<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ______________
Commission File Number: 0-10736
-------
MGI PHARMA, INC.
----------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1364647
--------------------------------- ---------------------------------------
(State or other jurisdiction (I.R.S. employer identification number)
of incorporation or organization)
6300 West Old Shakopee Road
Suite 110
Bloomington, Minnesota 55438 (952) 346-4700
--------------------------------- ---------------------------------------
(Address of principal executive (Registrant's telephone number,
offices and zip code) including area code)
Indicate by check mark, whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 16,465,936 shares
--------------------------------- ---------------------------------------
(Class) (Outstanding at November 10, 2000)
<PAGE>
MGI PHARMA, INC.
FORM 10-Q INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - December 31, 1999
and September 30, 2000 3
Statements of Operations - Three Months and
Nine Months Ended September 30, 1999 and 2000 5
Statements of Cash Flows - Nine Months
Ended September 30, 1999 and 2000 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security 18
Holders
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
----------------------------
MGI PHARMA, INC.
BALANCE SHEETS
(unaudited)
December 31, September 30,
1999 2000
-------------- --------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 8,249,248 $ 13,956,622
Short-term investments 15,901,325 23,690,885
Receivables, less allowances of
$128,771 and $147,320 2,427,901 3,675,677
Inventories 836,865 1,098,582
Prepaid expenses 153,923 270,542
------------- -------------
Total current assets 27,569,262 42,692,308
Equipment and furniture, at cost
less accumulated depreciation of
$839,300 and $1,065,718 1,027,482 1,286,607
Long-term investments -- 3,800,000
Other assets 376,992 448,479
------------- -------------
Total assets $ 28,973,736 $ 48,227,394
============= =============
(Continued)
3
BALANCE SHEETS
(Unaudited)
<PAGE>
Page 2
December 31, September 30,
1999 2000
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 964,242 $ 1,045,157
Accrued expenses 2,853,794 5,384,703
Deferred revenue 495,000 --
Other current liabilities 16,321 144,625
------------- -------------
Total current liabilities 4,329,357 6,574,485
------------- -------------
Noncurrent liabilities:
Deposit payable -- 1,000,000
------------- -------------
Total liabilities 4,329,357 7,574,485
------------- -------------
Stockholders' equity:
Preferred stock, 10,000,000
authorized and unissued shares -- --
Common stock, $.01 par value,
30,000,000 authorized shares,
14,979,640 and 16,459,662
issued shares 149,796 164,597
Additional paid-in capital 93,591,432 114,093,648
Accumulated deficit (69,096,849) (73,605,336)
------------- -------------
Total stockholders' equity 24,644,379 40,652,909
------------- -------------
Total liabilities and
stockholders' equity $ 28,973,736 $ 48,227,394
============= =============
-------------------------------------
See accompanying notes to financial statements.
4
<PAGE>
MGI PHARMA, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 4,271,847 $ 4,859,684 $ 13,528,969 $ 15,560,061
Promotion 250,000 250,000 625,000 769,874
Licensing 1,290,046 1,643,765 3,198,829 3,971,237
------------ ------------ ------------ ------------
5,811,893 6,753,449 17,352,798 20,301,172
------------ ------------ ------------ ------------
Costs and Expenses:
Cost of sales 258,882 331,684 821,441 1,028,897
Selling, general and administrative 2,923,887 4,466,957 9,667,086 12,627,259
Research and development 1,871,292 8,575,167 5,078,917 12,604,732
------------ ------------ ------------ ------------
5,054,061 13,373,808 15,567,444 26,260,888
------------ ------------ ------------ ------------
Income (loss) before interest and taxes 757,832 (6,620,359) 1,785,354 (5,959,716)
Interest income 270,403 686,703 675,692 1,599,229
------------ ------------ ------------ ------------
Income (loss) before taxes 1,028,235 (5,933,656) 2,461,046 (4,360,487)
Provision for income taxes 75,565 51,537 214,221 148,000
------------ ------------ ------------ ------------
Net income (loss) $ 952,670 $ (5,985,193) $ 2,246,825 $ (4,508,487)
============ ============ ============ ============
Net income (loss) per common share:
Basic $ 0.06 $ (0.36) $ 0.15 $ (0.28)
Assuming dilution $ 0.06 $ (0.36) $ 0.14 $ (0.28)
Weighted average number of
common shares outstanding:
Basic 14,818,854 16,452,089 14,681,292 15,829,416
Assuming dilution 15,732,835 16,452,089 15,586,710 15,829,416
</TABLE>
----------------------------------------------------------
See accompanying notes to financial statements.
