<PAGE>
As filed with the Securities and Exchange Commission on March 24, 2000
Registration No. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
MGI PHARMA, INC.
(Exact name of registrant as specified in its charter)
----------------
Minnesota 2834 41-1364647
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification No.)
of incorporation or Classification Code)
organization)
6300 West Old Shakopee Road, Suite 110
Bloomington, Minnesota 55438
(952) 346-4700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Charles N. Blitzer
Chief Executive Officer
MGI PHARMA, INC.
6300 West Old Shakopee Road, Suite 110
Bloomington, Minnesota 55438
(952) 346-4700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Timothy S. Hearn, Esq. David R. King, Esq.
Dorsey & Whitney LLP Michael J. Shim, Esq.
220 South Sixth Street Morgan, Lewis & Bockius LLP
Minneapolis, Minnesota 55402 1701 Market Street
(612) 340-2600 Philadelphia, Pennsylvania 19103
Facsimile: (612) 340-8827 (215) 963-5000
Facsimile: (215) 963-5299
---------------
Approximate date of commencement of proposed sale of securities to the
public: As soon as practicable after the effective date of this Registration
Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box: [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earliest effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Aggregate Amount of
Securities to be Registered Registered(1) Price(2) Offering Price(2) Registration Fee
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value.. 2,875,000 $29.375 $84,453,125 $22,296
- ------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Includes 375,000 shares that the underwriters have the option to purchase
to cover any over-allotments.
(2) Based on the average of the high and low sales prices for the common stock
on March 17, 2000.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the Securities and Exchange Commission +
+declares our registration statement effective. This prospectus is not an +
+offer to sell these securities and is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion, dated March 24, 2000
2,500,000 Shares
MGI PHARMA, INC.
Common Stock
[LOGO OF MGI PHARMA]
$ per share
------------------------------------------------------
. MGI PHARMA, INC. is . Closing price on March 23, 2000: $43.69 per
offering 2,500,000 share.
shares.
. Trading symbol:
Nasdaq National
Market--MOGN
----------
This investment involves risk. See "Risk Factors" beginning on page 8.
------------------------------------------------------
------------------------------------------------------
<TABLE>
<CAPTION>
Per Share Total
--------- ----------
<S> <C> <C>
Public offering price..................................... $ $
Underwriting discount..................................... $ $
Proceeds to MGI PHARMA.................................... $ $
</TABLE>
------------------------------------------------------
------------------------------------------------------
The underwriters have a 30-day option to purchase up to 375,000 additional
shares of common stock from us to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved of anyone's investment in these securities or
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
U.S. Bancorp Piper Jaffray
Banc of America Securities LLC
CIBC World Markets
The date of this prospectus is , 2000.
<PAGE>
[LOGO]
Product Pipeline
[Bar chart showing the stage of development of each of our commercialized
products and products under development]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary............................................................ 4
Risk Factors....................................................... 8
Forward-Looking Statements......................................... 19
Use of Proceeds.................................................... 19
Price Range of Common Stock........................................ 20
Dividend Policy.................................................... 20
Capitalization..................................................... 21
Selected Financial Data............................................ 22
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 23
Business........................................................... 28
Management......................................................... 49
Principal Stockholders............................................. 52
Description of Capital Stock....................................... 53
Underwriting....................................................... 56
Legal Matters...................................................... 57
Experts............................................................ 57
Where You Can Find More Information................................ 57
Index to Financial Statements...................................... F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, these securities in any state where the offer or sale
is not permitted. The information in this prospectus is complete and accurate
as of the date on the front cover, but the information may have changed since
that date.
3
<PAGE>
SUMMARY
The items in the following summary are described in more detail later in this
prospectus. This summary provides an overview of selected information and does
not contain all the information you should consider. Therefore, you should also
read the more detailed information set out in this prospectus, the financial
statements and the other information incorporated by reference into this
prospectus. Unless otherwise specified, all information in this prospectus
assumes no exercise of the underwriters' over-allotment option. References in
this prospectus to "MGI," "MGI PHARMA," "we," "us" and "our" refer to MGI
PHARMA, INC.
Business of MGI PHARMA
MGI PHARMA, INC. is a pharmaceutical company focused on the acquisition,
development and commercialization of drugs primarily for the treatment of
cancer and rheumatology disorders. We currently market and promote five
products through our 41-person specialty sales force. In 1999, we generated
revenues from product sales of approximately $18.6 million. We are also
developing irofulven as our lead product candidate for the treatment of cancer.
Irofulven is the first product candidate being developed from our proprietary
family of naturally derived compounds called acylfulvenes. Irofulven is
currently being tested in eight Phase 2 and four Phase 1 clinical trials for
the treatment of various cancers. Interim results from four Phase 2 trials of
irofulven have demonstrated that irofulven is well-tolerated for a
chemotherapeutic and potentially effective as an anti-tumor agent in treating
ovarian, pancreatic and prostate cancers. Based on interim results from ongoing
Phase 2 clinical trials of irofulven, we intend to initiate a pivotal Phase 3
clinical trial program for irofulven by the end of 2000.
Our primary commercial product, Salagen(R) Tablets, accounted for approximately
97 percent of our product sales in 1999. We market Salagen Tablets in the
United States to oncologists as a treatment for the symptoms of radiation-
induced xerostomia, or chronic dry mouth, in head and neck cancer patients. We
also market Salagen Tablets in the United States as a treatment for the
symptoms of dry mouth associated with Sjogren's syndrome, an autoimmune disease
that damages the body's moisture-producing glands. Salagen Tablets are marketed
outside the United States through our alliances with international
pharmaceutical companies and are approved for commercial sale in 21 countries.
We also co-promote three additional products to rheumatologists in the United
States.
To date, over 300 cancer patients have been treated in clinical trials with
irofulven. Based on results from our ongoing clinical trials and preclinical
studies, we believe that irofulven:
. is potentially effective as an anti-tumor agent in treating a broad
range of cancers;
. has a unique mechanism of action that may make it effective in treating
refractory cancers, or cancers that are unresponsive to existing cancer
therapies;
. has demonstrated activity against tumors that are known to be resistant
to other cancer therapies; and
. has a side effect profile that makes it potentially well-suited for use
in combination with existing cancer therapies.
We are conducting Phase 2 clinical trials of irofulven for the treatment of
ovarian, pancreatic and prostate cancers.
Irofulven for ovarian cancer
We are currently studying irofulven as a treatment for refractory ovarian
cancer in a 30 patient, Phase 2 clinical trial. Ovarian cancer is the leading
cause of gynecological cancer deaths among American women. The American Cancer
Society, or ACS, estimates that approximately 23,100 new cases of ovarian
cancer will be diagnosed and 14,000 women will die from the disease in the
United States in 2000. Worldwide, over 166,000 new cases of ovarian cancer and
101,000 deaths are estimated to occur annually. To qualify for this clinical
trial, patients must have had no tumor response during or following treatment
with another drug or combination
4
<PAGE>
of drugs or have had regrowth of their tumor within six months of treatment.
Interim response results from this Phase 2 trial include data from 16 evaluable
patients. Of these 16 patients:
. one patient experienced a confirmed partial response, or tumor shrinkage
greater than 50 percent;
. one patient experienced a partial response that was observed in only the
first of two measurements required for a confirmed partial response; and
. one patient experienced stable disease through four cycles of treatment.
The National Cancer Institute is also sponsoring a separate Phase 2 trial of
irofulven in ovarian cancer patients. Interim response results from this Phase
2 trial include data from eight evaluable patients. Of these eight patients:
. three patients, or 37.5 percent, experienced a partial response; and
. one patient experienced a minor response, or tumor shrinkage less than
50 percent.
We believe the interim response results from these Phase 2 clinical trials
demonstrate that irofulven is potentially effective in the treatment of
refractory ovarian cancer patients for whom few treatment options remain.
Irofulven for pancreatic cancer
We are currently studying irofulven as a treatment for advanced pancreatic
cancer in a 51 patient, Phase 2 clinical trial. Pancreatic cancer is the fifth
most common cause of cancer-related death in the United States. The ACS
estimates that 28,300 new cases of pancreatic cancer are diagnosed in the
United States each year, out of over 170,000 new cases worldwide. The death
rates for pancreatic cancer are virtually equal to the incidence rates. To
qualify for this clinical trial, patients must be refractory to gemcitabine, a
common first-line chemotherapeutic treatment for pancreatic cancer patients.
Once these patients become refractory to gemcitabine, they have few remaining
treatment options and generally survive less than three months.
To date, six of the 51 patients enrolled in our ongoing Phase 2 clinical trial
have achieved the primary endpoint of six-month survival. Furthermore, one
patient experienced a complete response, or disappearance of all tumor tissue,
that lasted over four months before the appearance of new tumor growth. We
believe these interim response results demonstrate that irofulven is
potentially effective in the treatment of advanced pancreatic cancer in
patients refractory to treatment with gemcitabine.
Irofulven for prostate cancer
We are currently studying irofulven as a treatment for hormone-refractory
prostate cancer in a 42 patient, Phase 2 clinical trial. Prostate cancer is the
most commonly diagnosed malignancy and the second leading cause of cancer death
among men in the United States. The ACS estimates that approximately 180,400
new cases of prostate cancer will occur in the United States during 2000.
Furthermore, the ACS estimates that 31,900 men die annually from prostate
cancer in the United States, out of over 165,000 prostate cancer-related deaths
worldwide. To qualify for this clinical trial, patients must no longer respond
to hormone-based therapies, leaving them with few second-line treatment
options. Currently approved cancer therapies are only effective in treating the
symptoms and slowing the progression of advanced prostate cancer. Interim
response results from our Phase 2 trial demonstrated that 25 of 31, or 81
percent, of the evaluable patients experienced stable or decreasing prostate
specific antigen levels, a blood marker used to measure the progression of
prostate cancer.
Other product opportunities
We are studying the treatment of solid tumors with irofulven in combination
with existing chemotherapeutic agents. Additionally, we are developing other
acylfulvene analogs in preclinical studies. We also intend to expand our
product portfolio through the acquisition of mid to late-stage product
candidates and approved products for the sale in the United States through our
specialty sales force.
5
<PAGE>
Office Location
Our principal executive offices are located at 6300 West Old Shakopee Road,
Suite 110, Bloomington, Minnesota 55438 and our telephone number is (952) 346-
4700.
The Offering
Common stock offered................ 2,500,000 shares
Common stock outstanding after the 17,881,092 shares
offering............................
Offering price...................... $ per share
Use of proceeds..................... We intend to use the net proceeds of this
offering to fund research and
development, product commercialization,
potential product acquisitions, product
development opportunities, working
capital and other general corporate
purposes. See the discussion under the
caption "Use of Proceeds."
Nasdaq National Market symbol....... MOGN
The number of shares of our common stock outstanding after the offering does
not take into account, as of March 14, 2000:
. 2,193,840 shares of common stock issuable upon exercise of outstanding
stock options at a weighted average exercise price of $9.74 per share;
and
. 375,000 shares of common stock issuable upon the exercise of the
underwriters' over-allotment option.
Corporate Information
We were incorporated under the name Molecular Genetics, Inc. in Minnesota in
November 1979. We have trademark protection on Salagen(R), MGI(R), MGI
PHARMA(R) and our logo. This prospectus also includes trade names and marks of
other companies.
6
<PAGE>
Summary Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Sales............................. $ 4,607 $ 6,460 $ 9,345 $12,945 $18,643
Promotion......................... -- -- -- 756 1,088
Licensing......................... 7,758 2,335 3,275 3,342 4,955
Interest and other................ 958 950 876 806 966
------- ------- ------- ------- -------
13,323 9,745 13,496 17,849 25,652
Costs and expenses:
Cost of sales..................... 772 678 768 939 1,209
Selling, general and
administrative................... 7,859 7,659 9,339 10,989 12,713
Research and development.......... 7,266 7,865 4,989 5,302 6,677
------- ------- ------- ------- -------
15,897 16,202 15,096 17,230 20,599
------- ------- ------- ------- -------
Income (loss) before taxes......... (2,574) (6,457) (1,600) 619 5,053
Provision for income taxes......... 40 165 185 205 321
------- ------- ------- ------- -------
Net income (loss).................. $(2,614) $(6,622) $(1,785) $ 414 $ 4,732
======= ======= ======= ======= =======
Net income (loss) per common share:
Basic............................. $ (0.21) $ (0.50) $ (0.13) $ 0.03 $ 0.32
Assuming dilution................. $ (0.21) $ (0.50) $ (0.13) $ 0.03 $ 0.30
Weighted average number of common
shares outstanding:
Basic............................. 12,509 13,179 14,116 14,368 14,742
Assuming dilution................. 12,509 13,179 14,116 14,966 15,633
</TABLE>
<TABLE>
<CAPTION>
As of
December 31, 1999
------------------
As
Actual Adjusted
-------- --------
<S> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term investments.......... $ 24,151 $126,689
Working capital............................................ 23,240 125,779
Total assets............................................... 28,974 131,512
Total liabilities.......................................... 4,329 4,329
Accumulated deficit........................................ (69,097) (69,097)
Total stockholders' equity................................. 24,644 127,183
</TABLE>
The balance sheet data as of December 31, 1999, as adjusted, reflects the sale
of 2,500,000 shares of common stock in this offering, assuming a public
offering price of $43.69 per share, and the receipt of the net proceeds after
deducting the underwriting discount and estimated offering expenses.
7
<PAGE>
RISK FACTORS
You should carefully consider each of the following risks and all of the other
information set forth in this prospectus before deciding to invest in shares of
our common stock. Some of the following risks relate principally to our
business and the industry in which we operate. Other risks relate principally
to the securities market and ownership of our common stock. The risks described
below are not the only ones facing our company. Additional risks not presently
known to us or that we currently believe to be immaterial may also adversely
affect our business. Our business, financial condition or results of operations
could be materially, adversely affected by any of these risks. The trading
price of our common stock could decline due to any of these risks, and you may
lose all or part of your investment.
Risks Related to Our Business
If we are unable to sustain profitability in the future, we may be unable to
continue our operations.
We have a limited history of profitability. In order to maintain our
profitability, we must continue to generate revenues from the sale of our
commercially available products, particularly Salagen(R) Tablets, at or beyond
current levels. In addition, our ability to remain profitable will depend upon
the amount of operating expenses that we incur in the future, including
expenses relating to the development and commercialization of irofulven and any
other products that we acquire or develop. We expect to significantly increase
our research and development expenses over the next several years as we
continue to devote resources to the development and commercialization of
irofulven. Therefore, unless we are able to significantly increase revenues
from the sale of Salagen Tablets and our other commercially available products,
we will not be able to maintain our profitability at recent levels, if at all.
Any adverse events relating to the sale of Salagen Tablets, including increased
competition in the markets in which we compete as a result of the expiration of
our orphan drug status in March 2001 for the treatment of symptoms of
radiation-induced xerostomia in head and neck cancer patients and in 2005 for
the Sjogren's syndrome indication, could adversely impact our ability to
generate such revenues. Furthermore, because research and development costs are
generally fixed, a delay or decline in revenues from the sale of our currently
available products could cause our operating results to decline significantly
in any given quarter. If we are unable to maintain our profitability, our
ability to continue our business operations as planned may be harmed.
Our operating results may fluctuate significantly, which may adversely affect
our stock price.
If our operating results do not meet the expectations of investors or analysts,
our stock price may decline. Our operating results may fluctuate significantly
from period to period due to a variety of factors including:
. changing demand for our current products, particularly Salagen Tablets;
. the introduction by others of competing products;
. the pace and breadth of our development programs;
. expenditures incurred to acquire or license and promote additional
products;
. availability of product supply from third-party manufacturers;
. changes in sales and marketing expenditures; and
. the timing of licensing and royalty revenues.
Variations in the timing of our future revenue could cause significant
fluctuations in operating results from period to period and may result in
unanticipated earnings shortfalls or losses. Therefore, we do not believe that
period-to-period comparisons of our operating results are meaningful. However,
securities analysts and investors may set expectations about our business based
upon past operating results. Consequently, if our operating results do not
follow past trends, our stock price may decline.
8
<PAGE>
We depend upon the sale of Salagen Tablets for substantially all of our product
revenues. If any factor adversely impacts sales of Salagen Tablets, our product
revenues will decrease and may decrease significantly.
We currently derive substantially all of our product revenues from the sale of
Salagen Tablets. In 1999, U.S. sales of Salagen Tablets represented 97 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. In March
2001, our orphan drug status for Salagen Tablets as a treatment for the
symptoms of radiation-induced xerostomia in head and neck cancer patients will
expire. As a result, competing generic products may enter this market. In
addition, we are currently aware of two other competing products which have
already been approved for commercial sale. If sales of Salagen Tablets decline
as a result of this competition, or for any other reason, our product revenues
will decline.
If we do not receive regulatory approvals of irofulven or any of our other
product candidates, or if regulatory approval is delayed for any reason, we
will be unable to commercialize and sell our products as we expect.
Government regulation in the United States and abroad is a significant factor
in the development, manufacturing 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, we must submit any
labeling, advertising and promotional material to the FDA for review. There is
a risk that the FDA will prohibit use of the marketing material in the form we
desire, which could have a material, adverse effect on our business, financial
condition and results of operations.
Further research and development of irofulven, including further extensive
human clinical testing, will be required prior to submission of a regulatory
application for commercial sale of irofulven. 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 regulatory
authorities in the United States and elsewhere, may not allow us to conduct
planned additional clinical testing of irofulven or any of our other product
candidates. There is also a risk that, if permitted, this additional clinical
testing will not prove that irofulven 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 1
and Phase 2 human clinical trials are not necessarily indicative of results
that will be obtained in subsequent or more extensive testing and commercial
experience.
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
manufacturing and 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 policy during the
period of development, or (2) changes in the requirements for regulatory review
of each submitted New Drug Application, or NDA. Even if the FDA approves the
marketing application of a product, this 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 this product or
9
<PAGE>
manufacturer that could affect the commercial viability of the product or could
require 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.
Clinical trials are complex and unpredictable and may produce unexpected
results which could affect our ability to commercialize our products.
Before obtaining regulatory approvals for the commercial sale of any product
under development, including irofulven, we must demonstrate through preclinical
studies and clinical trials that the product is safe and effective for use in
each target indication. We have not commenced Phase 3 clinical trials on any of
our product candidates and we will most likely be required to do so before
submitting an NDA for any product candidate. The results from preclinical
animal studies and early human clinical trials may not be predictive of results
that will be obtained in larger scale testing. Some of the results we are
announcing from Phase 2 clinical trials are interim results and may not be
predictive of future results, including final results from such Phase 2 trials,
because, among other factors, patient enrollment and the time period for
evaluating patient results are not complete. Our clinical trials may not
demonstrate the safety and efficacy required for marketing approval of a
product. Failure to adequately demonstrate the safety and efficacy of a
therapeutic product would 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, require 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 studies. 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:
. the size of the patient population;
. the nature of the protocol requirements;
. the diversion of patients to other trials or marketed therapies;
. the company's ability to recruit and manage clinical centers and
associated trials;
. the proximity of patients to clinical sites; and
. the eligibility criteria for the study.
Factors, such as lack of efficacy, unacceptable toxicities and delays in
planned patient enrollment, may result in increased costs and delays or
termination of clinical trials prior to completion. In addition, delays in
manufacturing of product for our clinical trials could impact our ability to
complete our clinical trials as planned. Delays could result from manufacturing
problems. Clinical trials must meet various FDA requirements, such as
institutional review board oversight, informed consent, and conformance with
good clinical practice requirements. Even after being approved by the FDA or
foreign regulatory authorities, products may later exhibit adverse effects that
prevent their widespread use or necessitate their withdrawal from the market.
There is always a risk that any product under development may not be safe when
administered to humans.
We depend on a single supplier to provide us with the active ingredient for the
production of Salagen Tablets. If such supplier terminates its relationship
with us, or is unable to fill our demand for the ingredient, we may be unable
to produce Salagen Tablets for commercial sale.
We rely on the Fine Chemicals Division of Merck KgaA as our sole and exclusive
supplier of oral-grade pilocarpine hydrochloride, the active pharmaceutical
ingredient in Salagen Tablets. To our knowledge, there is
10
<PAGE>
currently no other producer of pharmaceutical-grade pilocarpine hydrochloride
that is capable of meeting our commercial needs. If our relationship with Merck
KgaA terminates, or Merck KgaA is unable to meet our needs for any reason, we
will need to find an alternative source of pilorcarpine hydrochloride. If we
are unable to identify an alternate source, we may be unable to continue
producing Salagen Tablets for commercial sale. Even if we were able to procure
adequate supplies of pilocarpine hydrochloride from an alternate source, any
disruption in our supply of pilocarpine hydrochloride could have a material
adverse effect on our ability to meet customer demand for Salagen Tablets.
If our third-party manufacturers of Salagen Tablets or any of our other
products cease operations or fail to comply with applicable manufacturing
regulations, we may not be able to meet customer demand in a timely manner, if
at all.
We do not have manufacturing facilities and we rely on one third-party
manufacturer for the production of our products, including Salagen Tablets. We
intend to continue to rely on others to manufacture any future products,
including any products that we may acquire, and we have no plans to establish
manufacturing facilities. The manufacture of our products is, and will be,
subject to "good manufacturing practices" regulations prescribed by the FDA or
other standards prescribed by the appropriate regulatory agency in the country
of use. There is a risk that our manufacturers, including the current
manufacturer of Salagen Tablets, will not comply with all applicable regulatory
standards, and may not be able to manufacture Salagen Tablets or any other
product for commercial sale. If this occurs, we might not be able to identify
another third-party manufacturer on terms acceptable to us, or any other terms.
Material changes to an approved product, such as manufacturing changes or
additional labeling claims, require further FDA review and approval. Once
obtained, any approval may be withdrawn. Further, if we, our corporate partners
or our contract manufacturers fail to comply with applicable FDA and other
regulatory requirements at any stage during the regulatory process, the FDA may
impose sanctions, including:
. delays;
. warning letters;
. fines;
. product recalls or seizures;
. injunctions;
. refusal of the FDA to review pending market approval applications or
supplements to approval applications;
. total or partial suspension of production;
. civil penalties;
. withdrawals of previously approved marketing applications; or
. criminal prosecutions.
We derive additional product revenues from co-promotion arrangements. If these
arrangements terminate for any reason, our revenues will be adversely affected.
In 1999, we entered into agreements with Pharmacia & Upjohn Company to co-
promote Azulfidine EN-tabs(R) in the United States and with Connetics
Corporation to co-promote Luxiq(TM) and Ridaura(R) in the United States. These
co-promotion arrangements provide us with revenue to fund our operations. The
initial term of our agreement with Connetics for the co-promotion of Ridaura
expires in September 2000 and we cannot assure you that it will be extended or
renewed. We have no control over how our co-promotion partners run their own
businesses, and existing or future co-promotion partners may pursue and develop
drugs which compete with
11
<PAGE>
our co-promoted products. If our co-promotion partners terminate these
arrangements for any reason, or if we fail to successfully co-promote these
products, our revenues could be adversely affected.
Our business strategy depends on our ability to identify and acquire mid to
late-stage product candidates or approved products.
As part of our business strategy we plan to identify and acquire mid to late-
stage product candidates or approved products for markets that we can reach
through our marketing and distribution channels. If we fail to acquire, develop
and commercialize additional products or product candidates, or fail to promote
or market commercially successful products, our future business and results of
operations could be materially and adversely affected. Because we do not
directly engage in basic research or drug discovery, we must rely upon third
parties 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. In
addition, we may acquire new products with different marketing strategies,
distribution channels and bases of competition than those of our current
products. Therefore, we may not be able to compete favorably in those product
categories.
