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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 Commission File No. 0-10736
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MGI PHARMA, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-1364647
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6300 West Old Shakopee Road, Suite 110
Bloomington, Minnesota 55343
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(Address of principal executive offices) (Zip Code)
Registrant"s telephone number, including area code: 952/346-4700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
----
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant"s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates
of the Registrant as of March 14, 2000 was approximately $ (based on the closing
price of such stock as reported by The Nasdaq Stock Market on such date).
The number of shares outstanding of each of the Registrant"s
classes of common stock, as of March 14, 2000, was: Common Stock, $.01 par
value; 15,381,092 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to General Instruction G, the responses to Items 5, 6,
7, 7A and 8 of Part II of this report are incorporated herein by reference to
certain information contained in the Registrant"s Annual Report to Shareholders
for the fiscal year ended December 31, 1999 and the responses to Items 10, 11,
12 and 13 of Part III of this report are incorporated herein by reference to
certain information contained in the Registrant"s definitive Proxy Statement for
its 2000 Annual Meeting of Shareholders to be held on May 9, 2000.
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PART I
Item 1. 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
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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>
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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
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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.
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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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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;
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. 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
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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.
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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 annual
report 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.
10
<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
11
<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 annual report 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.
12
<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.
13
<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
14
<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.
16
<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
17
<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
19
<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.
20
<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.
21
<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.
22
<PAGE>
PART I
Item 2. Properties
The Company's offices are located in approximately 27,000 square feet
of office space leased by the Company in Bloomington, Minnesota. The lease for
this space expires in July 2005, with an option for renewal.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant"s Common Stock and Related Stockholder Matters
The information contained under the headings "Market Price and Related
Matters" and "Stock Price Range" on page 29 of the Company's Annual Report to
Shareholders for the year ended December 31, 1999 (the "Annual Report to
Shareholders") is incorporated herein by reference.
Item 6. Selected Financial Data
The information contained under the heading "Financial Highlights" on
page 6 of the Annual Report to Shareholders is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
The information contained under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 12
through 15 of the Annual Report to Shareholders is incorporated herein by
reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The information contained under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Market Risk
Considerations" on page 15 of the Annual Report to Shareholders is incorporated
herein by reference.
Item 8. Financial Statements and Supplementary Data
The information contained under the headings "Financial Statements"
and "Independent Auditors' Report" on pages 16 through 26 and page 27
of the Annual Report to Shareholders is incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
23
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the headings "Election of Directors,"
"Executive Officers of the Company" and "Section 16(a) Beneficial Ownership
Reporting Compliance" on pages 2 through 6 and on page 17 of the Company's Proxy
Statement for its 2000 Annual Meeting of Shareholders, to be held on May 9, 2000
(the "Proxy Statement"), is incorporated herein by reference.
Item 11. Executive Compensation
The information contained under the heading "Executive Compensation"
on pages 7 through 14 of the Proxy Statement is incorporated herein by
reference, other than the subsection thereunder entitled "Report of Compensation
Committee on Executive Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading "Security Ownership of
Certain Beneficial Owners and Management" on page 16 of the Proxy Statement is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
None.
24
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Section Reference in the
(a) 1. Financial Statements Annual Report to Shareholders
-------------------- -----------------------------
Balance Sheets at *
December 31, 1999 and 1998
Statements of Operations *
for the Years Ended December 31,
1997, 1998 and 1999
Statements of Cash Flows *
for the Years Ended December 31,
1997, 1998 and 1999
Statements of Stockholders' *
Equity for the Years Ended December 31,
1997, 1998 and 1999
Notes to Financial Statements *
Independent Auditors' Report *
* The financial statements and the Independent Auditors'
Report listed above, which are included in the Annual Report to
Shareholders, are incorporated by reference in Item 8 hereof.
Except for the financial statements listed above and the
items specifically incorporated herein by reference in Items 5,
6, 7, 7A and 8 hereof, the Annual Report to Shareholders is not
deemed to be "filed" as part of this Annual Report on Form 10-K.
Page in this
2. Financial Statement Schedules Annual Report
----------------------------- -------------
Independent Auditors' Report on 30
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts 31
All other schedules have been omitted because they are not applicable or
not required, or because the required information is included in the financial
statements or the notes thereto.
3. Exhibits
Exhibit No.
- ----------
3.1 Restated Articles of Incorporation (Incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-2,
File No. 33-40763).
3.2 Restated Bylaws of the Company, as amended to date (Incorporated
by reference to Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998).
25
<PAGE>
4.1 Specimen certificate for shares of Common Stock of the Company
(Incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998).
4.2 Rights Agreement, dated as of July 14, 1998, between the Company
and Norwest Bank, Minnesota, N.A. (including the form of Rights
Certificate attached as Exhibit B thereto) (Incorporated by
reference to Exhibit 1 to the Company's Registration Statement on
Form 8-A, filed July 15, 1998).
4.3 First Amendment to Rights Agreement, dated March 14, 2000,
between the Company and Norwest Bank, Minnesota, N.A.
(Incorporated by reference to Exhibit 2 to the Company's
Registration Statement on Form 8-A/A-1, filed March 20, 2000).
*10.1 1993 Nonemployee Director Stock Option Plan (Incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994).
*10.2 Nonemployee Director Stock Option Plan (Incorporated by reference
to Exhibit 10.2 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994).
*10.3 Deferred Compensation Plan for Nonemployee Directors
(Incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995).
*10.4 1994 Stock Incentive Plan (Incorporated by reference to Exhibit
10.3 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
*10.5 1984 Stock Option Plan (Incorporated by reference to Exhibit 10.4
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
*10.6 1982 Incentive Stock Option Plan (Incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994).
*10.7 1999 Nonemployee Director Stock Option Plan.
*10.8 Stock Acquisition Assistance Loan Program (Incorporated by
reference to Exhibit 10.6 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994).
*10.9 1997 Stock Incentive Plan (Incorporated by reference to Exhibit
10.8 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996).
*10.10 Termination Agreement, dated as of January 2, 1999, with
James V. Adam (Incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1998).
*10.11 Termination Agreement, dated as of January 2, 1999, with
Lori-jean Gille (Incorporated by reference to Exhibit 10.10 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
*10.12 Termination Agreement, dated as of January 2, 1999 with
Charles N. Blitzer (Incorporated by reference to Exhibit 10.11 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
26
<PAGE>
10.13 Trademark License Agreement, dated as of December 31, 1989,
between the Company and Norwich Eaton Pharmaceutical, Inc.
(Incorporated by reference to Exhibit 10.16 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994).
**10.14 Supply and License Agreement, dated March 19, 1992, among E.
Merck Fine Chemicals Division, EM Industries and the Company
(Incorporated by reference to Exhibit 10.23 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997).
10.15 Development, Marketing and Cooperation Agreement, dated October
23, 1995, between the Company and Dainippon Pharmaceutical Co.,
Ltd. (Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995).
10.16 Manufacturing Agreement, dated December 12, 1995, between the
Company and Global Pharm Inc. (Incorporated by reference to
Exhibit 10.25 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995).
**10.17 Exclusive License Agreement, dated August 31, 1993, between the
Company and the Regents of the University of California
(Incorporated by reference to Exhibit 10.25 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998).
*10.18 Termination Agreement, dated as of September 14, 1999, with
William C. Brown.
*10.19 Termination Agreement, dated as of September 27, 1999, with
Leon O. Moulder, Jr.
10.20 Promotion Agreement, dated April 1, 1999, between the Company and
Connetics Corporation, (Incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999).
**10.21 Promotion Agreement, dated April 1, 1999, between the Company and
Connetics Corporation, (Incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999).
*10.22 Separation Agreement, dated April 2, 1999, between the Company
and Lori-jean Gille, (Incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999).
10.23 Lease Agreement, dated April 19, 1999, with West Bloomington
Center LLC (Incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999).
*10.24 Retirement, Separation and Release Agreement, dated June 23,
1999, between the Company and James V. Adam (Incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999).
27
<PAGE>
**10.25 Co-Exclusive Marketing Agreement, dated June 29, 1999, between
the Company and Pharmacia & Upjohn Company (Incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999).
13 1999 Annual Report to Shareholders.
23 Consent of KPMG LLP.
24 Power of Attorney.
27 Financial Data Schedule.
99 Cautionary Statements under the Private Securities Litigation
Reform Act of 1995.
* Items that are management contracts or compensatory plans or
arrangements required to be filed as an exhibit pursuant to Item
14(c) of this Form 10-K.
** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as
amended, confidential portions of Exhibits 10.14, 10.17, 10.21
and 10.25 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for
confidential treatment.
(b) Reports on Form 8-K
-------------------
The Company filed no reports on Form 8-K during the quarter ended December
31, 1999.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 23, 2000 MGI PHARMA, INC.
By /s/ Charles N. Blitzer
-------------------------------------
Charles N. Blitzer, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title
<S> <C> <C>
Charles N. Blitzer President, Chief )
Executive Officer )
(principal executive )
officer) and Director )
) By /s/ Charles N. Blitzer
) -----------------------
William C. Brown* Vice President, ) Charles N. Blitzer
Finance (principal financial ) Pro se and as
and accounting officer) ) Attorney-in-Fact*
)
Andrew J. Ferrara* Director )
)
Joseph S. Frelinghuysen* Director )
)
Michael E. Hanson* Director )
)
Hugh E. Miller* Director )
)
Timothy G. Rothwell* Director )
)
Lee J. Schroeder* Director )
) Dated March 23, 2000
Arthur Weaver, M.D.* Director )
</TABLE>
* By Power of Attorney filed with this report as Exhibit 24 hereto.
29
<PAGE>
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors and Stockholders
MGI PHARMA, INC.:
Under the date of February 4, 2000, except as to Note 8 which is as of March 14,
2000, we reported on the 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, as contained in the 1999 Annual Report to Shareholders. These
financial statements and our report thereon are included in the annual report on
Form 10-K for the year 1999. In connection with our audits of the aforementioned
financial statements, we also have audited the related financial statement
schedule as listed in the accompanying index. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ KPMG LLP
Minneapolis, Minnesota
February 4, 2000
30
<PAGE>
MGI PHARMA, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
----------------------------------------
Balance at Charged to Charged to
Beginning Costs and Other Balance at
Description of Period Expenses Accounts Deductions(1) End of Period
- --------------------------------------- ---------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Deducted from asset accounts
Accounts receivable allowance $ 68,524 $214,410 $ -- $198,449 $ 84,215
Year ended December 31, 1998
Deducted from asset accounts
Accounts receivable allowance $ 84,215 $296,570 $ -- $282,825 $ 97,960
Year ended December 31, 1999
Deducted from asset accounts
Accounts receivable allowance $ 97,960 $407,025 $ -- $376,214 $128,771
</TABLE>
(1) Discounts by customers, or write-offs of uncollectable accounts, net of
recoveries.
31
<PAGE>
EXHIBIT INDEX
MGI PHARMA, INC.
Annual Report on Form 10-K
For
Year Ended December 31, 1999
Exhibit No.
- -----------
3.1 Restated Articles of Incorporation (Incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form
S-2, File No. 33-40763).
3.2 Restated Bylaws of the Company, as amended to date
(Incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998).
4.1 Specimen certificate for shares of Common Stock of the Company
(Incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998).
4.2 Rights Agreement, dated as of July 14, 1998, between the
Company and Norwest Bank, Minnesota, N.A. (including the form
of Rights Certificate attached as Exhibit B thereto)
(Incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A, filed July 15, 1998).
4.3 First Amendment to Rights Agreement, dated March 14, 2000,
between the Company and Norwest Bank, Minnesota, N.A.