5
<PAGE>
MGI PHARMA, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
-----------------------------
1999 2000
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 2,246,825 ($ 4,508,487)
Adjustments for non-cash items:
Depreciation 197,853 226,418
Benefit plan contribution 117,261 126,729
Stock option acceleration 162,953 --
Other 110,951 10,000
Change in operating assets and liabilities:
Receivables (1,626,414) (1,247,776)
Inventories 243,420 (261,717)
Prepaid expenses 116,643 (116,619)
Accounts payable and accrued expenses (110,116) 2,571,755
Deferred revenue (495,000) (495,000)
Other current liabilities 44,570 128,304
------------ ------------
Net cash provided by (used in)
operating activities 1,008,946 (3,566,393)
------------ ------------
INVESTING ACTIVITIES:
Purchase of investments (15,464,561) (38,049,285)
Maturity of investments 12,391,166 26,459,725
Purchase of equipment and furniture (672,519) (485,543)
Payment on notes receivable 56,999 --
Other (41,368) (71,487)
------------ ------------
Net cash used in investing activities (3,730,283) (12,146,590)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of shares, net -- 16,448,138
Issuance of shares under stock
plans 1,776,474 3,972,219
Receipt of deposit payable -- 1,000,000
------------ ------------
Net cash provided by financing
activities 1,776,474 21,420,357
------------ ------------
Increase (decrease) in cash and
cash equivalents (944,863) 5,707,374
Cash and cash equivalents at
beginning of period 6,513,204 8,249,248
------------ ------------
Cash and cash equivalents at
end of period $ 5,568,341 $ 13,956,622
============ ============
Supplemental disclosure of cash information:
Cash paid for income taxes $ 165,000 $ 233,000
----------------------------------
See accompanying notes to financial statements.
6
<PAGE>
MGI PHARMA, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
---------------------
MGI PHARMA, INC. (MGI or the company) is an oncology focused pharmaceutical
company. It acquires, develops and commercializes differentiated pharmaceutical
products that meet patient needs. MGI focuses its sales efforts solely in the
United States and collaborates with other pharmaceutical or biotechnology
companies for its products in international markets.
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 a copromoted product, Azulfidine EN-tabs(R) (sulfasalazine
delayed release tablets, USP Enteric-coated). Salagen Tablets are approved in
the United States for two indications: symptoms of radiation-induced dry mouth
in head and neck cancer patients, and the symptoms of dry mouth associated with
Sjogren's syndrome, an autoimmune disease that damages the salivary glands.
Sales of Salagen Tablets in the United States account for 97 percent of company
product sales. Didronel I.V. Infusion is used to treat hypercalcemia (elevated
blood calcium) in cancer patients. The copromoted product continues to be owned
and distributed by the copromotion partner, so MGI would recognize promotion fee
revenue, rather than product sales revenue, for this product. 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 preclinical studies
and clinical trials for irofulven, the lead product candidate in MGI's novel
family of proprietary cancer therapy compounds called 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 is expanding its current research and development activities to include
the product candidates licensed from MethylGene Inc. in August 2000. These
activities include clinical trials of MG98, and the preclinical studies of small
molecule DNA methyltransferase inhibitors. The company also provides ongoing
clinical support of Salagen Tablets.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal, recurring adjustments)
considered necessary for fair presentation have been included. Interim results
may not be indicative of annual results. Certain prior year amounts have been
reclassified to conform with the current year presentation, including the
separate presentation of interest income. For further information, refer to the
financial statements and footnotes included in the company's report on Form 10-K
for the year ended December 31, 1999.
(2) New Accounting Pronouncement
----------------------------
Staff Accounting Bulleting No. 101 ("SAB 101"), as amended, summarizes certain
views of the SEC staff in applying generally accepted accounting principles to
revenue recognition in financial statements. This
7
<PAGE>
bulletin would alter the revenue recognition stream with respect to certain
strategic arrangements - certain payments would be initially capitalized or
deferred, then amortized over a period of time. Implementation of SAB 101 is
required for the company in the quarter beginning October 1, 2000, with any
effect retroactive to January 1, 2000.
