointed by the parties. The place of
arbitration shall be Chicago, Illinois. The arbitrators shall apply the law of
the State of New York (regardless of that jurisdiction's or any other
jurisdiction's choice of law principles).
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Section 11.3. Notices. Any notice required or permitted by the terms of
this Agreement shall be given by overnight carrier, or by registered mail,
prepaid and properly addressed, or delivered by hand,
If to Connetics, to:
3400 West Bayshore Road
Palo Alto, California 94303
Attn.: President and Chief Executive Officer
And if to MGI, to:
Suite 300 E, Opus Center
9900 Bren Road East
Minnetonka, MN 55343-9667
Attn.: President and Chief Executive Officer
or at such other address as either party may designate by notice pursuant to
this Section. Any such notice shall be deemed to have been given when received.
Section 11.4. Term and Termination.
(a) Term. The term of this Agreement shall begin on the Effective Date and
shall continue, unless terminated sooner in accordance with this
Agreement, until the second (2nd) anniversary of the Effective Date.
(b) Termination for Good Cause. Either party may terminate this Agreement
for Good Cause effective at any time after providing sixty (60) days
written notice and an opportunity to cure during such sixty (60) day
period; provided, however, that either party shall have the right to
terminate this Agreement immediately upon written notice to the other
party if an Inability to Supply has continued for six (6) months or
more. If a cure is effected, the notice with respect to such Good
Cause shall be null and void.
(c) Termination by Either Party. Either party shall have the right to
terminate this Agreement upon six (6) months written notice to the
other party commencing upon the first anniversary of the Effective
Date.
(d) Termination for Other Reasons. Either party shall have the right to
terminate this Agreement in the event of a large scale recall or
withdrawal of the Product from the Territory resulting from a
significant safety risk inherent in the Product and not due to
tampering, a remediable manufacturing problem, or other defect that
can be cured with respect to Product manufactured after such risk is
discovered. Termination of this Agreement shall be without prejudice
to (i) any remedies that any party may then or thereafter have under
this Agreement or at law; (ii) a party's right to receive any payment
accrued under the Agreement prior to the termination date but which
became payable thereafter; or (iii) either party's right to obtain
performance of any
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obligation provided for in this Agreement that survives termination by
its terms or by a fair interpretation of this Agreement.
(e) Effect of Termination. Unless otherwise explicitly stated in this
Agreement, MGI shall not be entitled to compensation for sales of
Product after termination of this Agreement. If either party
terminates this Agreement for Good Cause, Connetics shall pay to MGI
all of the compensation due MGI under Section 5.1 (up to and including
any portion of the calendar month in which effective termination
occurs, including sums that have accrued but have not yet been paid as
of the effective date of termination).
Section 11.5. Announcements/Publicity. Subject to the requirements of law
and/or Nasdaq, any announcements or publicity to be made or given in respect of
this Agreement by either party shall be subject to the prior approval of the
other party (such approval not to be unreasonably withheld or delayed) where
such announcement or publicity refers to such other party.
Section 11.6. Force Majeure. Neither party shall be liable for failure to
perform any duty or obligation that party may have under this Agreement where
such failure has been occasioned by any force majeure which shall mean and
include government regulation, fire, flood, war, public disaster, strike or
labor dispute, inevitable accident, national emergency, or any other cause
outside the reasonable control of the party having the duty so to perform. Such
failure to perform shall only be excusable under the provisions of this Section
for so long as, and to the extent that, the same is rendered impossible by force
majeure. The party claiming that force majeure has occurred shall send to the
other party within five (5) working days of the first occurrence of force
majeure full particulars including the date of first occurrence and of the cause
or event giving rise to it. Notwithstanding the relief granted to any party by
this Section, the relevant party shall nevertheless use its reasonable endeavors
in any situation where it has invoked this Section to perform its relevant
obligations as soon as possible after force majeure has ceased. If a force
majeure event lasts longer than six (6) months, the unaffected party shall have,
in addition to the right to terminate this Agreement for Good Cause under
Section 11.4, the optional right to continue the Agreement in full force and
effect without modification.
Section 11.7. Assignment. Unless otherwise agreed this Agreement may not be
assigned by either of the parties, except in the case of a merger or sale of all
the assets of the business to which this Agreement relates.
Section 11.8. Survival. The covenants and agreements set forth in Section
4.7(b) and 5.3 and Articles 9, 10 and 11 shall survive any termination or
expiration of this Agreement and remain in full force and effect regardless of
the cause of termination.
Section 11.9. Nonwaiver of Rights. No failure or delay on the part of a
party in exercising any right hereunder will operate as a waiver of, or impair,
any such right. No single or partial exercise of any such right will preclude
any other or further exercise thereof or the exercise of any other right. No
waiver of any such right will be deemed a waiver of any other right hereunder.
Section 11.10. Headings. Section headings contained in this Agreement are
included for convenience only and form no part of the agreement between the
parties.
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Section 11.11. Validity of Provisions and Severability. If any provision of
this Agreement is or becomes or is deemed to be invalid, illegal, or
unenforceable in any jurisdiction: such provision will be deemed amended to
conform to applicable laws of such jurisdiction so as to be valid and
enforceable, or, if it cannot be so amended without materially altering the
intention of the parties, it will be stricken; the validity, legality and
enforceability of such provision will not in any way be affected or impaired
thereby in any other jurisdiction; and the remainder of this Agreement will
remain in full force and effect.
Section 11.12. No Hire. During the term of this Agreement and for six (6)
months thereafter, neither party nor its Affiliates shall solicit nor hire any
individual in the other party's Sales Force without such party's prior written
consent which consent such party may grant in its sole discretion.
Section 11.13. Entire Agreement. This Agreement sets forth the entire
agreement of the parties with respect to the subject matter hereof. This
Agreement may not be modified except by a writing signed by the parties'
authorized representatives.
[Remainder of this page is intentionally left blank]
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IN WITNESS WHEREOF, the parties have entered into this Agreement as of the
Effective Date.
Connetics Corporation, MGI Pharma, Inc.
a Delaware corporation
By /s/ T. Wiggans By /s/ C. N. Blitzer
----------------------------------- -------------------------------
Thomas G. Wiggans Charles N. Blitzer
President & Chief Executive Officer President & Chief Executive Officer
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EXHIBIT 10.2
CO-PROMOTION AGREEMENT
THIS CO-PROMOTION AGREEMENT is effective as of April 1, 1999 by and between
Connetics Corporation ("Connetics") and MGI Pharma, Inc. ("MGI").
B A C K G R O U N D
A. Connetics has marketing rights in the United States to a pharmaceutical
product known as Luxiq(TM).
B. MGI has experience and expertise in the marketing of products to
rheumatologists and internal medicine practitioners.
C. MGI has a professional sales force that calls on physicians and other
health care professionals in order to promote MGI products.
D. Connetics desires to enhance its marketing of Luxiq(TM) in the United
States by enlisting the support and participation of MGI and the MGI Sales Force
(as defined below) in the marketing effort.