(Incorporated by reference to Exhibit 2 to the Company's
Registration Statement on Form 8-A/A-1, filed March 20, 2000).
*10.1 1993 Nonemployee Director Stock Option Plan (Incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994).
*10.2 Nonemployee Director Stock Option Plan (Incorporated by
reference to Exhibit 10.2 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994).
*10.3 Deferred Compensation Plan for Nonemployee Directors
(Incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1995).
*10.4 1994 Stock Incentive Plan (Incorporated by reference to
Exhibit 10.3 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994).
*10.5 1984 Stock Option Plan (Incorporated by reference to Exhibit
10.4 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
*10.6 1982 Incentive Stock Option Plan (Incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994).
*10.7 1999 Nonemployee Director Stock Option Plan.
*10.8 Stock Acquisition Assistance Loan Program (Incorporated by
reference to Exhibit 10.6 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994).
*10.9 1997 Stock Incentive Plan (Incorporated by reference to
Exhibit 10.8 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996).
i
<PAGE>
*10.10 Termination Agreement, dated as of January 2, 1999, with James
V. Adam (Incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
*10.11 Termination Agreement, dated as of January 2, 1999, with
Lori-jean Gille (Incorporated by reference to Exhibit 10.10 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
*10.12 Termination Agreement, dated as of January 2, 1999 with
Charles N. Blitzer (Incorporated by reference to Exhibit 10.11
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.13 Trademark License Agreement, dated as of December 31, 1989,
between the Company and Norwich Eaton Pharmaceutical, Inc.
(Incorporated by reference to Exhibit 10.16 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1994).
**10.14 Supply and License Agreement, dated March 19, 1992, among E.
Merck Fine Chemicals Division, EM Industries and the Company
(Incorporated by reference to Exhibit 10.23 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1997).
10.15 Development, Marketing and Cooperation Agreement, dated
October 23, 1995, between the Company and Dainippon
Pharmaceutical Co., Ltd. (Incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995).
10.16 Manufacturing Agreement, dated December 12, 1995, between the
Company and Global Pharm Inc. (Incorporated by reference to
Exhibit 10.25 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995).
**10.17 Exclusive License Agreement, dated August 31, 1993, between
the Company and the Regents of the University of California
(Incorporated by reference to Exhibit 10.25 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1998).
*10.18 Termination Agreement, dated as of September 14, 1999, with
William C. Brown.
*10.19 Termination Agreement, dated as of September 27, 1999, with
Leon O. Moulder, Jr.
10.20 Promotion Agreement, dated April 1, 1999, between the Company
and Connetics Corporation, (Incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999).
**10.21 Promotion Agreement, dated April 1, 1999, between the Company
and Connetics Corporation, (Incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999).
ii
<PAGE>
*10.22 Separation Agreement, dated April 2, 1999, between the Company
and Lori-jean Gille, (Incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999).
10.23 Lease Agreement, dated April 19, 1999, with West Bloomington
Center LLC (Incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999).
*10.24 Retirement, Separation and Release Agreement, dated June 23,
1999, between the Company and James V. Adam (Incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999).
**10.25 Co-Exclusive Marketing Agreement, dated June 29, 1999, between
the Company and Pharmacia & Upjohn Company (Incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999).
13 1999 Annual Report to Shareholders.
23 Consent of KPMG LLP.
24 Power of Attorney.
27 Financial Data Schedule.
99 Cautionary Statements under the Private Securities Litigation
Reform Act of 1995.
* Items that are management contracts or compensatory plans or
arrangements required to be filed as an exhibit pursuant to
Item 14(c) of this Form 10-K.
** Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934,
as amended, confidential portions of Exhibits 10.14, 10.17,
10.21 and 10.25 have been deleted and filed separately with
the Securities and Exchange Commission pursuant to a request
for confidential treatment.
iii
<PAGE>
Exhibit 10.7
------------
MGI PHARMA, INC.
1999 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
1. Purpose of Plan
This plan shall be known as the "MGI PHARMA, INC. 1999 Nonemployee Director
Stock Option Plan" and is hereinafter referred to as the "Plan." The purpose of
the Plan is to promote the interests of MGI PHARMA, INC., a Minnesota
corporation (the "Company"), by enhancing its ability to attract and retain the
services of experienced and knowledgeable outside directors and by providing
additional incentive for such directors to increase their interest in the
Company's long-term success and progress.
2. Administration
The Plan shall be administered by the Board of Directors of the Company
(the "Board"). Grants of stock options under the Plan and the amount and nature
of the awards to be granted shall be automatic as described in Section 6.
However, all questions of interpretation of the Plan or of any options issued
under it shall be determined by the Board and such determination shall be final
and binding upon all persons having an interest in the Plan. Any or all powers
and discretion vested in the Board under this Plan may be exercised by any
committee duly authorized by the Board.
3. Participation in the Plan
Each director of the Company shall be eligible to participate in the Plan
unless such director is an employee of the Company (a "Nonemployee Director").
4. Stock Subject to the Plan
The stock to be subject to options under the Plan shall be authorized but
unissued shares of the Company's common stock, par value $.01 per share (the
"Common Stock"). Subject to the adjustment as provided in Section 12 hereof, the
maximum number of shares on which options may be exercised under this Plan shall
be 200,000 shares. If an option under the Plan expires, or for any reason is
terminated or unexercised with respect to any shares, such shares shall again be
available for options thereafter granted during the term of the Plan.
5. Nonqualified Stock Options
All options granted under the Plan shall be nonqualified stock options
which do not qualify as incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code").
6. Grants of Options Under the Plan
All grants of options hereunder shall be automatic and nondiscretionary and
shall be made strictly in accordance with the following provisions:
(a) No person shall have any discretion to select which Nonemployee
Directors shall be granted options or to determine the number of shares of
Common Stock to be covered by options granted to Nonemployee Directors.
(b) Each Nonemployee Director shall automatically receive on the date
such person first becomes a director by appointment by the Board of
Directors, an option to purchase 10,000 shares of Common Stock.
<PAGE>
(c) Each Nonemployee Director shall automatically receive, on each
date on which such person is elected or reelected as a director (beginning
with the election of directors at the 1999 annual meeting of shareholders
if the Plan becomes effective at such meeting), an option to purchase 7,500
shares of Common Stock.
(d) Each option granted hereunder shall be exercisable in equal
installments of 25% of the total number of options granted commencing on
the date which is one year after the date of grant and continuing on each
one year anniversary thereafter.
(e) The option exercise price per share for the shares covered by
each option shall be 100% of the fair market value of the Common Stock on
the date of the Company's annual meeting of shareholders to which the grant
relates, as determined in accordance with Section 10 of the Plan.
7. Terms and Conditions of Options
Each option granted under this Plan shall be evidenced by a written
agreement in such form as the Board shall from time to time approve, which
agreements shall comply with and be subject to the following terms and
conditions:
(a) Options Non-Transferable. No option granted under the Plan shall
be transferable by the optionee otherwise than by will, or by the laws of
descent and distribution as provided in Section 7(c)(iii) hereof. Except as
provided in Section 7(c)(iii) hereof with respect to disability of the
optionee, during the lifetime of the optionee, the options shall be
exercisable only by such optionee. No option or interest therein may be
transferred, assigned, pledged or hypothecated by the optionee during such
optionee's lifetime, whether by operation of law or otherwise, or be made
subject to execution, attachment or similar process.
(b) Period of Options. Options shall terminate upon the expiration of
10 years from the date on which they were granted (subject to prior
termination as provided in Section 8 hereof).
(c) Exercise of Options
(i) The exercise of any option granted hereunder shall only be
effective at such time as counsel to the Company shall have determined
that the issuance and delivery of Common Stock pursuant to such
exercise will not violate any state or federal securities or other
laws. An optionee desiring to exercise an option may be required by
the Company, as a condition of the effectiveness of any exercise of an
option granted hereunder, to agree in writing that all Common Stock to
be acquired pursuant to such exercise shall be held for his or her own
account without a view to any further distribution thereof, that the
certificates for such shares shall bear an appropriate legend to that
effect and that such shares will not be transferred or disposed of
except in compliance with applicable federal and state securities
laws.
(ii) An optionee electing to exercise an option shall give
written notice to the Company of such election and of the number of
shares subject to such exercise. The full purchase price of such
shares shall be tendered with such notice of exercise. Payment shall
be made to the Company by delivery of (A) cash (including check, bank
draft or money order), (B) shares of Common Stock already owned by the
optionee having a fair market value on the date of exercise equal to
the full purchase price of the shares, (C) written authorization for
the Company to retain from the total number of shares of Common Stock
as to which the option is exercised that number of shares having a
fair market value on the date of exercise equal to the aggregate
exercise price of the options exercised, (D) irrevocable instructions
to a broker promptly to deliver to the Company the amount of sale
proceeds required to pay the exercise price, (E) any combination of
the foregoing methods of payment, or (F) such other form of
consideration as the Board may deem
<PAGE>
acceptable. For purposes of the preceding sentence, the fair market
value of the Common Stock tendered shall be determined as provided in
Section 9 as of the date of exercise.
8. Effect of Termination of Membership on the Board
The right to exercise an option granted under this Plan shall be limited as
follows:
(a) If an optionee ceases being a director of the Company for any
reason other than the reasons identified in subparagraph (b) of this
Section 8, the optionee shall have the right to exercise the options as
follows, subject to the condition that no option shall be exercisable after
the expiration of the term of the option:
(i) If the optionee was a member of the Board for five or more
years, all outstanding options become immediately exercisable upon the
date the optionee ceases being a director. The optionee may exercise
the options for a period of 36 months from the date the optionee
ceased being a director, provided that if the optionee dies before the
36 month period has expired, the options may be exercised by the
optionee's legal representative or any person who acquires the right
to exercise an option by reason of the optionee's death for a period
of 12 months from the date of the optionee's death.
(ii) If the optionee was a member of the Board for less than
five years, the optionee may exercise the options, to the extent they
were exercisable at the date the optionee ceases being a member of the
Board, for a period of 90 days following the date the optionee ceased
being a director, provided that, if the optionee dies before the 90
day period has expired, the options may be exercised by the optionee's
legal representative, or any person who acquires the right to exercise
an option by reason of the optionee's death, for a period of 12 months
from the date of the optionee's death.
(iii) If the optionee dies while a member of the Board, the
options, to the extent exercisable by the optionee at the date of
death, may be exercised by the optionee's legal representative, or any
person who acquires the right to exercise an option by reason of the
optionee's death, for a period of 12 months from the date of the
optionee's death.
(iv) In the event any option is exercised by the executors,
administrators, legatees, or distributees of the estate of a deceased
optionee, the Company shall be under no obligation to issue stock
thereunder unless and until the Company is satisfied that the person
or persons exercising the option are the duly appointed legal
representatives of the deceased optionee's estate or the proper
legatees or distributees thereof.
(b) If an optionee ceases being a director of the Company due to an
act of
(i) fraud or intentional misrepresentation, or
(ii) embezzlement, misappropriation or conversion of assets or
opportunities of the Company or any affiliate of the Company, or
(iii) any other gross or willful misconduct,
as determined by the Board, in its sole and conclusive discretion, all
options granted to such optionee under this Plan shall immediately be
forfeited as of the date of the misconduct.
<PAGE>
9. Time for Granting Options
Unless the Plan shall have been discontinued as provided in Section 14
hereof, the Plan shall terminate upon the expiration of 10 years from the date
upon which it takes effect as provided in Section 13 hereof. No option may be
granted after such termination, but termination of the Plan shall not, without
the consent of the optionee, alter or impair any rights or obligations under any
option theretofore granted.