In October 2000, the SEC staff provided additional guidance with respect to SAB
101 in which it recognized the "many research and development arrangements in
the pharmaceutical and biotechnology industries are more complicated and contain
multiple elements". It further indicated that the SEC staff has requested that
the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards
Board address the accounting for such multiple-element contracts. The company
has continued to recognize irrevocable payments under license, research and
development arrangements as the factors underlying such payments that cause them
to be payable/receivable. Under pending guidance from the EITF, accounting for
such payments may require reversal, capitalization or deferral, and subsequent
amortization over a period of time. Please refer to footnote No. 11, Licensing
Arrangements, for more information.
(3) Income (Loss) Per Common Share
------------------------------
Income (loss) per share for the three month and nine month periods ended
September 30, 1999 and 2000 are summarized in the following table:
<TABLE>
<CAPTION>
Three Months Ended 1999 2000
September 30 ------------------------------------- --------------------------------------
Per Net Per
Net Share Income Share
Income Shares Amount (Loss) Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic $ 952,670 14,818,854 $ 0.06 ($5,985,193) 16,452,089 ($ 0.36)
Effect of
dilutive stock options -- 913,981 $ 0.00 -- -- $ 0.00
----------- ---------- -------- ----------- ---------- --------
Assuming dilution $ 952,670 15,732,835 $ 0.06 ($5,985,193) 16,452,089 ($ 0.36)
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended 1999 2000
September 30 ------------------------------------- --------------------------------------
Per Net Per
Net Share Income Share
Income Shares Amount (Loss) Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic $ 2,246,825 14,681,292 $ 0.15 ($4,508,487) 15,829,416 ($ 0.28)
Effect of
dilutive stock options -- 905,418 ($ 0.01) -- -- $ 0.00
----------- ---------- -------- ----------- ---------- --------
Assuming dilution $ 2,246,825 15,586,710 $ 0.14 ($4,508,487) 15,829,416 ($ 0.28)
</TABLE>
8
<PAGE>
(4) Short-Term Investments
----------------------
Because the company has the intent and ability to hold its investments to
maturity, they are considered held-to-maturity investments. As such, they are
stated at amortized cost, which approximates estimated fair value.
Held-to-maturity investments at December 31, 1999 and September 30, 2000 are
summarized in the following table:
1999 2000
----------- -----------
Commercial paper $10,747,279 $18,253,277
Certificates of deposit 3,116,817 5,437,608
Corporate notes 2,037,229 --
----------- -----------
$15,901,325 $23,690,885
=========== ===========
(5) Inventories
-----------
Inventories at December 31, 1999 and September 30, 2000 are summarized as
follows:
1999 2000
---------- ----------
Raw materials and supplies $ 160,744 $ 296,350
Work in process 153,447 479,650
Finished products 522,674 322,582
---------- ----------
$ 836,865 $1,098,582
========== ==========
Inventories are stated at the lower of cost or market. Cost is determined on a
first-in, first-out basis.
(6) Accrued Expenses
----------------
Accrued expenses at December 31, 1999 and September 30, 2000 are summarized in
the following table:
1999 2000
---------- ----------
Product development commitments $ 860,981 $3,417,222
Bonuses 467,820 516,066
Product return accrual 342,648 484,917
Other accrued expenses 1,182,345 966,498
---------- ----------
$2,853,794 $5,384,703
========== ==========
(7) Promotion Revenue
-----------------
In March 1999, MGI and Schein Pharmaceutical, Inc. concluded their agreement for
the promotion of INFeD(R) (iron dextran injection). MGI recognized a minimum
quarterly promotion fee of $125,000 in the first quarter of 1999, and smaller
promotion fees in subsequent quarters.
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 promoted Ridaura
and Luxiq to the rheumatology market in the United States. For Ridaura, MGI
received $250,000 per quarter for making a specified number of sales calls. For
Luxiq,
9
<PAGE>
MGI received a split of product contribution from Connetics Corporation's sales
of Luxiq in the rheumatology market. The Ridaura and Luxiq agreements concluded
in September 2000.
In September 1999, MGI began promoting Azulfidine EN-tabs(R) (sulfasalazine
delayed release tablets, USP Enteric-coated) on behalf of the Pharmacia
Corporation (Pharmacia) to the rheumatology market in the United States. MGI
will earn promotion revenue based on its ability to increase Pharmacia's sales
of Azulfidine EN-tabs(R). The Azulfidine EN-tabs(R) co-promotion agreement has
an initial term through June 30, 2003.