If we are unable to enter into and maintain relationships with third-party
collaborators, our research and development costs may increase, and we may not
be able to develop any of our product candidates in a timely manner, if at all.
We have entered into relationships with third-party collaborators, including
manufacturers, to assist us in the development of our product candidates. If
any of our collaborators breaches or terminates its agreement with us, or
otherwise fails to conduct its collaborative activities in a timely manner, we
may experience significant delays in the development or commercialization of
the product candidate or the research program covered by the agreement and may
be required to devote additional funds or other resources to these activities.
Furthermore, if we are unable to enter into alternative arrangements to
continue these activities, or are unable to continue these activities on our
own, we may be required to terminate the development program.
Our continued success will depend in large part upon the efforts of outside
parties. For the research, development, manufacture and commercialization of
our products, we will likely enter into various arrangements with other
corporations, licensors, licensees, outside researchers, consultants and
others. However, we cannot assure you that:
. we will be able to negotiate acceptable collaborative arrangements to
develop or commercialize our products;
. any arrangements with third-parties will be successful;
. current or potential collaborators will not pursue treatments for other
diseases or seek alternative means of developing treatments for the
diseases targeted by our programs; or
. the FDA will believe that our third-party manufacturers are in
compliance with good manufacturing practice requirements, which could
interrupt product supply or result in recall of previously distributed
products.
We rely on multinational and foreign pharmaceutical companies to develop and
commercialize our products and product candidates in markets outside the United
States.
Our strategy for commercialization of our products in foreign markets is to
enter into development and marketing alliances with multinational and foreign
pharmaceutical companies. We have entered into alliances with various companies
related to the marketing of Salagen Tablets in markets outside the United
States. We have entered into an agreement with Dainippon Pharmaceutical Co.,
Ltd. for the development and commercialization of irofulven in Japan. Revenues
from strategic alliances typically include milestone payments and payments
based on product sales. Our continued relationships with strategic partners are
12
<PAGE>
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.
We will need to enter into additional strategic alliances with pharmaceutical
companies to capitalize on product sales in foreign markets. We are currently
working with Chiron B.V. to identify a pharmaceutical company as our new
partner for the sale of Salagen Tablets in Europe. If we are unable to enter
into these alliances on terms acceptable to us, we may not be able to derive
revenue from product sales in foreign markets.
We depend upon licensing revenue from our marketing partners for a material
portion of our total revenue. Future licensing revenues from these partners
will likely fluctuate from quarter to quarter and year to year depending on:
. the achievement of milestones by us or our partners;
. the amount of product sales and royalty generating activities; and
. the timing of initiating additional licensing relationships.
We believe that our partners in these alliances have an economic motivation to
perform their contractual responsibilities, but we cannot 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.
If we fail to compete successfully with our large, multinational competitors,
our revenues and operating results will be harmed.
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. Currently, MedImmune Oncology, Inc.
and Snow Brand Milk Products Co. Ltd. have drugs that are approved for sale and
compete in the same markets as Salagen Tablets. Other pharmaceutical companies
are developing products which, if approved by the FDA, will compete directly
with Salagen Tablets. Our competitors could also develop and introduce generic
drugs comparable to Salagen Tablets, or drugs or other therapies that address
the underlying causes of the symptoms which Salagen Tablets treat. If a product
developed by a competitor is more effective than our product, or priced less
than our product, then our business, financial condition and results of
operations could be materially and adversely affected.
If we fail to obtain additional capital to grow our business, we may be unable
to complete our product acquisition, licensing and development programs.
Even with the proceeds from this offering, we may need to raise additional
funds for various reasons including the following:
. to fully develop irofulven and other acylfulvene analogs;
. to acquire or license additional products;
. to develop products we have acquired;
. to support the marketing and sales of additional products;
. to obtain necessary working capital; and
. to fund operating losses.
13
<PAGE>
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.
We are dependent on our key personnel. If we are not able to attract and retain
key employees and consultants, our business could be harmed.
We are highly dependent on the members of our scientific and management staff.
If we are not able to retain any of these persons, our business may suffer. In
particular, we depend on the services of Charles N. Blitzer, our President and
Chief Executive Officer, William C. Brown, our Chief Financial Officer and
Secretary, Leon O. Moulder, Jr., our Executive Vice President and John R.
MacDonald, Ph.D., our Vice President of Research and Development. For us to
pursue product development, marketing and commercialization plans, we will need
to hire additional qualified scientific personnel to perform research and
development. We will also need to hire personnel with expertise in clinical
testing, government regulation, manufacturing, sales, marketing and finance. We
may not be able to attract and retain personnel on acceptable terms, given the
competition for such personnel among biotechnology, pharmaceutical and
healthcare companies, universities and non-profit research institutions. If we
are not able to attract and retain qualified personnel, our business will
suffer.
If we are unable to keep up with rapid technological changes in the
pharmaceutical or biotechnology industries, we may be unable to continue our
operations.
The pharmaceutical and biotechnology industries have experienced rapid and
significant technological change. We expect that pharmaceutical technology and
biotechnology will continue to develop rapidly. Our future success will depend,
in large part, on our ability to develop and maintain a competitive position.
Technological development by others may result in our products becoming
obsolete before they are marketed or before we recover any of our development
and commercialization expenses incurred with respect to such products. In
addition, alternative therapies or new medical treatments could alter existing
treatment regimens, and thereby reduce the need for one or more of our
products, which would materially and adversely affect our business, financial
condition and results of operations.
If we are unable to obtain intellectual property protection, or protect our
proprietary technology, we may be unable to compete effectively.
Our ability to compete effectively with other companies will depend, in part,
on our ability to:
. maintain the proprietary nature of our products; and
. obtain patent and other proprietary rights.
We were awarded orphan drug status for Salagen Tablets in 1994 as a treatment
for the symptoms of xerostomia induced by radiation therapy in head and neck
cancer patients and in 1998 for the symptoms of dry mouth associated with
Sjogren's syndrome. Orphan designation provides market exclusivity for seven
years after the product is approved for marketing. Our orphan drug protection
for Salagen Tablets will expire in March 2001 for the treatment of symptoms of
radiation-induced xerostomia in head and neck cancer patients and in 2005 for
the Sjogren's syndrome indication.
We hold an exclusive, worldwide license on patents and patent applications
covering acylfulvene proprietary rights including: (1) acylfulvene analogs,
including irofulven and use of irofulven as a cancer therapy agent; (2) the
method of treating tumors using acylfulvene analogs; and (3) synthetic methods
for preparing acylfulvenes. The license applicable to these technologies is
subject to certain statutory rights held by the U.S. Government.
Even though we have licensed patents pertaining to acylfulvene analogs, methods
of treating tumors using such analogs and synthetic methods for preparing
acylfulvenes, this does not mean that we have exclusive rights to
14
<PAGE>
all possible acylfulvene analogs, all possible methods of using acylfulvene
analogs to treat tumors or all possible synthetic methods for preparing
acylfulvenes.
Our competitive position also depends, in part, on our ability to:
. enforce our patent rights; and
. operate without infringing upon the proprietary rights of others.
We will be able to protect our proprietary rights from unauthorized use by
third parties only to the extent that our proprietary rights are covered by
valid and enforceable patents or are effectively maintained as trade secrets.
Our pending patent applications, those we may file in the future, or those we
license from third parties, may not result in patents being issued. Patents, if
issued, may be challenged, invalidated or circumvented. In addition, other
entities may develop similar technologies that fall outside the scope of our
patents. Thus, any patent rights that we own or license from third parties may
not provide sufficient protection against potential competitors.
It is possible that our core technologies or activities taken in the course of
developing or selling our products will infringe the patents of others. In the
event that our technologies infringe the patents or violate other proprietary
rights of third parties and those patents or rights are enforceable, we and our
corporate partners may be prevented from pursuing product development or
commercialization. The laws of foreign countries may not protect our
intellectual property rights to the same extent as do the laws of the United
States.
In addition to patents, we rely on trade secrets and proprietary know-how. We
protect our proprietary technology and processes in part by confidentiality
agreements with our collaborative partners, employees and consultants. There is
a risk that:
. these confidentiality agreements will be breached;
. we will not have adequate remedies for any breach of these agreements;
. our trade secrets will otherwise become known; or
. our trade secrets will be independently discovered and used by
competitors.
If the validity of our patents or other proprietary rights are successfully
challenged, our business will suffer.
The biotechnology and pharmaceutical industries have been characterized by
litigation regarding patents and other intellectual property rights. The
defense and prosecution of intellectual property lawsuits, United States Patent
and Trademark Office interference proceedings and related legal and
administrative proceedings in the United States and internationally involve
complex legal and factual questions. As a result, such proceedings are costly
and time-consuming to pursue and their outcome is uncertain. Litigation may be
necessary to:
. enforce our issued and licensed patents;
. protect trade secrets or know-how that we own or license; or
. determine the enforceability, scope and validity of the proprietary
rights of others.
If we become involved in any litigation, interference or other administrative
proceedings, we will incur substantial expense and the efforts of our technical
and management personnel will be diverted. An adverse determination may subject
us to significant liabilities or require us to seek licenses that may not be
available from third parties on commercially favorable terms, if at all.
Therefore, we and our collaborative partners may be restricted or prevented
from manufacturing and selling products employing our acylfulvene technology or
our other proprietary technologies.
In some cases, litigation or other proceedings may be necessary to defend
against or to assert claims of infringement, to enforce patents issued to us or
our licensors, to protect trade secrets, know-how or other
15
<PAGE>
intellectual property rights owned by us, or to determine the scope and
validity of the proprietary rights of third parties. This litigation could
result in substantial costs to us. An adverse outcome in this litigation or
proceeding could subject us to significant liabilities, requiring us to cease
using the technology or to license the technology from the third party. This
could have a material, adverse effect on our business, financial condition and
results of operations.
If the use of one of our products harms people, we may be subject to costly and
damaging product liability claims.
We face exposure to product liability claims in the event that the use of our
product is alleged to have harmed someone. Although we have taken, and continue
to take, what we believe are appropriate precautions, there is a risk that we
will not be able to avoid significant product liability exposure. We currently
have product liability insurance in the amount of $15 million per occurrence
and in the aggregate for the year. There is a risk that our insurance will not
be sufficient to cover any potential claims. There is also a risk that adequate
insurance coverage will not be available in the future on commercially
reasonable terms, if at all. The successful assertion of an uninsured product
liability or other claim against us would have a material, adverse effect on
our business, financial condition and results of operations.
In addition to product liability risks associated with sales of products, we
may be liable to the claims of individuals who participate in clinical trials
of our products. A number of patients who participate in such trials are
already critically ill when they enter a trial. We cannot assure you that any
waivers we may obtain will protect us from liability or the costs of product
liability litigation. Our product liability insurance may not provide adequate
protection against potential liabilities. Moreover, we may not be able to
maintain our insurance on acceptable terms. As a result of these factors, a
product liability claim, even if successfully defended, could have a material,
adverse effect on our business, financial condition and results of operations.
If we are required to issue a product recall, our future business, results of
operations and financial condition could be harmed.
Product recalls may be issued at our discretion or at the discretion of the FDA
or other government agencies having regulatory authority for product sales.
Product recalls may occur due to manufacturing issues, safety concerns 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.
If we are unable to obtain adequate reimbursement from government health
administration authorities, private health insurers and other organizations,
our business, results of operations and financial condition could be harmed.
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. Salagen Tablets generally have been
eligible for reimbursement from third-party payors, however, 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 healthcare 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 healthcare
products. Federal and state regulations govern or influence the reimbursement
status of healthcare products in many situations. Although third-party
reimbursement is not currently an issue for us, there is a risk that
reimbursement will not be
16
<PAGE>
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 healthcare system have been proposed in recent years.
Although we cannot predict whether any of these proposals will be adopted,
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.
Our operations, and the operations of our third party contractors, involve
hazardous materials which could expose us to liability if environmental damage
occurs.
Our business activities involve the controlled use of hazardous materials. We
cannot eliminate the risk of accidental contamination or injury from these
materials. In the event of an accident or environmental discharge, we may be
held liable for any resulting damages, which may exceed our financial resources
and may materially, adversely affect our business, financial condition and
results of operations.
Risks Related to This Offering
Our stock price is volatile which may result in significant losses to
shareholders.
There has been significant volatility in the market prices of pharmaceutical
and biotechnology companies' securities. Various factors and events may have a
significant impact on the market price of our common stock. These factors
include:
. fluctuations in our operating results;
. announcements of technological innovations or new, commercial,
therapeutic products by us or our competitors;
. published reports by securities analysts;
. progress with clinical trials;
. governmental regulation, including healthcare reimbursement policies;
. developments in patent or other proprietary rights;
. developments in our relationship with collaborative partners;
. public concern as to the safety and efficacy of our products; and
. general market conditions.
The trading price of our common stock has been, and could continue to be,
subject to wide fluctuations in response to these factors, including the sale
or attempted sale of a large amount of our common stock into the market. Broad
market fluctuations may also adversely affect the market price of our common
stock.
The total price you will pay for our common stock in the offering will be much
more than the value of our assets after subtracting our liabilities.
The price you will pay for our common stock will be much more than the book
value per share of our outstanding common stock after the offering.
Accordingly, you will suffer immediate and substantial dilution of your
investment. In the past, we have issued options and warrants to buy our common
stock at prices below the offering price. You will experience further dilution
upon the exercise of outstanding stock options and warrants.
17
<PAGE>
Future sales of our common stock could cause the market price of our common
stock to decline.
If our existing shareholders or holders of securities exercisable for our
common stock sell a substantial number of these shares in the public market
during a relatively short period, our stock price may be depressed. Following
the offering, 17,881,092 shares of our common stock will be outstanding. If the
underwriters exercise their entire over-allotment option, we will have
18,256,092 shares of our common stock outstanding. All the shares sold in the
offering will be freely tradable, except for any shares purchased by an
affiliate of ours, which would be subject to the limitations of Rule 144 under
the Securities Act of 1933. In addition, our directors, officers and certain
employees and shareholders beneficially owning an aggregate of 1,038,929
shares, have agreed not to sell their shares for 90 days following the
offering. Upon expiration of this lock-up period, these shares may be sold in
the open market.
As of March 14, 2000, we have granted options to purchase an aggregate of
2,193,840 shares of our common stock under our stock option plans of which
928,577 were exercisable. Substantially all of these options have exercise
prices below the current market price of our common stock. If the exercise
prices of these options are less than the net tangible book value of our common
stock at the time these options are exercised, our stockholders will experience
an immediate dilution in the net tangible book value of their investment.
In addition, we may issue additional stock, warrants or options to raise
capital in the future or compensate employees or third parties. We regularly
examine opportunities to expand our technology base through means such as
licenses, joint ventures and acquisition of assets or ongoing businesses and
may issue securities in connection with these transactions. We may also issue
additional securities in connection with our stock option plans.
Our charter documents, our shareholder rights plan and Minnesota law contain
provisions that could delay or prevent an acquisition of our company.
Our charter documents contain provisions that may discourage third parties from
seeking to acquire our company. These provisions include:
. advance notice requirements for shareholder proposals and nominations;
and
. the authority of the board of directors to issue, without shareholder
approval, preferred stock with such terms as the board of directors may
determine.
In addition, our board of directors has adopted a shareholder rights plan, or
"poison pill," which enables our board of directors to issue preferred stock
purchase rights triggered by an acquisition of 15 percent or more of the
outstanding shares of our common stock. These provisions and specific
provisions of Minnesota law relating to business combinations with interested
stockholders may have the effect of delaying, deterring or preventing a merger
or change in control. Some of these provisions may discourage a future
acquisition of our company even if stockholders would receive an attractive
value for their shares or if a significant number of our stockholders believed
such a proposed transaction to be in their best interest. As a result,
stockholders who desire to participate in such a transaction may not have the
opportunity to do so.
Our management will have broad discretion as to the use of proceeds of this
offering.
Our management will have broad discretion regarding how we use the net proceeds
of this offering. You will be relying on the judgment of management regarding
the application of the proceeds of the offering. The results and effectiveness
of our use of the proceeds from this offering are uncertain.
18
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains certain "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995 and information relating to us
that are based on the beliefs of our management, as well as assumptions made by
and information currently available to our management. When used in this
prospectus, the words "estimate," "project," "believe," "anticipate," "intend,"
"expect" and similar expressions are intended to identify forward-looking
statements. These forward-looking statements reflect our current views with
respect to future events and are subject to risks and uncertainties that could
cause actual results to differ materially from those contemplated in these
forward-looking statements, including those risks discussed in this prospectus.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this prospectus. We have no
obligation to publicly release any revisions to these forward-looking
statements to reflect events or circumstances after the date of this prospectus
or to reflect the occurrence of unanticipated events.
USE OF PROCEEDS
We estimate our net proceeds from the sale of our common stock in this
offering, at an assumed public offering price of $43.69 per share and after
deducting the underwriting discount and estimated offering expenses payable by
us, will be approximately $102.5 million, or $118.0 million if the
underwriters' over-allotment is exercised in full.
We intend to use the net proceeds from this offering to fund research and
development, product commercialization, potential product acquisitions, working
capital and other general corporate purposes. We have discussions on an ongoing
basis regarding potential acquisitions and in-licensing opportunities that are
complementary to our business. Although we may use a portion of the net
proceeds for this purpose, we currently have no agreements or commitments in
this regard. We reserve the right, at the sole discretion of our Board of
Directors, to reallocate our use of proceeds in response to these and other
factors. Pending these uses, we intend to invest the net proceeds from this
offering in interest-bearing, investment-grade securities.
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<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock is quoted on the Nasdaq National Market under the symbol MOGN.
The following table shows the high and low sale prices for the periods
indicated, as reported on the Nasdaq National Market. The prices shown
represent inter-dealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions.
As of March 14, 2000, we had 787 record holders of our common stock. The
closing sale price of our common stock on March 23, 2000 was $43.69 per share.
<TABLE>
<CAPTION>
Common Stock
Sale Price
-------------
High Low
------ ------
<S> <C> <C>
Year Ended December 31, 1998
First Quarter.................................................... $ 8.13 $ 3.69
Second Quarter................................................... $24.00 $ 6.50
Third Quarter.................................................... $ 9.13 $ 4.63
Fourth Quarter................................................... $13.00 $ 5.75
Year Ended December 31, 1999
First Quarter.................................................... $13.88 $ 7.00
Second Quarter................................................... $12.13 $ 8.25
Third Quarter.................................................... $14.75 $10.00
Fourth Quarter................................................... $14.38 $ 9.75
Year Ended December 31, 2000
First Quarter (through March 23, 2000)........................... $54.75 $11.50
</TABLE>
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and do
not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings to fund the development and growth
of our business.
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CAPITALIZATION
(in thousands, except share and per share data)
The following table shows our actual and as adjusted capitalization at December
31, 1999, as described below. The As Adjusted column gives effect to the
issuance and sale of 2,500,000 shares of our common stock in this offering,
assuming a public offering price of $43.69 per share and the receipt of the
proceeds from the offering, after deducting the underwriting discount and
estimated offering expenses. This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes, which are included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of December 31, 1999
-------------------------
Actual As Adjusted
----------- ------------
<S> <C> <C>
Cash, cash equivalents and short-term investments.... $ 24,151 $126,689
=========== ===========
Long-term obligations................................ $ -- $ --
----------- -----------
Stockholders' equity:
Preferred stock, $.10 par value; 10,000,000 shares
authorized; no shares issued and outstanding,
actual and as adjusted; 1,000,000 shares preferred
stock designated as Series A junior participating
preferred stock, $.10 par value; no shares issued
and outstanding, actual and as adjusted............ -- --
Common stock, $.01 par value; 30,000,000 shares
authorized; 14,979,640 shares issued and
outstanding actual; and 17,479,640 shares issued
and outstanding as adjusted........................ 150 175
Additional paid-in capital.......................... 93,591 196,105
Accumulated deficit................................. (69,097) (69,097)
----------- -----------
Total stockholders' equity......................... 24,644 127,183
----------- -----------
Total capitalization............................. $ 24,644 $ 127,183
=========== ===========
</TABLE>
The number of shares of common stock issued and outstanding, as adjusted, is
based on shares outstanding on December 31, 1999. It excludes 2,104,134 shares
of common stock issuable upon the exercise of outstanding options at a weighted
average exercise price of $7.56 per share. As of March 14, 2000, there were
2,193,840 shares of common stock issuable upon the exercise of outstanding
stock options at a weighted average price of $9.74 per share.
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SELECTED FINANCIAL DATA
(in thousands, except per share data)
The following selected financial data should be read together with the
financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing in this
prospectus. The selected statement of operations data shown below for the years
ended December 31, 1997, 1998 and 1999 and the balance sheet data as of
December 31, 1998 and 1999 are derived from our audited financial statements
included in this prospectus. The selected statement of operations data shown
below for the years ended December 31, 1995 and 1996 and the balance sheet data
as of December 31, 1995, 1996 and 1997 are derived from our audited financial
statements not included in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Sales...................... $ 4,607 $ 6,460 $ 9,345 $ 12,945 $ 18,643
Promotion.................. -- -- -- 756 1,088
Licensing.................. 7,758 2,335 3,275 3,342 4,955
Interest and other......... 958 950 876 806 966
-------- -------- -------- -------- --------
13,323 9,745 13,496 17,849 25,652
Costs and expenses:
Cost of sales.............. 772 678 768 939 1,209
Selling, general and
administrative............ 7,859 7,659 9,339 10,989 12,713
Research and development... 7,266 7,865 4,989 5,302 6,677
-------- -------- -------- -------- --------
15,897 16,202 15,096 17,230 20,599
-------- -------- -------- -------- --------
Income (loss) before taxes.. (2,574) (6,457) (1,600) 619 5,053
Provision for income taxes.. 40 165 185 205 321
-------- -------- -------- -------- --------
Net income (loss)........... $ (2,614) $ (6,622) $ (1,785) $ 414 $ 4,732
======== ======== ======== ======== ========
Net income (loss) per common
share:
Basic...................... $ (0.21) $ (0.50) $ (0.13) $ 0.03 $ 0.32
Assuming dilution.......... $ (0.21) $ (0.50) $ (0.13) $ 0.03 $ 0.30
Weighted average number of
common shares outstanding:
Basic...................... 12,509 13,179 14,116 14,368 14,742
Assuming dilution.......... 12,509 13,179 14,116 14,966 15,633
<CAPTION>
As of December 31,
------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
short-term investments..... $ 17,979 $ 17,888 $ 15,056 $ 17,081 $ 24,151
Working capital............. 15,973 15,820 13,981 16,096 23,240
Total assets................ 20,515 20,163 18,191 21,122 28,974
Total liabilities........... 3,783 3,796 3,172 4,011 4,329
Accumulated deficit......... (65,836) (72,458) (74,243) (73,828) (69,097)
Total stockholders' equity.. 16,732 16,367 15,019 17,111 24,644
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a pharmaceutical company focused on the acquisition, development,
commercialization and marketing of differentiated, specialty pharmaceutical
products that address unmet medical needs. Our current product portfolio is
comprised of prescription products that address special needs in the fields of
cancer and rheumatology, however, we may expand into other medical fields as
our business grows. We focus our sales efforts solely in the United States and
create partnerships with other pharmaceutical or biotechnology companies for
our products in other countries.