NOW, THEREFORE, in consideration of the Background and the mutual promises
contained in this Agreement, Connetics and MGI agree as follows:
A G R E E M E N T
ARTICLE 1
DEFINITIONS
"Affiliate" means in respect of either party any corporation or business
entity controlled by, controlling, or under common control with Connetics or
MGI, respectively. For this purpose "control" means the direct or indirect
beneficial ownership of at least fifty percent (50%) of the voting stock of, or
at least fifty percent (50%) interest in the income of, such corporation or
other business entity, or such other relationship as, in fact, constitutes
actual control.
"Best Efforts" means those efforts that would be made by a reasonably
prudent business person acting in good faith in the exercise of reasonable
commercial judgment.
"Call" means a presentation of the Product by a professional sales
representative to a physician or other health care professional or organization
licensed to administer, dispense or prescribe prescription drugs during a visit
which is for the purpose of actively promoting the sale of the Product.
<PAGE>
"Coordinator" means the person appointed by each of Connetics and MGI in
accordance with Section 3.1.
"Cost of Goods" shall mean shall mean the cost of Product manufactured in
final form by or on behalf of Connetics, including without limitation, all
direct and indirect costs for material, labor and production overhead included
in manufacturing, producing and supplying Product in the Territory, royalties
paid to third parties, distribution costs, and freight and other transportation
costs, including insurance charges, and duties, tariffs, sales and excise taxes
and other governmental charges based directly on sales turnover or delivery of
such Product and actually paid and allowed by Connetics, all calculated in
accordance with U.S. generally accepted accounting principles.
"Dermatologist" shall mean all physicians specializing in dermatology as
defined by mutually acceptable criteria and reported by a mutually acceptable
reporting service.
"Effective Date" means the date first written above.
"FDA" means the United States Food and Drug Administration.
"Good Cause" means (a) the material failure of the other party to comply
with its material obligations contained in this Agreement. Material obligations
include, without limitation, the failure of MGI to provide the full level of
detailing and promotional support required by Articles 2 and 4, or the failure
of Connetics to make the payments required by Section 5.1, (b) the filing of a
petition by or against the other party under any bankruptcy, insolvency or
similar law (which petition is not dismissed within sixty (60) days after
filing); the appointment of a receiver for the other party's business or
property; or the other party's making of a general assignment for the benefit of
its creditors, or (c) any force majeure event as defined in Section 11.6
affecting the other party beyond the other party's control that lasts for a
period of at least six (6) months and which is of sufficient intensity to
interrupt or prevent the carrying out of the totality of such other party's
material obligations under this Agreement during such period.
"Gross Margin" means Net Sales less Cost of Goods.
"Internal Medicine Physicians" shall mean all physicians specializing in
internal medicine as defined by mutually acceptable criteria and reported by a
mutually acceptable reporting service.
"Joint Marketing Team" means the committee appointed pursuant to Section
3.2 of this Agreement.
"Launch Stocking" means the Net Sales of Product sold by Connetics under
its Launch Stocking Incentive Program.
"Launch Stocking Incentive Program" means Connetics' offer to wholesalers
of special purchase terms on all Product ordered on or before April 30, 1999.
"Luxiq Prescriptions" shall mean prescriptions for the Product as
determined using data from an agreed upon service provider.
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"Marketing Expenses" shall mean all out-of-pocket expenses in connection
with the Product that are approved by the Joint Marketing Team and are (i)
incurred by Connetics for marketing and promotional materials and activities
produced by Connetics, or (ii) incurred by MGI for marketing and promotional
materials and activities produced by MGI, except as set forth in Section 4.1.
"MGI Physicians" means rheumatologists and internal medicine practitioners
with a rheumatology sub-specialty as defined by mutually acceptable criteria and
reported by a mutually acceptable reporting service.
"NDA" means Connetics' new drug application number 20-934 submitted to the
FDA on December 16, 1997 (a summary of which has been provided to MGI).
"Net Sales" shall mean the gross amounts invoiced by Connetics for Product
in the Territory in accordance with U.S. generally accepted accounting
principles (except Launch Stocking), less the following amounts directly
chargeable to such Products: (a) customary trade, quantity or cash discounts and
rebates, actually allowed and taken; (b) allowances for estimated returns,
rebates and chargebacks; (c) uncollectible amounts; and (d) recalls.
"Product" means the betamethasone valerate foam product, trade name Luxiq
(TM), as described in the product specifications of the NDA as it may be amended
from time to time including any improvements thereto.
"Product Contribution" means the amount calculated, on a quarterly basis,
by application of the following formula: ***
"Product Information" means the dossier, regulatory status and information,
data and results of clinical and other trials and investigations relating to the
Product, including the NDA and right of cross-reference to the NDA, together
with all other information relating to the specification of the Product and
information relating to the manufacture (including method, conditions, and
process equipment), testing (including quality control standards, assay methods
and stability studies), storage and use of the Product now or hereafter during
the term of this Agreement in the possession or under the control of Connetics.
"Promotion Plan" means a plan developed by the Joint Marketing Team for the
detailing and promotion of the Product in the Territory, and shall include
promotional strategies, detailing plans, pricing and budgets for promotional
activities (including the development of materials for the detailing and
promotion of the Product) for each discrete detailing period in which MGI
participates during the Term of this Agreement.
"Proprietary Information" means any information of value of either party,
not generally known to the public, including (but not limited to):
(a) the Product Information; the development status of the Product;
Product indications and modes of administration; technical
information, such as
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
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clinical, biological, manufacturing, pharmaceutical and characterizing
data; and know-how;
(b) business information, such as reports; records; customer lists;
supplier lists; marketing and sales plans; financial information;
costs; and pricing information; and
(c) pharmacoeconomic analyses, if any, conducted by Connetics with respect
to the Product.
"Representatives" means sales representatives employed by MGI for detailing
the Product in the Territory as permitted hereunder.
"Sales Force" means all of the Representatives employed by Connetics or
MGI, as the case may be.
"Territory" means the United States of America, including its territories
and possessions.
"Year" means the period beginning with a given anniversary of the Effective
Date and ending at the end of the day before the next anniversary of that date.
ARTICLE 2
GRANTS AND OBLIGATIONS
Section 2.1. Grant to MGI. Connetics hereby grants to MGI, during the Term
of this Agreement, the (i) exclusive right to detail and promote the Product in
the Territory to MGI Physicians, and (ii) the non-exclusive right to detail and
promote the Product in the Territory to Internal Medicine Physicians other than
MGI Physicians. During the Term of this Agreement, neither Connetics nor an
Affiliate of Connetics will authorize, or grant the right to, any third party
the rights to co-detail, co-promote, or co-market the Product to MGI Physicians
in the Territory as are granted to MGI hereunder, without MGI's prior written
consent which may be granted in MGI's sole discretion.