(8) Stock Incentive Plans
---------------------
Under stock incentive plans, designated persons (including officers, directors,
employees and consultants) are granted rights to acquire company common stock.
These rights include stock options and other equity rights.
At September 30, 2000, 4,119,399 shares of common stock remain reserved for
issuance, of which 1,820,608 remain available for grant. Options to purchase
2,298,791 shares of common stock were outstanding, of which 1,004,861 were
exercisable. Options outstanding had a weighted average exercise price of $11.29
per share.
(9) Stockholders' Equity
--------------------
Changes in selected stockholders' equity accounts for the nine months ended
September 30, 2000 were as follows:
Common Stock Additional
---------------------------- paid-in
Shares Par value capital
------------ ------------ ------------
Balance at December 31, 1999 14,979,640 $ 149,796 $ 93,591,432
Issuance of shares 1,000,000 10,000 16,438,138
Exercise of stock options 469,761 4,698 3,870,508
Employee retirement savings
plan contribution -- -- 86,660
Employee stock purchase plan 9,711 97 96,916
Other issuance 550 6 9,994
------------ ------------ ------------
Balance at September 30, 2000 16,459,662 $ 164,597 $114,093,648
============ ============ ============
In the second quarter of 2000, the company completed a sale of 1,000,000 newly
issued shares of common stock at $18 per share. The net proceeds, after fees and
expenses, were approximately $16.4 million.
On July 25, 2000, the company filed a shelf registration with the Securities and
Exchange Commission to sell three million common shares. Under a shelf
registration, the company may sell securities from time to time in one or more
separate offerings in amounts, at prices and on terms to be determined at the
time of sale.
10
<PAGE>
(10) Commitments
-----------
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. Future minimum lease
payments for this lease agreement are as follows:
Remainder of 2000 $ 91,000
2001 441,000
2002 448,000
2003 455,000
2004 455,000
Thereafter 265,000
-----------
$2,155,000
===========
(11) Licensing Arrangements
----------------------
In April 2000, MGI entered into a license agreement with CIBA Vision AG under
which MGI granted CIBA Vision an exclusive, royalty-bearing license to develop
and commercialize Salagen Tablets in Europe, Russia and certain other countries.
Simultaneous with this agreement, the previous agreements with Chiron B.V. for
Salagen Tablets rights in Europe were terminated. In addition, MGI
simultaneously entered into a supply agreement with CIBA Vision pursuant to
which MGI agreed to supply CIBA Vision's requirements of Salagen Tablets until
the termination of the license agreement with CIBA Vision. Sales of Salagen
Tablets in Europe began in 1995.
In the second quarter of 2000, MGI recognized $750,000 of licensing income
related to the license agreement with CIBA Vision. This immediate recognition
treatment is consistent with MGI's accounting policy for irrevocable license
payments. Under SAB 101, accounting for this payment may require reversal,
deferral and subsequent amortization over a yet to be estimated expected period
of benefit.
In the third quarter of 2000, MGI recognized a milestone payment of $830,000
from Kissei related to the development of Salagen Tablets in Japan. This
transaction may also be subject to reversal, deferral and subsequent
amortization over a yet to be estimated expected period of benefit under SAB
101.
In August 2000, MGI entered into license, research and development and stock
purchase agreements with MethylGene Inc. ("MethylGene"). Under the agreements,
MethylGene granted MGI an exclusive, royalty-bearing license to develop and
commercialize MG98 in North America for all therapeutic indications. The
agreement also included similar rights to small molecule inhibitors of DNA
methyltransferase (DNA MeTase Inhibitors) for oncology and rheumatology
indications. MGI agreed to make initial payments to MethylGene aggregating $5.7
million, purchased a minority interest in MethylGene for $3.8 million, agreed to
make milestone payments for both MG98 and the first DNA MeTase Inhibitors that
achieve such development milestones, agreed to purchase up to $6 million of
research services from MethylGene, and agreed to make an additional purchase of
MethlyGene shares for $3.0 million by March 31, 2001. MGI also agreed to pay
royalties on annual net sales revenue related to MG98 and DNA MeTase. Unless
earlier terminated by the parties, the term of the agreement in each country
extends until the later of: (a) the expiration of the last-to-expire patent MGI
has licensed; or (b) ten years from the first commercial sale of any licensed
product.