10. Fair Market Value of Common Stock
For purposes of this Plan, the fair market value of the Common Stock on a
given date shall be (i) the average of the closing representative bid and asked
prices of the Common Stock as reported on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") on such date, if the Common Stock
is then quoted on NASDAQ; (ii) the last sale price of the Common Stock as
reported on the NASDAQ National Market System; or (iii) the closing price of the
Common Stock on such date on a national securities exchange, if the Common Stock
is then being traded on a national securities exchange. If on the date as of
which the fair market value is being determined the Common Stock is not publicly
traded, the Board shall make a good faith attempt to determine such fair market
value and, in connection therewith, shall take such actions and consider such
factors as it deems necessary or advisable.
11. Limitation of Rights
(a) No Right to Continue as a Director. Neither the Plan, nor the
granting of an option nor any other action taken pursuant to the Plan,
shall constitute, or be evidence of, any agreement or understanding,
express or implied, that the Company will retain a director for any period
of time, or at any particular rate of compensation.
(b) No Shareholder Rights for Options. An optionee shall have no
rights as a shareholder with respect to the shares covered by options until
the date of the issuance of such optionee of a stock certificate therefor,
and no adjustment will be made for dividends or other rights for which the
record date is prior to the date such certificate is issued.
12. Adjustments to Common Stock
If there shall be any change in Common Stock through merger, consolidation,
reorganization, recapitalization, stock dividend (of whatever amount), stock
split or other changes in the corporate structure, appropriate adjustments to
the Plan and outstanding options shall be made. In the event of any such
changes, adjustments shall include, where appropriate, changes in the aggregate
number of shares subject to the Plan, the option exercise price, the number of
shares subject to outstanding options and the options' exercise prices thereof
in order to prevent dilution or enlargement of option rights.
13. Effective Date of the Plan
The Plan shall take effect immediately upon its approval by the affirmative
vote of the holders of a majority of the shares present in person or by proxy
and voted at a duly held meeting of shareholders of the Company.
14. Amendment of the Plan
(a) The Board may suspend or discontinue the Plan or revise or amend
it in any respect whatsoever; provided, however, that without approval of
the shareholders no revision or amendment shall change the number of shares
subject to the Plan (except as provided in Section 12 hereof), change the
designation of the class of directors eligible to receive options or
materially increase the benefits accruing to participants under the Plan.
The Board shall not alter or impair any option theretofore granted under
the Plan without the consent of the holder of the option. In addition,
subject to section (b) below and to the extent necessary and desirable to
comply with any applicable law or regulation, the Company shall obtain
shareholder approval of any Plan amendment in such a manner and to such a
degree as required.
<PAGE>
(b) The Board may, in its sole discretion, amend the vesting,
exercisability and other provisions of the Plan, including any outstanding
awards under the Plan, as necessary to avoid adverse accounting impact on
the Company of any changes in the accounting industry's interpretation of
APB No. 25.
15. Governing Law
The Plan and all determinations made and actions taken pursuant hereto
shall be governed by the laws of the State of Minnesota and construed
accordingly.
<PAGE>
Exhibit 10.18
-------------
TERMINATION AGREEMENT
This Agreement is made as of the 14th day of September, 1999, between
MGI PHARMA, INC., a Minnesota corporation, with its principal offices at Suite
300E Opus Center, 9900 Bren Road East, Minnetonka, Minnesota 55343 (the
"Company") and William C. Brown ("Employee"), residing at 317 Campbell Drive,
Hopkins, MN 55343.
WITNESSETH THAT:
WHEREAS, this Agreement is intended to specify the financial
arrangements that the Company will provide to the Employee upon Employee's
separation from employment with the Company under any of the circumstances
described herein; and
WHEREAS, this Agreement is entered into by the Company in the belief
that it is in the best interests of the Company and its shareholders to provide
stable conditions of employment for Employee notwithstanding the possibility,
threat or occurrence of certain types of change in control, thereby enhancing
the Company's ability to attract and retain highly qualified people.
NOW, THEREFORE, to assure the Company that it will have the continued
dedication of Employee notwithstanding the possibility, threat or occurrence of
a bid to take over control of the Company, and to induce Employee to remain in
the employ of the Company, and for other good and valuable consideration, the
Company and Employee agree as follows:
1. Term of Agreement. The term of this Agreement shall commence on
-----------------
the date hereof as first written above and shall continue through December 31,
1999; provided that commencing on January 1, 2000 and each January 1 thereafter,
the term of this Agreement shall automatically be extended for one additional
year unless not later than twelve months prior to such January 1, the Company
shall have given notice that it does not wish to extend this Agreement (which
notice may not, in any event, be given sooner than January 1, 2000); and
provided, further, that notwithstanding any such notice by the Company not to
extend, this Agreement shall continue in effect for a period of 24 months beyond
the term provided herein if a Change in Control (as defined in Section 3(i)
hereof) shall have occurred during such term.
2. Termination of Employment
-------------------------
(i) Prior to a Change in Control. Prior to a Change in Control (as
----------------------------
defined in Section 3(i) hereof), the Company may terminate Employee from
employment with the Company at will, with or without Cause (as defined in
Section 3(iii) hereof), at any time.
(ii) After a Change in Control
-------------------------
(a) From and after the date of a Change in Control (as defined in Section
3(i) hereof) during the term of this Agreement, the Company shall not terminate
Employee from employment with the Company except as provided in this Section
2(ii) or as a result of Employee's Disability (as defined in Section 3(iv)
hereof) or his death.
(b) From and after the date of a Change in Control (as defined in Section
3(i) hereof) during the term of this Agreement, the Company shall have the right
to terminate Employee from employment with the Company at any time during the
term of this Agreement for Cause (as defined in Section 3(iii) hereof), by
written notice to the Employee, specifying the particulars of the conduct of
Employee forming the basis for such termination.
(c) From and after the date of a Change in Control (as defined in Section
3(i) hereof) during the term of this Agreement: (x) the Company shall have the
right to terminate Employee's employment without Cause (as
<PAGE>
defined in Section 3(iii) hereof), at any time; and (y) the Employee shall, upon
the occurrence of such a termination by the Company without Cause, or upon the
voluntary termination of Employee's employment by Employee for Good Reason (as
defined in Section 3(ii) hereof), be entitled to receive the benefits provided
in Section 4 hereof. Employee shall evidence a voluntary termination for Good
Reason by written notice to the Company given within 60 days after the date of
the occurrence of any event that Employee knows or should reasonably have known
constitutes Good Reason for voluntary termination. Such notice need only
identify the Employee and set forth in reasonable detail the facts and
circumstances claimed by Employee to constitute Good Reason.
Any notice given by Employee pursuant to this Section 2 shall be effective five
business days after the date it is given by Employee.
3. Definitions
-----------
(i) A "Change in Control" shall mean:
(a) a change in control of a nature that would be required to be reported
in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or successor
provision thereto, whether or not the Company is then subject to such reporting
requirement;
(b) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3
promulgated under the Exchange Act), directly or indirectly, of securities of
the Company representing 35% or more of the combined voting power of the
Company's then outstanding securities;
(c) the Continuing Directors (as defined in Section 3(v) hereof) cease to
constitute a majority of the Company's Board of Directors; provided that such
-------------
change is the direct or indirect result of a proxy fight and contested election
or elections for positions on the Board of Directors; or
(d) the majority of the Continuing Directors (as defined in Section 3(v)
hereof) determine in their sole and absolute discretion that there has been a
change in control of the Company.
(ii) "Good Reason" shall mean the occurrence of any of the following
events, except for the occurrence of such an event in connection with the
termination or reassignment of Employee's employment by the Company for Cause
(as defined in Section 3(iii) hereof), for Disability (as defined in Section
3(iv) hereof) or for death:
(a) the assignment to Employee of employment responsibilities which are
not of comparable responsibility and status as the employment responsibilities
held by Employee immediately prior to a Change in Control;
(b) a reduction by the Company in Employee's base salary as in effect
immediately prior to a Change in Control;
(c) an amendment or modification of the Company's incentive compensation
program (except as may be required by applicable law) which affects the terms or
administration of the program in a manner adverse to the interest of Employee as
compared to the terms and administration of such program immediately prior to a
Change in Control;
(d) the Company's requiring Employee to be based anywhere other than
within 50 miles of Employee's office location immediately prior to a Change in
Control, except for requirements of temporary travel on the Company's business
to an extent substantially consistent with Employee's business travel
obligations immediately prior to a Change in Control;
<PAGE>
(e) except to the extent otherwise required by applicable law, the failure
by the Company to continue in effect any benefit or compensation plan, stock
ownership plan, stock purchase plan, bonus plan, life insurance plan,
health-and-accident plan or disability plan in which Employee is participating
immediately prior to a Change in Control (or plans providing Employee with
substantially similar benefits), the taking of any action by the Company which
would adversely affect Employee's participation in, or materially reduce
Employee's benefits under, any of such plans or deprive Employee of any material
fringe benefit enjoyed by Employee immediately prior to such Change in Control,
or the failure by the Company to provide Employee with the number of paid
vacation days to which Employee is entitled immediately prior to such Change in
Control in accordance with the Company's vacation policy as then in effect; or
(f) the failure by the Company to obtain, as specified in Section 5(i)
hereof, an assumption of the obligations of the Company to perform this
Agreement by any successor to the Company.
(iii) "Cause" shall mean termination by the Company of Employee's
employment based upon (a) the willful and continued failure by Employee
substantially to perform his duties and obligations (other than any such failure
resulting from his incapacity due to physical or mental illness or any such
actual or anticipated failure resulting from Employee's termination for Good
Reason) or (b) the willful engaging by Employee in misconduct which is
materially injurious to the Company, monetarily or otherwise. For purposes of
this Section 3(iii), no action or failure to act on Employee's part shall be
considered "willful" unless done, or omitted to be done, by Employee in bad
faith and without reasonable belief that his action or omission was in the best
interests of the Company.
(iv) "Disability" shall mean any physical or mental condition
which would qualify Employee for a disability benefit under the Company's long-
term disability plan.
(v) "Continuing Director" shall mean any person who is a member
of the Board of Directors of the Company, while such person is a member of the
Board of Directors, who is not an Acquiring Person (as hereinafter defined) or
an Affiliate or Associate (as hereinafter defined) of an Acquiring Person, or a
representative of an Acquiring Person or of any such Affiliate or Associate, and
who (a) was a member of the Board of Directors on the date of this Agreement as
first written above or (b) subsequently becomes a member of the Board of
Directors, if such person's initial nomination for election or initial election
to the Board of Directors is recommended or approved by a majority of the
Continuing Directors. For purposes of this Section 3(v): "Acquiring Person"
shall mean any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) who or which, together with all Affiliates and Associates of such
person, is the "beneficial owner" (as defined in Rule 13d-3 promulgated under
the Exchange Act) of 20% or more of the shares of Common Stock of the Company
then outstanding, but shall not include the Company, any subsidiary of the
Company or any employee benefit plan of the Company or of any subsidiary of the
Company or any entity holding shares of Common Stock organized, appointed or
established for, or pursuant to the terms of, any such plan; and "Affiliate" and
"Associate" shall have the respective meanings ascribed to such terms in Rule
12b-2 promulgated under the Exchange Act.