We promote products directly to physicians in the United States using our own
specialty sales force. These products include our Salagen(R) Tablets
(pilocarpine hydrochloride) and Didronel(R) I.V. Infusion (etidronate
disodium), and three co-promoted products, Azulfidine EN-tabs(R) (sulfasalazine
delayed release tablets), 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 accounted for more than 97 percent of our
product sales during 1999. Didronel I.V. Infusion is used to treat
hypercalcemia (elevated blood calcium) in cancer patients. Co-promoted products
continue to be owned and distributed by the co-promotion partners, so we
recognize promotion fee revenue, rather than product sales revenue for these
products. We began our co-promotion relationships in 1999 for Azulfidine EN-
tabs and Ridaura for the treatment of rheumatoid arthritis and Luxiq for the
treatment of dermatosis. Outside the United States, we commercialize our
products through various alliances from which we recognize licensing revenues,
and have agreements with several international pharmaceutical companies to
develop and commercialize Salagen Tablets in Europe, Canada and Japan.
Our current product development efforts include preclinical and clinical
studies for irofulven, the lead drug candidate in our novel family of
proprietary cancer therapy compounds called the acylfulvenes. Exclusive rights
in Japan to irofulven and the other acylfulvene analogs were granted to
Dainippon under a development and commercialization agreement in 1995. We also
provide ongoing clinical support of Salagen Tablets. We rely on third-parties
to manufacture our commercialized and development stage products.
Results of Operations
Revenues
Sales
Total sales revenues increased 39 percent from $9,344,548 in 1997 to
$12,944,620 in 1998, and increased 44 percent to $18,643,168 in 1999. The
increases primarily reflect more sales of Salagen Tablets due to broader demand
for the product, following FDA approval of Salagen Tablets as a treatment of
Sjogren's syndrome symptoms in February 1998.
Product sales of Salagen Tablets in the United States provided 92 percent of
our product sales in 1997, 95 percent in 1998, and 97 percent in 1999. As is
common in the pharmaceutical industry, our domestic sales are made to
pharmaceutical wholesalers for further distribution through pharmacies to the
ultimate consumers of our products. Sequential quarterly changes in U.S. sales
of Salagen Tablets during 1999 ranged from a 10 percent decline during the
third quarter to a 20 percent increase in the fourth quarter. We believe that
fluctuations in the quarter-to-quarter comparisons are caused by uneven
purchasing patterns of pharmaceutical wholesalers. Because Salagen Tablets are
the first FDA approved product to treat dry mouth symptoms associated with
Sjogren's syndrome, no historical standard exists by which to judge the
ultimate size of this market. We expect sales growth of Salagen Tablets to
moderate due to competition from new products and increased penetration of the
market.
23
<PAGE>
Promotion
Promotion revenue was first recognized in 1998 and totaled $756,326 in that
year. Promotion revenue increased 44 percent to $1,087,852 in 1999. In 1998, we
were promoting INFeD(R) under an agreement with Schein Pharmaceutical. In 1999,
we concluded our promotional activities with Schein, and entered into promotion
agreements with Pharmacia & Upjohn Company for Azulfidine EN-tabs and Connetics
Corporation for Ridaura and Luxiq. Under the Schein agreement, we earned a
minimum promotion fee of $125,000 per quarter, plus an additional fee of
$250,000 in the first quarter of 1998 resulting from an amendment to the
contract. We concluded our promotional activity with Schein at the end of the
first quarter of 1999, resulting in a final minimum quarterly payment of
$125,000 in the first quarter of 1999, and reduced promotion payments for the
remaining quarters of 1999. Under the Connetics agreement for the promotion of
Ridaura, which has an initial term ending in September 2000, we receive
$250,000 per quarter. We have not yet recognized promotion revenue for either
Azulfidine EN-tabs or Luxiq.
Licensing
Licensing revenue increased two percent from $3,275,375 in 1997 to $3,341,568
in 1998, and increased 48 percent to $4,954,468 in 1999. The increase from 1997
to 1998 was due to an increase in contract minimum payments for Salagen Tablets
in Canada, and a scheduled increase in quarterly licensing payments from
Dainippon for continuing acylfulvene rights in Japan. The increase from 1998 to
1999 was due to approximately $500,000 in non-recurring royalties from a
retroactive broadening of the royalty base on herbicide resistant crop
technology from our former agricultural business, an increase in revenue from
international Salagen Tablets relationships, and a scheduled increase in
quarterly licensing payments from Dainippon. We believe the increases in
Salagen licensing revenue from international partners were not reflective of
underlying product demand and may not be recurring. We are committed to
improving the promotion of Salagen Tablets in Europe and we are working with
the current license partner to find a replacement partner. Until this is
achieved, only modest year-to-year increases, if any, in Salagen Tablets
related licensing income are expected. In addition, future licensing revenues
will likely fluctuate from one quarter to another and between years depending
on the achievement of milestones by us or our partners, the level of recurring
royalty generating activities, and the timing of initiating additional
licensing relationships. In 1999, we received $2,200,000 of licensing revenue
related to quarterly licensing payments from Dainippon. These payments are
scheduled to conclude with a $100,000 payment in the second quarter of 2000,
which would result in recognition of $650,000 during 2000 related to these
payments.
Interest and other
Interest and other income decreased eight percent from $875,906 in 1997 to
$805,996 in 1998, but increased 20 percent to $966,434 in 1999. The average
amount of funds available for investment has increased from 1997 through 1999.
However, the yield on investments has decreased over the same period. This
resulted in decreased interest and other income from 1997 to 1998. In 1999, the
effect of the decreased investment yield was more than offset by an approximate
$7,000,000 increase in funds available for investment.
Costs and Expenses
Cost of sales
Cost of sales increased 22 percent from $767,680 in 1997 to $938,628 in 1998,
and increased 29 percent to $1,208,650 in 1999. Both changes reflect increased
unit sales of Salagen Tablets. We believe that cost of sales as a percent of
product sales should continue within its recent annual range of five to eight
percent for our commercialized products.
Selling, general and administrative
Selling, general and administrative expenses increased 18 percent from
$9,339,110 in 1997 to $10,989,017 in 1998, and increased 16 percent to
$12,713,287 in 1999. The 1998 increase resulted from an increase in selling
24
<PAGE>
and promotion costs in conjunction with the April 1998 launch of Salagen
Tablets as a treatment for symptoms of dry mouth from Sjogren's syndrome. The
1999 increase also resulted from further increased selling and promotion costs
for Salagen Tablets; $525,000 in expenses associated with non-recurring
retirement and separation agreements; expenses related to relocation and
recruiting for sales, marketing and business development positions; and costs
related to our move to a new office location. During 2000, we expect to further
expand our commercial organization and promotional spending, especially for the
promotion of Salagen Tablets. The size of our U.S. based sales organization is
expected to increase by approximately two-thirds. These changes and related
costs are expected to significantly increase total SG&A expense in 2000.
Research and development
Research and development expense increased six percent from $4,988,584 in 1997
to $5,301,578 in 1998, and increased 26 percent to $6,677,435 in 1999. The
increases reflect increasing costs for the development of irofulven, the lead
drug candidate in our novel family of proprietary cancer therapy compounds
called the acylfulvenes. During 1998, development of irofulven progressed from
Phase 1 clinical trials to larger and more expensive Phase 2 clinical trials.
Enrollment in three Phase 2 clinical trials sponsored by us began in 1998, and
has increased during 1999. These studies evaluate the efficacy and safety of
irofulven for the treatment of patients with ovarian, pancreatic or prostate
cancer who are refractory to current therapies. In addition, we continued to
provide clinical supplies of irofulven for clinical studies sponsored by the
NCI. Based on initial clinical data that has already demonstrated objective
anti-tumor responses with irofulven treatment in humans as a single agent and
in combination with an approved chemotherapy, we hope to initiate Phase 3
clinical trials by the end of 2000 that could, if successful, become the
fundamental basis of an initial new drug application, or NDA, submission to the
FDA for irofulven. Conduct of these studies is expected to substantially
increase research and development costs in 2000 and beyond. Further, this
emerging data suggests multiple development paths may be warranted with
irofulven and could further increase research and development expense in 2000.
We expect research and development to increase significantly in the next few
years compared to 1999 as we pursue multiple development paths with irofulven.
Tax expense
Over the past three years, our effective tax rate has ranged from a negative
3.7 percent to a positive 33.1 percent, which reflects a ten percent foreign
tax rate on the Dainippon licensing payment and a two percent tax rate for
alternative minimum tax.
In 1999, we had net income of $4,731,499. However, we have a history of losses,
and currently have an accumulated deficit of $69,096,849. Our ability to
sustain profitable operations is uncertain, and therefore, we will continue to
maintain a valuation allowance against this deferred tax asset.
Net Income (Loss)
Although we had a net loss of $1,784,545 in 1997, we produced net income of
$414,287 in 1998, and net income of $4,731,499 in 1999. The increases in net
income are due to an increase in total revenues of 32 percent from 1997 to
1998, and 44 percent from 1998 to 1999. Costs and expenses increased 14 percent
from 1997 to 1998, and increased 20 percent from 1998 to 1999. During the next
several years, we will direct our efforts toward activities intended to grow
long-term revenues, including expanded development of irofulven and other
pharmaceuticals. Increased spending on these initiatives and others may not
allow us to remain profitable on a consistent basis.
Liquidity and Capital Resources
At December 31, 1999, we had cash and investments of $24,150,573 and working
capital of $23,239,905, compared with $17,081,265 and $16,095,725,
respectively, at December 31, 1998. For the year ended December 31, 1999, we
generated $5,662,542 of cash from our operating activities and received
$2,174,583 in
25
<PAGE>
cash from issuance of shares under stock award plans. We purchased $783,501 of
equipment and furniture in 1999, primarily related to our move to a new office
location.
Cash in excess of current operating needs is invested in money market
instruments in accordance with our 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. We believe we
have sufficient cash and investments to fund our current operations through the
end of 2000. However, substantial amounts of capital are required for
pharmaceutical development and commercialization efforts. For continued
development and commercialization of irofulven and Salagen Tablets and
acquisition and development of product candidates, we plan to utilize cash
provided from product sales, collaborative arrangements and existing liquid
assets. We may also seek other sources of funding, including additional equity
or debt issuances.
Selected Quarterly Operating Results
The following table shows our unaudited financial information for each of the
quarters in the two-year period ended December 31, 1999. In our opinion, this
unaudited quarterly information has been prepared on the same basis as the
audited financial statements and includes all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the
information for the quarters presented, when read in conjunction with the
financial statements and notes included elsewhere in this prospectus. We
believe that quarter-to-quarter comparisons of our financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- ------------- ------------ --------- -------- ------------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Sales.................. $ 2,629 $ 3,260 $ 3,274 $ 3,781 $ 4,503 $ 4,754 $ 4,272 $ 5,114
Promotion.............. 375 125 125 131 125 250 250 463
Licensing.............. 621 694 1,072 956 872 1,037 1,290 1,756
Interest and other..... 187 200 209 210 194 211 270 291
------- ------- ------- ------- ------- ------- ------- -------
3,812 4,279 4,680 5,078 5,694 6,252 6,082 7,624
------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Costs of sales......... 207 293 216 222 308 254 259 387
Selling, general and
administrative........ 2,414 2,650 2,712 3,213 3,173 3,570 2,924 3,046
Research and
development........... 1,238 1,357 1,317 1,390 1,461 1,747 1,871 1,599
------- ------- ------- ------- ------- ------- ------- -------
3,859 4,300 4,245 4,825 4,942 5,571 5,054 5,032
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
tax.................... (47) (21) 435 253 752 681 1,028 2,592
Provision for income
tax.................... 50 50 50 55 69 70 75 107
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ (97) $ (71) $ 385 $ 198 $ 683 $ 611 $ 953 $ 2,485
======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per
common share:
Basic.................. $ (0.01) $ (0.00) $ 0.03 $ 0.01 $ 0.05 $ 0.04 $ 0.06 $ 0.17
Assuming dilution...... $ (0.01) $ (0.00) $ 0.03 $ 0.01 $ 0.04 $ 0.04 $ 0.06 $ 0.16
Weighted average number
of common shares:
Basic.................. 14,207 14,326 14,452 14,478 14,575 14,647 14,819 14,931
Assuming dilution...... 14,207 14,326 15,020 15,321 15,475 15,549 15,733 15,779
</TABLE>
Market Risk Considerations
Our operations are not subject to risks of material foreign currency
fluctuations, nor do we use derivative financial instruments in our investment
practices. We place our investments in instruments that meet high credit
quality standards, as specified in our investment policy guidelines. We do not
expect material loss with respect to our investment portfolio or exposure to
market risks associated with interest rates.
26
<PAGE>
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission, or SEC, staff issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101). SAB 101 summarizes the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
This bulletin will alter the revenue recognition stream for future strategic
agreements; certain payments will be initially capitalized, then amortized over
a period of time.
Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging activities," (as amended by SFAS 137 with
respect to the effective date) will be effective for us in January 2001. SFAS
133 requires all derivatives to be recognized as assets or liabilities on the
balance sheet and measured at fair value on a mark-to-market basis. These
market value adjustments are to be included either in net earnings or loss in
the statement of operations or in other comprehensive income (and accumulated
in stockholders' equity), depending on the nature of the transaction. We do not
believe that SFAS 133 will have a material impact on the company.
27
<PAGE>
BUSINESS
Overview
We are a pharmaceutical company focused on the acquisition, development and
commercialization of drugs primarily for the treatment of cancer and
rheumatology disorders. We currently market and promote five products through
our 41-person specialty sales force. Our primary commercial product, Salagen(R)
Tablets, in 1999 accounted for approximately 97 percent of our product sales.
We market Salagen Tablets in the United States to oncologists as a treatment
for the symptoms of radiation-induced xerostomia, commonly known as chronic dry
mouth, in head and neck cancer patients. We also market Salagen Tablets in the
United States as a treatment for the symptoms of dry mouth associated with
Sjogren's syndrome, an autoimmune disease. In 1999, we generated revenues from
product sales of approximately $18.6 million. We focus our sales and marketing
efforts solely within the United States and create alliances with other
pharmaceutical or biotechnology companies for the sales and marketing of our
products in other countries.
Our current product development efforts include preclinical and clinical
studies of irofulven, the lead cancer therapy product candidate from our
proprietary family of compounds, called acylfulvenes. Irofulven is currently
being tested in eight Phase 2 clinical trials and four Phase 1 clinical trials
for the treatment of various cancers. Interim results from three of our leading
Phase 2 trials of irofulven have demonstrated that irofulven is well-tolerated
for a chemotherapeutic and potentially effective as an anti-tumor agent in
treating ovarian, pancreatic and prostate cancers. We intend to initiate a
pivotal Phase 3 clinical program for irofulven by the end of 2000.
Business Strategy
Our goal is to become a leading pharmaceutical company serving well-defined
markets. We are initially focused on serving the oncology and rheumatology
markets. The key elements of our strategy are to:
. Develop and Commercialize Irofulven for Various Cancers. A
substantial portion of our efforts over the next few years will be
devoted to the further development, approval and commercialization of
irofulven for the treatment of various cancers. We seek to develop
irofulven for life threatening indications, such as refractory
cancers, for which we believe irofulven would likely be eligible for
expedited regulatory review. In addition, we plan to perform clinical
trials to evaluate irofulven in cancers in non-refractory patients,
with a goal of broadening irofulven's approved uses once it is
approved for commercial sale. We also intend to investigate
irofulven's efficacy as both a single therapeutic agent for various
cancers as well as in combination with other cancer therapies. We
intend to focus our direct sales and marketing efforts within the
United States and to rely on partners to commercialize irofulven in
other countries.
. Focus Sales and Marketing Efforts on Well-Defined Markets. Our
recently expanded 41-person specialty sales force is focused on
marketing products in the United States to targeted patient and
physician groups. We target therapeutic areas with physician
populations that are relatively small in number and generally
concentrated in urban areas. For example, we currently market Salagen
Tablets in the United States to approximately 2,300 radiation
oncologists and medical oncologists managing head and neck cancer
patients and approximately 5,000 rheumatologists and internists
managing Sjogren's syndrome patients. We intend to continue to pursue
strategic collaborations with pharmaceutical and biotechnology
companies to commercialize our current products and products under
development outside of the United States.
. Expand Product Portfolio through Product Acquisitions and Co-
promotion Arrangements. We maintain an active program to expand our
product portfolio through product acquisition or co-promotion
arrangements of complementary products. We focus on currently
marketable pharmaceutical or mid to late-stage product candidates for
which we believe we can most effectively use our expertise in sales
and marketing and in product development. Through this strategy, we
seek to reduce our risk of product failure, since these products have
generally
28
<PAGE>
progressed beyond the initial discovery stage, passed preliminary
toxicity testing, and have demonstrated early stage efficacy in early
human clinical studies. For example:
. we identified the active pharmaceutical ingredient for Salagen
Tablets, pilocarpine hydrochloride, in the public domain and
then developed and commercialized Salagen Tablets;
. we acquired Didronel(R) I.V. Infusion; and
. we currently co-promote Azulfidine EN-tabs(R), Ridaura(R) and
Luxiq(TM).
. Leverage Development and Commercialization Efforts through
Outsourcing. To reduce overhead, control expenses and maintain
flexibility, we contract with third parties for a number of business
activities, including:
. pre-clinical studies and clinical trials;
. clinical data analysis;
. product formulation;
. product manufacturing; and
. product distribution.
By using contract manufacturers to produce our current products,
which require relatively small and infrequent production runs, we
control our investment in capital and manage the risks involved in
pharmaceutical manufacturing. Similarly, by contracting with third
parties to perform certain research needed to bring our products to
market, we reduce expenses and risks associated with maintaining a
research facility and retain flexibility to allocate resources as
development programs evolve. We expect to continue to contract with
third parties until it is necessary and economical to add such
capabilities internally.
Commercialized Products
The following table summarizes the products, principal indications and
commercial rights for the products we currently market or co-promote.
<TABLE>
<CAPTION>
Products Principal Indications Commercial Rights
-------- --------------------- -----------------
<S> <C> <C>
Salagen Symptoms of radiation-induced MGI PHARMA--U.S.
Tablets xerostomia (chronic dry mouth) Various partners--other countries
in head and neck cancer patients
Symptoms of dry mouth (and dry MGI PHARMA--U.S.
eye outside the U.S.) in Sjogren's Various partners--other countries
syndrome patients
Azulfidine Rheumatoid arthritis MGI PHARMA--co-promotes in the U.S.
EN-tabs
Ridaura Rheumatoid arthritis MGI PHARMA--co-promotes in the U.S.
Luxiq Dermatosis associated with MGI PHARMA--co-promotes in the U.S.
rheumatology conditions
Didronel Cancer-related hypercalcemia MGI PHARMA--U.S.
I.V. MGI PHARMA--Canada
Infusion
</TABLE>
29
<PAGE>
Salagen Tablets for the Treatment of the Symptoms of Xerostomia and Sjogren's
Syndrome
Salagen Tablets are an oral formulation of pilocarpine hydrochloride, a
naturally derived substance that stimulates secretions from exocrine glands,
including saliva. Salagen Tablets received FDA approval and orphan drug status
in 1994 as a treatment for the symptoms of radiation-induced xerostomia, or
chronic dry mouth, in head and neck cancer patients. In early 1998, the FDA
also approved Salagen Tablets for the treatment of the symptoms of dry mouth
associated with Sjogren's syndrome. Salagen Tablets were the first systemic
pharmaceutical product approved for the treatment of symptoms associated with
chronic dry mouth in these indications. Chronic dry mouth can result in
discomfort, pain, difficulty in eating and sleeping, severe halitosis, rapid
tooth decay, periodontal disease and oral infections. Prior to the approval of
Salagen Tablets, patients suffering from chronic dry mouth were limited to
using home remedies or over-the-counter saliva substitutes that had minimal
efficacy.
Salagen Tablets are currently also marketed in Canada, the United Kingdom and
eight other countries for the symptoms associated with xerostomia in head and
neck cancer patients or Sjogren's syndrome. Through our collaborative partners,
we are also seeking approval of Salagen Tablets for the treatment of the
symptoms of xerostomia in head and neck cancer patients in Japan and Singapore
and for the treatment of the symptoms associated with Sjogren's syndrome
including dry mouth and dry eyes in Europe and Japan. Our collaborative
partners for Salagen Tablets and their respective territories include Pharmacia
& Upjohn Company (Canada), Chiron B.V. (Europe), Hyundai Pharmaceutical Co.,
Ltd. (Korea), Megapharm L.T.D. (Israel), Kissei Pharmaceutical Co., Ltd.
(Japan), and Pharma Forte Singapore PTE, Ltd. (Singapore). During 1999, we
generated approximately $18.1 million in revenue from sales of Salagen Tablets
in the United States.
Head and neck cancer
Approximately 40,000 Americans are diagnosed each year with head or neck
tumors. Approximately 25,000 patients receive radiation therapy to treat their
disease. Although often effective in treating primary tumors, head and neck
radiation therapy can permanently damage a patient's salivary glands, resulting
in a significant, chronic reduction of saliva production. Patients using
Salagen Tablets for radiation-induced dry mouth typically take one tablet three
times per day during the course of radiation therapy, approximately six to
eight weeks, and then take it indefinitely to treat the residual dry mouth
symptoms that follow radiation therapy.
Salagen Tablets have been shown to stimulate the residual functioning tissue in
the damaged salivary glands to increase saliva production and provide patients
with a longer-lasting solution for the symptoms of radiation-induced chronic
dry mouth. Two 12-week studies, which included 369 patients who had been
treated with radiation therapy for head and neck cancer, were conducted
comparing Salagen Tablets with placebo tablets. In both studies, patients who
received Salagen Tablets experienced significant improvement in their overall
condition of dry mouth. Those patients also demonstrated statistically
significant improvements in salivary flow compared to the patients receiving
placebo tablets. Less than one percent of the patients who had received Salagen
Tablets withdrew from these studies due to lack of efficacy. Sweating was the
most commonly reported side effect; however less than one percent of patients
taking the approved dosing regimen withdrew from the study due to sweating.
Sjogren's syndrome
Sjogren's syndrome is a chronic autoimmune disorder in which the body's own
immune system attacks the moisture-producing glands, including the salivary
glands, causing them to lose their ability to produce adequate moisture.
Symptoms of Sjogren's syndrome vary in degree and type, but the common
component is chronic dryness. Patients can exhibit dry mouth, swollen glands,
dry eyes, vaginal dryness and fatigue. The syndrome can be manifested alone
(primary Sjogren's) or in combination with other autoimmune disorders
(secondary Sjogren's). We believe that approximately 50,000 of the 200,000
primary Sjogren's syndrome patients could benefit from Salagen Tablets.
In patients with Sjogren's syndrome-related dry mouth, Salagen Tablets can help
to relieve the symptoms of oral dryness. Salagen Tablets can stimulate the
salivary glands to increase production of saliva, which is
30
<PAGE>
essential to maintaining good oral health. For Sjogren's syndrome patients, use
of previously available therapies included tear and saliva substitutes. These
types of products provide transient relief at best and often fail to prevent
complications.
In two twelve-week studies involving a total of 629 primary or secondary
Sjogren's syndrome patients, the ability of Salagen Tablets, versus placebo, to
relieve the symptoms of dry mouth and to stimulate saliva production, was
assessed. Patients receiving Salagen Tablets four times a day, unlike the
placebo patients, reported a significant improvement in their problems
associated with oral dryness, and they also demonstrated a significant increase
in saliva for the full 12 weeks. Similar to the head and neck studies, less
than one percent of the patients receiving Salagen Tablets withdrew from study
due to lack of efficacy. The most commonly reported side effect was mild to
moderate sweating. Less than four percent of patients taking the approved
dosing regimen withdrew from the study due to sweating.