11
<PAGE>
(12) Subsequent Events
-----------------
In October 2000, MGI entered into a purchase agreement with MedImmune, Inc for
HEXALEN(R) (altretamine). HEXALEN is approved for the treatment of refractory
ovarian cancer. Closing and transfer of full product rights to MGI are expected
to occur by early 2001. The fixed portion of the purchase price of $7.2 million
will be paid evenly over 18 months beginning with the closing date. Since
Hexalen is an approved, commercialized product, this fixed purchase price will
be deferred as a long-term asset and amortized over the six year estimated
period of benefit. Royalties will be due on quarterly net sales for a period of
ten years.
12
<PAGE>
Item 2.
-------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
MGI PHARMA, INC. (we, us or our) is an oncology focused pharmaceutical company.
We acquire, develop and commercialize differentiated pharmaceutical products
that meet patient needs. We focus our sales efforts solely in the United States
and create alliances 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 one co-promoted product, Azulfidine EN-tabs(R) (sulfasalazine delayed
release tablets). 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 97 percent of our product sales during 1999.
Didronel I.V. Infusion is used to treat hypercalcemia (elevated blood calcium)
in cancer patients. Our co-promoted product continues to be owned and
distributed by the co-promotion partner, so we would recognize promotion fee
revenue, rather than product sales revenue, for this product. We began our
co-promotion relationship in 1999 for Azulfidine EN-tabs for the treatment of
rheumatoid arthritis. 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. Exclusive rights in
Japan to irofulven and the other acylfulvene analogs were granted to Dainippon
under a development and commercialization agreement in 1995. We rely on
third-parties to manufacture our commercialized and development stage products.
Our current product development efforts include preclinical studies and clinical
trials for irofulven, the lead product candidate in our novel family of
proprietary cancer therapy compounds called the acylfulvenes. We are expanding
our current research and development activities to include the technologies
licensed from MethylGene Inc. in August 2000, resulting in $5,700,000 in expense
in the third quarter of 2000. Our financial obligations include funding for
clinical trials of MG98, preclinical studies of small molecule inhibitors of DNA
methyltransferase (DNA MeTase inhibitors), certain milestone payments and equity
investments in MethylGene. We also provide ongoing clinical support of Salagen
Tablets.
13
<PAGE>
Results of Operations
Periods Ended September 30, 2000 Compared to Periods Ended September 30, 1999
Revenues
Sales: Total sales revenue increased 14 percent from $4,271,847 in the third
quarter of 1999 to $4,859,684 in the third quarter of 2000, and increased 15
percent from $13,528,969 in the first nine months of 1999 to $15,560,061 in the
first nine months of 2000. The increases in sales revenue result from higher
unit sales derived from an increase in demand for Salagen Tablets, as well as
increases in the price of Salagen Tablets.
Sales of Salagen Tablets in the United States provided 97 percent of our product
sales in the first nine months of 2000. 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.
Recent sequential quarterly changes have ranged from a 10 percent decrease from
the fourth quarter of 1999 to the first quarter of 2000, a 32 percent increase
from the first quarter of 2000 to the second quarter of 2000, and a 21 percent
decrease from the second quarter of 2000 to the third quarter of 2000. Greater
than typical fluctuations in quarterly sales of Salagen Tablets have resulted
from wholesalers increasing their inventory levels in advance of the 1999
year-end for apparent year 2000 concerns and in the 2000 second quarter in
advance of a price increase. Growth in sales of Salagen Tablets is moderating
due primarily to competition from new products and moderating growth in the
Sjogren's syndrome portion of the market.
Promotion: Promotion revenue was unchanged from the third quarter of 1999 to the
third quarter of 2000, but increased 23 percent from $625,000 in the first nine
months of 1999 to $769,874 in the first nine months of 2000. These results
reflect promotion revenue from different product relationships between 1999 and
2000. In 1999, we concluded our promotion of INFeD(R) under an agreement with
Schein Pharmaceutical, resulting in a minimum quarterly payment of $125,000 in
the first quarter of 1999. In the second quarter of 1999, we began recognizing
$250,000 per quarter for the promotion of Ridaura under an agreement with
Connetics Corporation. The co-promotion agreements with Connectics Corporation
concluded in September 2000. For future periods, promotion revenue is not
expected until sales of Azulfidine EN-tabs, which we promote under an agreement
with Pharmacia Corporation, grow approximately one-third above current levels.