4. Benefits upon Termination under Section 2(ii)(c)
------------------------------------------------
(i) Upon the termination (voluntary or involuntary) of the
employment of Employee pursuant to Section 2(ii)(c) hereof, Employee shall be
entitled to receive the benefits specified in this Section 4. The amounts due to
Employee under subparagraphs (a), (b) and (c) of this Section 4(i) shall be paid
to Employee not later than one business day prior to the date that the
termination of Employee's employment becomes effective (the "Employment
Termination Date"). All benefits to Employee pursuant to this Section 4(i) shall
be subject to any applicable payroll or other taxes required by law to be
withheld.
(a) The Company shall pay to Employee any and all amounts payable to
Employee pursuant to any standard or general severance policy of the Company or
its Board of Directors;
(b) In lieu of any further base salary payments to Employee for
periods subsequent to the Employment Termination Date, the Company shall pay as
severance pay to Employee a lump-sum cash amount equal to twenty-four (24) times
the Employee's monthly base salary (as in effect in the month preceding the
month,
<PAGE>
in which the termination becomes effective or as in effect in the month
preceding the Change in Control, whichever is higher);
(c) The Company shall also pay to Employee all legal fees and expenses
incurred by Employee as a result of such termination of employment (including
all fees and expenses, if any, incurred by Employee in seeking to obtain or
enforce any right or benefit provided to Employee by this Agreement whether by
arbitration or otherwise); and
(d) Any and all contracts, agreements or arrangements between
the Company and Employee prohibiting or restricting the Employee from owning,
operating, participating in, or providing employment or consulting services to,
any business or company competitive with the Company at any time or during any
period after the Employment Termination Date, shall be deemed terminated and of
no further force or effect as of the Employment Termination Date, to the extent,
but only to the extent, such contracts, agreements or arrangements so prohibit
or restrict the Employee; provided that the foregoing provisions shall not
constitute a license or right to use any proprietary information of the Company
and shall in no way affect any such contracts, agreements or arrangements
insofar as they relate to nondisclosure and nonuse of proprietary information of
the Company notwithstanding the fact that such nondisclosure and nonuse may
prohibit or restrict the Employee in certain competitive activities.
(ii) Employee shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or otherwise.
The amount of any payment or benefit provided in this Section 4 shall not be
reduced by any compensation earned by Employee as a result of any employment by
another employer or from any other source.
(iii) In the event that any payment or benefit received or to be
received by Employee in connection with a Change in Control of the Company or
termination of Employee"s employment (whether payable pursuant to the terms of
this Agreement or any other plan, contract, agreement or arrangement with the
Company, with any person whose actions result in a Change in Control of the
Company or with any person constituting a member of an "affiliated group" as
defined in Section 280G(d)(5) of the Internal Revenue Code of 1986, as amended
(the "Code"), with the Company or with any person whose actions result in a
Change in Control of the Company (collectively, the "Total Payments")) would be
subject to the excise tax imposed by Section 4999 of the Code or any interest,
penalties or additions to tax with respect to such excise tax (such excise tax,
together with any such interest, penalties or additions to tax, are collectively
referred to as the "Excise Tax"), then Employee shall be entitled to receive
from the Company an additional cash payment (a "Gross-Up Payment") within thirty
business days of such determination in an amount such that after payment by
Employee of all taxes (including such interest, penalties or additions to tax
imposed with respect to such taxes), including any Excise Tax, imposed upon the
Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to
the Excise Tax imposed upon the Total Payments. All determinations required to
be made under this Section 4(iii), including whether a Gross-Up Payment is
required and the amount of such Gross-Up Payment, shall be made by the
independent accounting firm retained by the Company on the date of the Change in
Control (the "Accounting Firm"), which shall provide detailed supporting
calculations both to the Company and Employee within 15 business days of the
Employment Termination Date, or such earlier time as is requested by the
Company. If the Accounting Firm determines that no Excise Tax is payable by
Employee, it shall furnish Employee with an opinion that Employee has
substantial authority not to report any Excise Tax on his or her federal income
tax return.
Any uncertainty in the application of Section 4999 of the Code at the
time of the initial determination by the Accounting Firm hereunder shall be
resolved in favor of Employee. As a result of the uncertainty in the application
of Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that at a later time there will be a
determination that the Gross-Up Payments made by the Company were less than the
Gross-Up Payments that should have been made by the Company ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that Employee is required to make a payment of any Excise Tax, the Accounting
Firm shall determine the amount of the Underpayment, if any, that has occurred
and any such Underpayment shall be promptly paid by the Company to or for the
benefit of Employee. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting
<PAGE>
Firm hereunder, it is possible that at a later time there will be a
determination that the Gross-Up Payments made by the Company were more than the
Gross-Up Payments that should have been made by the Company ("Overpayment"),
consistent with the calculations required to be made hereunder. Employee agrees
to refund to the Company the amount of any Overpayment that the Accounting Firm
shall determine has occurred hereunder. Any determination by the Accounting Firm
as to the amount of any Gross-Up Payment, including the amount of any
Underpayment or Overpayment, shall be binding upon the Company and Employee.
5. Successors and Binding Agreement
--------------------------------
(i) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company), by agreement in
form and substance satisfactory to Employee, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle
Employee to compensation from the Company in the same amount and on the same
terms as Employee would be entitled hereunder if employee terminated Employee's
employment after a Change in Control for Good Reason, except that for purposes
of implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the date that the termination of Employee's employment
becomes effective. As used in this Agreement, "Company" shall mean the Company
and any successor to its business and/or assets which executes and delivers the
agreement provided for in this Section 5(i) or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
(ii) This Agreement is personal to Employee, and Employee may not
assign or transfer any part of Employee's rights or duties hereunder, or any
compensation due to Employee hereunder, to any other person. Notwithstanding the
foregoing, this Agreement shall inure to the benefit of and be enforceable by
Employee's personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
6. Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
the Minneapolis-St. Paul metropolitan area, in accordance with the applicable
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction.
7. Modification; Waiver. No provisions of this Agreement may be
--------------------
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in a writing signed by Employee and such officer as may be
specifically designated by the Board of Directors of the Company. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
8. Notice. All notices, requests, demands and all other
------
communications required or permitted by either party to the other party by
this Agreement (including, without limitation, any notice of termination of
employment and any notice of intention to arbitrate) shall be in writing and
shall be deemed to have been duly given when delivered personally or received by
certified or registered mail, return receipt requested, postage prepaid, at the
address of the other party, as first written above (directed to the attention of
the Board of Directors and Corporate Secretary in the case of the Company).
Either party hereto may change its address for purposes of this Section 8 by
giving 15 days' prior notice to the other party hereto.
9. Severability. If any term or provision of this Agreement or
------------
the application hereof to any person or circumstances shall to any extent be
invalid or unenforceable, the remainder of this Agreement or the application of
such term or provision to persons or circumstances other than those as to which
it is held invalid or unenforceable shall not be affected thereby, and each term
and provision of this Agreement shall be valid and enforceable to the fullest
extent permitted by law.
10. Counterparts. This Agreement may be executed in several
counterparts, each of which
<PAGE>
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
11. Governing Law. This Agreement has been executed and delivered
-------------
in the State of Minnesota and shall in all respects be governed by, and
construed and enforced in accordance with, the laws of the State of Minnesota,
including all matters of construction, validity and performance, and without
taking into consideration the conflict of law provisions of such state.
12. Effect of Agreement; Entire Agreement. The Company and the
-------------------------------------
Employee understand and agree that this Agreement is intended to reflect
their agreement only with respect to payments and benefits upon termination in
certain cases and is not intended to create any obligation on the part of either
party to continue employment. This Agreement supersedes any and all other oral
or written agreements or policies made relating to the subject matter hereof and
constitutes the entire agreement of the parties relating to the subject matter
hereof; provided that this Agreement shall not supersede or limit in any way
Employee's rights under any benefit plan, program or arrangements in accordance
with their terms.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed, all as of the date first written above.
MGI PHARMA, INC.
By /s/ Charles N. Blitzer
-----------------------------------
Its CEO & President
-----------------------------------
EMPLOYEE
/s/ William C. Brown
--------------------------------------
William C. Brown
<PAGE>
Exhibit 10.19
-------------
TERMINATION AGREEMENT
This Agreement is made as of the 27/th/ day of September, 1999,
-- ---------
between MGI PHARMA, INC., a Minnesota corporation, with its principal offices at
Suite 300E Opus Center, 9900 Bren Road East, Minnetonka, Minnesota 55343 (the
"Company") and Leon O. Moulder, Jr. ("Employee"), residing at 193 Willis Road,
-------------------- ----------------
Sudbury, MA 01776.
- -----------------
WITNESSETH THAT:
WHEREAS, this Agreement is intended to specify the financial
arrangements that the Company will provide to the Employee upon Employee's
separation from employment with the Company under any of the circumstances
described herein; and
WHEREAS, this Agreement is entered into by the Company in the belief
that it is in the best interests of the Company and its shareholders to provide
stable conditions of employment for Employee notwithstanding the possibility,
threat or occurrence of certain types of change in control, thereby enhancing
the Company's ability to attract and retain highly qualified people.
NOW, THEREFORE, to assure the Company that it will have the continued
dedication of Employee notwithstanding the possibility, threat or occurrence of
a bid to take over control of the Company, and to induce Employee to remain in
the employ of the Company, and for other good and valuable consideration, the
Company and Employee agree as follows:
1. Term of Agreement. The term of this Agreement shall commence
-----------------
on the date hereof as first written above and shall continue through December
31, 1999; provided that commencing on January 1, 2000 and each January 1
-------- ----
thereafter, the term of this Agreement shall automatically be extended for one
additional year unless not later than twelve months prior to such January 1, the
Company shall have given notice that it does not wish to extend this Agreement
(which notice may not, in any event, be given sooner than January 1, 2000); and
provided, further, that notwithstanding any such notice by the Company not to
- -------- ------- ----
extend, this Agreement shall continue in effect for a period of 24 months beyond
the term provided herein if a Change in Control (as defined in Section 3(i)
hereof) shall have occurred during such term.
2. Termination of Employment
-------------------------
(i) Prior to a Change in Control. Prior to a Change in Control
(as defined in Section 3(i) hereof), the Company may terminate Employee from
employment with the Company at will, with or without Cause (as defined in
Section 3(iii) hereof), at any time.
(ii) After a Change in Control
------------------------
(a) From and after the date of a Change in Control (as defined in Section
3(i) hereof) during the term of this Agreement, the Company shall not terminate
Employee from employment with the Company except as provided in this Section
2(ii) or as a result of Employee's Disability (as defined in Section 3(iv)
hereof) or his death.
(b) From and after the date of a Change in Control (as defined in Section
3(i) hereof) during the term of this Agreement, the Company shall have the right
to terminate Employee from employment with the Company at any time during the
term of this Agreement for Cause (as
<PAGE>
defined in Section 3(iii) hereof), by written notice to the Employee, specifying
the particulars of the conduct of Employee forming the basis for such
termination.(c) From and after the date of a Change in Control (as defined in
Section 3(i) hereof) during the term of this Agreement: (x) the Company shall
have the right to terminate Employee's employment without Cause (as defined in
Section 3(iii) hereof), at any time; and (y) the Employee shall, upon the
occurrence of such a termination by the Company without Cause, or upon the
voluntary termination of Employee's employment by Employee for Good Reason (as
defined in Section 3(ii) hereof), be entitled to receive the benefits provided
in Section 4 hereof. Employee shall evidence a voluntary termination for Good
Reason by written notice to the Company given within 60 days after the date of
the occurrence of any event that Employee knows or should reasonably have known
constitutes Good Reason for voluntary termination. Such notice need only
identify the Employee and set forth in reasonable detail the facts and
circumstances claimed by Employee to constitute Good Reason.
Any notice given by Employee pursuant to this Section 2 shall be effective five
business days after the date it is given by Employee.