Azulfidine EN-tabs for Rheumatoid Arthritis
In July 1999, we entered into an agreement with Pharmacia & Upjohn to co-
promote Azulfidine EN-tabs in the United States as a treatment for morning
stiffness, lack of grip strength and pain experienced by rheumatoid arthritis
patients who have responded inadequately to non-steroidal anti-inflammatory
drugs. In addition to its ability to improve symptoms of rheumatoid arthritis
such as pain and stiffness, Azulfidine EN-tabs has been shown by x-ray to slow
the progression of rheumatoid arthritis thereby placing it in the class of
disease modifying anti-rheumatic drugs. Azulfidine EN-tabs is a specially
coated formulation of sulfasalazine, which allows for greater patient
tolerability than uncoated sulfasalazine tablets. In 1999, Pharmacia & Upjohn
had $12.4 million of Azulfidine EN-tabs sales in the United States. Under the
terms of our agreement with Pharmacia & Upjohn, we will receive one-half of all
incremental net profits from any growth in Azulfidine EN-tabs sales subsequent
to the commencement of this co-promotion.
Ridaura for Rheumatoid Arthritis
In March 1999, we entered into an agreement with Connetics Corporation to co-
promote Ridaura in the United States. Ridaura is an oral drug which slows joint
destruction and the progression of rheumatoid arthritis. Ridaura is indicated
for rheumatoid arthritis patients who are not responsive to, or are intolerant
of, non-steroidal anti-inflammatory drugs. Under the terms of our agreement
with Connetics, we promote Ridaura to the rheumatology market in the United
States in exchange for promotional fees of $250,000 per quarter. The initial
term of this agreement continues through September 2000.
Luxiq for Dermatosis Associated with Rheumatology Conditions
In March 1999, we entered into an agreement with Connetics to co-promote Luxiq
(betamethasone valerate) Foam, 0.12% in the United States. Luxiq is a medium-
potency topical corticosteroid foam used for the treatment of scalp psoriasis
and other corticosteroid-responsive skin disorders of the scalp.
Corticosteroids constitute a class of primarily synthetic steroids used
topically as anti-inflammatory agents. Luxiq's foam vehicle provides an
effective method of applying medication to the scalp, thereby improving patient
compliance and product efficacy. Under the terms of our agreement with
Connetics, we are promoting Luxiq to rheumatologists treating psoriatic
arthritic patients in exchange for a split of the profits from sales of Luxiq
in the rheumatology market.
Didronel I.V. for Cancer-Related Hypercalcemia
Didronel I.V. Infusion is used to treat cancer-related hypercalcemia, or
elevated blood calcium, which is the most common life-threatening metabolic
disorder associated with cancer. Didronel I.V. Infusion is a member of the
bisphosphonate class of compounds. It acts to slow the turnover or dissolving
of bone, also known as bone resorption. Elevated blood calcium causes mental
confusion, nausea and vomiting, loss of kidney function, and, if left
untreated, death. The condition affects up to 20 percent of all cancer patients
sometime during the course of their disease, but appears to be most prevalent
with tumors that have metastasized to bone, usually myeloma and breast tumors.
31
<PAGE>
Products Under Development
The following table summarizes the currently ongoing preclinical studies and
clinical trials of irofulven and other acylfulvene analogs:
<TABLE>
<CAPTION>
Product Indication Status Sponsor
------- ---------- ------ -------
<C> <S> <C> <C>
Irofulven Ovarian Cancer--Advanced Phase 2 Ongoing MGI PHARMA
Ovarian Cancer--Recurrent Phase 2 Ongoing NCI
Epithelial
Pancreatic Adenocarcinoma-- Phase 2 Ongoing MGI PHARMA
Advanced
Pancreatic Adenocarcinoma-- Phase 2 to Begin MGI PHARMA
Alternate
Dosing Schedule
Prostate Cancer--Hormone Phase 2 Ongoing MGI PHARMA
Refractory
Breast Cancer--Metastatic Phase 2 Ongoing NCI
Non-Small Cell Lung Cancer-- Phase 2 Ongoing NCI
Relapsed or Refractory
Malignant Melanoma Phase 2 Ongoing NCI
Cervical Carcinoma--Advanced Phase 2 to Begin NCI
Endometrial Carcinoma Phase 2 to Begin NCI
Advanced Solid Tumors-- Phase 1 Ongoing MGI PHARMA
Alternate
Dosing Schedule
Combination Study with Phase 1 Ongoing MGI PHARMA
Chemotherapy
Childhood Solid Tumors Phase 1 Ongoing NCI
Various Leukemias Phase 1 Ongoing NCI
Various Advanced Cancers Phase 1 to Begin Dainippon
- ------------------------------------------------------------------------------
Other Acylfulvene Various Cancers Preclinical MGI PHARMA
Analogs
</TABLE>
Cancer Overview
According to the American Cancer Society, or ACS, there are approximately 1.2
million new cases of cancer diagnosed in the United States each year. Cancer is
the second leading cause of death in the United States and is projected to
result in approximately 550,000 deaths in the United States in 2000.
Cancer is characterized by the uncontrolled growth and spread of abnormal
cells. These abnormal cells accumulate and form tumors or lumps that can
compress, invade and destroy normal tissue. If cancerous cells break away from
the primary tumor, they can travel through the bloodstream or the lymph system
to other areas of the body. There, they may settle and form new tumors. The
spread of a tumor to a new site is called metastasis.
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<PAGE>
Different types of cancer vary in their rates of growth, patterns of spread,
and, consequently, typically respond in varying degrees to different types of
treatment. The three most common forms of treatment for cancer in order of
their typical use are:
. surgery--the physical removal of a patient's tumor mass;
. radiation therapy--the use of high energy particles or waves, such as x-
rays or gamma rays, to destroy or damage cancer cells; and
. chemotherapy--the use of drugs to damage or kill cancer cells. Systemic
chemotherapy uses cancer therapy drugs that are usually administered
intravenously or orally. These drugs enter the bloodstream and can
potentially reach all areas of the body, making this treatment
potentially useful for cancer that has spread.
A cancer patient often receives a combination of treatments depending upon the
type and progression of the disease. While surgery attempts to remove the
cancer from the patient and radiation attempts to kill the cancer cells, there
are significant limitations of, and complications associated with, these cancer
treatments that result in high rates of treatment failure due primarily to
metastasis and dose-limiting severe side effects. Chemotherapeutic agents
attempt to address the limitations of surgery and radiation by interfering with
the replication of cancer cells.
Cell replication requires cells to first replicate their DNA. Cancer is a
disease characterized by uncontrolled cell replication. Therefore, many
chemotherapeutic agents target the cancer cells' ability to replicate DNA or,
following the replication of their DNA, the ability of the cancer cells to
divide wherever they exist within the body, including sites of metastasis.
Different classes of chemotherapeutic agents are distinguished by their
mechanism of action or how they specifically interfere with the cancer cells'
ability to replicate DNA or divide.
When a cancer cell's DNA is damaged by a chemotherapeutic agent, DNA synthesis
is inhibited or cell division is inhibited, and a cellular process known as
apoptosis, or programmed cell death, may be activated. Apoptosis of tumor cells
can lead to reduction in tumor size or to the arrest of tumor growth.
Because different chemotherapeutic agents may target different specific
processes required for DNA replication and cell division, chemotherapeutic
agents are often used in combination to maximize tumor cell death or inhibition
of growth, while more effectively managing the side effect profile of the
individual agents. Agents that interfere with DNA replication or cell division
in novel ways are therefore excellent candidates to be used in combination with
existing chemotherapy agents.
One of the principal causes of chemotherapy treatment failure is the
development of drug resistance by cancer cells, where cancer cells become
resistant or refractory to the intended cytotoxic action of a variety of
conventional chemotherapeutic agents. In many cases, resistance developed to a
specific chemotherapeutic agent results in resistance where the cancer cell
becomes cross-resistant to a wide variety of chemotherapeutic agents. Given the
current limitations of chemotherapy, there is a clear need for new therapies
that are effective against a broad range of resistant and refractory cancers,
as well as chemotherapeutics that act by novel mechanisms which can offer
benefits as a combination therapy with existing chemotherapeutic agents.
Irofulven (MGI 114) cancer therapy agent
Irofulven is our lead cancer therapy drug candidate under development and is
part of our family of proprietary cancer therapy compounds called acylfulvenes.
Acylfulvenes, including irofulven, are semi-synthetic derivatives of the
natural product illudin S obtained from the Omphalotus olearius mushroom. We
licensed rights to the entire class of acylfulvene agents, including irofulven,
from the University of California in 1993.
We believe irofulven:
. is potentially effective as an anti-tumor agent in treating a broad
range of cancers;
33
<PAGE>
. has a unique mechanism of action that may make it effective in treating
refractory cancers, or cancers that are unresponsive to existing cancer
therapies;
. has demonstrated activity against tumors that are known to be resistant
to other cancer therapies; and
. has a side effect profile that makes it potentially well-suited for use
in combination with existing cancer therapies.
Mechanism of action studies have indicated that irofulven is rapidly taken up
by sensitive tumor cell types where it reacts with tumor cell DNA and protein
targets in a novel manner, producing rapid inhibition of DNA synthesis and DNA
lesions that are difficult for the tumor cell to repair. The initiation of DNA
damage by irofulven begins tumor selective apoptotic degradation of DNA that
ultimately causes cell death. We believe the differential effect of irofulven
on tumor cells compared to healthy cells can lead to real clinical benefit. We
further believe irofulven could be the first of a series of acylfulvene analogs
that merit development as cancer therapies.
We believe that irofulven has a unique mechanism of action that makes it well-
suited for study in refractory patient populations and in combination with
other cancer therapies. Preclinical data and early clinical data demonstrate
irofulven's activity against tumors that are known to be resistant to other
therapies. Preclinical studies have also demonstrated the additive or
synergistic effect of irofulven with a number of marketed cancer therapies.
Furthermore, to date, irofulven has demonstrated a differentiated side effect
profile relative to certain marketed cancer therapies, which we believe adds to
the prospect of irofulven combining well with these cancer therapies.
Therefore, we believe that pursuing multiple development paths for irofulven in
different refractory cancers, and in combination with other cancer therapies,
could lead to its use as a first line-therapy in various tumor types.
Preclinical toxicology studies in rats and dogs and initial clinical data from
the dosing of over 300 cancer patients with irofulven have demonstrated that
irofulven is generally well-tolerated for a chemotherapeutic compound and it
has reversible side effects. The primary dose-limiting side effect has been
bone marrow suppression, or depleted blood platelet counts. Other drug-related
side effects have been nausea, vomiting, fatigue and facial redness. Bone
marrow suppression has been controlled through dose reductions or treatment
delays to allow recovery of blood platelet counts. Nausea and vomiting are
prophylactically controlled with standard, currently available treatments.
One method of identifying targets for further human trials is to conduct
preclinical tests on mice that have been implanted with human, solid tumors.
Testing of irofulven in this disease model has demonstrated dose-related anti-
tumor activity, including an increase in survival and tumor regressions in the
following types of cancers:
. Prostate . Gastric
. Ovarian . Breast
. Pancreatic . Melanoma
. Non-small Cell Lung . Small Cell Lung
. Colon . Squamous Cell (Head and Neck)
. Rhabdomyosarcoma . Neuroblastoma
An Investigational New Drug Application, or IND, for irofulven was submitted to
the FDA in September 1995 and Phase 1 human safety testing was initiated in
December 1995. In October 1997, we initiated a second Phase 1 trial to evaluate
a different dosing schedule. Both Phase 1 trials completed enrollment in 1998
after establishing a maximum tolerated dose level and a recommended dosing
regimen for the initial Phase 2 trials of 11 mg/m/2/ infused daily for five
consecutive days, repeated every four weeks.
Phase 1 clinical trials are conducted in small patient populations and are not
designed to measure efficacy. However, the investigators participating in our
clinical programs, including our Phase 1 trials, have observed anti-tumor
activity using standard response criteria. A complete response means that all
tumor tissue has
34
<PAGE>
disappeared and the patient appears to be disease free. A partial response
means that evaluable tumor tissue has shrunk by at least 50 percent. A minor
response means that the tumor has shrunk by 25-50 percent. Stable disease means
that the tumor has either shrunk or grown by less than 25 percent. Progressive
disease means that the tumor has grown by more than 25 percent. Seven out of a
total of 32 patients who received daily treatments at a dose between 8 and 18
mg/m/2/ in our Phase 1 trials demonstrated anti-tumor responses to irofulven.
Of the patients participating in these Phase 1 clinical trials:
. one patient with metastatic pancreatic cancer experienced an objective
partial response. The tumor shrunk 71 percent and the patient remained
in the study through seven courses, or nine months, of irofulven therapy
before withdrawing from the study due to progressive disease;
. one patient with cancer of the thymus gland experienced an objective
minor response;
. one patient with ampullary cancer, which affects a duct from the
pancreas, experienced notable improvement in quality of life through
five courses of therapy; and
. three patients with colon cancer and one patient with liver cancer
experienced stable disease through at least four courses of therapy.
Irofulven is currently being tested in eight Phase 2 trials for various solid
tumor types. Of these trials, we are sponsoring one trial for the treatment of
ovarian cancer, one trial for the treatment of prostate cancer, and two trials
for the treatment of pancreatic cancer. We chose to sponsor these specific
trials because:
. these cancer types have significant mortality and morbidity associated
with them;
. current therapies are inadequate;
. there was noticeable anti-tumor response in our preclinical and clinical
studies;
. clinical trials for ovarian and pancreatic cancers should be of a
relatively short duration; and
. product candidates for these indications are likely to qualify for
expedited regulatory review.
Under a Clinical Trials Agreement with us, the NCI is sponsoring six additional
irofulven Phase 2 trials for the treatment of five other solid tumor types. We
intend to utilize the future results from these trials to further illustrate
the safety of irofulven as well as support the potential expansion of
irofulven's label into additional refractory solid tumor types. Furthermore, we
are conducting clinical trials to determine the efficacy of irofulven in
combination with existing cancer therapies. We plan to initiate discussions
with the FDA in preparation for a Phase 3 clinical program for irofulven. Based
on our review of interim results from our ongoing clinical trials of irofulven,
we intend to initiate our pivotal Phase 3 clinical program by the end of 2000.
Irofulven for ovarian cancer
We are developing irofulven for the treatment of ovarian cancer. Ovarian cancer
is the leading cause of gynecological cancer deaths among American women. The
ACS estimates that approximately 23,100 new cases of cancer will be diagnosed
and 14,000 women will die from the disease in the United States in 2000.
Worldwide, 166,000 new cases of ovarian cancer and 101,000 deaths are estimated
to occur annually. Taxol(R) and Paraplatin(R) are the two most commonly
prescribed drugs as first-line treatments for ovarian cancer.
Initially, we are studying irofulven in refractory ovarian cancer patients who
have had no anti-tumor response during, or following, treatment with another
drug or combination of drugs or have had regrowth of their tumor within six
months of treatment. For these patients few treatment alternatives are
available.
35
<PAGE>
Based on preclinical data and our Phase 1 results, in December 1998 we
initiated a Phase 2 trial with irofulven for the treatment of ovarian cancer
patients utilizing the dosing regimen established in our Phase 1 trials. To
qualify for this clinical trial, patients must have advanced ovarian cancer and
must not have responded, or are no longer responding, to paclitaxel (Taxol) and
platinum-based therapies such as cisplatin (Platinol(R)) or carboplatin
(Paraplatin). The primary endpoint of this trial is objective tumor response,
with secondary endpoints being time to response, duration of response, and time
to progression. The clinical trial was initially designed to evaluate 14
ovarian cancer patients. In May 1999, we expanded patient enrollment to include
a total of 30 evaluable patients after observing a confirmed partial response
in one of the first six patients. Interim results as of the date of this
prospectus from this Phase 2 trial include data from 16 evaluable patients. Of
these 16 patients:
. one patient experienced a confirmed partial response;
. one patient experienced a partial response that was observed in only the
first of two measurements required for a confirmed partial response;
. one patient experienced stable disease through four cycles of treatment;
. nine patients discontinued treatment due to progressive disease; and
. four patients discontinued treatment due to adverse events including
nausea, vomiting, fatigue and psychosis.
The NCI is also conducting a Phase 2 trial of irofulven for the treatment of
ovarian cancer. The most significant difference between our Phase 2 trial and
the NCI Phase 2 trial is that the NCI trial is being conducted in ovarian
cancer patients with a broader range of initial response to a variety of
therapies but with recurrent or persistent disease. The recently published
abstract for the upcoming meeting of the American Association for Cancer
Research, or AACR, concluded that irofulven is an active agent in ovarian
cancer patients with recurrent or persistent disease and that further studies
are warranted. This conclusion was based on an analysis of 11 patients enrolled
in this study when the abstract was submitted in November 1999. Of those 11
patients, three patients were not yet evaluable, since they had each only
received a single course of therapy and still remained in the trial. Of the
eight evaluable patients at the time the abstract was submitted:
. three patients, or 37.5 percent, experienced a partial response after
four to six cycles of therapy;
. one patient experienced a minor response with reduction in tumor size of
44 percent after two cycles of therapy;
. three patients withdrew due to malaise and fatigue; and
. one patient discontinued treatment due to progressive disease after
three cycles of therapy.
We expect investigators from the NCI to present updated data, with more recent
clinical results for this Phase 2 clinical trial, at their presentation at the
April 2000 AACR annual meeting.
These clinical trials are ongoing and subsequent results from this clinical
trial, or results from future clinical trials, may not demonstrate similar
safety and efficacy. Furthermore, the dosing regimen in these trials has been
modified to 11 mg/m/2/ for four consecutive days, versus five days currently,
to improve tolerability, which may also affect future clinical trial results.
We believe the interim response results from the NCI and our Phase 2 clinical
trials demonstrate that irofulven is potentially effective in the treatment of
refractory ovarian cancer patients for which few treatment options remain.
Ovarian cancer represents a disease with a large, unmet medical need that we
believe would make irofulven eligible for expedited regulatory review.
Therefore, we are considering ovarian cancer as a candidate for our pivotal
Phase 3 clinical program for irofulven.
36
<PAGE>
Irofulven for pancreatic cancer
We are developing irofulven for the treatment of pancreatic cancer. Pancreatic
cancer is the fifth most common cause of cancer-related death in the United
States. It is an aggressive disease that has few effective treatment options.
The ACS estimates that 28,300 new cases of pancreatic cancer are diagnosed in
the United States each year, out of an estimated 170,000 new cases worldwide.
The death rates for pancreatic cancer are virtually equal to the incidence
rates. Currently, the most common treatment is chemotherapy with the drug
gemcitabine (Gemzar(R)), which was approved by the FDA in 1996.
Based on our preclinical data and our Phase 1 results, in December 1998 we
initiated a 51 patient, multi-center Phase 2 trial with irofulven for the
treatment of pancreatic cancer patients utilizing the dosing regimen
established in our Phase 1 trials. To qualify for this clinical trial, patients
must be refractory to gemcitabine. Once these patients become refractory to
gemcitabine, they have few remaining treatment options and generally survive
less than three months. The primary endpoint of this trial is six-month
survival with secondary endpoints being objective tumor response, time to tumor
progression, and quality of life measures.
To date, six of the 51 patients enrolled in our ongoing Phase 2 clinical trial
have achieved the primary endpoint of six-month survival. Further results
include:
. one patient experienced a complete response that lasted over four months
before discontinuing treatment due to progressive disease;
. one patient experienced a confirmed partial response with reduction in
tumor size of 84 percent;
. one patient experienced a partial response after one measurement, but
withdrew from the trial before a second measurement required for a
confirmed response could be taken; and
. 12 patients discontinued treatment due to adverse events including
nausea, vomiting and bone marrow suppression.
This clinical trial is ongoing and subsequent results from this clinical trial,
or results from future clinical trials, may not demonstrate similar safety and
efficacy. We believe the interim response results from our Phase 2 clinical
trial demonstrate that irofulven is potentially effective in the treatment of
advanced pancreatic cancer in patients refractory to the first-line therapy of
gemcitabine.
In April 2000, we plan to initiate an additional Phase 2 trial for pancreatic
cancer. The goal of this trial is to better understand the impact of dosing
regimen adjustments on the safety and efficacy of irofulven in pancreatic
cancer patients. The trial has a two-stage design: if at least one of the first
19 evaluable patients demonstrates a partial response, the enrollment goal will
increase to 35 evaluable patients. To be eligible for the trial, a patient must
have inoperable, advanced or metastatic pancreatic cancer. Unlike the initial
Phase 2 pancreatic cancer trial, this study allows for the enrollment of
patients who have not received prior drug therapy.
Pancreatic cancer represents a disease with a large, unmet medical need that we
believe would make irofulven eligible for expedited regulatory review.
Therefore, we are considering pancreatic cancer as a candidate for our Phase 3
clinical program for irofulven.
Irofulven for prostate cancer
We are developing irofulven for the treatment of prostate cancer. Prostate
cancer is the most commonly diagnosed malignancy and the second leading cause
of cancer death among men in the United States. The ACS estimates that
approximately 180,400 new cases of prostate cancer will occur in the U.S.
during 2000. Furthermore, 31,900 men die annually from prostate cancer in the
United States, out of an estimated 165,000 prostate cancer-related deaths
worldwide. First-line pharmaceutical therapies used, in combination with
surgery, to treat prostate cancer are almost exclusively hormone-based
therapies. Unfortunately, such hormone therapies
37
<PAGE>
ultimately lose their ability to contain the disease, leaving patients with few
second-line treatment options. Approximately, 30 percent of all newly diagnosed
prostate cancer patients will progress to hormone-refractory metastatic
disease. Currently approved cancer therapies are only effective in treating the
symptoms and slowing the progression of advanced prostate cancer.
Based on our preclinical data and our Phase 1 results, in July 1998 we
initiated a 14 patient Phase 2 trial with irofulven for the treatment of
hormone-refractory prostate cancer patients. The primary endpoint of this trial
is a decrease or stability in prostate specific antigen, or PSA, levels, a
blood marker that is often used by clinicians to help diagnose and measure the
progression of prostate cancer. Secondary clinical endpoints include objective
tumor response in patients with measurable disease, duration of response and
time to disease progression. In December 1998, we expanded this trial to
include a total of 31 evaluable patients after two of the original patients
showed a sustained drop in their PSA levels of 64 to 81 percent, meeting the
requirement for trial expansion.
Interim results as of the date of this prospectus from this fully enrolled
Phase 2 trial include data from 42 patients with hormone-refractory prostate
cancer include:
. five of 31 patients evaluable for PSA response, or 16 percent,
experienced decreased PSA levels;
. 20 of 31 patients evaluable for PSA response, or 65 percent, experienced
stable PSA levels;
. two out of nine patients with measurable disease experienced an
objective response in their abdominal lymph nodes, including one
complete response;
. six patients evaluable for PSA response discontinued treatment due to
progressive disease without meeting the primary endpoint of the trial;
and
. the primary toxicity was reversible bone marrow suppression.
Based on this clinical trial data, we believe irofulven has the ability to
reduce PSA levels in hormone-refractory prostate cancer patients. While
hormone-refractory prostate cancer represents a disease with a large, unmet
medical need and there are a number of patients who could benefit from a
chemotherapeutic agent that demonstrated life extension, it is unlikely we will
consider prostate cancer as a candidate for our initial Phase 3 clinical
program for irofulven. This expectation is based upon uncertainty about the
ability of PSA decreases to predict survival benefit and the need for
relatively large and long clinical trials. Development of irofulven for the
treatment of prostate cancer will be further evaluated during 2000 to assess
the merits of its use, either as a stand-alone therapy or in combination with
other therapies.