Section 2.2. MGI's Obligations. Subject to the provisions of and during the
Term of this Agreement, MGI shall use its Best Efforts to detail and promote the
Product in the Territory to MGI Physicians according to the Promotion Plan and
in such manner and with such expedition as MGI itself would have adopted in
detailing and promoting a product of its (or any of its Affiliates) own
invention, including but not limited to the use of its trained and qualified
Sales Force to make Calls on physicians and other persons and organizations
licensed to administer, dispense and prescribe prescription drugs with respect
to the Product. Subject to the obligations set forth in Section 2.3 and Article
4, and in particular Section 4.3, nothing in this Agreement is intended to
prevent MGI from marketing and/or promoting other products during the term of
this Agreement or thereafter.
Section 2.3. Competition. During the term of this Agreement, MGI will not
promote any other topical corticosteroid products that competes with the Product
to MGI Physicians.
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Nothing in this Agreement shall restrict Connetics from engaging in commercial
alliances for Product with other parties for sales promotion to physicians other
than MGI Physicians.
ARTICLE 3
GOVERNANCE
Section 3.1. Coordinator. Connetics and MGI shall each appoint an
authorized and knowledgeable representative ("Coordinator") to direct
communications. Each party will promptly notify the other as to the name of the
individual so appointed. Each party may replace its Coordinator at any time,
upon prompt written notice to the other party.
Section 3.2. Joint Marketing Team. Within thirty (30) days following the
Effective Date, the Coordinators shall establish a "Joint Marketing Team"
consisting of representatives of Connetics and representatives of MGI appointed
by the respective Chief Executive Officers of each party. The Joint Marketing
Team will be directed by Connetics' Coordinator and will meet from time to time,
at mutually agreeable times and locations but in any event at least two (2)
times in each calendar year, to discuss and coordinate the joint promotion and
detailing of the Product in the Territory and the strategies and programs that
should be developed to maximize sales of the Product. By way of example, the
Joint Marketing Team shall develop and implement the Promotion Plan, and guide
all continuing joint promotion and detailing efforts with respect to the Product
in the Territory. Connetics will have the final responsibility, with the
cooperation and assistance of MGI, for developing promotion and detailing
strategies with respect to the Product, and for developing promotional and
detailing materials. Each party shall bear its own costs associated with its
participation in the Joint Marketing Team.
Section 3.3. Promotion Plan. From time to time, but in no event less than
once a year, the Joint Marketing Team shall develop and formulate a written
Promotion Plan for specified periods, which shall set forth promotion and
detailing strategies relating to the Product.
Section 3.4. Recommendations. Each party shall have the right to comment
upon and make recommendations to the other party regarding the other party's
activities under this Agreement, which recommendations the other party shall
thoroughly evaluate and consider, taking into account the other party's
expertise and experience with pharmaceutical products in the Territory.
Section 3.5. Decisions. It is expressly understood and agreed that the
Joint Marketing Team shall be led by a Connetics' representative with MGI's
participation. In the event of a disagreement among the members of the Joint
Marketing Team, the matter shall promptly be referred to the Senior Vice
President, Commercial Operations of Connetics and the Vice President, Marketing
and Sales of MGI for resolution; if the matter is still not resolved, it shall
promptly be referred to the Presidents of Connetics and MGI for resolution. If
the two Presidents cannot reach agreement, in light of the fact that Connetics
owns the Product and the regulatory approvals relating to the Product, Connetics
shall have the right to resolve any such disagreement, including without
limitation any disagreement regarding the following subjects:
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(a) promotional material that Connetics considers, in its reasonable
judgment, inconsistent with the labeling of the Product or with a
regulatory submission pertaining to the Product;
(b) promotional material and other promotional activities that Connetics
regards, in its reasonable judgments, as adversely affecting
Connetics' promotion and/or marketing of the Product in other
countries;
(c) communications with the FDA concerning the Product, including but not
limited to the reporting of adverse events associated with use of the
Product;
(d) any decisions regarding programs and financial expenditures; and
(e) any proposed recall of the Product.
Section 3.6. Pricing. Connetics will establish the initial ex-factory
prices for the Product. Connetics shall at its sole discretion establish all
future ex-factory prices for the Product. Connetics may offer and sell the
Product at prices below the established or published ex-factory prices to
wholesalers whenever Connetics considers that such pricing is necessary to
obtain the business of certain customers.
ARTICLE 4
PRODUCT PROMOTION
Section 4.1. Joint Promotion. Subject to Connetics' leadership of the Joint
Marketing Team, MGI shall have the obligations set forth in Section 2.2 for
detailing and promoting the Product in the Territory. Except as otherwise
determined by the Joint Marketing Team, MGI shall bear all costs and expense
related directly to the MGI Sales Force (e.g., salaries, incentive compensation,
bonuses, benefits, cars, travel and entertainment expenses, etc.) and associated
MGI personnel for all purposes, including attending training sessions related to
the Product; the cost of any conference facilities etc. reserved in connection
with the training of MGI's Sales Force if that training is not held in
conjunction with Connetics Sales Force Training; personnel costs of MGI's
continuing medical education ("CME") staff; MGI's personnel and travel costs
associated with meetings and conventions; and any promotional materials that MGI
prepares. Connetics shall supply to MGI, at Connetics' cost, tradepacks,
placebos and other materials which may be deemed part of the Marketing Expenses.
The Joint Marketing Team will determine the scope and nature of the Marketing
Expenses.
Section 4.2. Promotional Activities. The Joint Marketing Team shall advise
Connetics regarding promotional activities with respect to the Product, which
may include, without limitation, the following: journal advertising, direct mail
to physicians and pharmacies, advertising agency fees, promotional literature,
Sales Force detailing aids, creative and advertising preparation, CME speaker
programs (subject to Section 4.1), exhibits, symposia, audio- and
videocassettes, clinical evaluation programs as agreed upon by the Joint
Marketing Team, and marketing support trials (limited to comparative clinical
studies against competitive products intended for differentiation of the Product
during detailing and promotion).
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Section 4.3. Call Requirement. MGI shall detail and promote the Product at
its discretion using the MGI Sales Force in the Territory pursuant to a plan
approved by the Joint Marketing Team.
Section 4.4. Management of Sales Forces. The MGI Sales Force shall be
directed by the senior management of MGI, subject to the Promotion Plan
developed by the Joint Marketing Team. Connetics shall not have any
responsibility for the hiring, firing or compensation of the MGI's employees or
for any employee costs or benefits associated therewith.
Section 4.5. Promotion Activity Reporting.
(a) MGI shall provide Connetics with a detailed report within thirty (30)
days after the end of each fiscal quarter during the Term of this
Agreement, describing the specific detailing and promotion activities
undertaken by its Sales Force during such fiscal quarter. MGI warrants
and represents that it will maintain records of Calls made by its
Sales Force and that the records will accurately represent the number
of Calls made.