3. Definitions
-----------
(i) A "Change in Control" shall mean:
(a) a change in control of a nature that would be required to be reported
in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or successor
provision thereto, whether or not the Company is then subject to such reporting
requirement;
(b) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3
promulgated under the Exchange Act), directly or indirectly, of securities of
the Company representing 35% or more of the combined voting power of the
Company's then outstanding securities;
(c) the Continuing Directors (as defined in Section 3(v) hereof) cease to
constitute a majority of the Company's Board of Directors; provided that such
--------
change is the direct or indirect result of a proxy fight and contested election
or elections for positions on the Board of Directors; or
(d) the majority of the Continuing Directors (as defined in Section 3(v)
hereof) determine in their sole and absolute discretion that there has been a
change in control of the Company.
(ii) "Good Reason" shall mean the occurrence of any of the following
events, except for the occurrence of such an event in connection with the
termination or reassignment of Employee's employment by the Company for Cause
(as defined in Section 3(iii) hereof), for Disability (as defined in Section
3(iv) hereof) or for death:
(a) the assignment to Employee of employment responsibilities which are
not of comparable responsibility and status as the employment responsibilities
held by Employee immediately prior to a Change in Control;
(b) a reduction by the Company in Employee's base salary as in effect
immediately prior to a Change in Control;
(c) an amendment or modification of the Company's incentive compensation
program (except as may be required by applicable law) which affects the terms or
administration of the program in a manner adverse to the interest of Employee as
compared to the terms and administration of such program immediately prior to a
Change in Control;
(d) the Company's requiring Employee to be based anywhere other than
within 50 miles of Employee's office location immediately prior to a Change in
Control, except for requirements of temporary travel on the Company's business
to an extent substantially consistent with Employee's business travel
obligations immediately prior to a Change in Control;
<PAGE>
(e) except to the extent otherwise required by applicable law, the failure
by the Company to continue in effect any benefit or compensation plan, stock
ownership plan, stock purchase plan, bonus plan, life insurance plan,
health-and-accident plan or disability plan in which Employee is participating
immediately prior to a Change in Control (or plans providing Employee with
substantially similar benefits), the taking of any action by the Company which
would adversely affect Employee's participation in, or materially reduce
Employee's benefits under, any of such plans or deprive Employee of any material
fringe benefit enjoyed by Employee immediately prior to such Change in Control,
or the failure by the Company to provide Employee with the number of paid
vacation days to which Employee is entitled immediately prior to such Change in
Control in accordance with the Company's vacation policy as then in effect; or
(f) the failure by the Company to obtain, as specified in Section 5(i)
hereof, an assumption of the obligations of the Company to perform this
Agreement by any successor to the Company.
(iii) "Cause" shall mean termination by the Company of Employee's
employment based upon (a) the willful and continued failure by Employee
substantially to perform his duties and obligations (other than any such failure
resulting from his incapacity due to physical or mental illness or any such
actual or anticipated failure resulting from Employee's termination for Good
Reason) or (b) the willful engaging by Employee in misconduct which is
materially injurious to the Company, monetarily or otherwise. For purposes of
this Section 3(iii), no action or failure to act on Employee's part shall be
considered "willful" unless done, or omitted to be done, by Employee in bad
faith and without reasonable belief that his action or omission was in the best
interests of the Company.
(iv) "Disability" shall mean any physical or mental condition which
would qualify Employee for a disability benefit under the Company's long-term
disability plan.
(v) "Continuing Director" shall mean any person who is a member of
the Board of Directors of the Company, while such person is a member of the
Board of Directors, who is not an Acquiring Person (as hereinafter defined) or
an Affiliate or Associate (as hereinafter defined) of an Acquiring Person, or a
representative of an Acquiring Person or of any such Affiliate or Associate, and
who (a) was a member of the Board of Directors on the date of this Agreement as
first written above or (b) subsequently becomes a member of the Board of
Directors, if such person's initial nomination for election or initial election
to the Board of Directors is recommended or approved by a majority of the
Continuing Directors. For purposes of this Section 3(v): "Acquiring Person"
shall mean any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) who or which, together with all Affiliates and Associates of such
person, is the "beneficial owner" (as defined in Rule 13d-3 promulgated under
the Exchange Act) of 20% or more of the shares of Common Stock of the Company
then outstanding, but shall not include the Company, any subsidiary of the
Company or any employee benefit plan of the Company or of any subsidiary of the
Company or any entity holding shares of Common Stock organized, appointed or
established for, or pursuant to the terms of, any such plan; and "Affiliate" and
"Associate" shall have the respective meanings ascribed to such terms in Rule
12b-2 promulgated under the Exchange Act.
4. Benefits upon Termination under Section 2(ii)(c)
------------------------------------------------
(i) Upon the termination (voluntary or involuntary) of the
employment of Employee pursuant to Section 2(ii)(c) hereof, Employee shall be
entitled to receive the benefits specified in this Section 4. The amounts due to
Employee under subparagraphs (a), (b) and (c) of this Section 4(i) shall be paid
to Employee not later than one business day prior to the date that the
termination of Employee's employment becomes effective (the "Employment
Termination Date"). All benefits to Employee pursuant to this Section 4(i) shall
be subject to any applicable payroll or other taxes required by law to be
withheld.
(a) The Company shall pay to Employee any and all amounts payable to
Employee pursuant to any standard or general severance policy of the Company or
its Board of Directors;
(b) In lieu of any further base salary payments to Employee for periods
subsequent to the Employment Termination Date, the Company shall pay as
severance pay to Employee a lump-sum cash amount equal to twenty-four (24) times
the Employee's monthly base salary (as in effect in the month preceding the
month
<PAGE>
in which the termination becomes effective or as in effect in the month
preceding the Change in Control, whichever is higher);
(c) The Company shall also pay to Employee all legal fees and expenses
incurred by Employee as a result of such termination of employment (including
all fees and expenses, if any, incurred by Employee in seeking to obtain or
enforce any right or benefit provided to Employee by this Agreement whether by
arbitration or otherwise); and
(d) Any and all contracts, agreements or arrangements between the Company
and Employee prohibiting or restricting the Employee from owning, operating,
participating in, or providing employment or consulting services to, any
business or company competitive with the Company at any time or during any
period after the Employment Termination Date, shall be deemed terminated and of
no further force or effect as of the Employment Termination Date, to the extent,
but only to the extent, such contracts, agreements or arrangements so prohibit
or restrict the Employee; provided that the foregoing provisions shall not
constitute a license or right to use any proprietary information of the Company
and shall in no way affect any such contracts, agreements or arrangements
insofar as they relate to nondisclosure and nonuse of proprietary information of
the Company notwithstanding the fact that such nondisclosure and nonuse may
prohibit or restrict the Employee in certain competitive activities.
(ii) Employee shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or otherwise.
The amount of any payment or benefit provided in this Section 4 shall not be
reduced by any compensation earned by Employee as a result of any employment by
another employer or from any other source.
(iii) In the event that any payment or benefit received or to be
received by Employee in connection with a Change in Control of the Company or
termination of Employee"s employment (whether payable pursuant to the terms of
this Agreement or any other plan, contract, agreement or arrangement with the
Company, with any person whose actions result in a Change in Control of the
Company or with any person constituting a member of an "affiliated group" as
defined in Section 280G(d)(5) of the Internal Revenue Code of 1986, as amended
(the "Code"), with the Company or with any person whose actions result in a
Change in Control of the Company (collectively, the "Total Payments")) would be
subject to the excise tax imposed by Section 4999 of the Code or any interest,
penalties or additions to tax with respect to such excise tax (such excise tax,
together with any such interest, penalties or additions to tax, are collectively
referred to as the "Excise Tax"), then Employee shall be entitled to receive
from the Company an additional cash payment (a "Gross-Up Payment") within thirty
business days of such determination in an amount such that after payment by
Employee of all taxes (including such interest, penalties or additions to tax
imposed with respect to such taxes), including any Excise Tax, imposed upon the
Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to
the Excise Tax imposed upon the Total Payments. All determinations required to
be made under this Section 4(iii), including whether a Gross-Up Payment is
required and the amount of such Gross-Up Payment, shall be made by the
independent accounting firm retained by the Company on the date of the Change in
Control (the "Accounting Firm"), which shall provide detailed supporting
calculations both to the Company and Employee within 15 business days of the
Employment Termination Date, or such earlier time as is requested by the
Company. If the Accounting Firm determines that no Excise Tax is payable by
Employee, it shall furnish Employee with an opinion that Employee has
substantial authority not to report any Excise Tax on his or her federal income
tax return.
Any uncertainty in the application of Section 4999 of the Code at the time of
the initial determination by the Accounting Firm hereunder shall be resolved in
favor of Employee. As a result of the uncertainty in the application of Section
4999 of the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that at a later time there will be a determination
that the Gross-Up Payments made by the Company were less than the Gross-Up
Payments that should have been made by the Company ("Underpayment"), consistent
with the calculations required to be made hereunder. In the event that Employee
is required to make a payment of any Excise Tax, the Accounting Firm shall
determine the amount of the Underpayment, if any, that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of
Employee. As a result of the uncertainty in the application of Section 4999 of
the Code at the time of the initial determination by the Accounting
<PAGE>
Firm hereunder, it is possible that at a later time there will be a
determination that the Gross-Up Payments made by the Company were more than the
Gross-Up Payments that should have been made by the Company ("Overpayment"),
consistent with the calculations required to be made hereunder. Employee agrees
to refund to the Company the amount of any Overpayment that the Accounting Firm
shall determine has occurred hereunder. Any determination by the Accounting Firm
as to the amount of any Gross-Up Payment, including the amount of any
Underpayment or Overpayment, shall be binding upon the Company and Employee.
5. Successors and Binding Agreement
--------------------------------
(i) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company), by agreement in
form and substance satisfactory to Employee, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle
Employee to compensation from the Company in the same amount and on the same
terms as Employee would be entitled hereunder if employee terminated Employee's
employment after a Change in Control for Good Reason, except that for purposes
of implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the date that the termination of Employee's employment
becomes effective. As used in this Agreement, "Company" shall mean the Company
and any successor to its business and/or assets which executes and delivers the
agreement provided for in this Section 5(i) or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
(ii) This Agreement is personal to Employee, and Employee may not
assign or transfer any part of Employee's rights or duties hereunder, or any
compensation due to Employee hereunder, to any other person. Notwithstanding the
foregoing, this Agreement shall inure to the benefit of and be enforceable by
Employee's personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
6. Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
the Minneapolis-St. Paul metropolitan area, in accordance with the applicable
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction.
7. Modification; Waiver. No provisions of this Agreement may be
------------
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in a writing signed by Employee and such officer as may be
specifically designated by the Board of Directors of the Company. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
8. Notice. All notices, requests, demands and all other
------
communications required or permitted by either party to the other party by this
Agreement (including, without limitation, any notice of termination of
employment and any notice of intention to arbitrate) shall be in writing and
shall be deemed to have been duly given when delivered personally or received by
certified or registered mail, return receipt requested, postage prepaid, at the
address of the other party, as first written above (directed to the attention of
the Board of Directors and Corporate Secretary in the case of the Company).
Either party hereto may change its address for purposes of this Section 8 by
giving 15 days' prior notice to the other party hereto.