Irofulven in combination with other cancer therapies
In February 1999, we initiated a Phase 1 human safety trial combining irofulven
with Pharmacia & Upjohn's cancer therapy drug CPT-11 (Camptosar(R)). The trial
is a dose-escalating trial that will attempt to find the maximum tolerable dose
of these two drugs when used in combination. We believe that a major advantage
of combination therapy is the potential to use lower doses of either agent to
achieve the same or improved anti-tumor benefit with reduced side effects. CPT-
11 therapy is associated with dose-limiting diarrhea and neutropenia, which is
a decrease in white blood cell counts. In contrast, irofulven has not been
associated with significant diarrhea, but may produce neutropenia and other
bone marrow suppression. In this Phase 1 trial, we observed anti-tumor activity
in a non-small cell lung cancer patient. Reversible neutropenia has been the
most significant side effect observed to date in this dose-escalating trial.
We have also initiated a Phase 1 human safety trial of irofulven on a weekly
dosing schedule that is designed for more convenient use with other cancer
therapies. The dosing regimen being investigated is a five-minute infusion,
once a week for three weeks, repeated every four weeks. The trial is expected
to determine the maximum tolerated dose of irofulven, when administered on this
schedule, to patients with advanced solid tumors. This trial began in December
1999 and is ongoing.
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<PAGE>
NCI clinical trials
Under a 1996 Clinical Trials Agreement with us, the NCI is sponsoring and
overseeing, at its own expense, a clinical trials program using irofulven in
its network of designated cancer centers and other institutions.
<TABLE>
<CAPTION>
Cancer Type Cancer Statistics* Trial Description
<S> <C> <C>
Ovarian Cancer . U.S. 23,100 new cases Ongoing Phase 2 efficacy
14,000 deaths trial in an expected total
. Worldwide 166,000 new cases of 29 to 74 patients with
101,000 deaths refractory or persistent
disease.
Breast Cancer . Most common cancer among women. Ongoing Phase 2 efficacy
trial in an expected total
. U.S. 184,200 new cases of 14 to 30 patients who
41,200 deaths have received one or two
. Worldwide 796,000 new cases chemotherapy regimens prior
314,000 deaths to beginning trial.
Non-Small Cell . U.S. 164,100 new cases Ongoing Phase 2 efficacy
Lung Cancer 156,900 deaths trial in an expected total
. Worldwide 1,037,000 new cases of 66 patients with
921,000 deaths refractory or relapsed non-
small cell lung cancer.
Melanoma . U.S. 47,700 new cases Ongoing Phase 2 efficacy
7,700 deaths trial in an expected total
. Worldwide 106,000 new cases of 14 to 35 patients with
33,000 deaths metastatic melanoma.
Cervical Cancer . U.S. 12,800 new cases Pending Phase 2 efficacy
4,600 deaths trial in an expected total
. Worldwide 371,000 new cases of 12 to 37 patients with
190,000 deaths metastatic or recurrent
cervical cancer.
Endometrial . U.S. 36,100 new cases Pending Phase 2 efficacy
Cancer 6,500 deaths trial in an expected total
. Worldwide 142,000 new cases of 19 to 51 patients with
42,000 deaths persistent or recurrent
endometrial cancer.
Childhood . Represents the leading Ongoing Phase 1 trial
Cancers cause of death from designed to determine the
disease between the ages maximum tolerated dose,
of one and 19. determine a safe and
. U.S. 12,400 new cases tolerable dose of irofulven
2,300 deaths for Phase 2 trials, and
make a preliminary
assessment of anti-tumor
activity of irofulven in
childhood solid tumors.
Leukemia-- . U.S. 30,800 new cases Ongoing Phase 1 trial
Various Types 21,700 deaths designed to determine the
. Worldwide 231,000 new cases maximum tolerated dose,
184,000 deaths determine a safe and
tolerable dose of irofulven
for Phase 2 trials, and
make a preliminary
assessment of anti-tumor
activity of irofulven in
leukemia. Approximately 25
patients are projected to
be enrolled.
</TABLE>
* U.S. cancer statistics are ACS projections for the year 2000. Worldwide
cancer statistics are based on ACS data for 45 countries during the years
1994-1997.
39
<PAGE>
We have agreed to provide drug product for all of these trials and we will have
access to any resulting data. Based on the results from these trials, further
development of irofulven for the treatment of each indication, either as a
single agent or in combination with other cancer therapies, will be evaluated.
Five Phase 2 trials, two each in colorectal cancer and renal cancer and one in
non-small cell lung cancer, have recently been closed by their respective
sponsoring institutions due to a lack of sufficient response or tolerance
concerns.
Other acylfulvene analogs
In addition to irofulven, we have obtained license rights to over 100
acylfulvene analogs which have been developed using targeted, structural
modification of illudin S. The development and the initial testing of these
analogs has been performed at the University of California, San Diego, or UCSD.
The NCI is also screening new analogs from the acylfulvene family for anti-
tumor activity. Currently, ten analogs with activity in the NCI's primary in
vitro screen have been through additional in vivo testing by the NCI. The NCI
has noted favorable results for all ten of these analogs in a hollow fiber in
vivo assay. The broad-based anti-tumor activity of these acylfulvene analogs
suggests that this class of compounds has the potential to produce additional
clinical development candidates. Three of these analogs have been further
tested on human tumors implanted into immunodeficient mice. All three analogs
were found to cause complete regressions of certain non-small cell lung,
ovarian and renal tumors. We are currently evaluating these analogs for full
preclinical development.
Sales and Marketing
We currently market our products in the United States directly to radiation
oncologists, rheumatologists, select internal medicine physicians and other
physician specialists through our sales force of four regional directors who
oversee approximately 41 sales representatives, each assigned a geographic
territory. We intend to use our specialty sales force to market and sell
irofulven in the United States if it is approved for commercial sale.
In addition, we have an in-house sales and marketing staff of eight persons who
support the specialty sales force. We also use a variety of marketing programs
to reach our targeted audiences, including telemarketing and journal
advertising.
We use international partnerships to commercialize our products outside the
United States. We currently have agreements with Chiron, Kissei and Pharmacia &
Upjohn to develop and commercialize Salagen Tablets for the European, Japanese
and Canadian markets, respectively. We receive payments based upon product
sales in these territories. We also have distribution agreements for Salagen
Tablets in Israel, Korea and Singapore. Under these distribution agreements, we
receive milestone payments, licensing payments based on product sales and other
payments depending on the territory.
Research and Development
We maintain active drug development programs for all of our new drug candidates
and commercialized products. Current drug development efforts are primarily
focused on irofulven. We are also participating in post-marketing studies to
support the continuing commercialization of Salagen Tablets. Our research and
development expenses increased 26 percent from 1998 from 1999 due to the
expanding clinical trial program for irofulven. We anticipate that our research
and development expenses will increase significantly over the next few years as
we pursue multiple development paths for irofulven.
We have incurred significant research and development costs in the past and
believe that substantial capital resources will be required to support current
and future development programs. We spent approximately $5.0 million in 1997,
$5.3 million in 1998 and $6.7 million in 1999 on research and development. In
recent years, from one-half to two-thirds of our research and development
expense was attributable to contracts with third parties. Approximately 64
percent of our research and development expense in 1999 was attributable to
third party services. Funding for research and development is expected to come
from internally generated
40
<PAGE>
funds, joint ventures, strategic alliances or other sources of capital,
including equity or debt offerings. We also pursue product acquisitions in
order to expand our development pipeline.
Successful drug development requires a broad spectrum of scientific, clinical
and product development expertise. As part of our strategy, we do not directly
conduct basic research or traditional drug discovery activities because we
intend to acquire rights to drug candidates that are at least in the human
clinical stage of development. This approach substantially reduces our research
risk due to product failure, and eliminates the need for investment in
discovery research laboratories and personnel.
We manage our human clinical development of drug candidates by selectively
outsourcing certain activities. We have in-house medical communications
capabilities and regulatory affairs expertise which allow us to maintain
support systems, monitor adverse drug experience reporting, and file NDAs with
the FDA. We outsource other development activities, such as:
. preclinical studies and clinical trials;
. clinical data analysis;
. product formulation;
. product manufacturing; and
. product distribution.
We expect to continue to contract with third parties until it is necessary and
economical to add these capabilities internally. We currently have 28 employees
in research and development, regulatory affairs and product formulation.
International Alliances
Dainippon Pharmaceutical Co., Ltd.
In October 1995, we entered into a development and commercialization agreement
with Dainippon under which we granted an exclusive license to Dainippon to
develop and commercialize acylfulvenes, including irofulven, in Japan.
Dainippon granted back to us an irrevocable, exclusive, royalty-free license
allowing us to use any technology or data developed by Dainippon relating to
the acylfulvenes. If a resulting product has not been launched in Japan by
October 2005, we may terminate the license unless Dainippon elects to make
license continuation payments on a quarterly basis. Dainippon agreed to pay us
an initial and continuing quarterly milestone payments through April 2000 of
which the most recent, in the amount of $550,000, was received in December
1999. They have also agreed to pay us a portion of any non-royalty payments
made by a sublicensee to Dainippon. Under the terms of the agreement, from
April 2000 through January 1, 2002, $4.3 million in deposit payments are
scheduled to be received. Our repayment is due on April 1, 2002, or receipt of
initial marketing approval in Japan, whichever is later. Dainippon may elect to
receive the deposit repayment in cash, as a credit toward delivery of bulk drug
substance or in shares of our common stock. Unless terminated earlier by the
parties, the term of the agreement is for the term of our patents in Japan, or
10 years from the date of the last regulatory approval in Japan, whichever is
later. Thereafter, the agreement automatically renews for additional one year
periods.
In addition, we entered into a supply agreement with Dainippon in October 1995
pursuant to which we participate in the commercialization of the product and
agree to supply Dainippon's requirement of the product during the term of the
development, marketing and cooperation agreement described above. Dainippon
agrees to make certain minimum purchase requirements during the first four
years and as agreed upon by the parties thereafter.
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<PAGE>
Kissei Pharmaceutical Co., Ltd.
In December 1994, we entered into a license agreement with Kissei under which
we granted to Kissei an exclusive, royalty-bearing license to develop and
commercialize Salagen Tablets in Japan. Kissei is currently conducting its
pivotal clinical program of Salagen Tablets for the symptoms of radiation-
induced xerostomia in head and neck cancer patients. Kissei granted back to us
an irrevocable, non-exclusive, royalty-free license allowing us to use any
technology or data developed by Kissei relating to Salagen Tablets. Kissei paid
us an initial license fee upon execution of the agreement and agreed to pay us
additional milestone payments, one of which was paid in 1995 and another in
1997. In addition, Kissei agreed to pay us royalties equal to a certain
percentage of net sales revenues, subject to annual minimum requirements.
Unless earlier terminated by the parties, the term of the agreement is for ten
years from the date Salagen Tablets are launched in Japan. Thereafter, the
agreement automatically renews for additional one year periods.
Chiron B.V.
In December 1992, we entered into a cooperation and license agreement with
Chiron under which we have granted to Chiron an irrevocable, royalty-bearing
license to develop and commercialize Salagen Tablets in Europe. Sales of
Salagen Tablets in Europe began in 1995. Chiron granted to us an irrevocable,
non-exclusive, royalty-free license allowing us to use any technology or data
developed by Chiron relating to Salagen Tablets. Chiron paid us an initial
license fee upon execution of the agreement and agreed to pay us three
additional milestone payments. In addition, Chiron agreed to pay us royalties
equal to a certain percentage of net sales revenues, with an increased
percentage of sales for two or more indications. Chiron also agreed to pay us
decreased royalties during the three-year period following termination of the
agreement. Unless earlier terminated by the parties, the term of the agreement
is for 15 years from the date of first commercial sales of Salagen Tablets in
Europe or the date of termination of our exclusive rights under our supply
agreement with the Fine Chemicals Division of Merck KgaA with respect to a
major market, whichever is later. Thereafter, the agreement may be renewed for
one additional three-year period and thereupon automatically expires unless
extended by the parties. We are currently working with Chiron to identify a
pharmaceutical company as a new partner for sales of Salagen Tablets in Europe.
In addition, we entered into a supply agreement with Chiron in December 1992
pursuant to which we agree to supply Chiron's requirement of Salagen Tablets
until the termination of the cooperation and license agreement with Chiron or
our agreement with Merck KgaA, whichever is earlier.
Pharmacia & Upjohn Company
In November 1994, we entered into a license agreement with Pharmacia & Upjohn,
under which we have granted to Pharmacia & Upjohn an exclusive, royalty-bearing
license to develop and commercialize Salagen Tablets in Canada. Sales of
Salagen Tablets began in 1997. Pharmacia & Upjohn granted to us an irrevocable,
non-exclusive, royalty-free license allowing us to use any technology or data
developed by Pharmacia & Upjohn relating to Salagen Tablets. Pharmacia & Upjohn
paid us an initial license fee upon execution of the agreement and agreed to
pay us royalties equal to a percentage of net sales revenues, subject to annual
minimum requirements. In addition, we agreed to pay Pharmacia & Upjohn
royalties if we promote Salagen Tablets in Canada in the first or second year
following termination of the agreement. Unless earlier terminated by the
parties, the term of the agreement is for seven years from the date of first
commercial sales of Salagen Tablets in Canada. Thereafter, the agreement
continues for an additional two-year period and thereupon automatically expires
unless extended by the parties.
In addition, we entered into a supply agreement with Pharmacia & Upjohn in
November 1994 pursuant to which we agree to supply Pharmacia & Upjohn's
requirement of the product until the termination of the License Agreement with
Pharmacia & Upjohn or our agreement with Merck KgaA, whichever is earlier.
42
<PAGE>
Acyfulvene License Agreement
In August 1993, we entered into an exclusive license agreement with the Regents
of the University of California. Under the agreement, the university granted to
us an exclusive, worldwide, royalty-bearing license for the commercial
development, manufacture, use and sale of the method of treating tumors using
acylfulvene analogs. We paid the university an initial license fee upon
execution of the agreement and agreed to pay license maintenance fees on each
anniversary of the execution of the agreement until we submit the first NDA
relating to the analogs to the FDA. In addition, we made a development
milestone payment in 1996 and agreed to make additional development milestone
payments in the future. We have also agreed to pay royalties on an annual net
sales revenues, subject to annual minimum requirements. Unless earlier
terminated by the parties, the term of the agreement extends until the later
of: (a) the expiration of the last-to-expire patent we have licensed; or (b)
ten years from the date of first commercial sale of products developed from the
acylfulvene analogs.
Co-Promotion Agreements
In July 1999, we entered into a co-promotion agreement with Pharmacia & Upjohn
for the exclusive promotion and marketing of Azulfidine EN-tabs to the
rheumatology market in the United States. Under the agreement, we will earn
promotion revenue based on our ability to increase Pharmacia & Upjohn sales of
Azulfidine EN-tabs. Pharmacia & Upjohn will pay us one-half of all incremental
net profits from any growth in sales of Azulfidine EN-tabs subsequent to the
commencement of this co-promotion. The agreement has an initial term of
42 months, ending in March 2003.
In April 1999, we entered into a co-promotion agreement with Connetics for the
promotion of Ridaura to the rheumatology market in the United States. We
receive $250,000 per quarter for making a specified number of sales calls. We
are also entitled to an annual payment of 50 percent of the gross margins on
Connetics' net sales of Ridaura that equal or exceed $7,500,000. We do not
receive payment for gross margins on Connetics' sales of Ridaura that are less
than $7,500,000. The agreement has an initial term of 18 months, ending in
September 2000.
In April 1999, we also entered into a co-promotion agreement with Connetics for
the promotion of Luxiq Foam, 0.12% to the rheumatology market in the United
States. Under the terms of the agreement, we receive a split of product
contribution from Connetics' sales of Luxiq in the rheumatology market. The
agreement has a minimum term of 30 months, ending in October 2001.
Distribution Agreements
We entered into distribution agreements granting a license to the following
three exclusive, independent distributors to promote and distribute Salagen
Tablets in the designated territories:
. Megapharm (Israel)--expires April 7, 2000;
. Hyundai Pharmaceutical (Korea)--expires February 26, 2006; and
. Pharma Forte (Singapore)--expires three years after regulatory approval
in Singapore.
The distributors are required to obtain local authorizations in connection with
the import/export and distribution of Salagen Tablets in their designated
territory. We generally receive milestone payments, payments based on product
sales and other payments depending on the territory.
Manufacturing
We do not own or operate any facilities for the manufacture of our products or
product candidates. Our marketed and development-stage pharmaceuticals are
manufactured under agreements with third party manufacturers. Our manufacturing
and quality assurance personnel authorize, monitor and approve virtually all
aspects of the manufacturing process. In-process and finished product
inventories are analyzed through
43
<PAGE>
independent testing laboratories and the results are reviewed and approved by
us prior to release for distribution.
We generally carry at least a six month supply of inventory of each of our
marketable products as safety stock. We have a policy to fill orders by
wholesalers on demand, and do not intend to carry a backlog of orders at any
time.
Salagen Tablets
We obtain pilocarpine hydrochloride, the active pharmaceutical ingredient for
the manufacture of Salagen Tablets, under an exclusive supply and license
agreement with Merck KgaA. The exclusive term of this agreement ends on
December 31, 2007, and may be extended for additional five-year terms unless
earlier terminated by the parties. Upon termination of the exclusive term, the
agreement may continue for an indefinite period on a non-exclusive basis. The
refined raw material is a semi-synthetic salt of an extract from plants grown
and processed exclusively on carefully managed plantations in South America. We
believe that the supply of pilocarpine hydrochloride is adequate for the
foreseeable future. Salagen Tablets are currently manufactured for us at Global
Pharm, Inc. in Toronto, Ontario, Canada under a manufacturing agreement. This
agreement may be terminated by either party upon three years' written notice.
Didronel I.V. Infusion
Pharmaceutical grade etidronate disodium for the manufacture of Didronel I.V.
Infusion is obtained from Procter & Gamble Pharmaceutical, Inc. in Norwich, New
York, under a supply agreement. The agreement provides for automatic renewal
for one-year terms unless either party gives written notice of termination at
least 180 days prior to the end of each calendar year. Didronel I.V. Infusion
is currently manufactured at Taylor Pharmaceuticals, a wholly owned subsidiary
of Akorn, Inc. in Decatur, Illinois. Ben Venue Laboratories, Inc. of Bedford,
Ohio is an approved alternate contract manufacturer of Didronel I.V. Infusion.
Co-Promotional Arrangements
Products co-promoted by us are manufactured and distributed by their owners;
Ridaura and Luxiq by Connetics and Azulfidine EN-tabs by Pharmacia & Upjohn. We
receive promotion fees based on sales of the co-promoted products or on the
basis of our sales call activity. We are not involved in the manufacture of
these products.
Irofulven and Other Development-Stage Pharmaceuticals
As a regular part of our business, we establish contract manufacturing
arrangements for our development-stage pharmaceuticals, including irofulven.
These arrangements are typically short-term and include purchase orders, supply
agreements and development-scale manufacturing contracts.
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<PAGE>
Patents and Proprietary Rights
We rely on patent rights, orphan drug designation, trade secrets, trademarks,
and nondisclosure agreements to establish and protect our proprietary rights in
our products in both the United States and selected foreign jurisdictions.
Current patent and orphan drug status with respect to certain of our products
are as follows:
<TABLE>
<CAPTION>
Subject Status Issue Date Country
------- ------ ---------- -------
<S> <C> <C> <C>
Salagen Tablets for Orphan drug March 22, 1994 United States
symptoms of
radiation-induced
xerostomia in head
and neck cancer
patients
Salagen Tablets for Orphan drug February 11, 1998 United States
symptoms of
Sjogren's syndrome
Irofulven and use Three patents August 8, 1995, United States and
of irofulven, as issued June 4, 1996 and various other
cancer therapy October 8, 1996 countries
agent
Synthetic methods Two patents issued March 3, 1998 and United States; PCT
for preparing January 5, 1999 application filed
acylfulvenes (United States) to preserve foreign
rights
Substituted Three U.S. patents August 8, 1995, United States and
acylfulvene issued; one U.S. August 3, 1999 and various other
compounds and use patent allowed; February 15, 2000 countries
as cancer therapy various patent
agents (not applications
including pending
irofulven)
Irofulven for Orphan drug April 6, 1999 United States
treatment of
pancreatic cancer
Irofulven for Orphan drug July 12, 1999 United States
treatment of
ovarian cancer
Irofulven for Orphan drug July 27, 1999 United States
treatment of renal
cell carcinoma
</TABLE>
The term of a U.S. patent issued from an application filed before June 8, 1995
is the longer of seventeen years from its issue date or twenty years from its
effective filing date. The term of a U.S. patent issuing from an application
filed after June 8, 1995 is twenty years from its effective filing date. All of
the U.S. patents covering irofulven or its use were issued from applications
filed before June 8, 1995. The Drug Price and Competition and Patent Term
Restoration Act of 1984, the Generic Animal Drug Act, and the Patent Term
Restoration Act generally provide that a patent relating to, among other items,
a human drug product, may be extended for a period of up to five years by the
U.S. Commissioner of Patents and Trademarks if the patented item was subject to
regulatory review by the FDA before the item was marketed. Under these acts, a
product's regulatory review period (which consists generally of the period from
the time when the exemption to permit clinical investigations becomes effective
until the FDA grants marketing approval for the product) forms the basis for
determining the length of the extension an applicant may receive. There can be
no assurance that any issued patents will be extended in term.
We have obtained extensive patent protection for analogs of irofulven. However,
we can make no assurances that any issued patent, whether domestic or foreign,
will provide significant patent protection. Further, patent
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<PAGE>
positions of pharmaceutical companies are generally uncertain and involve
complex legal and factual issues. Therefore, although we believe our patents
are valid, we cannot predict with any precision the scope or enforceability of
the claims allowed thereunder. In addition, there can be no assurance that our
patent applications will result in issued patents, that issued patents will
provide an adequate measure of protection against competitive technology which
could circumvent such patents, or that issued patents would withstand review
and be held valid by a court of competent jurisdiction. Furthermore, there can
be no assurance that any issued patents will not be infringed or otherwise
circumvented by others.
Orphan drugs are currently provided seven years market exclusivity for an
approved indication following approval to market by the FDA. Orphan drug
designation for our products does not, however, insulate us from other
manufacturers attempting to develop an alternate drug for the designated
indication, or the designated drug for another, separate indication.
We also rely on trade secrets and continuing innovation which we seek to
protect with reasonable business procedures for maintaining trade secrets,
including confidentiality agreements with our collaborators, employees and
consultants. There can be no assurance that these agreements will not be
breached, that we will have adequate remedies for any breach or that our trade
secrets and proprietary know-how will not otherwise be known or be
independently discovered by competitors.
In addition to the patents which form the basis of the pharmaceutical focus of
this company, we also own four U.S. patents which claim maize plants which are
resistant to herbicides which normally inhibit the activity of acetohydroxyacid
synthase and which also claim methods for producing such resistant plants.
These patents were issued between 1988 and 1998. While these patents have been
licensed to American Cyanamid, we may still incur expenses associated with any
litigation, interference or other administrative proceedings related to these
patents.
Trademarks
We have obtained trademark registration on the Salagen(R) trademark in the
United States and certain foreign jurisdictions. In addition, we use the
federally registered Didronel I.V. trademark under a license with Procter &
Gamble, the Ridaura(R) and Luxiq(TM) trademarks under a license with Connetics,
and the Azulfidine EN-tabs(R) trademark under a license with Pharmacia &
Upjohn.