(b) Connetics shall be entitled to audit the source data and documents
that MGI used to compile such reports during normal business hours and
at Connetics' expense. Accordingly, during the term of this Agreement
and for three (3) years after such records are reported to Connetics
pursuant to Section 4.5(a), MGI shall maintain such records in
sufficient detail to permit Connetics to determine the specific
detailing and promotion activities undertaken by its Sales Force
during such term, and the amount allocated to Marketing Expenses under
this Agreement. Connetics shall have the right to nominate an
independent firm reasonably acceptable to the MGI to verify records of
MGI and the calculation of the specific detailing and promotion
activities undertaken by its Sales Force under Section 4.5(a) of this
Agreement during the time period MGI is required to maintain such
records hereunder. Such verification shall be conducted during normal
business hours, and Connetics shall bear the fees and expenses of the
accountants performing such verification. The accountants appointed
pursuant to this Section shall not be authorized to disclose to
Connetics any information other than the accuracy or inaccuracy of the
item(s) to be verified.
Section 4.6. Promotional Materials. Connetics shall create and develop
promotional materials relating to the Product for distribution to independent
third parties. The Joint Marketing Team will establish the copy platform for all
promotional materials and will agree on tactical programs. Subject to the
restrictions on trademark usage set forth in Article 8, MGI may create and
develop promotional materials related to the Product using, and based on,
materials created by or for Connetics; provided, however, MGI will not, publish
or distribute any such promotional material (or other material) with respect to
the Product that the Joint Marketing Team has not approved. The Joint Marketing
Team will determine whether the expenses incurred by MGI in creating such
promotional materials shall be included in Marketing Expenses.
Section 4.7. Exchange of Information. During the Term of and subject to any
other provision of this Agreement, each party will provide the other with any
information or summaries of information relevant to the promotion of the Product
(including but not limited to market research data, information concerning
competitive products, physician communications, and the like) within
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a reasonable time after such information becomes known to the party. Such
information shall be considered confidential or proprietary and therefore
subject to Section 11.1.
Section 4.8. Training Materials. Connetics shall train the MGI Sales Force
as required to detail and promote the Product in the Territory according to the
terms of this Agreement through existing in-house staff and field clinical
liaisons, including a training program commencing on April 11, 1999 in
Minneapolis, Minnesota, or at such other time and place to be agreed by the
parties. Except as otherwise provided herein, each party shall bear the expenses
associated with training its Sales Force. Connetics shall provide MGI with
initial Product training materials, as well as any Product training materials
developed subsequent to the initial Product training materials, which MGI shall
reproduce and distribute to its Sales Force at MGI's own expense. The Joint
Marketing Team shall develop programs to monitor, test and otherwise ensure that
the Connetics and MGI Sales Forces are sufficiently knowledgeable about the
Product and other information contained in Connetics' training materials.
Section 4.9. Sampling.
(a) In developing the Promotion Plan to achieve the objectives of this
Agreement, the Joint Marketing Team will consider whether and to what
extent it is necessary to distribute the Product to health care
personnel and the trade as trade packs or samples (e.g., starter or
trial kits). If the Joint Marketing Team determines that sales of the
Product would be enhanced by distributing such samples, Connetics
shall provide to MGI a percentage of available samples of the Product,
to be distributed by the MGI Sales Force, in accordance with the
Promotion Plan.
(b) MGI shall keep records as required by the FDA or any other
governmental authority with regard to all samples distributed by its
Sales Force.
ARTICLE 5
CONSIDERATION
Section 5.1. Consideration to MGI. Connetics shall book all sales of
Product in the Territory and, for so long as MGI is conducting detailing and
promotion activities pursuant to and in accordance with this Agreement, shall
pay to MGI *** percent (***%) of the Product Contribution, calculated on a
quarterly basis.
Section 5.2. Payment Terms.
(a) Within forty-five (45) days after the close of each fiscal quarter
during the Term of this Agreement (or, if later, fifteen (15) days
after Connetics receives the report from the reporting service for
that quarter) Connetics shall submit to MGI an accounting of the
Product Contribution in the Territory, including an itemization of all
elements of Product Contribution for such fiscal quarter and
calculating the compensation due MGI for such fiscal Quarter under
Section 5.1. At the time of submitting each accounting, Connetics
shall submit to MGI all payments due thereunder net of any credits of
amounts owed by MGI to Connetics.
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24-2 of the Securities
Exchange Act of 1934.
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(b) Within thirty (30) days of December 31, 1999, Connetics shall pay to
MGI a one time adjustment for Launch Stocking which payment shall be
the amount calculated according to the following formula: ***
Section 5.3. Audit Rights. During the term of this Agreement and for three
(3) years thereafter Connetics shall keep full and accurate financial and
accounting records in accordance with U.S. generally accepted accounting
principles and shall maintain such records in sufficient detail to permit
calculation of Net Sales, Cost of Goods and Product Contribution. MGI shall have
the right to nominate an independent firm of certified public accountants
reasonably acceptable to the Connetics to verify the records of Connetics and
the calculation of the payment due under Section 5.1 of this Agreement. Such
verification shall be conducted during normal business hours, and MGI shall bear
the fees and expenses of the accountants performing such verification. The
accountants appointed pursuant to this Section shall not be authorized to
disclose to MGI any information other than the accuracy or inaccuracy of the
item(s) to be verified. If the audit reveals that Connetics has over-reported
for the period of the audit, MGI shall immediately remit to Connetics any refund
due and interest calculated from the payment date on such overpayment at the
then-current prime rate. If the audit reveals that Connetics has under-reported
for the period of the audit, Connetics shall immediately remit to MGI any
balance owing and interest calculated from the date on such overdue amount at
the then-current prime rate. In addition, if the audit reveals that Connetics
under-reported and underpaid by more than 10%, Connetics shall be responsible
for paying the accountants' fees in connection with the audit.
ARTICLE 6
MANUFACTURING AND DISTRIBUTION
Section 6.1. Supply of Product. Connetics shall have the sole
responsibility, financially and otherwise, for manufacturing the Product, either
directly or through one or more contractors (including Affiliates of Connetics),
receiving and processing orders, distributing the Product to customers, and
handling Product inventory and receivables. Connetics shall bear all costs of
such activities, including without limitation all third party royalties
(including all payments due to Soltec Research Pty, Ltd.) and cost of goods.
Connetics shall use its best efforts to insure, but cannot guarantee, that
sufficient stock of the Product will be available in its inventory to promptly
fill orders from the trade based on reasonable, non-binding forecasts to be
provided by the Joint Marketing Team at the beginning of each fiscal quarter
during the Term of this Agreement for that fiscal quarter and the following
three (3) fiscal quarters.
Section 6.2. Monthly Reporting. In order to aid the Joint Marketing Team to
provide the forecast to be provided under Section 6.1, Connetics within thirty
(30) days after the end of a given calendar month (or within a reasonable time
after it becomes available) will provide the Coordinators with a written report
for that calendar month. This report will set forth, if available, the quantity
and dollar amounts of all elements of Product Contribution for the given month,
including any deductions taken and corresponding comparisons for the previous
year.
*** Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
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Section 6.3. Orders. If, for any reason, MGI receives orders for the
Product, MGI shall forward such orders to Connetics as soon as practicable.
Section 6.4. Failure to Supply Product. MGI understands and acknowledges
that only one (1) contractor (a party not an Affiliate of Connetics) is
currently approved by the FDA to manufacture the Product. If Connetics is at any
time unable to supply the Product to be sold by Connetics under this Agreement,
which failure may be due to the failure of a contract manufacturer to meet its
obligations to supply Product to Connetics, such failure will be treated as a
force majeure condition under Section 11.6 and MGI's obligations hereunder to
promote and detail the Product shall be suspended for the period of such
inability to supply. In the event that Connetics is unable to cure such
inability to supply within a period of six (6) months, MGI may immediately
terminate this Agreement for Good Cause, and Connetics shall reimburse MGI for
all Marketing Expenses incurred by MGI through the date of termination of this
Agreement.
ARTICLE 7
REGULATORY AFFAIRS AND MEDICAL INQUIRY
Section 7.1. FDA Approval. Connetics will maintain ownership of the NDA and
file any supplements to it. Connetics shall file, own and maintain in its name
any and all regulatory and formulary submissions pertaining to the Product and
any and all regulatory and formulary approvals that may be issued with respect
to the Product.
Section 7.2. Complaint Handling. Connetics shall have the sole right and
responsibility, and shall bear all costs related thereto, to take such actions
as may be necessary, in accordance with accepted business practices and legal
requirements, to obtain and maintain the authorization and/or ability to market
the Product in the Territory, including without limitation the following:
(a) responding to customer and medical complaints relating to the quality,
strength or purity of the Product, and MGI agrees that it shall
promptly refer any such complaints that it receives to Connetics;
(b) handling all returns of the Product (if the Product is returned to MGI
it shall be shipped to Connetics at a location to be provided by
Connetics, with any reasonable or authorized shipping or other
documented out-of-pocket costs to be paid by Connetics), and MGI and
Connetics shall each advise their customers generally that they should
make returns to Connetics; and
(c) handling all recalls of the Product (at Connetics' request, MGI will
assist Connetics in receiving the recalled Product, and any documented
out-of-pocket costs incurred by MGI with respect to participating in
such recall shall be reimbursed by Connetics).
Section 7.3. Adverse Event Reporting Requirements. Connetics shall be
solely responsible for submitting Adverse Event Reports to the FDA, except to
the extent (if at all) that MGI may be required by law to make such reports
itself. During the Term of this Agreement, MGI shall promptly forward to
Connetics at the address set forth in Section 11.3 any reports MGI
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receives of adverse events (distinguished as serious and non-serious by FDA
regulations), concerning side effects, injury, toxicity or sensitivity reaction
including unexpected increased incidence and severity associated with commercial
or clinical uses, studies, investigations or test with the Product (animal or
human), throughout the world, whether or not determined to be attributable to
the Product. For purposes of this Section 7.3, "promptly" means as soon as
practicable, but in no event later than (a) five business days for serious
adverse events after receipt of complete information regarding such events, or
(b) thirty calendar days for non-serious adverse events after receipt of
complete information regarding such events. Connetics shall transmit adverse
event reports to MGI on a periodic basis, but no less often than once every six
(6) months; provided, however, that Connetics shall promptly notify MGI of any
adverse event report requiring the cessation or substantial alteration of
detailing activities by the MGI Sales Force. MGI shall hold all such
communications in the strictest confidence and subject to the terms of Section
11.1 of this Agreement.
Section 7.4. Communications with Government Agencies. Connetics shall have
the sole right and responsibility and shall bear all costs related to
communications with any government agencies to satisfy their requirements
regarding the authorization and/or continued authorization to market the Product
in commercial quantities in the Territory. MGI shall promptly notify Connetics
of any inquiry or other communication that it receives from the FDA concerning
the Product. Connetics shall be primarily responsible for all communications
with the FDA (and state equivalent agencies) concerning the Product, including
but not limited to reporting adverse events and responding to any inquiries
concerning advertising, detailing or promotional materials. MGI, however, shall
be able to communicate with the any such governmental agency regarding the
Product if:
(a) such communication is necessary to comply with the terms of this
Agreement or the requirements of any law, governmental order or
regulation; or
(b) MGI, if practical, made a request of such agency to communicate with
Connetics instead, and such agency refused such request; provided,
however, that before making any communication under this Section 7.4,
MGI shall, if practical, give Connetics notice as soon as possible of
MGI's intention to make such communications, and Connetics shall, if
practical, be permitted to accompany MGI, take part in any such
communications and receive copies of all such communications.
Section 7.5. Medical Inquiries. MGI shall refer to Connetics all medical
questions or inquiries relating to the Product directed to MGI or MGI's Sales
Force, except that Adverse Event Reports shall be handled as set forth in
Section 7.3. MGI's medical inquiry personnel shall instruct individuals who
contact MGI or its Sales Force to direct medical inquiries directly to
Connetics.
Section 7.6. Post-Market Studies. Connetics shall be responsible for, and
bear the cost of, conducting any clinical study required by the FDA to maintain
the NDA for the Product or establish any new indication or dosage form of the
Product. MGI shall not conduct any clinical study nor incur any expenses in
anticipation of conducting any such study. The cost of any such study conducted
by Connetics shall not be considered Marketing Expenses, or advertising,
detailing or promotional expenses for purposes of this Agreement. Conversely,
the cost of clinical evaluation
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programs and marketing support trials meeting the requirement of Section 4.2
shall be considered Marketing Expenses for purposes of this Agreement.
ARTICLE 8
INTELLECTUAL PROPERTY
Section 8.1. Trademark License. Connetics hereby grants to MGI a
non-exclusive, royalty-free license to use the following trademarks for the
advertising, promotion, marketing, distribution and sale of Product in the
Territory:
Connetics name
Luxiq(TM)
LUXIQ(TM)
and its Foam Dollop icon, stylized name, and c-globe design, all as set
forth on Exhibit A
In using the trademarks in materials it generates, MGI shall display the marks
in a style or size of print distinguishing the mark from any accompanying
wording or text.
Section 8.2. Marking. During the Term of this Agreement and if permitted by
FDA regulations, all advertising, detailing and promotional materials related to
the Product may include both Connetics' name and logo and MGI's name and logo in
a manner approved by the Joint Marketing Team. Neither party will acquire any
rights in the other party's name or logo on account of its use in advertising,
detailing and promotional materials for the Product. Nothing in this Agreement
shall be construed to give either party any rights to use the other party's name
or logo outside of the Territory or other than in accordance with this
Agreement. Neither party shall distribute information that bears the name of the
other party unless the information meets the requirements of this Section 8.2,
or the other party has consented in writing to the use of its name on the
information, except that MGI shall be permitted to distribute and use all
materials in any form provided or previously approved by Connetics or the Joint
Marketing Committee.