9. Severability. If any term or provision of this Agreement or the
-----------
application hereof to any person or circumstances shall to any extent be invalid
or unenforceable, the remainder of this Agreement or the application of such
term or provision to persons or circumstances other than those as to which it is
held invalid or unenforceable shall not be affected thereby, and each term and
provision of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
10. Counterparts. This Agreement may be executed in several
------------
counterparts, each of which
<PAGE>
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
11. Governing Law. This Agreement has been executed and delivered in
-------------
the State of Minnesota and shall in all respects be governed by, and construed
and enforced in accordance with, the laws of the State of Minnesota, including
all matters of construction, validity and performance, and without taking into
consideration the conflict of law provisions of such state.
12. Effect of Agreement; Entire Agreement. The Company and the
-------------------------------------
Employee understand and agree that this Agreement is intended to reflect their
agreement only with respect to payments and benefits upon termination in certain
cases and is not intended to create any obligation on the part of either party
to continue employment. This Agreement supersedes any and all other oral or
written agreements or policies made relating to the subject matter hereof and
constitutes the entire agreement of the parties relating to the subject matter
hereof; provided that this Agreement shall not supersede or limit in any way
Employee's rights under any benefit plan, program or arrangements in accordance
with their terms.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed, all as of the date first written above.
MGI PHARMA, INC.
By /s/ Charles N. Blitzer
---------------------------------------
Its CEO & President
EMPLOYEE
/s/ Leon O. Moulder, Jr.
---------------------------------------
Leon O. Moulder, Jr.
<PAGE>
EXHIBIT 13
MGI PHARMA 1999 ANNUAL REPORT
A Future of Opportunity
[cover page graphic]
[Logo]
<PAGE>
About the Company
MGI PHARMA, INC. (Nasdaq: MOGN), acquires, develops and markets
differentiated pharmaceutical products for unmet therapeutic needs, focusing on
cancer and rheumatology. MGI promotes Salagen(R) Tablets (pilocarpine
hydrochloride) and other products with its U.S.-based sales force and works with
partners to market its products internationally. Irofulven, the company's
promising anti-cancer drug candidate, is well advanced in a series of Phase 2
clinical trials sponsored by MGI or the National Cancer Institute. Irofulven is
the lead drug candidate in MGI's novel family of proprietary anti-cancer
compounds called the acylfulvenes.
By blending product development, product acquisition and marketing alliance
strategies, MGI manages development risk, timetables and financial expenditures.
MGI has proven product development capabilities and its goal is to manage
business risk by strategically acquiring mid- to-late development stage
products. The company also strikes arrangements with other companies to promote
their FDA-approved products in MGI's target markets.
Contents
2 The Irofulven Story
6 Financial Highlights
7 Executive Message
10 Operating Review
11 Management's Discussion and Analysis
16 Financial Statements
20 Notes to Financial Statements
27 Independent Auditors' Report
28 Board of Directors and Executive Officers
29 Corporate Information
<PAGE>
A Future of Opportunities
Cancer is the second leading cause of death in the United States; half of all
men and one-third of all women will develop cancer during their lifetimes.
[Comparison charts for annual new cases of pancreas, ovary and prostate cancer
in the United States and worldwide based on the following data]
--------------------------------------------------------
United States Worldwide
--------------------------------------------------------
Pancreas 28,300 170,000
--------------------------------------------------------
Ovary 23,100 166,000
--------------------------------------------------------
Prostate 180,400 396,000
--------------------------------------------------------
All sites 1,220,100 8,083,000
--------------------------------------------------------
1
<PAGE>
A New Class of Agents
- ----------------------
[Illustration of irofulven molecule and other acylfulvenes]
Irofulven is the lead drug candidate from MGI's novel family of proprietary
anti-cancer compounds called the acylfulvenes, discovered by Drs. Trevor C.
McMorris and Michael J. Kelner at the University of California, San Diego
(UCSD). In 1993, MGI in-licensed the worldwide rights to develop and
commercialize the acylfulvenes from UCSD. Currently, MGI is evaluating
additional analogs developed by McMorris and Kelner to determine their potential
as anti-cancer drugs. We at MGI believe this analog program may generate a
series of novel anti-cancer drugs.
[Photograph of Dr. McMorris and Dr. Kelner]
"When we demonstrated outstanding antitumor activity with the acylfulvenes in a
drug-resistant lung tumor model, we knew we had just discovered something
unique. It is exciting to see our work leading to a new family of antitumor drug
candidates."
Dr. Trevor C. McMorris
Professor, Department of Chemistry and Biochemistry
University of California, San Diego
and
Dr. Michael J. Kelner
Professor of Pathology, School of Medicine
University of California, San Diego
2
<PAGE>
Novel Mechanism of Action
Irofulven exhibits a unique mechanism of action compared to current anti-cancer
drugs. Irofulven is taken up rapidly by tumor cells. Once inside the cell,
irofulven binds to DNA and protein targets. This binding interferes with DNA
replication and cell division, leading to tumor selective programmed cell death
(apoptosis) and tumor reduction or elimination. In preclinical studies and early
clinical trials, irofulven has been shown to be effective against tumors
resistant to other anti-cancer drugs. These studies have also shown the
potential benefits of using irofulven in combination with several approved
anti-cancer drugs and radiation therapy.
[Illustration of mechanism of action]
[Photograph of Dr. MacDonald]
"A novel mechanism of action gives irofulven the ability to remain active
against the most common forms of drug-resistant tumors and the potential to
combine effectively with other antitumor therapies. These characteristics
translate into a high potential to treat a broad range of human cancers, either
alone or in combination with other therapies."
Dr. John R. MacDonald
Vice President, Research and Development
MGI PHARMA, INC.
3
<PAGE>
Validating the Promise
Irofulven has demonstrated complete shrinkage of more than 10 different types of
human solid tumors transplanted into mice, including pancreatic, prostate,
ovarian, breast, lung and colon tumors. Human studies have been initiated to
confirm irofulven's broad spectrum of anti-cancer activity. In each of the three
initial MGI-sponsored Phase 2 studies of prostate, pancreatic and ovarian
cancer, objective anti-cancer responses have been demonstrated. The National
Cancer Institute (NCI) has initiated more than 10 complementary Phase 2 studies.
Initial Phase 2 results will need to be confirmed in larger scale Phase 3 trials
before irofulven could be approved for marketing.
[CT scan of a pancreatic cancer patient]
[Photograph of Dr. Tempero]
"Irofulven is an exciting new compound with a unique mechanism of action. Early
trials suggested possible efficacy in pancreatic cancer and more definitive
trials are in progress. Pancreatic cancer is an appropriate target for new drug
development since so few agents have established activity in this disease."
Dr. Margaret A. Tempero
Deputy Director
University of California, San Francisco, Cancer Center
4
<PAGE>
Capturing the Opportunity
Irofulven's potential to shrink various cancers opens the way to multiple
development paths, and MGI intends to pursue as many indications with the FDA as
warranted by the data. Initially, MGI will select a type of tumor that is
expected to represent the shortest path to marketing approval in the United
States. Based on initial clinical trial results with irofulven and planned
discussions with the FDA, we intend to initiate our Phase 3 clinical program for
irofulven in 2000.
[Photo of irofulven vials in clinical trial packaging]
[Photograph of Sheri Smith]
"With the help of a world-renowned advisory panel, the National Cancer
Institute, and many oncology investigators, we intend to work with the FDA to
develop a comprehensive clinical trial program for irofulven. Our unifying goal
is to evaluate irofulven in numerous types of cancer in order to help as many
patients, as quickly as is appropriate."
Sheri L. Smith
Director, Clinical Research
MGI PHARMA, INC.
5
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------ ------------- ------------- ------------
(in thousands, except per share data)
<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 7,859 7,659 9,339 10,989 12,713
administrative
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
Basic 12,509 13,179 14,116 14,368 14,742
Assuming dilution 12,509 13,179 14,116 14,966 15,633
Balance Sheet Data (at period end):
Cash and 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>
6
<PAGE>
Executive Message
[Photograph of Charles N. Blitzer, President and Chief Executive Officer]
Dear Shareholders:
During 1999, MGI PHARMA broke records, and everyone affiliated with the
company - shareholders, board members and associates alike - can view 1999 with
great pride. Annual U.S. sales of Salagen(R) Tablets (pilocarpine hydrochloride)
set a record, we made exceptional clinical progress with irofulven (MGI 114),
and our net income grew more than ten-fold to $4.7 million, another record. With
the support of our multi-talented, experienced board of directors, MGI's
executive team has a plan and the commitment to make our future even more
successful.
Most exciting during 1999 was the continued flow of excellent Phase 1 and 2
clinical trial data for irofulven, MGI's lead anti-cancer compound. To date,
irofulven has shown important objective responses in prostate, pancreatic and
ovarian cancer. Moreover, we believe that the upcoming year could be even more
exciting - Phase 2 clinical results will be available from our ongoing trials,
and interim results from clinical trials with irofulven will be presented at
major cancer research meetings, including the American Association for Cancer
Research meeting in April and American Society of Clinical Oncology annual
meeting in May, 2000. We believe that irofulven is well along the path to
ultimately becoming a drug that will help many cancer patients.
Business Development Strategy
- -----------------------------
MGI's principal business development strategy is to acquire the rights to
pharmaceutical products that may need further development or are already
approved and on the market. Our market focus is on specialty pharmaceutical
products, particularly in oncology and rheumatology. Our commercial organization
is quite familiar with physician prescribers in these specialties and can reach
them effectively. Three key assets that permit this strategy are our highly
experienced commercial sales and marketing organization, a proven product
development team and an effective executive team.
Product Development Team
- ------------------------
Advances Irofulven Irofulven is the lead drug candidate in MGI's novel
family of proprietary anti-cancer compounds called the acylfulvenes. It is a new
chemical entity with a novel mechanism of action, and MGI has secured a strong
worldwide patent position on irofulven and the acylfulvenes.
MGI's product development team has made important progress with the
irofulven clinical trials. During 1999, irofulven made the transition from a
compound under study for potential activity in different tumor types to a drug
candidate deserving a broad development strategy for multiple cancer
indications. During 1999, we conducted a number of initial clinical trials and
have observed objective responses in refractory ovarian, pancreatic and prostate
cancer patients and in a Phase 1 trial with irofulven in combination with CPT-11
(Camptosar(R)). Based on initial clinical trial results with irofulven and
discussions with the FDA, we intend to initiate our Phase 3 clinical program for
irofulven in 2000. We intend to provide the effort and resources needed to fully
pursue irofulven's substantial therapeutic and commercial potential.
[Chart of status of irofulven clinical programs]
7
<PAGE>
Beyond the excitement generated by progress with irofulven, our product
development team has demonstrated skills that can help MGI acquire and develop
other products. With two New Drug Application approvals under their belts and
significant progress with irofulven, parties with products to develop or sell
can be confident that this group of talented people has the potential to realize
the medical and economic value of their products.
Commercial Organization Advances Salagen(R)Tablets Sales
- --------------------------------------------------------
Sjogren's syndrome is an autoimmune disease where the body's own immune
system attacks the salivary glands, damaging their ability to produce saliva.
The commercial organization at MGI has very successfully introduced Salagen(R)
Tablets to the Sjogren's syndrome market. In 1999, U.S. Salagen(R) Tablets sales
grew more than 40 percent for the fourth consecutive year.
In 2000, our commercial organization faces new challenges. We intend to
broaden our presence in the Sjogren's market beyond the patient with severely
dry mouth to the many patients who are moderately dry. In addition, a competing
prescription product is expected to enter the U.S. market sometime in the first
half of 2000.
In part to help meet these challenges, we are expanding and strengthening
our sales organization. When the expansion is complete, we will have increased
our sales capacity by about two-thirds. In addition to supporting sales of
currently promoted products, this expansion should help attract additional
products to MGI. Further, the expansion puts MGI's commercial organization on a
growth path toward sufficient size to realize the opportunity that would be
available upon approval of irofulven. We are very excited about where our sales
organization is heading, and equally proud of its leadership and talent pool.