Competition
The pharmaceutical industry is intensely competitive, based mostly on product
performance and pricing. Many members of the industry have resources far
greater than we do, providing them with potentially greater flexibility in
developing and marketing their products. While we will seek to protect our
products from direct competition through filing patents, seeking marketing
exclusivity under the Orphan Drug Act, and maintaining technical information as
trade secrets, there is no way to protect us from competition from products
with different chemical composition or products made using different
technology.
Currently, MedImmune Oncology, Inc. and Snow Brand Milk Products Co. Ltd. have
drugs that are approved for sale and compete with Salagen Tablets. A competing
product, amifostine, was approved in June 1999 by the FDA for reducing the
incidence of radiation-induced dry mouth in post-operative head and neck cancer
patients. Salagen Tablets are approved for the treatment of dry mouth symptoms
resulting from radiation used to treat head and neck cancer patients, and for
dry mouth symptoms associated with Sjogren's syndrome. Due to the more
restricted patient population for amifostine, as well as other factors such as
price and invasive administration, we currently believe that amifostine will
not have a major impact on sales of Salagen Tablets. Another competing product,
cevimeline hydrochloride, was approved in January 2000 as a treatment for dry
mouth symptoms associated with Sjogren's syndrome. It is too soon for us to
estimate what effect this competing compound will have on the overall size of
the Sjogren's syndrome market and future demand for Salagen Tablets.
46
<PAGE>
The exclusivity period afforded by orphan drug status for Salagen Tablets as a
treatment for symptoms of radiation-induced xerostomia in head and neck cancer
patients will end in March 2001. 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. There can be no assurance that we will be successful in our plan
to gain product specific protection for each of our pharmaceuticals or that
developments by others will not render our products noncompetitive or obsolete.
Many companies of all sizes, including large pharmaceutical companies as well
as specialized biotechnology companies, are developing cancer therapy drugs
that will compete with irofulven, if it is approved for sale in the United
States. There are also a number of products already on the market that will
compete directly with irofulven if it is approved. In addition, colleges,
universities, governmental agencies and other public and private research
institutions will continue to conduct research and may develop new cancer
therapies which would render our cancer therapy drug candidates obsolete or
non-competitive. Many of our competitors in the cancer therapy market also have
substantially greater financial, research and development, human and other
resources than we do.
Government Regulation
Our research and marketing activities are subject to significant regulation by
numerous governmental authorities in the United States and other countries.
Pharmaceutical products intended for therapeutic use in humans are governed by
FDA regulations in the United States and by comparable regulations in foreign
countries. The process of completing clinical testing and obtaining FDA
approval for a new drug product requires a number of years and the expenditure
of substantial resources without any assurance that approval for marketing will
be granted.
The FDA has established mandatory procedures to regulate the manufacturing and
testing process regarding the identity, strength, quality and purity of a
product. Following initial formulation, the steps required before any new
prescription pharmaceutical product may be marketed in the United States
include (1) preclinical laboratory and animal tests; (2) the submission to the
FDA of an IND; (3) adequate and well-controlled clinical trials to establish
the safety and efficacy of the drug; (4) the submission of an NDA to the FDA;
and (5) FDA approval of the NDA prior to any commercial sale.
Typically, preclinical studies are conducted in the laboratory and in animal
model systems to gain preliminary information on the drug's efficacy and to
identify any significant safety problems. The results of these studies are
submitted to the FDA as part of the IND application. Testing in humans may
commence 30 days after the IND has been filed unless the FDA issues a "clinical
hold." Some animal studies may be performed throughout the development process.
A three-phase clinical program is usually required for FDA approval of a
pharmaceutical product, unless "accelerated approval" is granted. Phase 1
clinical trials are conducted to determine the metabolism and pharmacologic
action of the product plus assess the side effects associated with increasing
doses of the product. Most Phase 1 trials are conducted with healthy
volunteers. Phase 1 cancer trials are conducted with cancer patients. If Phase
1 testing data is positive and there are no limiting adverse reactions, a Phase
2 clinical trial is conducted to gain exploratory therapeutic evidence as to
the safety and efficacy of the product among patients with the disease being
studied. A Phase 3 confirmatory therapeutic clinical trial is conducted on a
broader patient population including patients with multiple disease states and
taking one or more medications to provide sufficient data for the statistical
evidence of safety and efficacy that are necessary to evaluate the overall
benefit and risk relationship in a defined patient population. Phase 2 and
Phase 3 trials are usually multi-center trials in order to achieve greater
statistical validity and to have a broader patient population that is more
representative of the population of the country. A post-approval Phase 3 trial
may be required under "accelerated approval" and Phase 4 trials may also be
requested.
47
<PAGE>
Upon completion of clinical testing which demonstrates the product is safe and
effective for a specific indication, a NDA may be filed with the FDA. This
application includes details of the testing processes, preclinical studies,
clinical trials, as well as chemical, analytical, manufacturing, packaging and
labeling information. FDA approval of the application is required before the
applicant may market the new product.
Even after initial FDA approval has been obtained, further studies may be
required to provide additional data on safety or efficacy for current
indications, or in order to obtain approval for uses other than those for which
the product was initially tested. Moreover, such approval may entail
limitations on the indicated uses for which a drug may be marketed. Even if FDA
approval is obtained, there can be no assurance of commercial success for any
product. Post-marketing testing may be, and surveillance programs are,
required. The FDA may require withdrawal of an approved product from the market
if any significant safety issues arise while a product is being marketed. In
addition, before, during and after the process of approval, our prescription
drug products must all be manufactured in accordance with "good manufacturing
practices" as set forth by the FDA. Marketing of products is also regulated by
the FDA.
In November 1997, the FDA Modernization Act was enacted which defined and
codified the "fast track" product designation and used elements of the
accelerated approval process provided under the FDA's implementing regulations.
In contrast to the standard review process, the fast track process allows the
FDA to approve a product for market that is intended for the treatment of a
serious or life-threatening condition and has demonstrated an effect on a
clinical or surrogate endpoint "that is reasonably likely to predict clinical
benefit." In order to obtain fast track approval, there must be sufficient
clinical information available to persuade the FDA that a clinical benefit
should be demonstrated in confirming multi-center clinical trials. One
potential benefit of fast track is the option to submit and receive review of
components of the NDA according to an agreed to schedule, thereby expediting
the review process. Fast track approval allows a company to market the product
for an indication while the company conducts the confirming trials. These
confirming trials may require several years to complete. If the trials do not
demonstrate the safety and efficacy of a product, the FDA will withdraw its
fast track approval.
The health care industry is changing rapidly as the public, government, medical
professionals and the pharmaceutical industry examine ways to broaden medical
coverage while controlling health care costs. Potential approaches that may
affect us include managed care initiatives, pharmaceutical buying groups,
formulary requirements and various proposals to offer an expanded Medicare
prescription benefit. We are unable to predict when any proposed health care
reforms will be implemented, if ever, or the effect of any implemented reforms
on our business. Federal, state and local environmental laws and regulations do
not materially affect our operations and we believe that we are currently in
material compliance with such applicable laws and regulations.
Employees
As of March 20, 2000, we had 100 full-time and three part-time employees. Of
our employees, 50 are engaged in our marketing and selling effort, 28 are
involved in pharmaceutical development, including regulatory affairs and
manufacturing, and 25 are in other management or administrative positions. None
of our employees is represented by a labor union or is subject to a collective
bargaining agreement. We believe that our relations with our employees are
satisfactory.
Facilities
We lease approximately 27,000 square feet of office space in Bloomington,
Minnesota. The initial term of this lease expires in July 2005, with an option
for renewal.
Legal Proceedings
We are not currently a party to any material legal proceedings.
48
<PAGE>
MANAGEMENT
Directors, Executive Officers and Key Personnel
Set forth below is certain information regarding our executive officers,
directors and key employees.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Charles N.
Blitzer(/1/)........... 59 President, Chief Executive Officer and Director
William C. Brown(/1/)... 44 Chief Financial Officer and Secretary
Leon O. Moulder,
Jr.(/1/)............... 42 Executive Vice President
Alan R. Caplan.......... 43 Vice President, Sales and Marketing
Robert M. Johnson....... 56 Vice President, Pharmaceutical Manufacturing Operations
John R. MacDonald,
Ph.D. ................. 45 Vice President, Research and Development
Edgar F. Timberlake..... 52 Vice President, Human Resources and Administration
Andrew J. Ferrara....... 59 Director
Joseph S.
Frelinghuysen.......... 58 Director
Michael E. Hanson....... 52 Director
Hugh E. Miller.......... 64 Director
Timothy G. Rothwell..... 49 Director
Lee J. Schroeder........ 71 Director
Arthur L. Weaver,
M.D. .................. 63 Director
</TABLE>
- -------------------------------
(/1/Executive)officers
Charles N. Blitzer has served as President, Chief Executive Officer and
director of MGI since April 1996. Before joining MGI, Mr. Blitzer served as
President and Chief Executive Officer of Oncologix, Inc., a pharmaceutical
company, since July 1992, and held a variety of management positions with
Marion Merrell Dow Pharmaceuticals, Inc. and Marion Laboratories, Inc.,
pharmaceutical companies, since 1977.
William C. Brown joined MGI in June 1986 as Controller and since that time has
held several positions of increasing responsibility in finance, accounting and
business development. He became Chief Financial Officer and Secretary in
September 1999.
Leon O. Moulder, Jr. joined MGI in September 1999 as Executive Vice President.
Before joining MGI, Mr. Moulder was Vice President of Business Development and
Commercial Affairs at Eligix, Inc. (formerly Coulter Therapies, Inc.), a
biomedical company, since 1997 and held a variety of sales, sales management,
marketing and business development positions at Hoechst Marion Roussel Inc.,
Marion Merrell Dow Pharmaceuticals, Inc. and Marion Laboratories, Inc. since
1981.
Alan R. Caplan joined MGI in February 2000 as Vice President of Sales and
Marketing. Before joining MGI, Mr. Caplan was National Sales Director--
Oncology/Rheumatology at Hoechst Marion Roussel, a pharmaceutical company,
since 1998 and held a variety of sales, sales management, marketing and
business development positions at Hoechst Marion Roussel, Marion Merrell Dow
Inc. and Marion Laboratories since 1978.
Robert M. Johnson joined MGI in 1988 as director of manufacturing and in 1997
was promoted to Vice President of Pharmaceutical Manufacturing Operations.
Before joining MGI, Mr. Johnson was the director of manufacturing at Armour
Pharmaceutical Company and held a variety of positions in manufacturing and
quality assurance at Abbott Laboratories, Inc., C.R. Bard, Inc. and Baxter-
Travenol Laboratories, Inc.
John R. MacDonald, Ph.D. joined MGI in 1994 as director of pharmacology and
toxicology and in 1997 was named Vice President of Research and Development.
Prior to joining MGI, Dr. MacDonald was the senior research associate/group
leader in the Department of Pathology and Experimental Toxicology at Parke-
Davis Pharmaceutical Research, a division of Warner-Lambert Company.
Previously, Dr. MacDonald held a research faculty position in the Department of
Pathology at the University of California San Francisco's School of Medicine.
49
<PAGE>
Edgar F. Timberlake joined MGI in May 1999 as Vice President of Human Resources
and Administration. Before joining MGI, Mr. Timberlake was Vice President,
Human Resources at Nash Finch Company, a wholesale grocery company, and held a
variety of positions in training and human resources at Nash Finch. Prior to
joining Nash Finch, Mr. Timberlake held a variety of positions at Thomas &
Howard Company.
Andrew J. Ferrara has been a Director of MGI since May 1998. Mr. Ferrara is the
founder, President and Chief Executive Officer of Boston Healthcare, a
healthcare consulting firm. Before founding Boston Healthcare in 1993, Mr.
Ferrara founded Molecular Simulations, Inc. (f/k/a Polygen Corporation), a
computer software company, in 1984. Prior to that he spent 20 years with Eli
Lilly & Company, serving in a number of business areas in the United States and
Europe, including sales, marketing and public relations.
Joseph S. Frelinghuysen has been a Director of MGI since November 1997. Mr.
Frelinghuysen is the President of J.S. Frelinghuysen & Co., a private
investment firm which he founded in 1989. He previously spent 20 years with The
First Boston Corporation, where he served as a Managing Director in the
Investment Banking Department.
Michael E. Hanson has been a Director of MGI since May 1998. Mr. Hanson retired
from Eli Lilly & Company in December 1997 after 24 years of service, most
recently as President of the Internal Medicine Business Unit. Before joining
Eli Lilly, he was on the faculty of the University of Minnesota College of
Pharmacy and Assistant Director of the University of Minnesota Hospital
Pharmacy.
Hugh E. Miller has been a Director of MGI since 1992 and the Chairman of the
Board since July 1998. In December 1990, Mr. Miller retired from ICI Americas
Inc., a chemical, pharmaceutical, agricultural, consumer and specialty products
company, after 22 years of service, most recently as Vice Chairman and
Director. Before joining ICI, Mr. Miller was with Jefferson Chemical for 13
years. Mr. Miller is also a director of Wilmington Trust Co., Inc.
Timothy G. Rothwell has been a Director of MGI since November 1996. Since
January 1998, he has served as the Executive Vice President and President of
Pharmaceutical Operations at Pharmacia & Upjohn, Inc. Previously, he was
President of Rhone-Poulenc Rorer, Inc., a pharmaceutical company. From 1972 to
1989, Mr. Rothwell served in various positions at Sandoz Pharmaceuticals. In
1989, he joined Squibb Corporation, a pharmaceutical company, as Vice President
of Marketing and Sales, and in 1991 he joined Burroughs Wellcome, a
pharmaceutical company, as Senior Vice President of Marketing and Sales. He
returned to Sandoz in 1992 as Chief Executive Officer and President of the U.S.
pharmaceuticals business of Sandoz Pharmaceuticals and in 1994 became the head
of worldwide business development and licensing.
Lee J. Schroeder has been a Director of MGI since May 1989. Mr. Schroeder is
President and Director of Lee Schroeder & Associates, Inc., a pharmaceutical
consulting company. In 1985, Mr. Schroeder retired as President and Chief
Operating Officer of Foxmeyer Drug Co., a wholesale drug company. Previously,
he had been the Executive Vice President of Sandoz, Inc., where he was
responsible for the prescription business in the United States. Mr. Schroeder
is also a director of Ascent Pediatrics, Inc., Interneuron Pharmaceuticals,
Inc. and Celgene Corporation.
Arthur L. Weaver, M.D. has been a Director of MGI since July 1998. Since 1988,
Dr. Weaver has served as the Director of Clinical Research at the Arthritis
Center of Nebraska and since 1995, has been a clinical professor in the
Department of Medicine at the University of Nebraska Medical Center. He also
serves on the medical advisory boards of several pharmaceutical and
biotechnology companies and was a past president of the American College of
Rheumatology.
Scientific Advisory Board
We recruited a panel of leading oncologists to review and provide ongoing
advice on the development of irofulven. These practicing and research
clinicians bring medical, clinical program design and regulatory expertise to
the irofulven development program. They have experience in drug development in
the United
50
<PAGE>
States and Europe. The advisory board meets at least once per year, and met
most recently in November 1999. The members receive a per diem payment for
attendance at meetings and travel reimbursement. The members of the irofulven
Scientific Advisory Board are as follows:
Daniel D. Von Hoff, M.D., F.A.C.P. Director, Arizona Cancer Center, Professor
of Medicine, Arizona Cancer Center, Tucson, Arizona.
Esteban Cvitkovic, M.D. Medical oncologist Service d'Oncologie Medicale,
Hopital Paul Brousse, Villejuif, France.
S. Gail Eckhardt, M.D. Associate Professor of Medicine and Director of
Developmental Therapeutics, University of Colorado, Denver, Colorado.
Robert A. Figlin, M.D., F.A.C.P. Professor of Medicine, UCLA, Associate Program
Director, Solid Tumor Oncology, Jonsson Comprehensive Cancer Center, Los
Angeles, California.
Mark R. Green, M.D. Director, Hollings Cancer Center, Medical University of
South Carolina, Charleston, South Carolina.
Margaret A. Tempero, M.D. Deputy Director, University of California, San
Francisco Cancer Center, San Francisco, California.
Charles L. Vogel, M.D., F.A.C.P. Medical Director and Director of Cancer
Research, Columbia South Florida, South Florida Comprehensive Cancer Centers,
Mount Sinai Comprehensive Breast Center, Miami Beach, Florida.
George Wilding, M.D. Professor of Medicine, Section of Medical Oncology,
Director, Medical Oncology Program, University of Wisconsin Comprehensive
Cancer Center, Madison, Wisconsin.
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table shows information with respect to the beneficial ownership
of our common stock as of March 14, 2000, except as otherwise noted in the
footnotes and as adjusted to reflect the sale of 2,500,000 shares of common
stock in the offering: (1) each person known by us to own beneficially more
than five percent of our outstanding common stock; (2) each director; (3) each
named executive officer as of December 31, 1999; and (4) all our directors and
executive officers as a group.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
Number of Shares ------------------------------
Name of Beneficial Owner Beneficially Owned(/1/) Before Offering After Offering
- ------------------------ ----------------------- --------------- --------------
<S> <C> <C> <C>
Avenir Corporation(/2/)........... 916,814 6.0% 5.1%
1725 K Street, NW, Suite 410
Washington, D.C. 20006
Charles N. Blitzer(/3/)(/4/)...... 276,190 1.8% 1.5%
Andrew J. Ferrara(/3/)............ 4,375 * *
Joseph S.
Frelinghuysen(/3/)(/5/).......... 83,625 * *
Michael E. Hanson(/3/)............ 7,276 * *
Hugh E. Miller(/3/)............... 45,875 * *
Timothy G. Rothwell(/3/).......... 18,751 * *
Lee J. Schroeder(/3/)(/6/)........ 44,073 * *
Arthur L. Weaver, M.D.(/3/)....... 4,375 * *
James V. Adam(/3/)(/4/)(/7/)...... -- * *
Leon O. Moulder, Jr.(/3/)(/4/).... -- * *
William C. Brown(/3/)(/4/)........ 96,983 * *
All directors and executive
officers as a group
(11 persons)(/3/)(/4/)(/5/)(/6/).. 581,523 3.7% 3.2%
</TABLE>
- -------------------------------
* Less than one percent
(/1/)To our knowledge, except as set forth below, the persons named in the
table have sole voting and investment power with respect to all shares of
our common stock shown as beneficially owned by them, subject to community
property laws where applicable and the information contained in the
footnotes in this table.
(/2/)Disclosure is made in reliance upon a statement on Schedule 13G, dated as
of February 14, 2000, filed with the Securities and Exchange Commission.
(/3/)Includes the following number of shares which could be acquired within 60
days of March 14, 2000 through the exercise of stock options: Mr. Blitzer,
270,542 shares; Mr. Ferrara, 4,375 shares; Mr. Frelinghuysen, 8,125
shares; Mr. Hanson, 6,875 shares; Mr. Miller, 41,875 shares; Mr. Rothwell,
18,751 shares; Mr. Schroeder, 5,626 shares; Dr. Weaver, 4,375 shares; Mr.
Moulder, 0 shares; Mr. Brown, 57,071 shares; Mr. Adam, 0 shares, and all
directors and executive officers, 417,615 shares.
(/4/)Includes the following number of shares beneficially owned as of December
31, 1999 through the Company's Retirement Savings Plan: Mr. Blitzer, 5,648
shares; Mr. Moulder, 0 shares; Mr. Brown, 9,676 shares; and Mr. Adam, 0
shares.
(/5/)Includes 5,000 shares owned by Mr. Frelinghuysen and held in trust.
(/6/)Includes 12,696 shares owned by Mr. Schroeder's spouse and disclaimed by
Mr. Schroeder.
(/7/)Mr. Adam retired from his position as Chief Operating Officer of MGI as of
August 31, 1999.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock will consist of 30,000,000 shares of common stock,
$.01 par value, and 10,000,000 shares of preferred stock, $.10 par value. As of
March 14, 2000, and after giving effect to the issuance of 2,500,000 shares of
common stock offered by us in the offering, there will be:
. 17,881,092 shares of common stock outstanding;
. no shares of preferred stock issued or outstanding;
. 1,000,000 shares of preferred stock designated as "Series A Junior
Participating Preferred Stock," $.10 par value; and
. options to purchase 2,193,840 shares of common stock outstanding.
Common Stock
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders. Cumulative voting for the election
of directors is not authorized by our articles of incorporation, which means
that the holders of a majority of the shares voted can elect all of the
directors then standing for election. Subject to preferences that may be
applicable to any preferred stock outstanding at the time, the holders of
outstanding shares of common stock are entitled to receive dividends out of
assets legally available at times and in amounts as the board of directors from
time to time may determine. The common stock is not entitled to preemptive
rights and is not subject to conversion or redemption. Upon our liquidation,
dissolution or winding-up, the assets legally available for distribution to
stockholders shall be distributed ratably among the holders of our common stock
after payment of liquidation preferences, if any, on any outstanding shares of
preferred stock and payment of other claims of creditors. Each outstanding
share of common stock is, and each share of common stock to be outstanding upon
completion of the offering will be upon payment, duly and validly issued, fully
paid and non-assessable.
Preferred Stock
The authorized shares of preferred stock may be issued in one or more series
without further stockholder authorization, and the board of directors is
authorized to fix and determine the terms, limitations and relative rights and
preferences of the preferred stock, to establish series of preferred stock and
to fix and determine the variations among series. If we issue preferred stock,
it would have priority over our common stock with respect to dividends and to
other distributions, including the distribution of assets upon liquidation. The
board of directors can issue preferred stock without the approval of our common
stockholders. Under our rights agreement, dated July 14, 1998, we designated
10,000,000 shares of our preferred stock as "Series A Junior Participating
Preferred Stock." See "Anti-Takeover Provisions--Shareholder Rights Plan."
Stock Options
At December 31, 1999, 3,089,160 shares of common stock remain reserved for
issuance, of which 985,026 remain available for grant. Options to purchase
2,104,134 shares of common stock were outstanding, of which 1,141,004 were
exercisable. Options outstanding had a weighted average exercise price of $7.56
per share.
The 1997 Stock Incentive Plan, as currently in effect, permits the granting of
options to purchase up to an aggregate of 1,200,000 shares of our common stock.
Under this plan, we may grant incentive stock options and non-incentive stock
options. The exercise price for shares covered by an incentive stock option may
not be less than 100% of the fair market value of our common stock on the date
of grant. The term of each option and the time or times at which an option may
be exercised shall be fixed by the committee of the Board of Directors
designated to administer the plan.
The 1999 Nonemployee Director Stock Option Plan, as currently in effect,
permits the granting of options to purchase up to an aggregate of 200,000
shares of our common stock. Options we grant under this plan are non-
53
<PAGE>
incentive stock options, and may only be granted to directors of our company
who are not employees. Each nonemployee director automatically receives an
option to purchase 10,000 shares of common stock on the date such person first
becomes a director, and an option to purchase 7,500 shares of common stock on
each subsequent date of reelection as a director. The option exercise price per
share is 100 percent of the fair market value of our common stock on the date
of our annual meeting to which the grant relates. Options have a ten-year term
from date of grant.
Anti-Takeover Provisions
Shareholder Rights Plan
On July 14, 1998, our board of directors adopted a "poison pill" by declaring a
dividend distribution of one preferred stock purchase right for each
outstanding share of our common stock. As amended on March 14, 2000, each right
entitles the registered holder to purchase from us one one-hundredth of a share
of Series A Junior Participating Preferred Stock, par value $.10 per share, at
a price of $200.00 per one-hundredth of a preferred share, subject to
adjustment. The description and terms of the rights are set forth in a rights
agreement which we entered into with Norwest Bank Minnesota, N.A., as rights
agent.