Section 8.3. Ownership. All proprietary features constituting the trade
dress of the Product, including but not limited to the shape and color of the
can, cap, label design, the size and configuration of the units in cartons, etc.
shall belong exclusively to Connetics. Except as expressly set forth in this
Section 8.3, Connetics shall own all copyrights to all advertising, detailing,
promotional and training materials as well as all other written materials,
audiotapes, videotapes, or other copyrightable materials that are created during
the Term of this Agreement in connection with the advertising, detailing,
marketing and promotion of the Product, and MGI will and does waive all rights
in and to any and all such materials. To the extent necessary, Connetics will
contract with, and make all arrangements with, any and all third parties for the
creation of any such materials. Connetics shall, and does hereby, grant to MGI a
royalty-free license to use and reproduce such materials solely in conjunction
with its performance of services pursuant to this Agreement, which license MGI
shall not assign or transfer. Any copyrights on promotional and training
materials made
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by or on behalf of MGI and funded solely by MGI shall be owned by MGI. MGI
hereby grants to Connetics a perpetual, non-exclusive royalty-free license under
such copyrights to reproduce, use and sell such promotional and training
materials.
ARTICLE 9
REPRESENTATIONS AND WARRANTIES
Section 9.1. Representations and Warranties of Connetics. Connetics hereby
represents and warrants to MGI as follows:
(a) Connetics has the corporate power and authority to execute and deliver
this Agreement and to perform its obligations thereunder, and the
execution, delivery and performance of this Agreement have been duly
authorized by Connetics.
(b) Connetics has the right to grant to MGI the rights and licenses
granted under this Agreement.
(c) To the best of Connetics' knowledge, there are no pending or
threatened legal claims relating to the Product, and there is no
infringement or threatened infringement of a third party's patent
rights with respect to any use or sale of Product in the Territory.
Section 9.2. Representation and Warranty of MGI. MGI hereby represents and
warrants to Connetics that MGI has the corporate power and authority to execute
and deliver this Agreement and to perform its obligations thereunder, and the
execution, delivery and performance of the Agreement have been duly authorized
by MGI.
Section 9.3. Disclaimer of Warranties. TO THE MAXIMUM EXTENT PERMITTED BY
APPLICABLE LAW, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT,
CONNETICS MAKES NO WARRANTY WITH RESPECT TO ANY TECHNOLOGY, GOODS, SERVICES,
RIGHTS, OR OTHER SUBJECT MATTER OF THIS AGREEMENT AND HEREBY DISCLAIMS ALL
WARRANTIES, CONDITIONS OR REPRESENTATIONS OF ANY KIND, EXPRESS OR IMPLIED,
INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF PERFORMANCE,
MERCHANTABILITY, SATISFACTORY QUALITY, FITNESS FOR A PARTICULAR PURPOSE OR
NON-INFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS.
Section 9.4. Disclaimer of MGI. Connetics acknowledges that MGI disclaims
any warranty, representation or guarantee that MGI's promotion and detailing of
the Product as permitted hereunder will generate any particular level of actual
prescriptions, or any increase in sales of the Products, as a result of Calls
made to MGI Physicians.
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ARTICLE 10
INDEMNIFICATION
Section 10.1. Connetics Indemnity.
(a) Connetics agrees to indemnify and hold harmless MGI, its Affiliates,
and their respective officers, directors, employees and agents from
and against any and all damages, claims, liabilities, demands,
charges, suits, penalties, costs, expenses and obligations to third
parties incurred or arising in connection with (i) the manufacture,
advertising, promotion, sale, import or use of the Product, including
without limitation, product liability and intellectual property
infringement claims, or (ii) breach of any warranty, representation or
covenant of Connetics contained in this Agreement; provided, however,
Connetics' obligations to indemnify MGI in any action related to a
claim that the Product infringes the intellectual property of a third
party shall be limited to the amount of actual damages awarded to such
third party by a court or arbitrator, as the case may be, and to the
reasonable costs and expenses (including reasonable attorneys' fees)
of MGI, its Affiliates, and their respective officers, directors,
employees and agents in connection with such action. Connetics shall
have no indemnification obligation under this Section 10.1(a) for any
claim(s) arising from: (a) any modifications to the Product by MGI
where liability would not have occurred but for such modifications; or
(b) the negligence or wrongful act of MGI, its officers, agents or
employees, including without limitation (i) the detailing and/or
promotion of the Product in a manner that is inconsistent with the FDA
approval pertaining to the Product, or (ii) any liability arising out
of or relating to any representation or statement regarding the
Products which is inconsistent with the specifications or product
label claims.
(b) MGI shall give Connetics prompt written notice of the receipt of any
claim or the commencement of any action, suit or proceeding for which
MGI may seek indemnification under Section 10.1(a) (individually or
collectively, referred to hereafter as an "Action"), and Connetics
shall assume the defense of the Action; provided that MGI complies
with any good faith request made by Connetics for assistance in such
defense; and provided further that:
(i) MGI shall have the right at any time to participate in any such
Action with counsel of its own choice at MGI's sole expense;
(ii) if MGI elects for Connetics to defend the Action, then MGI's
counsel may participate in all discussions, but shall not be
entitled to appear in any legal or judicial proceeding relating
to the Action;
(iii) if Connetics fails to assume the defense within a reasonable
time, MGI may assume such defense, and the reasonable fees and
expenses of MGI's attorneys will be covered by the indemnity
provided for in Section 10.1; and
(iv) if a conflict with respect to legal representation arises which
cannot be resolved, and MGI is not prepared to waive such
conflict, then MGI shall
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have the right to obtain separate legal counsel at Connetics'
expense; provided, however, Connetics shall have no obligation to
pay MGI's expenses in connection with MGI obtaining separate
legal counsel in any Action brought by Connetics against MGI or
any Action brought by MGI against Connetics.
Nothing in the foregoing discussion shall give either party the
right or authority to settle any Action on behalf of the other
party without the other party's written consent.
(c) Limitation of Liability. EXCEPT FOR (A) ANY LOSS, LIABILITY,
DAMAGE OR OBLIGATION ARISING OUT OF OR RELATING TO THE DISCLOSURE
OF CONFIDENTIAL INFORMATION PURSUANT TO SECTION 11.1 OR (B) THE
INDEMNITY OBLIGATIONS OF CONNETICS SET FORTH IN SECTION 10.1, OR
AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, IN NO EVENT
SHALL EITHER PARTY HAVE ANY LIABILITY TO THE OTHER PARTY OR ANY
OTHER THIRD PARTY FOR ANY LOST OPPORTUNITY OR PROFITS, COSTS OF
PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES, OR FOR ANY INDIRECT,
INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR SPECIAL DAMAGES ARISING
OUT OF THIS AGREEMENT, UNDER ANY CAUSE OF ACTION OR THEORY OF
LIABILITY (INCLUDING NEGLIGENCE), AND WHETHER OR NOT SUCH PARTY
TO THIS AGREEMENT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGE. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE
OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
Section 10.2. MGI Indemnity.