Financial Performance Sets Records
- ----------------------------------
In 1999, strong revenue growth across all categories of revenue drove the
44 percent increase in MGI's revenues to $25.7 million. Continued growth in U.S.
sales of Salagen(R) Tablets dominated this revenue growth, by growing $5.8
million in 1999. Combining this strong revenue growth with 20 percent growth in
total costs and expenses produced record net income of $4.7 million in 1999, or
30 cents per diluted share.
Our performance demonstrates our commitment to building value for you, the
shareholders of MGI. While we produced more income in 1999 than in all prior
years, we anticipate a significant increase in R&D spending in subsequent years
to develop irofulven.
[Chart of Growing Revenues (other revenues and product sales)
for 1997, 1998 and 1999]
I've been using the word we because MGI is managed by an executive team.
Chuck Blitzer certainly retains the "buck stops here" role, and there are
certain decisions that only I can make as your CEO. However, the executive team
has assumed a larger role within the organization as we begin to solidify
greater plans for our future. In August, we strengthened the management team
with the addition of Lonnie Moulder as executive vice president. Lonnie, an
experienced pharmaceutical executive, is currently directing our sales,
marketing and business development activities. To assist Lonnie in these duties,
Al Caplan recently joined MGI as vice president of sales. Al's two decades of
sales and marketing experience includes serving as the national sales director
of a 117-person oncology and rheumatology sales force just before joining MGI.
In May, Edgar Timberlake joined MGI as vice president for human resources and
administration. He is playing a significant role in the growth and
organizational development of the company.
Along with the invaluable talents of our board of directors and all MGI
associates, the executive team is setting the stage for further growth.
Expansion of the sales organization is one example. Refocusing and aggressively
pursuing business development activities is another. Certainly, the three
rheumatology co-promotion products we began promoting in 1999 exemplify one of
the dual business development methods for growing MGI. In addition to
establishing these marketing alliances, we intend to acquire other products.
In closing, let me say thank you for your support as MGI shareholders. We
believe we are taking the right steps to build shareholder value. While we are
excited and proud of our record-setting year, we are convinced that the most
promising growth lies ahead.
/s/ Charles N. Blitzer
Charles N. Blitzer
President and Chief Executive Officer
March 1, 2000
8
<PAGE>
Product Pipeline
[Chart of each product and product candidate, indicating whether it is in
preclinical, phase 1, phase 2, phase 3 or marketed/co-promoted stage]
9
<PAGE>
Operating Review
Salagen(R) Tablets
- ------------------
Salagen(R) Tablets (pilocarpine hydrochloride) are the prime example of MGI
PHARMA's ability to develop and commercialize differentiated specialty
pharmaceutical products that meet patient needs and build shareholder value. The
associates of MGI PHARMA developed the tablet form of pilocarpine hydrochloride;
designed and conducted preclinical and clinical studies; received approval from
the Food and Drug Administration for not one, but two dry mouth indications; and
launched, promoted and supported Salagen(R) Tablets in the United States.
Salagen(R) Tablets are the first prescription drug approved to treat the
symptoms of chronic dry mouth in certain patient populations. Chronic dry mouth
can be a potentially painful and debilitating condition. Salagen(R) Tablets
stimulate the exocrine glands, including the salivary glands, to increase their
moisture-producing activity. Whole saliva is important to oral health and
quality of life in general. People with chronic dry mouth can experience
difficulty eating and sleeping, rapid tooth decay, periodontal disease and oral
infections.
Salagen(R) Tablets are approved in the United States to treat the symptoms
of dry mouth resulting from radiation used to treat head and neck cancer and
Sjogren's syndrome. Salagen(R) Tablets have been marketed for the cancer-related
indication since 1994 and the Sjogren's syndrome indication since 1998.
[Picture of Salagen Tablets product]
[Graph chart depicting prescriptions per day of Salagen Tablets from
1997 to 1999]
When head and neck cancer patients receive radiation treatment, this
therapy often damages the salivary glands and their ability to produce moisture.
Salagen(R) Tablets, when used during or after radiation treatment, can stimulate
the glands to generate more moisture and has become the standard of care for
these patients.
Sjogren's syndrome is a chronic, inflammatory, autoimmune disease that left
untreated can ultimately affect the neurological, muscular and gastrointestinal
systems. It gradually damages the body's moisture-producing glands, including
the salivary glands, causing patients to suffer significantly from the resulting
dryness. Symptoms of the disease can include dry mouth, dry eyes, dry skin, and
vaginal dryness, depending upon which moisture-producing glands are affected and
to what degree.
Market Performance
Growth in U.S. sales of Salagen(R) Tablets has been the primary financial
force underlying MGI PHARMA's ability to increase profitability. U.S. sales of
Salagen(R) Tablets accounted for more than 70 percent of MGI PHARMA's total
revenues, and sales have been expanding at more than 40 percent annually for
four years. This is a powerful affirmation of our sales organization and
associates, who are based in the United States and focused on the domestic
market.
10
<PAGE>
Outside the United States, MGI PHARMA creates partnerships with
pharmaceutical companies to market and realize the commercial value of our
products. Salagen(R) Tablets have been approved for marketing in Europe, Canada,
and certain smaller markets for treatment of the symptoms of dryness resulting
from Sjogren's syndrome or radiation induced dry mouth in head and neck cancer
patients.
U.S. Sales Organization Expands
A two-thirds expansion of MGI PHARMA's U.S.-based sales organization is
nearly complete. This expansion will allow us to further capitalize on the
Salagen(R) Tablets franchise as well as strengthen our sales asset that is
essential to acquiring other products and creating marketing alliances. By
establishing a sufficient presence with physicians in selected medical
specialties, as we have with rheumatologists, MGI PHARMA becomes a more
attractive entity for acquiring or promoting other companies' products.
Business Development
- --------------------
MGI PHARMA's principal business development strategy is to acquire the
rights to pharmaceutical products in mid- to late-development stages or products
that have been approved and are on the market. Our focus is on pharmaceutical
products with physician prescribers in concentrated medical specialties,
particularly oncology and rheumatology, who can be reached by our sales
organization.
Beyond the purchase of marketed products, MGI PHARMA's product development
capabilities give the company the potential to acquire compounds that may need
further clinical development. Alternatively, the company may strike promotional
arrangements to promote FDA approved and already marketed products into MGI
PHARMA's target markets on behalf of a product's owner. By blending product
acquisition and promotional techniques, our goal is to manage product
development risk, development timelines, and financial expenditures while
expanding the value delivered to our target therapeutic markets.
Recent Co-Promotional Arrangements
During 1999, we initiated co-promotional arrangements for three
rheumatology products:
* Azulfidine EN-tabs(R), a Pharmacia & Upjohn product for rheumatoid
arthritis patients who have responded inadequately to non-steroidal
anti-inflammatory drugs.
* Ridaura(R), a disease-modifying anti-rheumatic drug (DMARD) from
Connetics Corporation, slows the progression of rheumatoid arthritis
and is believed to slow joint destruction.
* Luxiq(TM) (betamethasone valerate) Foam, 0.12%, from Connetics
Corporation, approved in 1999 as a topical treatment for
corticosteriod-responsive scalp dermatoses, a painful inflammation of
the scalp. MGI PHARMA promotes Luxiq(TM) to rheumatologists for their
psoriatic arthritis patients.
Of these three products, Azulfidine EN-tabs is believed to have the greatest
financial potential for MGI PHARMA. The expansion of the sales force and their
experience co-promoting products should facilitate future co-promotional
arrangements.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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(R) and Ridaura(R) for the treatment
of rheumatoid arthritis and Luxiq(TM) 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
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. 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 United States
Food and Drug Administration (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.
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(R)
and Connetics Corporation for Ridaura(R) and Luxiq(TM). 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, which has an
initial term
12
<PAGE>
ending in September 2000, we receive $250,000 per quarter for the promotion of
Ridaura. We have not yet recognized promotion revenue for either Azulfidine
EN-tabs(R) or Luxiq.
Licensing. Licensing revenue increased two percent from $3,275,375 in 1997 to
$3,341,568 in the 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 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
anti-cancer 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 MGI sponsored Phase 2 studies 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 National Cancer Institute. 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 studies by the end of 2000 that could, if successful,
become the fundamental basis of an initial new drug application 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 10 percent
foreign tax rate on the Dainippon licensing payment and a 2 percent tax rate for
alternative minimum tax.
13
<PAGE>
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 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 in this Annual Report. 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:
Cost of sales 207 293 216 222 308 254 259 387
Selling, general and 2,414 2,650 2,712 3,213 3,173 3,570 2,924 3,046
administrative
Research and 1,238 1,357 1,317 1,390 1,461 1,747 1,871 1,599
development
---------- --------- ------------ ------------ ---------- --------- ------------ -----------
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>
14
<PAGE>
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.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission 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.
Cautionary Statement
This document contains forward-looking statements within the meaning of federal
securities laws. These statements include statements regarding intent, belief,
or current expectations of the company and its management. These forward-looking
statements are not guarantees of future performance and involve a number of
risks and uncertainties that may cause our actual results to differ materially
from the results discussed in these statements. Factors that might cause such
differences include, but are not limited to, dependence on sales of Salagen
Tablets, the ability to develop irofulven into an approved and successfully
marketed chemotherapy agent, dependence on a license acquisition strategy,
uncertainty of strategic alliances, and other risks and uncertainties detailed
from time to time in the company's filings with the Securities and Exchange
Commission, including Exhibit 99 to the Annual Report on Form 10-K for the year
ended December 31, 1999. We do not intend to update any of the forward-looking
statements after the date of this Annual Report to conform them to actual
results.
15
<PAGE>
BALANCE SHEETS
December 31,
------------------------------
1998 1999
------------ ------------
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
============ ============
- -------------------------------------
See accompanying notes to financial statements.
16
<PAGE>
STATEMENTS OF OPERATIONS
MGI PHARMA, INC.
<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.
17
<PAGE>
STATEMENTS OF CASH FLOWS
MGI PHARMA, INC.
<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.
18
<PAGE>
STATEMENTS OF STOCKHOLDERS' EQUITY
MGI PHARMA, INC.
<TABLE>
<CAPTION>
Notes
Additional receivable Total
Common paid-in from Accumulated stockholders'
stock capital officers deficit equity
-------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 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 -- -- -- (1,784,635) (1,784,545)
-------- ----------- --------- ------------ -----------
Balance at December 13, 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 13, 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, 39,681 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 13, 1999 $149,796 $93,591,432 $ -- $(69,096,849) $24,644,379
======== =========== ========= ============ ===========
</TABLE>
- -----------------------------------------------
See accompanying notes to financial statements.
19
<PAGE>
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.
20
<PAGE>
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 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:
1998 1999
------------ ------------
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
=========== ===========
21
<PAGE>
3. Inventories
Inventories at December 31, 1998 and 1999 are summarized as follows:
1998 1999
---------- --------
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
========== ========
4. Accrued Expenses
Accrued expenses at December 31, 1998 and 1999 are summarized as follows:
1998 1999
---------- ----------
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
========== ==========
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:
2000 363,000
2001 441,000
2002 448,000
2003 455,000
2004 455,000
Thereafter 265,000
----------
$2,427,000
==========
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(R) 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(R) Tablets into a Phase
3 human clinical program.