The rights are not exercisable until the distribution date, which means the
date of the earlier to occur of:
. the first date of public announcement that a person or group of
affiliated or associated persons has acquired beneficial ownership, as
defined in the rights agreement, of 15 percent or more of our
outstanding common shares; or
. 10 business days after the date of the commencement or public
announcement by a person of an intention to make a tender offer or
exchange offer for an amount of common stock which, together with the
shares of stock already owned by such person, constitutes 15 percent or
more of our outstanding shares of common stock.
The rights will expire on July 14, 2008, unless we decided to redeem them
earlier as described below.
In the event that after the distribution date, we are acquired in a merger or
other business combination transaction or if 50 percent or more of our assets,
cash flow or earning power are sold or otherwise transferred, each right holder
shall have the right to receive, upon the exercise thereof at the then current
exercise price of the right, that number of shares of common stock of the
acquiring company which at the time of such transaction would have a market
value of two times the exercise price of the right. In the event that we were
the surviving corporation of a merger and our common stock were changed or
exchanged, each right holder will thereafter have the right to receive upon
exercise that number of shares of common stock of the other party to the
transaction having a market value of two times the exercise price of the right.
Upon specified conditions, at any time prior to such time as any person
acquires at least 15 percent of our outstanding shares of common stock, by a
resolution of our board of directors, we may redeem the rights in whole, but
not in part, at a price of $0.01 per right.
At any time after a person acquires at least 15 percent of our outstanding
shares of common stock and prior to the acquisition by that person of 50
percent or more of our outstanding common stock, our board of directors may
exchange the rights, in whole or in part, for our common stock at an adjustable
exchange ratio initially set at one share of common stock per right.
Each share of the junior participating preferred stock purchasable upon
exercise of the rights will have a minimum preferential dividend of $1.00 per
quarter, but will be entitled to receive, in the aggregate, a dividend of 100
times the dividend declared on a share of common stock. In the event of
liquidation, these preferred stockholders will be entitled to receive a
liquidation payment in the amount of the greater of $100.00 per share, or an
aggregate liquidation payment equal to 100 times the payment to be made per
share of common stock. Each share will have 100 votes, voting together with the
shares of common stock. In the event of any merger,
54
<PAGE>
consolidation or other transaction in which our common stock shares are
exchanged, each share of the junior participating preferred stock will be
entitled to receive 100 times the amount and type of consideration received per
share of common stock. The dividend and liquidation rights of these shares, and
the rights of these shares relating to mergers and consolidations, are
protected by anti-dilution provisions.
Until a right is exercised, the right holder will have no rights as a
stockholder of our company, including, without limitation, the right to vote or
to receive dividends.
Minnesota anti-takeover law
Section 302A.671 of the Minnesota Business Corporation Act applies, with
exceptions, to any acquisition of our voting stock from a person other than us,
and other than in connection with certain mergers and exchanges to which we are
a party, that results in the beneficial ownership of 20 percent or more of the
voting stock then outstanding. Section 302A.671 requires approval of any such
acquisitions by a majority vote of our shareholders before its consummation. In
general, shares acquired in the absence of such approval are denied voting
rights and are redeemable at their then fair market value by us within 30 days
after the acquiring person has failed to give a timely information statement to
us or the date the shareholders voted not to grant voting rights to the
acquiring person's shares.
Section 302A.673 of the Minnesota Business Corporation Act generally prohibits
any business combination by us, or by any subsidiaries, with any shareholder
that purchases ten percent or more of our voting shares within four years from
the date the shareholder first acquired ten percent or more ownership in our
company. The business combination may be permitted if it is approved by a
committee of all of the disinterested members of our board of directors before
the date the shareholder first acquired ten percent or more ownership interest
in our company.
Authorized But Unissued Shares
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued common stock
and preferred stock could render more difficult or discourage an attempt to
obtain control of our company by means of a proxy contest, tender offer, merger
or otherwise.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Norwest Bank
Minnesota, N.A., St. Paul, Minnesota.
55
<PAGE>
UNDERWRITING
The underwriters named below have agreed to buy, subject to the terms of the
purchase agreement, the number of shares listed opposite their names below. The
underwriters are committed to purchase and pay for all of the shares if any are
purchased.
<TABLE>
<CAPTION>
Number
Underwriters of Shares
------------ ---------
<S> <C>
U.S. Bancorp Piper Jaffray Inc. ........
Banc of America Securities LLC..........
CIBC World Markets Corp. ...............
---------
Total................................. 2,500,000
</TABLE>
The underwriters have advised us that they propose to offer the shares to the
public at $ per share. The underwriters propose to offer the shares to
certain dealers at the same price less a concession of not more than $ per
share. The underwriters may allow and the dealers may reallow a concession of
not more than $ per share on sales to certain other brokers and dealers.
After the offering, these figures may be changed by the underwriters.
We have granted to the underwriters an option to purchase up to an additional
375,000 shares of common stock from us at the same price to the public, and
with the same underwriting discount, as set forth in the table above. The
underwriters may exercise this option any time during the 30-day period after
the date of this prospectus, but only to cover over-allotments, if any. To the
extent the underwriters exercise the option, each underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of the additional shares as it was obligated to purchase under the
purchase agreement.
The following table shows the underwriting fees to be paid to the underwriters
in connection with this offering. These amounts are shown assuming both no
exercise and full exercise of the over-allotment option.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share.............. $ $
Total.................. $ $
</TABLE>
We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments that the underwriters may be required to make in respect of those
liabilities.
We, and each of our directors, officers and certain employees and shareholders,
have agreed to certain restrictions on our ability to sell additional shares of
our common stock for a period of 90 days after the date of this prospectus. We
have agreed not to directly or indirectly offer for sale, sell, contract to
sell, grant any option for the sale of, or otherwise issue or dispose of, any
shares of common stock, options or warrants to acquire shares of common stock,
or any related security or instrument, without the prior written consent of
U.S. Bancorp Piper Jaffray Inc. The agreements provide exceptions for (1) sales
to underwriters pursuant to the purchase agreement, (2) our sales in connection
with the exercise of options granted under the existing stock option plans and
(3) certain other exceptions.
To facilitate the offering, the underwriters may engage in transactions that
stabilize, maintain or otherwise affect the price of the common stock during
and after the offering. Specifically, the underwriters may over-allot or
otherwise create a short position in the common stock for their own account by
selling more shares of common stock than have been sold to them by us. The
underwriters may elect to cover any such short position by purchasing shares of
common stock in the open market or by exercising the over-allotment option
granted to the underwriters. In addition, the underwriters may stabilize or
maintain the price of the common stock by
56
<PAGE>
bidding for or purchasing shares of common stock in the open market and may
impose penalty bids. If penalty bids are imposed, selling concessions allowed
to syndicate members or other broker-dealers participating in the offering are
reclaimed if shares of common stock previously distributed in the offering are
repurchased, whether in connection with stabilization transactions or
otherwise. The effect of these transactions may be to stabilize or maintain the
market price of the common stock at a level above that which might otherwise
prevail in the open market. The imposition of a penalty bid may also effect the
price of the common stock to the extent that it discourages resales of the
common stock. The magnitude or effect of any stabilization or other transaction
is uncertain. These transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
In connection with this offering, some underwriters (and selling group members)
may also engage in passive market making transactions in the common stock on
the Nasdaq National Market. Passive market making consists of displaying bids
on the Nasdaq National Market limited by the prices of independent market
makers and effecting purchases limited by those prices in response to order
flow. Rule 103 of Regulation M promulgated by the SEC limits the amount of net
purchases that each passive market maker may make and the displayed size of
each bid. Passive market making may stabilize the market price of the common
stock at a level above that which might otherwise prevail in the open market
and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the issuance of shares of common stock offered by us in this
offering will be passed upon for us by Dorsey & Whitney LLP, Minneapolis,
Minnesota. Legal matters related to the offering will be passed upon for the
underwriters by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania.
EXPERTS
Our financial statements as of December 31, 1998 and 1999 and for each of the
years in the three-year period ended December 31, 1999 have been included and
incorporated by reference in this prospectus in reliance upon the report of
KPMG LLP, independent certified public accountants, included and incorporated
by reference in this prospectus, given on their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-3 with respect to the common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not include all of the information contained in the
registration statement. For further information about us and our common stock,
you should review the registration statement and its exhibits and schedules.
You may read and copy any document we file with the Commission at its public
reference room at 450 Fifth Street, NW, Washington, DC 20549, as well as at its
regional offices located at 7 World Trade Center, Suite 1300, New York, NY
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL
60661. Please call the Commission at 1-800-SEC-0330 for further information
about its public reference facilities and copy charges. Our filings are also
available to the public from the Commission's web site at http://www.sec.gov.
We file periodic reports, proxy statements and other information with the
Commission. These periodic reports, proxy statements and other information are
available for inspection and copying at the Commission's public reference room
and the regional offices listed above and can be obtained over the Internet
through the Commission's web site.
57
<PAGE>
The Commission allows us to incorporate by reference information into this
prospectus. This allows us to disclose important information to you by
referring you to another document filed separately with the Commission. The
information incorporated by reference is deemed to be part of this prospectus,
except for any information superceded by information contained directly in this
prospectus.
The documents that we are incorporating by reference are:
. our annual report on Form 10-K for the fiscal year ended December 31,
1999;
. our Form 8-A, filed on October 25, 1982, as amended on July 20, 1987;
and our Form 8-A filed on July 15, 1998, as amended on March 20, 2000,
all of which contain descriptions of our common stock; and
. our Form 8-K filed on March 20, 2000.
We also are incorporating by reference any future filings made by us with the
SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
until the completion of this offering. The most recent information that we file
with the SEC automatically updates and supercedes more dated information.
You can obtain a copy of any documents which are incorporated by reference in
this prospectus (other than an exhibit to a filing unless that exhibit is
specifically incorporated by reference into that filing) at no cost, by writing
or telephoning us at William Brown, MGI PHARMA, INC., 6300 West Old Shakopee
Road, Minneapolis, MN 55438, (952) 346-4700.
58
<PAGE>
MGI PHARMA, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.......................................... F-2
Balance Sheets as of December 31, 1998 and 1999....................... F-3
Statements of Operations for the years ended December 31, 1997,
1998 and 1999........................................................ F-4
Statements of Cash Flows for the years ended December 31, 1997,
1998 and 1999........................................................ F-5
Statements of Stockholders' Equity for the years
ended December 31, 1997, 1998 and 1999............................... F-6
Notes to Financial Statements......................................... F-7
</TABLE>
F-1
<PAGE>
MGI PHARMA, INC.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
MGI PHARMA, INC.:
We have audited the accompanying balance sheets of MGI PHARMA, INC. as of
December 31, 1998 and 1999 and the related statements of operations, cash flows
and stockholders' equity for each of the years in the three-year period ended
December 31, 1999. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MGI PHARMA, INC. as of
December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1999,
in conformity with generally accepted accounting principles.
KPMG LLP
Minneapolis, Minnesota
February 4, 2000, except as
to Note 8 which is as of March 14, 2000.
F-2
<PAGE>
MGI PHARMA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 6,513,204 $ 8,249,248
Short-term investments........................... 10,568,061 15,901,325
Receivables, less allowances of $97,960 and
$128,771........................................ 1,410,539 2,427,901
Inventories...................................... 1,285,368 836,865
Prepaid expenses................................. 329,953 153,923
------------ ------------
Total current assets........................... 20,107,125 27,569,262
Equipment and furniture, at cost less accumulated
depreciation of $1,062,405 and $839,300......... 540,084 1,027,482
Other assets..................................... 474,859 376,992
------------ ------------
Total assets................................... $ 21,122,068 $ 28,973,736
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 794,266 $ 964,242
Accrued expenses................................. 2,712,884 2,853,794
Deferred revenue................................. 495,000 495,000
Other current liabilities........................ 9,250 16,321
------------ ------------
Total current liabilities...................... 4,011,400 4,329,357
------------ ------------
Stockholders' equity:
Preferred Stock, 10,000,000 authorized and
unissued shares................................. -- --
Common stock, $0.01 par value, 30,000,000
authorized shares, 14,542,472 and 14,979,640
issued and outstanding shares................... 145,425 149,796
Additional paid-in capital....................... 90,850,590 93,591,432
Notes receivable from officers................... (56,999) --
Accumulated deficit.............................. (73,828,348) (69,096,849)
------------ ------------
Total stockholders' equity..................... 17,110,668 24,644,379
------------ ------------
Commitments (Note 5)
Total liabilities and stockholders' equity..... $ 21,122,068 $ 28,973,736
============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
MGI PHARMA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Sales.................................. $ 9,344,548 $12,944,620 $18,643,168
Promotion.............................. -- 756,326 1,087,852
Licensing.............................. 3,275,375 3,341,568 4,954,468
Interest and other..................... 875,906 805,996 966,434
----------- ----------- -----------
13,495,829 17,848,510 25,651,922
----------- ----------- -----------
Costs and expenses:
Cost of sales.......................... 767,680 938,628 1,208,650
Selling, general and administrative.... 9,339,110 10,989,017 12,713,287
Research and development............... 4,988,584 5,301,578 6,677,435
----------- ----------- -----------
15,095,374 17,229,223 20,599,372
----------- ----------- -----------
Income (loss) before taxes............... (1,599,545) 619,287 5,052,550
Provision for income taxes............... 185,000 205,000 321,051
----------- ----------- -----------
Net income (loss)........................ $(1,784,545) $ 414,287 $ 4,731,499
=========== =========== ===========
Net income (loss) per common share:
Basic.................................. $ (0.13) $ 0.03 $ 0.32
Assuming dilution...................... $ (0.13) $ 0.03 $ 0.30
Weighted average number of common shares
outstanding:
Basic.................................. 14,116,471 14,367,627 14,742,151
Assuming dilution...................... 14,116,471 14,966,112 15,633,120
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
MGI PHARMA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net income (loss).................... $ (1,784,545) $ 414,287 $ 4,731,499
Adjustments for non-cash items:
Depreciation and amortization...... 180,935 253,685 394,201
Benefit plan contribution.......... 259,727 314,496 362,087
Stock option acceleration.......... -- -- 162,953
Other.............................. 15,154 8,293 53,791
Changes in operating assets and
liabilities:
Receivables........................ 5,977 (336,546) (1,017,362)
Inventories........................ (243,894) (447,310) 448,503
Prepaid expenses................... (130,844) (145,673) 176,030
Accounts payable and accrued
expenses.......................... (1,078,843) 785,640 343,769
Deferred revenue................... 450,000 45,000 --
Other current liabilities.......... (1,456) 2,995 7,071
------------ ------------ ------------
Net cash provided by (used in)
operating activities............ (2,327,789) 894,867 5,662,542
------------ ------------ ------------
Investing activities:
Purchase of investments.............. (15,688,037) (18,699,585) (22,393,143)
Maturity of investments.............. 17,356,458 16,130,356 17,059,879
Purchase of equipment and furniture.. (572,663) (174,907) (783,501)
Payments on notes receivable......... 2,358 45,576 56,999
Other................................ (99,387) (54,955) (41,315)
------------ ------------ ------------
Net cash provided by (used in)
investing activities............ 998,729 (2,753,515) (6,101,081)
------------ ------------ ------------
Financing activities:
Issuance of shares under stock
plans............................... 165,582 1,314,761 2,174,583
------------ ------------ ------------
Net cash provided by financing
activities...................... 165,582 1,314,761 2,174,583
------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents......................... (1,163,478) (543,887) 1,736,044
Cash and cash equivalents at
beginning of year................... 8,220,569 7,057,091 6,513,204
------------ ------------ ------------
Cash and cash equivalents at end of
year................................ $ 7,057,091 $ 6,513,204 $ 8,249,248
============ ============ ============
Supplemental disclosure of cash flow
information:
Cash paid for income taxes......... $ 185,000 $ 207,000 $ 240,000
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
MGI PHARMA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Notes
Additional receivable Total
Common paid-in from Accumulated stockholders'
stock capital officers deficit equity
-------- ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... $140,816 $88,789,495 $(104,933) $(72,458,090) $16,367,288
Exercise of stock
options, 5,675 shares.. 57 39,869 -- -- 39,926
Employee stock purchase
plan, 45,916 shares.... 459 140,351 -- -- 140,810
Employee retirement
savings plan
contribution, 62,398
shares................. 624 252,860 -- -- 253,484
Note payment............ -- -- 2,358 -- 2,358
Net loss................ -- -- -- (1,784,545) (1,784,545)
-------- ----------- --------- ------------ -----------
Balance at December 31,
1997................... $141,956 $89,222,575 $(102,575) $(74,242,635) $15,019,321
Exercise of stock
options, 275,786
shares................. 2,758 1,184,504 -- -- 1,187,262
Employee stock purchase
plan, 31,442 shares.... 314 135,478 -- -- 135,792
Employee retirement
savings plan
contribution, 39,681
shares................. 397 308,033 -- -- 308,430
Note payment............ -- -- 45,576 -- 45,576
Net income.............. -- -- -- 414,287 414,287
-------- ----------- --------- ------------ -----------
Balance at December 31,
1998................... $145,425 $90,850,590 $ (56,999) $(73,828,348) $17,110,668
Exercise of stock
options, 386,006
shares................. 3,860 2,021,544 -- -- 2,025,404
Employee stock purchase
plan, 18,189 shares.... 182 161,704 -- -- 161,886
Employee retirement
savings plan
contribution, 32,973
shares................. 329 394,641 -- -- 394,970
Note payment............ -- -- 56,999 -- 56,999
Stock option
acceleration........... -- 162,953 -- -- 162,953
Net income.............. -- -- -- 4,731,499 4,731,499
-------- ----------- --------- ------------ -----------
Balance at December 31,
1999................... $149,796 $93,591,432 $ -- $(69,096,849) $24,644,379
======== =========== ========= ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
MGI PHARMA, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
MGI PHARMA, INC. (MGI or the company) acquires, develops and commercializes
differentiated, specialty pharmaceutical products that meet patient needs and
build shareholder value. The company currently promotes products with uses in
oncology and rheumatology. MGI focuses its efforts solely in the United States
and creates alliances with other pharmaceutical or biotechnology companies for
its products in other countries.
The company promotes products directly to physicians in the United States using
its own specialty sales force. These products include company-owned Salagen(R)
Tablets (pilocarpine hydrochloride) and Didronel(R) I.V. Infusion (etidronate
disodium), and three copromoted products, Ridaura(R) (auranofin), Luxiq(TM)
(betamethasone valerate) Foam, 0.12%, and Azulfidine EN-tabs(R) (sulfasalazine
delayed release tablets, USP). Salagen Tablets are approved in the United
States for two indications: symptoms of radiation-induced dry mouth in head and
neck cancer patients and the symptoms of dry mouth associated with Sjogren's
syndrome, an autoimmune disease that damages the salivary glands. Sales of
Salagen Tablets in the United States accounted for approximately 97 percent of
company product sales in 1999. Didronel I.V. Infusion is used to treat
hypercalcemia (elevated blood calcium) in cancer patients. Copromoted products
continue to be owned and distributed by the copromotion partners, so MGI
recognizes promotion 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 irofulven, the lead drug candidate in MGI's novel
family of proprietary anti-cancer compounds called the acylfulvenes. Exclusive
rights in Japan to irofulven 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.
Cash, Cash Equivalents and Short-Term Investments The company considers highly
liquid marketable securities with remaining maturities of ninety days or less
at the time of purchase to be cash equivalents. Other highly liquid marketable
securities with remaining maturities of one year or less at the time of
purchase are classified as short-term investments.
The company classifies short-term marketable security investments as held-to-
maturity investments because it has the intent and the ability to hold its
investments to maturity. As such, they are stated at amortized cost, which
approximates estimated fair value. Amortized cost is adjusted for amortization
of premiums and discounts to maturity, and this amortization is included in
interest and other income in the accompanying statements of operations.
Concentration of Credit Risk Financial instruments that may subject the company
to significant concentrations of credit risk consist primarily of short-term
marketable security investments and trade receivables.
Cash in excess of current operating needs is invested in accordance with the
company's investment policy. This policy emphasizes principal preservation, so
it requires strong issuer credit ratings and limits the amount of credit
exposure from any one issuer or industry.
The company grants credit primarily to pharmaceutical wholesale distributors
throughout the United States in the normal course of business. Five wholesalers
account for approximately 89 percent of company product sales. Customer credit
worthiness is routinely monitored and collateral is not normally required.
Inventories Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
Sales Recognition Sales and related costs are recognized upon shipment of
product to customers. Sales are recorded net of provisions for pricing
adjustments, collection discounts and product returns.
F-7
<PAGE>
MGI PHARMA, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Licensing Revenue Recognition Licensing revenue is recognized when underlying
performance criteria for payment have been met and the company has an
unconditional right to such payment. Depending on a license agreement's terms,
recognition criteria may be satisfied upon achievement of milestones, passage
of time or product sales by the licensee. Payments received by the company in
excess of amounts earned are classified as deferred revenue. The company also
recognizes licensing revenue to the extent the company provides support
services to strategic partners.
Effective January 1, 2000, the company will adopt Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101
summarizes the Securities and Exchange Commission's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
This bulletin will alter the revenue recognition stream for future strategic
agreements; certain payments will be initially capitalized, then amortized over
a period of time.
Stock Based Compensation The company applies the intrinsic value method
described in APB Opinion No. 25 in accounting for the issuance of stock
incentives to employees and directors. Accordingly, no compensation expense has
been recognized in the financial statements. Consistent with Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation," pro forma information reflecting compensation cost for such
issuances is presented in the Stockholders' Equity footnote.
Advertising and Promotion Expense Costs of advertising and promotion are
expensed as incurred and were $1,241,214, $1,617,828 and $1,801,341 in 1997,
1998 and 1999, respectively. The company has not deferred any costs related to
direct-response advertising.
Depreciation Depreciation of equipment and furniture is provided over the
estimated useful lives of the respective assets on a straight-line basis.
Estimated useful lives of equipment and furniture range from three to ten
years.
Income Taxes Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial carrying amounts
of existing assets and liabilities and their respective tax bases. The
measurement of deferred tax assets is adjusted by a valuation allowance for any
tax benefits which are not assured of realization.
Income (Loss) Per Common Share Basic earnings per share (EPS) is calculated by
dividing net income (loss) by the weighted-average common shares outstanding
during the period. Diluted EPS reflects the potential dilution to basic EPS
that could occur upon conversion or exercise of securities, options, or other
such items, to common shares using the treasury stock method based upon the
weighted-average fair value of the company's common shares during the period.
Use of Estimates Preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions affecting reported asset and liability amounts and disclosure
of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Basis of Presentation Certain prior year amounts have been reclassed to conform
with current year presentation.
New Accounting Pronouncement Statement of Financial Accounting Standards No.
133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities,"
(as amended by SFAS 137 with respect to the effective date) will be effective
for MGI in January 2001. SFAS 133 requires all derivatives to be recognized as
assets or liabilities on the balance sheet and measured at fair value on a
mark-to-market basis. These market value adjustments are to be included either
in net earnings or loss in the statement of operations
F-8
<PAGE>
MGI PHARMA, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
or in other comprehensive income (and accumulated in stockholders' equity),
depending on the nature of the transaction. MGI does not believe that SFAS 133
will have a material impact on the company.