(a) MGI agrees to indemnify and hold harmless Connetics, its
Affiliates, and their respective officers, directors, employees
and agents from and against any and all damages, claims,
liabilities, demands, charges, suits, penalties, costs, expenses
and obligations to third parties arising from the negligence or
wrongful act of MGI, its officers, agents or employees, including
without limitation the detailing and/or promotion of the Product
in a manner that is inconsistent with the FDA approval pertaining
to the Product.
(b) Connetics shall give prompt written notice of the receipt of any
claim or the commencement of any action, suit or proceeding for
which Connetics may seek indemnification under Section 10.2(a),
and MGI shall assume the defense thereof; provided, however, that
Connetics shall be entitled to participate in any such action,
suit or proceeding with counsel of its own choice, but at its own
expense. If MGI fails to assume the defense within a reasonable
time, Connetics may assume such defense, and the reasonable fees
and expenses of its attorneys will be covered by the indemnity
provided for in Section 10.2. No such claim, action, suit or
proceeding shall be compromised or settled in any manner that
might adversely affect the interests of MGI without the prior
written consent of MGI.
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Section 10.3. Indemnity Disputes. In the event that both parties claim
indemnification for the same claim, action, suit or proceeding, the provisions
of Sections 10.1 and 10.2 shall apply, except that the cost of defense shall be
shared equally pending final resolution, at which time the party found to be
entitled to indemnification shall also be entitled to reimbursement for any
amount paid by it as defense costs, in addition to other amounts recoverable
under Sections 10.1 and 10.2, as the case may be.
ARTICLE 11
GENERAL TERMS AND CONDITIONS
Section 11.1. Confidentiality.
(a) In order to facilitate this Agreement it will be necessary for
the parties to exchange certain Proprietary Information. Each
party agrees to retain the Proprietary Information of the other
party in strict confidence and not to disclose or transfer the
Proprietary Information to any party or use the Proprietary
Information other than as authorized by the terms of this
Agreement or otherwise in writing by the discloser. The parties
acknowledge that such Proprietary Information can constitute
"inside information" for securities purposes and the
responsibility to refrain from any unauthorized disclosure,
trading or other such use. Each party represents to the other
that it maintains policies and procedures designed to prevent
unauthorized disclosure of its own Proprietary Information. All
employees of a party performing services under this Agreement
shall be subject to agreements prohibiting the disclosure of
Proprietary Information except on the terms permitted in this
Agreement.
(b) These obligations of confidentiality and non-use shall not apply
to Proprietary Information: (a) that was previously known to the
recipient as evidenced by recipient's written records, (b) that
is lawfully obtained by recipient from a source independent of
the disclosing party, (c) that is now or becomes public knowledge
other than by breach of this Agreement, or (d) that is legally
required to be disclosed under federal or state law, provided
that the party or its Affiliate required to make the disclosure
takes reasonable steps, consistent with protection it would seek
for its own confidential information, to prevent the Proprietary
Information from becoming public.
(c) Each party shall have the right to disclose the Proprietary
Information of the other to those of its Affiliates that need the
Proprietary Information for the purposes of this Agreement,
provided that each such Affiliate agrees to be bound to the other
party by the provisions of this Article 11 and the disclosing
party guarantees the performance under this Agreement of any such
Affiliate.
(d) These obligations of confidentiality and non-use shall survive
the expiration or termination of this Agreement.
Section 11.2. Arbitration and Applicable Law. Any dispute, controversy or
claim arising out of or relating to this Agreement, or the breach or termination
of this Agreement, shall be settled
Page 16
<PAGE>
by arbitration in accordance with the rules of the American Arbitration
Association then in effect. Judgment upon the award rendered by the arbitrators
may be entered in any court having jurisdiction. In any arbitration pursuant to
this Section 11.2, the award shall be rendered by a majority of the members of a
board of arbitration consisting of three members, one being appointed by each
party and the third being appointed by mutual agreement of the two arbitrators
appointed by the parties. The place of arbitration shall be Chicago, Illinois.
The arbitrators shall apply the law of the State of New York (regardless of that
jurisdiction's or any other jurisdiction's choice of law principles).
Section 11.3. Notices. Any notice required or permitted by the terms of
this Agreement shall be given by overnight carrier, or by registered mail,
prepaid and properly addressed, or delivered by hand,
If to Connetics, to:
3400 West Bayshore Road
Palo Alto, California 94303
Attn.: President and Chief Executive Officer
And if to MGI, to:
Suite 300 E, Opus Center
9900 Bren Road East
Minnetonka, MN 55343-9667
Attn.: President and Chief Executive Officer
or at such other address as either party may designate by notice pursuant to
this Section. Any such notice shall be deemed to have been given when received.
Section 11.4. Term and Termination.
(a) Term. The term of this Agreement shall begin on the Effective
Date and shall continue, unless terminated sooner in accordance
with this Agreement, until thirty (30) months after the Effective
Date. This Agreement may be renewed upon the mutual agreement of
the parties.
(b) Termination for Good Cause. Either party may terminate this
Agreement for Good Cause effective at any time after providing
sixty (60) days written notice and an opportunity to cure during
such sixty (60) day period; provided, however, that either party
shall have the right to terminate this Agreement immediately upon
written notice to the other party if an inability to supply (as
described in Section 6.4) has continued for six (6) months. If a
cure is effected, the notice with respect to such Good Cause
shall be null and void.
(c) Termination for Other Reasons. Either party shall have the right
to terminate this Agreement in the event of a large scale recall
or withdrawal of the Product from the Territory resulting from a
significant safety risk inherent in the Product and not due to
tampering, a remediable manufacturing problem, or other defect
that can be cured
Page 17
<PAGE>
with respect to Product manufactured after such risk is
discovered. Termination of this Agreement shall be without
prejudice to (i) any remedies that any party may then or
thereafter have under this Agreement or at law; (ii) a party's
right to receive any payment accrued under the Agreement prior to
the termination date but which became payable thereafter; or
(iii) either party's right to obtain performance of any
obligation provided for in this Agreement that survives
termination by its terms or by a fair interpretation of this
Agreement.
(d) Effect of Expiration or Termination. Unless otherwise explicitly
stated in this Agreement, MGI shall not be entitled to
compensation for sales of Product after termination of this
Agreement. If either party terminates this Agreement for Good
Cause, Connetics shall pay to MGI all of the compensation due MGI
under Section 5.1 (up to and including any portion of the
calendar month in which effective termination occurs, including
sums that have accrued but have not yet been paid as of the
effective date of termination). If MGI terminates this Agreement
for Good Cause, or upon the natural expiration of this Agreement
pursuant to Section 11.4(a) including any renewal, Connetics (or
its successor) shall make payments to MGI of (i) all of the
compensation due MGI under Section 5.1 (up to and including any
portion of the calendar month in which effective termination
occurs, including sums that have accrued but have not yet been
paid as of the effective date of termination), and (ii) Fifty
percent (50%) of the amounts due to MGI pursuant to Section 5.1
for sales made thereafter in each quarter (or portion thereof)
until one year from the date on which this Agreement terminates.