MGI has entered into licensing agreements for the commercialization of
Salagen(R) Tablets in Europe and Canada with Chiron B.V. and 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
22
<PAGE>
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(R) (auranofin) and Luxiq(TM) (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(R) (sulfasalazine
delayed release tablets, USP) Enteric-coated on behalf of the Pharmacia & Upjohn
Company (P&U) to the rheumatology market in the United States. MGI will earn
promotion revenue based on its ability to increase P&U sales of Azulfidine
EN-tabs(R). The Azulfidine EN-tabs(R) 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:
Number Average Price
of Shares Per Share
--------- -------------
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
=========
23
<PAGE>
The following table summarizes information concerning options outstanding and
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- ----------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Remaining Exercise 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:
1997 1998 1999
----------- --------- ----------
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
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.
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:
1997 1998 1999
---- ---- ----
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
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.
24
<PAGE>
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>
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.
25
<PAGE>
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
December 31, 1997 Net Income (Loss) Shares Per Share 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)
Year ended
December 31, 1998
- -----------------
Basic $414,287 14,367,627 $0.03
Effect of dilutive stock
options -- 598,485 --
Assuming dilution $414,287 14,966,112 $0.03
Year ended
December 31, 1999
- -----------------
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>
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:
1997 1998 1999
---- ---- ----
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
=========== =========== ===========
26
<PAGE>
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
/s/ KPMG LLP
Minneapolis, Minnesota
February 4, 2000, except as
to Note 8 which is as of March 14, 2000.
27
<PAGE>
Board of Directors and Executive Officers
Directors
Charles N. Blitzer joined MGI PHARMA in April 1996 as president, chief executive
officer and director. Prior to joining the company, he was president and chief
executive officer of Oncologix, Inc. From 1977 through 1992, Mr. Blitzer also
held a variety of management positions at Marion Laboratories, Inc., and Marion
Merrell Dow Pharmaceuticals, Inc.
Andrew J. Ferrara is president and chief executive officer of Boston Healthcare,
a healthcare consulting firm. In 1984, Ferrara founded Molecular Simulations,
Inc., a computer software company. Previously, he spent 20 years with Eli Lilly
& Company. He joined MGI PHARMA's board of directors in May 1998.
Joseph S. Frelinghuysen is president of J.S. Frelinghuysen & Co., a private
investment firm he formed in 1989. He was employed for 20 years at The First
Boston Corporation where he served as a managing director in investment banking.
He joined MGI PHARMA's board of directors in November 1997.
Michael E. Hanson retired from Eli Lilly & Company in December 1997, having
served as president of Lilly's Internal Medicine Business Unit since July 1994.
Prior to joining Lilly in 1973, he was on the faculty of the University of
Minnesota College of Pharmacy and assistant director of the University of
Minnesota Hospital Pharmacy. He joined MGI PHARMA's board of directors in May
1998.
Hugh E. Miller retired as vice chairman and director in December 1990 from ICI
Americas Inc., a chemical, pharmaceutical, agricultural, consumer and specialty
products company, after a 22-year career. Prior to ICI, Miller was with
Jefferson Chemical for 13 years. He joined MGI PHARMA's board of directors in
October 1992, and in July 1998 he was appointed chairman of the board. Mr.
Miller is also a director of Wilmington Trust Co., Inc.
Timothy G. Rothwell was appointed the executive vice president and president of
pharmaceutical operations at Pharmacia & Upjohn, Inc., in January 1998.
Previously, he was the president of Rhone-Poulenc Rorer, Inc. Rothwell worked at
Sandoz Pharmaceuticals from 1972 to 1989. In 1989, he joined Squibb Corporation
and in 1991 Rothwell moved to Burroughs Wellcome. He returned to Sandoz in 1992
as chief executive officer and president of the U.S. pharmaceuticals business,
and in 1994 headed up worldwide business development and licensing. Rothwell
joined MGI PHARMA's board of directors in November 1996.
Lee J. Schroeder is president and director of Lee Schroeder & Associates, Inc.,
a pharmaceutical consulting company. In 1985, he retired from Foxmeyer Drug Co.,
a wholesale drug company, as president and chief operating officer. Previously,
he had been the executive vice president of Sandoz, Inc. From 1960 to 1981,
Schroeder held a variety of positions at Dorsey Laboratories, a division of
Sandoz. From 1953 to 1960, Schroeder was a sales representative for Armour
Laboratories. He joined MGI PHARMA's board of directors in May 1989. He is also
a director of Ascent Pediatrics, Inc., Interneuron Pharmaceuticals, Inc., and
Celgene Corporation.
Arthur L. Weaver, M.D., is a leading rheumatologist in the United States. He
serves as the director of clinical Research at the Arthritis Center of Nebraska
and is a clinical professor in the department of medicine at the University of
Nebraska Medical Center. He is on the medical advisory boards for several
recognized pharmaceutical and biotechnology companies. He joined MGI PHARMA's
board of directors in July 1998.
Executive Officers
Charles N. Blitzer
Chief Executive Officer and President
Leon O. Moulder, Jr.
Executive Vice President
William C. Brown
Chief Financial Officer
28
<PAGE>
Corporate Information
Market Price and Related Matters
MGI PHARMA's common stock trades on the Nasdaq National Market under the symbol
MOGN. As of March 14, 2000, MGI had approximately 810 shareholders of record and
15,381,092 shares of common stock outstanding. The company has not paid cash
dividends on its common stock and has no present intention of paying cash
dividends on its common stock.
The following table sets forth the highest and lowest daily closing sales prices
as reported by Nasdaq under the symbol MOGN during the quarters listed. Prices
represent transactions between dealers and do not reflect retail markups,
markdowns, or commissions, and may not necessarily represent actual
transactions.
Stock Price Range
1998 High Low
------- -------
First Quarter $ 7.750 $ 3.875
Second Quarter 12.813 6.750
Third Quarter 8.563 5.000
Fourth Quarter 12.125 6.281
1999 High Low
------- -------
First Quarter $13.87 $ 7.625
Second Quarter 12.813 8.375
Third Quarter 14.000 10.250
Fourth Quarter 14.063 10.063
Independent Auditors
KPMG LLP
Minneapolis, Minnesota
Outside Legal Counsel
Dorsey & Whitney LLP
Minneapolis, Minnesota
Transfer Agent and Registrar
Norwest Bank Minnesota, N.A.
Shareowner Services
P.O. 64854
Saint Paul, Minnesota 55164-0854
Phone: 800-468-9716
E-Mail Address: [email protected]
Website Address: www.norwest.com/business-stocktransfer
SEC Form 10-K
A copy of the company's annual report to the Securities and Exchange Commission
on Form 10-K is available without charge upon written request to:
MGI PHARMA, INC.
Investor Relations
Suite 110
6300 West Old Shakopee Road
Bloomington, MN 55438-2318
Annual Meeting of Shareholders
The annual meeting of shareholders will be held on May 9, 2000 at 3:30 p.m. at
the Minneapolis Hilton Towers, 1001 Marquette Ave., Minneapolis, Minnesota.
Shareholder Inquiries
Shareholders and prospective investors are welcome to call or write the company
with questions or requests for additional information. Inquiries should be
directed to Investor Relations at MGI PHARMA, 612-346-4723. You are also invited
to visit our website at www.mgipharma.com.
Cancer statistics on page 1:
The American Cancer Society Website
CA Cancer Journal for Clinicians
Salagen(R) is a registered trademark of MGI PHARMA, INC.
Didronel(R) is a registered trademark of Procter & Gamble
INFed(R) is a registered trademark of Schein Pharmaceutical, Inc.
Camptosar(R) is a registered trademark of Pharmacia & Upjohn
Gemzar(R) is a registered trademark of Eli Lilly & Company
Taxol(R) is a registered trademark of Bristol-Myers Squibb Company.
Azulfidine-EN tabs(R) is a registered trademark of Pharmacia & Upjohn Company
Ridaura(R) is a registered trademark of Connetics Corporation
Luxiq(TM) is a trademark of Connetics Corporation
29
<PAGE>
Exhibit 23
----------
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
MGI PHARMA, INC.:
We consent to incorporation by reference in the Registration Statements (Nos.
33-13785, 33-23098, 33-23099, 33-65026, 33-79024, 333-38453 and 333-57691) on
Form S-8 of MGI PHARMA, INC. of our reports dated February 4, 2000, except as to
Note 8, which is as of March 14, 2000, relating to the balance sheets of MGI
PHARMA, INC. as of December 31, 1998 and 1999, and the related statements of
operations, cash flows, stockholders' equity and the related financial statement
schedule for each of the years in the three-year period ended December 31, 1999,
which reports are included or incorporated by reference in the 1999 annual
report on Form 10-K of MGI PHARMA, INC.
/s/ KPMG LLP
Minneapolis, Minnesota
March 23, 2000
<PAGE>
Exhibit 24
----------
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Charles N. Blitzer and William C.
Brown, and each of them, his true and lawful attorneys-in-fact and agents, each
acting alone, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign an Annual Report
on Form 10-K of MGI PHARMA, INC., and any and all amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Charles N. Blitzer President, Chief Executive March 23, 2000
- ----------------------------------
Charles N. Blitzer Officer and Director (principal
executive officer)
/s/ William C. Brown Vice President, Finance March 23, 2000
- ----------------------------------
William C. Brown (principal financial and
accounting officer)
/s/ Andrew J. Ferrara Director March 23, 2000
- ----------------------------------
Andrew J. Ferrara
/s/ Joseph S. Frelinghuysen Director March 23, 2000
- ----------------------------------
Joseph S. Frelinghuysen
/s/ Michael E. Hanson Director March 23, 2000
- ----------------------------------
Michael E. Hanson
/s/ Hugh E. Miller Director March 23, 2000
- ----------------------------------
Hugh E. Miller
/s/ Timothy G. Rothwell Director March 23, 2000
- ----------------------------------
Timothy G. Rothwell
/s/ Lee J. Schroeder Director March 23, 2000
- ----------------------------------
Lee J. Schroeder
/s/ Arthur L. Weaver, M.D. Director March 23, 2000
- ----------------------------------
Arthur L. Weaver, M.D.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING BALANCE SHEET OF MGI PHARMA, INC. AS OF DECEMBER 31, 1999, AND THE
RELATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,249,248
<SECURITIES> 15,901,325
<RECEIVABLES> 2,427,901
<ALLOWANCES> 128,771
<INVENTORY> 836,865
<CURRENT-ASSETS> 27,569,262
<PP&E> 1,027,482
<DEPRECIATION> 839,300
<TOTAL-ASSETS> 28,973,355
<CURRENT-LIABILITIES> 4,329,357
<BONDS> 0
0
0
<COMMON> 24,644,379
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 28,973,736
<SALES> 18,643,168
<TOTAL-REVENUES> 25,651,922
<CGS> 1,208,650
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,677,435
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,052,550
<INCOME-TAX> 321,051
<INCOME-CONTINUING> 4,731,499
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,731,499
<EPS-BASIC> .32
<EPS-DILUTED> .30
</TABLE>
<PAGE>
Exhibit 99
----------
MGI PHARMA, INC.
Annual Report on Form 10-K
December 31, 1999
Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
The private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for the forward-looking statements to encourage companies to provide prospective
information without fear of litigation so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in the statement. The company desires to
take advantage of these "safe harbor" provisions and is filing this Exhibit 99
in order to do so. Accordingly, the company hereby identifies the following
important factors which could cause the company's actual results to differ
materially from any such results which may be projected, forecast, estimated or
budgeted by the company in forward-looking statements made by the company from
time to time in reports, proxy statements, registration statements and other
written communications, or in oral forward-looking statements made from time to
time by the company"s officers and agents.
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.
1
<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
2
<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
3
<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
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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
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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.
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.
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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
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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
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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
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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.
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.
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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. 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.
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