2. Short-Term Investments
Held-to-maturity investments, stated at amortized cost, which approximates
estimated fair value, at December 31, 1998 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Commercial paper................................. $ 6,434,638 $10,747,279
Corporate notes.................................. 4,133,423 2,037,229
Certificates of deposit.......................... -- 3,116,817
----------- -----------
$10,568,061 $15,901,325
=========== ===========
</TABLE>
3. Inventories
Inventories at December 31, 1998 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
1998 1999
---------- --------
<S> <C> <C>
Raw materials and supplies........................... $ 83,016 $160,744
Work in process...................................... 531,952 153,447
Finished products.................................... 670,400 522,674
---------- --------
$1,285,368 $836,865
========== ========
</TABLE>
4. Accrued Expenses
Accrued expenses at December 31, 1998 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Bonuses............................................ $ 536,683 $ 467,820
Product return accrual............................. 467,547 342,648
Product development commitments.................... 446,429 860,981
Third party manufacturing.......................... 422,334 --
Retirement plan contribution....................... 204,619 204,158
Other accrued expenses............................. 635,272 978,187
---------- ----------
$2,712,884 $2,853,794
========== ==========
</TABLE>
5. Leases
The company leases office space and computer software under noncancellable
lease agreements that contain renewal options and require the company to pay
operating costs, including property taxes, insurance and maintenance. Rent
expense was $396,092, $437,227 and $408,163 in 1997, 1998 and 1999,
respectively.
Future minimum lease payments under noncancellable lease are as follows:
<TABLE>
<S> <C>
2000........................................................... $ 363,000
2001........................................................... 441,000
2002........................................................... 448,000
2003........................................................... 455,000
2004........................................................... 455,000
Thereafter..................................................... 265,000
----------
$2,427,000
==========
</TABLE>
F-9
<PAGE>
MGI PHARMA, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Licensing Arrangements
During 1995, MGI entered into a cooperative development and commercialization
agreement with Dainippon Pharmaceutical Co., Ltd., a Japanese pharmaceutical
company, whereby MGI granted Dainippon exclusive rights to MGI's acylfulvenes
in Japan. Under this agreement, Dainippon is expected to make milestone
payments during the precommercial phase and MGI will participate in the
commercial success of the drug candidate in Japan by supplying Dainippon with
bulk drug substance. Quarterly license payments are scheduled to be received
into 2000. In the 2000 second quarter, the character of quarterly license
payments is scheduled to become deposit payments. Under the terms of the
agreement, through January 1, 2002, $4.3 million in deposit payments is
scheduled to be received. Repayment by MGI is due on the later of April 1, 2002
or receipt of the initial marketing approval in Japan. Dainippon may elect to
receive the deposit repayment in cash, as a credit toward delivery of bulk drug
substance under the related Supply Agreement, or in shares of MGI common stock.
If Dainippon elects to receive stock, the shares will be valued at the closing
price of MGI common stock on the date of Dainippon's election. The
precommercial phase will conclude upon receipt of approval to market the first
acylfulvene product in Japan and payment of a $1 million approval milestone by
Dainippon. In conjunction with this 1995 agreement, MGI issued 750,000 shares
of common stock to Dainippon and received net proceeds of $2.8 million from
this issuance.
During 1994, MGI licensed exclusive rights to commercialize Salagen Tablets in
Japan to Kissei Pharmaceutical Co., Ltd., a Japanese pharmaceutical company.
Kissei is scheduled to make a final milestone payment upon the earlier of its
filing for product approval in Japan or September 29, 2000. MGI will
participate in the commercial success of the product through royalty payments
based on product sales in Japan. In 1997, a $747,000 milestone payment, net of
taxes, was received as a result of Kissei's advancement of Salagen Tablets into
a Phase 3 human clinical program.
MGI has entered into licensing agreements for the commercialization of Salagen
Tablets in Europe and Canada with Chiron B.V. and Pharmacia & Upjohn Company,
respectively. Under these arrangements, MGI receives payments based upon
product sales in the respective territories.
To build its product pipeline, the company acquires rights to develop and
market pharmaceuticals and medical products from others. Under this approach,
the company may be required to pay up-front, development services and milestone
fees. In addition, the company may be required to pay royalties on net sales
upon marketing the products. Within a period of time after providing notice,
the company generally may terminate its licenses. All material, noncancellable
commitments were recognized as of December 31, 1999.
7. Promotion Arrangements
In March 1999, MGI and Schein Pharmaceutical, Inc. concluded their agreement
for the promotion of INFeD(R) (iron dextran injection). Under the agreement,
MGI recognized a final minimum quarterly promotion fee of $125,000 in the first
quarter of 1999, and smaller promotion fees for the remaining three quarters of
1999.
In April 1999, MGI entered into promotion agreements with Connetics Corporation
for the promotion of Ridaura (auranofin) and Luxiq (betamethasone valerate)
Foam, 0.12%. Under the terms of the agreements, MGI promotes Ridaura and Luxiq
to the rheumatology market in the United States. For Ridaura, MGI receives
$250,000 per quarter for making a specified number of sales calls. For Luxiq,
the company receives a split of product contribution from Connetics
Corporation's sales of Luxiq in the rheumatology market. Minimum terms for the
Ridaura and Luxiq agreements are 18 months and 30 months respectively.
In September 1999, MGI began promoting Azulfidine EN-tabs (sulfasalazine
delayed release tablets, USP) Enteric-coated on behalf of the Pharmacia &
Upjohn Company (P&U) to the rheumatology market in the
F-10
<PAGE>
MGI PHARMA, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
United States. MGI will earn promotion revenue based on its ability to increase
P&U sales of Azulfidine EN-tabs. The Azulfidine EN-tabs co-promotion agreement
has an initial term of 42 months from the September 1999 co-promotion marketing
launch.
8. Shareholder Rights Plan (as amended March 14, 2000)
On July 14, 1998, the company declared a dividend of one preferred share
purchase right (Right) per share for each outstanding share of common stock of
the company. Each Right entitles the registered holder to purchase one one-
hundredth of a share of Series A Junior Participating Preferred Stock, at a
price of $200 per one-hundredth of a preferred share (subject to adjustment).
The Rights become exercisable only if certain change in ownership control
events occur and the company does not redeem the Rights. The Rights expire on
July 14, 2008, if not previously redeemed or exercised.
9. Stockholders' Equity
Stock Incentive Plans Under stock incentive plans, designated persons
(including officers, employees, directors and consultants) have been or may be
granted rights to acquire company common stock. These rights include stock
options and other equity rights. At December 31, 1999, 3,089,160 shares of
common stock remain reserved for issuance, of which 985,026 shares remain
available for grant.
Stock options become exercisable over varying periods and expire up to ten
years from date of grant. Options may be granted in the form of incentive stock
options or nonqualified stock options. The option price for incentive stock
options cannot be less than fair market value on the date of the grant. The
option price for nonqualified stock options may be set by the Board of
Directors.
Stock option activity in the three years ended December 31, 1999 is summarized
as follows:
<TABLE>
<CAPTION>
Number Average Price
of Shares Per Share
--------- -------------
<S> <C> <C>
Outstanding at December 31, 1996................. 1,867,452 $6.87
Granted........................................ 511,306 4.31
Exercised...................................... (5,675) 4.37
Canceled....................................... (291,933) 6.31
---------
Outstanding at December 31, 1997................. 2,081,150 6.32
Granted........................................ 472,408 4.81
Exercised...................................... (275,786) 4.27
Canceled....................................... (90,296) 4.43
---------
Outstanding at December 31, 1998................. 2,187,476 6.33
Granted........................................ 548,711 11.78
Exercised...................................... (386,006) 5.21
Canceled....................................... (246,047) 9.77
---------
Outstanding at December 31, 1999................. 2,104,134 $7.56
=========
</TABLE>
F-11
<PAGE>
MGI PHARMA, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes information concerning options outstanding and
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
---------------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range of Exercise Price Number Life Price Number Price
----------------------- --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$3.38-$3.94............... 399,357 7.69 $ 3.84 137,359 $ 3.80
$4.00-$4.63............... 175,590 5.97 $ 4.35 140,077 $ 4.34
$4.75-$4.81............... 478,066 6.62 $ 4.77 377,055 $ 4.76
$4.88-$6.00............... 192,344 5.83 $ 5.45 162,322 $ 5.51
$6.88-$11.50.............. 214,565 6.43 $ 9.70 123,679 $10.60
$11.56-$12.00............. 412,125 9.11 $11.87 6,725 $12.00
$12.38-$30.00............. 232,087 4.62 $14.24 193,787 $13.83
--------- ---------
Total................... 2,104,134 6.94 $ 7.56 1,141,004 $ 6.92
========= =========
</TABLE>
Employee Stock Purchase Plan Under the company's employee stock purchase plan,
substantially all employees may purchase shares of common stock at the end of
semiannual purchase periods at a price equal to the lower of 85% of the stock's
fair market value on the first or last day of that period. Plan funding occurs
throughout the purchase period by pre-elected payroll deductions of up to 15%
of regular pay. No compensation expense results from the plan. Shares issued
under the plan were 45,916, 31,422 and 18,189 at average prices of $3.07, $4.32
and $8.90 per share in 1997, 1998 and 1999, respectively. At December 31, 1999,
126,978 shares remain reserved for future issuance under the plan.
Fair Value of Stock Plans The company applies APB Opinion No. 25 in accounting
for its stock incentive plans for designated persons and, accordingly, no
compensation cost has been recognized in the financial statements for employee
and director stock options granted under its stock plans or for the fair value
of the discount offered to its employees under the employee stock purchase
plan. Had the company determined compensation cost based on the fair value at
the grant date for its stock options and the fair value of the discount related
to the employee stock purchase plan under SFAS No. 123, the company's net
earnings (loss) would have been reported as shown below:
<TABLE>
<CAPTION>
1997 1998 1999
----------- --------- ----------
<S> <C> <C> <C>
Net income (loss):
As reported......................... $(1,784,545) $ 414,287 $4,731,499
Pro forma........................... $(2,721,827) $(647,715) $2,853,476
Net income (loss) per common share:
As reported diluted................. $ (0.13) $ 0.03 $ 0.30
Pro forma diluted................... $ (0.19) $ (0.04) $ 0.18
</TABLE>
Pro forma amounts only reflect options granted during 1995 through 1999.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 for years prior to 1999 is not reflected in the pro forma
amounts presented above because compensation cost is reflected over the
options' vesting period, and compensation cost for options granted prior to
January 1, 1995 is not considered.
F-12
<PAGE>
MGI PHARMA, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The per share weighted-average fair value of stock options granted during 1997,
1998 and 1999 was $2.22, $2.73 and $6.50, respectively, on the date of grant,
using the Black-Scholes option-pricing model with the following weighted-
average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield................................. 0% 0% 0%
Risk-free interest rate................................. 5.40% 5.00% 5.00%
Annualized volatility................................... 0.52 0.61 0.60
Expected life, in years................................. 5 5 5
</TABLE>
Retirement Savings Plan The company's retirement savings plan conforms to
Section 401(k) of the Internal Revenue Code and participation is available to
substantially all employees. Under the savings plan, participants may
contribute a percentage of their eligible compensation for investment in
company common stock or other investments. The company matches a portion of
employees' contributions and may also make discretionary contributions ratably
to all eligible employees. Company contributions are made in the form of
company common stock and become fully vested when an employee attains five
years of service. Contribution expense was $259,727, $314,496 and $362,087 in
1997, 1998 and 1999, respectively. The company had 216,794 shares reserved for
future issuance under the savings plan at December 31, 1999.
Preferred Stock At December 31, 1999, 10,000,000 shares of preferred stock
remain issuable. Issuance is subject to Board of Directors' action.
10. MGI Funded Retirement Trust
The company sponsors a money purchase retirement plan covering substantially
all employees. Under the plan, the company contributes a percentage of
participating employees' eligible compensation. Company contributions resulted
in expense of $154,615, $198,647 and $203,724 in 1997, 1998, and 1999,
respectively.
11. Income Taxes
Effective tax rates differ from statutory federal income tax rates in the years
ended December 31, 1997, 1998 and 1999 as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate................... (34.0)% 34.0% 34.0%
Foreign tax......................................... (7.6) 21.9 2.9
Valuation allowance change.......................... 47.1 (18.7) (37.9)
Research activities credit.......................... (3.0) (24.2) (3.4)
Orphan drug credit.................................. (32.0) (35.9) (7.7)
State income taxes, net of federal benefit.......... (2.5) 2.5 2.5
Stock option exercises.............................. (0.1) (71.1) (15.9)
Alternative minimum tax............................. -- -- 2.0
Net operating loss expiration....................... 24.8 113.2 27.1
Other............................................... 3.6 11.4 2.8
----- ----- -----
(3.7)% 33.1% 6.4%
===== ===== =====
</TABLE>
F-13
<PAGE>
MGI PHARMA, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred taxes as of December 31, 1998 and 1999 consist of the following:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Receivable allowances..................... $ 36,734 $ 48,289
Inventory allowances...................... 2,277 4,131
Product return allowance.................. 175,330 128,493
Accrued expenses.......................... 40,930 100,085
Net operating loss carryforward........... 28,205,491 25,720,964
Research credit carryforward.............. 2,172,631 2,345,201
Orphan drug credit........................ 735,030 1,121,387
Alternative minimum tax credit
carryforward............................. 48,295 48,295
------------ ------------
31,416,718 29,516,845
Less valuation allowance.................. (31,394,482) (29,481,846)
------------ ------------
$22,236 $ 34,999
============ ============
Deferred tax liabilities:
Tax depreciation greater than book........ $ 22,236 $ 34,999
============ ============
</TABLE>
At December 31, 1999, the company had net operating loss carryforwards of
approximately $68.6 million for federal income tax purposes of which $7.6
million may expire through 2002 if the company does not generate sufficient
taxable income. Additionally, the company had research credit carryforwards of
approximately $2.3 million, which begin to expire in 2000. In 1999, the company
had net income of $4.7 million. However, the company has a history of losses,
and currently has an accumulated deficit of $69.1 million. The company is
uncertain about its ability to remain profitable on a consistent basis.
Therefore, the company continues to maintain a valuation allowance against its
deferred tax assets. The net change in the annual valuation allowance was a
decrease of $115,852 in 1998, and a decrease of $1,912,636 in 1999.
12. Income (Loss) Per Common Share
Income (loss) per share for the years ended December 31, 1997, 1998 and 1999
are summarized in the following table:
<TABLE>
<CAPTION>
Year ended Net Income Per Share
December 31, 1997 (Loss) Shares Amount
----------------- ----------- ---------- ---------
<S> <C> <C> <C>
Basic................................... $(1,784,545) 14,116,471 $(0.13)
Effect of dilutive stock options........ -- -- --
Assuming dilution....................... $(1,784,545) 14,116,471 $(0.13)
<CAPTION>
Year ended
December 31, 1998
-----------------
<S> <C> <C> <C>
Basic................................... $ 414,287 14,367,627 $ 0.03
Effect of dilutive stock options........ -- 598,485 --
Assuming dilution....................... $ 414,287 14,966,112 $ 0.03
<CAPTION>
Year ended
December 31, 1999
-----------------
<S> <C> <C> <C>
Basic................................... $ 4,731,499 14,742,151 $ 0.32
Effect of dilutive stock options........ -- 890,969 $(0.02)
Assuming dilution....................... $ 4,731,499 15,633,120 $ 0.30
</TABLE>
F-14
<PAGE>
MGI PHARMA, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The total number of options excluded from the calculation of potentially
dilutive securities either because the exercise price exceeded the average
market price or because their inclusion in a calculation of net loss per share
would have been anti-dilutive were 2,071,150, 408,674 and 232,087 for 1997,
1998 and 1999 respectively.
13. Related Party Transactions
One of the Company's directors, who became a director in May 1998, is the
managing partner of Boston BioLicensing L.L.C., a pharmaceutical consulting
firm. Under consulting arrangements, MGI made payments to Boston BioLicensing
of $136,000 and $87,000 in 1998 and 1999, respectively. Transactions with
Boston BioLicensing were in the ordinary course of business at prices
comparable to transactions with other companies.
14. Segment and Geographic Information
The company operates in the single operating segment of specialty
pharmaceuticals. Essentially all of its long-lived assets are located in the
United States. Operating revenues attributed to U.S. and foreign customers in
the years ended December 31, 1997, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
United States
Sales............................... $ 9,041,335 $12,742,831 $18,357,105
Promotion........................... -- 756,326 1,087,852
Licensing........................... 541,863 820,451 1,784,228
----------- ----------- -----------
9,583,198 14,319,608 21,229,185
----------- ----------- -----------
Foreign
Sales............................... 303,213 201,789 286,063
Promotion........................... -- -- --
Licensing........................... 2,733,512 2,521,117 3,170,240
----------- ----------- -----------
3,036,725 2,722,906 3,456,303
----------- ----------- -----------
Total
Sales............................... 9,344,548 12,944,620 18,643,168
Promotion........................... -- 756,326 1,087,852
Licensing........................... 3,275,375 3,341,568 4,954,468
----------- ----------- -----------
$12,619,923 $17,042,514 $24,685,488
=========== =========== ===========
</TABLE>
F-15
<PAGE>
2,500,000 Shares
MGI PHARMA, INC.
Common Stock
---------------------
PROSPECTUS
---------------------
U.S. Bancorp Piper Jaffray
Banc of America Securities LLC
CIBC World Markets
, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following is an itemized statement of the estimated amounts of all expenses
payable by the Registrant in connection with the registration of the common
stock offered hereby, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 22,296
NASD Filing Fee.................................................. 8,946
Nasdaq Filing Fee................................................ 1,750
Accountants' fees and expenses................................... 65,000
Legal fees and expenses.......................................... 160,000
Printing expenses................................................ 100,000
Transfer agent and registrar fees................................ 1,500
Miscellaneous.................................................... 40,508
--------
Total.......................................................... $400,000
</TABLE>
Item 15. Indemnification of Officers and Directors
Minnesota Statutes Section 302A.521 provides that a corporation shall indemnify
any person made or threatened to be made a party to a proceeding by reason of
the former or present official capacity of such
person against judgments, penalties, fines (including, without limitation
excise taxes assessed against such person with respect to any employee benefit
plan), settlements and reasonable expenses, including attorneys' fees and
disbursements, incurred by such person in connection with the proceeding, if,
with respect to the acts or omissions of such person complained of in the
proceeding, such person (1) has not been indemnified therefor by another
organization or employee benefit plan; (2) acted in good faith; (3) received no
improper personal benefit and Section 302A.255 (with respect to director
conflicts of interest), if applicable, has been satisfied; (4) in the case of a
criminal proceeding, had no reasonable cause to believe the conduct was
unlawful; and (5) reasonably believed that the conduct was in the best
interests of the corporation in the case of acts or omissions in such person's
official capacity for the corporation or reasonably believed that the conduct
was not opposed to the best interests of the corporation in the case of acts or
omissions in such person's official capacity for other affiliated
organizations. The Bylaws of the Company provide that the Company shall
indemnify its officers and directors under such circumstances and to the extent
permitted by Section 302A.521 as now enacted or hereafter amended.
Item 16. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement
5.1 Opinion of Dorsey & Whitney LLP*
23.1 Consent of KPMG LLP*
23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
</TABLE>
- --------
* Filed herewith.
II-1
<PAGE>
Item 17. Undertakings
The undersigned Registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act, each filing of the Registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange
Act of 1934 that is incorporated by reference in the Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that (1) for purposes of
determining any liability under the Securities Act, the information omitted
from the form of prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the time it was
declared effective; and (2) for the purpose of determining any liability under
the Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-3 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Minneapolis, State of Minnesota, on March 23, 2000.
MGI PHARMA, INC.
/s/ Charles N. Blitzer
By:
__________________________________
Charles N. Blitzer,
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Charles N. Blitzer and William C. Brown, and
each of them, his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for him and in his name, place and stead,
in any and all capacities, to sign any and all (i) amendments (including post-
effective amendments) to this Registration Statement and (ii) registration
statements and any and all amendments thereto (including post-effective
amendments) for the same offering that is effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933 and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, and hereby grants to such attorneys-in-fact
and agents and each of them full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each of said attorneys-in-fact
and agents, or his or her substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration Statement
has been signed by the following persons in the indicated capacities on March
23, 2000.
Signature Title
By: /s/ Charles N. Blitzer President, Chief Executive Officer
---------------------------------- and Director (principal executive
Charles N. Blitzer officer)
By: /s/ William C. Brown Chief Financial Officer and
---------------------------------- Secretary (principal financial and
William C. Brown accounting officer)
By: /s/ Andrew J. Ferrara Director
----------------------------------
Andrew J. Ferrara
By: /s/ Joseph S. Frelinghuysen Director
----------------------------------
Joseph S. Frelinghuysen
By: /s/ Michael E. Hanson Director
----------------------------------
Michael E. Hanson
II-3
<PAGE>
Signature Title
By: /s/ Hugh E. Miller Director
----------------------------------
Hugh E. Miller
By: /s/ Timothy G. Rothwell Director
----------------------------------
Timothy G. Rothwell
By: /s/ Lee J. Schroeder Director
----------------------------------
Lee J. Schroeder
By: /s/ Arthur L. Weaver, M.D. Director
----------------------------------
Arthur L. Weaver, M.D.
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement
5.1 Opinion of Dorsey & Whitney LLP*
23.1 Consent of KPMG LLP*
23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
</TABLE>
- --------
* Filed herewith.
<PAGE>
Exhibit 5.1
DORSEY & WHITNEY LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402-1498
MGI PHARMA, Inc.
Suite 110
6300 West Old Shakopee Road
Bloomington, MN 55438
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel to MGI PHARMA, Inc., a Minnesota corporation (the
"Company"), in connection with a Registration Statement on Form S-3, together
with any subsequent amendments thereto (the "Registration Statement"), relating
to the proposed issuance by the Company of 2,875,000 shares of the Company's
common stock, $.01 par value per share, including 375,000 shares which the
underwriters may purchase to cover any over-allotments (the "Common Stock").
We have examined such documents, including resolutions adopted by the Board
of Directors of the Company at a meeting held on March 14, 2000 (the
"Resolutions"), and have reviewed such questions of law as we have considered
necessary and appropriate for the purposes of our opinion set forth below. In
rendering our opinion, we have assumed the authenticity of all documents
submitted to us as originals, the genuineness of all signatures and the
conformity to authentic originals of all documents submitted to us as copies. We
have also assumed the legal capacity for all purposes relevant hereto of all
natural persons and, with respect to all parties to agreements or instruments
relevant hereto other than the Company, that such parties had the requisite
power and authority (corporate or otherwise) to execute, deliver and perform
such agreements or instruments, that such agreements or instruments have been
duly authorized by all requisite action (corporate or otherwise), executed and
delivered by such parties and that such agreements or instruments are the valid,
binding and enforceable obligations of such parties. As to questions of fact
material to our opinion, we have relied upon certificates of officers of the
Company and of public officials.
Based on the foregoing, we are of the opinion that the Common Stock has
been duly authorized by all requisite corporate action and, upon issuance,
delivery and payment therefor, will be validly issued, fully paid and
nonassessable.
<PAGE>
In rendering the opinion set forth above, we have assumed that, at the time
of the issuance and delivery of the Common Stock, the Resolutions will not have
been modified or rescinded, and there will not have occurred any change in the
law affecting the authorization, issuance or delivery of the Common Stock.
Our opinion expressed above is limited to the laws of the State of
Minnesota and the federal laws of the United States of America.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the reference to our firm under the caption
"Legal Matters" contained in the prospectus included therein.
Dated: March 24, 2000
Very truly yours,
/s/ Dorsey & Whitney LLP
TSH
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
MGI PHARMA, INC.:
We consent to the use of our reports dated February 4, 2000, except as
to Note 8 which is as of March 14, 2000, included and incorporated by
reference herein and to the reference to our firm under the heading
"Experts" in the prospectus in this Form S-3 registration statement.
/s/ KPMG LLP
Minneapolis, Minnesota
March 23, 2000