Section 11.5. Announcements/Publicity. Subject to the requirements of law
and/or Nasdaq, any announcements or publicity to be made or given in respect of
this Agreement by either party shall be subject to the prior approval of the
other party (such approval not to be unreasonably withheld or delayed) where
such announcement or publicity refers to such other party.
Section 11.6. Force Majeure. Neither party shall be liable for failure to
perform any duty or obligation that party may have under this Agreement where
such failure has been occasioned by any force majeure which shall mean and
include government regulation, fire, flood, war, public disaster, strike or
labor dispute, inevitable accident, national emergency, or any other cause
outside the reasonable control of the party having the duty so to perform. Such
failure to perform shall only be excusable under the provisions of this Section
for so long as, and to the extent that, the same is rendered impossible by force
majeure. The party claiming that force majeure has occurred shall send to the
other party within five (5) working days of the first occurrence of force
majeure full particulars including the date of first occurrence and of the cause
or event giving rise to it. Notwithstanding the relief granted to any party by
this Section, the relevant party shall nevertheless use its reasonable endeavors
in any situation where it has invoked this Section to perform its relevant
obligations as soon as possible after force majeure has ceased. If a force
majeure event lasts longer than six (6) months, the unaffected party shall have,
in addition to the right to terminate this Agreement for Good Cause under
Section 11.4, the optional right to continue the Agreement in full force and
effect without modification.
Section 11.7. Assignment. Unless otherwise agreed this Agreement may not be
assigned by either of the parties except in the case of a merger or sale of all
the assets of the business related to this Agreement.
Page 18
<PAGE>
Section 11.8. Survival. The covenants and agreements set forth in Section
4.5(b) and Articles 5 (to the extent specified in Section 11.4(d)), 9, 10 and 11
shall survive any termination or expiration of this Agreement and remain in full
force and effect regardless of the cause of termination.
Section 11.9. Nonwaiver of Rights. No failure or delay on the part of a
party in exercising any right hereunder will operate as a waiver of, or impair,
any such right. No single or partial exercise of any such right will preclude
any other or further exercise thereof or the exercise of any other right. No
waiver of any such right will be deemed a waiver of any other right hereunder.
Section 11.10. Headings. Section headings contained in this Agreement are
included for convenience only and form no part of the agreement between the
parties.
Section 11.11. Validity of Provisions and Severability. If any provision of
this Agreement is or becomes or is deemed to be invalid, illegal, or
unenforceable in any jurisdiction: such provision will be deemed amended to
conform to applicable laws of such jurisdiction so as to be valid and
enforceable, or, if it cannot be so amended without materially altering the
intention of the parties, it will be stricken; the validity, legality and
enforceability of such provision will not in any way be affected or impaired
thereby in any other jurisdiction; and the remainder of this Agreement will
remain in full force and effect.
Section 11.12. No Hire. During the term of this Agreement and for six (6)
months thereafter, neither party nor its Affiliates shall solicit nor hire any
individual in the other party's Sales Force without such party's prior written
consent which consent such party may grant in its sole discretion.
Section 11.13. Entire Agreement. This Agreement sets forth the entire
agreement of the parties with respect to the subject matter hereof. This
Agreement may not be modified except by a writing signed by the parties'
authorized representatives.
[Remainder of this page is intentionally left blank]
Page 19
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the
Effective Date.
Connetics Corporation, MGI Pharma, Inc.
a Delaware corporation a Minnesota corporation
By /s/ T. Wiggans By /s/ C. N. Blitzer
----------------------------------- ---------------------------------
Thomas G. Wiggans Charles N. Blitzer
President & Chief Executive Officer President & Chief Executive Officer
Page 20
<PAGE>
Exhibit A
Foam Dollop icon, stylized logo, and c-globe design
Page 21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING BALANCE SHEET OF MGI PHARMA, INC. AS OF MARCH 31, 1999, AND THE
RELATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,558,684
<SECURITIES> 11,980,351
<RECEIVABLES> 2,276,202
<ALLOWANCES> 121,091
<INVENTORY> 1,157,245
<CURRENT-ASSETS> 20,311,502
<PP&E> 488,476
<DEPRECIATION> 1,116,204
<TOTAL-ASSETS> 21,334,559
<CURRENT-LIABILITIES> 3,276,512
<BONDS> 0
0
0
<COMMON> 18,058,047
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 21,334,559
<SALES> 4,502,943
<TOTAL-REVENUES> 5,694,182
<CGS> 307,878
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,460,905
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 751,903
<INCOME-TAX> 68,938
<INCOME-CONTINUING> 682,965
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 682,965
<EPS-PRIMARY> .05
<EPS-DILUTED> .04
</TABLE>
<PAGE>
Exhibit 99
MGI PHARMA, INC.
Report on Form 10-Q
March 31, 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 $682,965 for the first quarter of 1999,
and $414,287 for the year of 1998, we have had net losses in previous years. At
March 31, 1999, we had an accumulated deficit of approximately $73.1 million.
Our profitability in the future will depend on many factors, including:
o our ability to increase sales of Salagen 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 achieve annual profitability in 1999 or sustain profitability thereafter.
<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 quarter of 1999, our U.S. sales of Salagen Tablets were
$4.3 million, representing 96 percent of our total product sales and 77 percent
of our total revenue. In 1998, our 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. We anticipate that sales of our other product, Didronel I.V. Infusion,
will continue to represent a minor portion of total product sales.
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.
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
<PAGE>
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 from foreign partners was $.8 million or 13 percent of total
revenues in the first quarter of 1999 and $2.3 million or 13 percent of 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, 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:
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.
<PAGE>
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 identified or
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.
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 additional preclinical and 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
<PAGE>
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 preclinical or clinical testing.
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 or any competing protocol,
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.
<PAGE>
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. We are aware of other pharmaceutical companies which
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, 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 regimes, and thereby reduce the need
for one or more of our 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 three patents covering (1) acylfulvene analogs,
including MGI 114 and use of MGI 114, as an
<PAGE>
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 continuing demand for our current products,
o the introduction of new products,
o the stream 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
<PAGE>
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 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 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.
<PAGE>
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 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
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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,
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
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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.
The total estimated cost for resolving our Year 2000 issues is approximately
$740,000, of which approximately $580,000 has been spent through March 31, 1999.
The total cost estimate includes the cost of replacing non-compliant systems as
a remediation cost in cases where we have accelerated plans to replace such
systems. Estimates of Year 2000 costs are based on numerous assumptions. There
is a risk that the estimates may not be correct and that actual costs may be
materially greater than anticipated.
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