Licensing: Licensing revenue increased 27 percent from $1,290,046 in the third
quarter of 1999 to $1,643,765 in the third quarter of 2000, and increased 24
percent from $3,198,829 in the first nine months of 1999 to $3,971,237 in the
first nine months of 2000. Both increases reflect the recognition of a $830,000
milestone payment from Kissei related to the development of Salagen Tablets in
Japan. The increase in the nine month period also reflects $750,000 in income
related to the license relationship with CIBA Vision initiated in the second
quarter of 2000 for marketing Salagen Tablets in Europe. This immediate
recognition treatment for both of these payments is consistent with our
accounting policy for irrevocable license payments.
Staff Accounting Bulleting No. 101 ("SAB 101"), as amended, summarizes certain
views of the SEC staff in applying generally accepted accounting principles to
revenue recognition in financial statements. This bulletin would alter the
revenue recognition stream with respect to certain strategic arrangements -
certain payments would be initially capitalized or deferred, then amortized over
a period of time. Implementation of SAB 101 is required for the company in the
quarter beginning October 1, 2000, with any effect retroactive to January 1,
2000.
14
<PAGE>
In October 2000, the SEC staff provided additional guidance with respect to SAB
101 in which it recognized the "many research and development arrangements in
the pharmaceutical and biotechnology industries are more complicated and contain
multiple elements". It further indicated that the SEC staff has requested that
the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards
Board address the accounting for such multiple-element contracts. The company
has continued to recognize irrevocable payments under license, research and
development arrangements as the factors underlying such payments that cause them
to be payable/receivable. Under pending guidance from the EITF, accounting for
such payments may require reversal, capitalization or deferral, and subsequent
amortization over a period of time.
The increases in licensing revenue during the first nine months of 2000 compared
to the first nine months of 1999 also reflect an increase in royalties on
technology from our former agricultural business, less a decrease in licensing
revenue from Dainippon. Quarterly licensing payments from Dainippon, equal to
$550,000 in the first three quarters of 1999 and the first quarter of 2000,
concluded with a $100,000 payment in the second quarter of 2000.
Future licensing revenues will likely fluctuate between years and from one
quarter to another depending on the achievement of milestones by us or our
partners, the level of recurring royalty generating activities, and the
initiation of additional licensing relationships.
Costs and Expenses
Cost of sales: Cost of sales as a percent of sales was six percent for the three
month and nine month periods ended September 30, 1999, and seven percent for the
three month and nine month periods ended September 30, 2000. The increases
result from a slight increase in production costs for our products. We believe
that future cost of sales as a percent of product sales for our currently
marketed products could range up to ten percent, as a result of increasing costs
and change in the product mix.
Selling, general and administrative: Selling, general and administrative
expenses increased 53 percent from $2,923,887 in the third quarter of 1999 to
$4,466,957 in the third quarter of 2000, and increased 31 percent from
$9,667,086 in the first nine months of 1999 to $12,627,259 in the first nine
months of 2000. The increases resulted from the costs associated with the
expansion of our U.S. based sales force by approximately two-thirds near the end
of the first quarter of 2000. Increases in selling, general and administrative
expense are expected in 2001, primarily to support significant planned increases
in the scale of our in-house research and development activities.
Research and development: Research and development expense more than doubled
from $1,871,292 in the third quarter of 1999 to $8,575,167 in the third quarter
of 2000, and increased 148 percent from $5,078,917 in the first nine months of
1999 to $12,604,732 in the first nine months of 2000. Both increases reflect
$5,700,000 in expense related to the license, research and development agreement
with MethylGene Inc. The increases also reflect expanded development of
irofulven. Enrollment in three Phase 2 clinical trials of irofulven sponsored by
us began in 1998 and has increased throughout 1999 and 2000. Two additional
Phase 1 trials and two additional Phase 2 trials of irofulven were initiated in
2000. These trials are designed to evaluate the efficacy and safety of irofulven
for the treatment of patients with pancreatic, ovarian or prostrate cancer who
are refractory to current therapies. In addition, we continue to provide
clinical supplies of irofulven for clinical trials sponsored by the NCI. We
intend to initiate a larger and more expansive pivotal Phase 3 trial program for
irofulven near the end of 2000. Conduct of these studies is expected to
substantially increase research and development costs. Further, emerging data
suggests multiple development paths may be warranted with irofulven. We expect
research and development to increase significantly in the next few years as we
pursue multiple development paths with irofulven and
15
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the development of the recently licensed anti-cancer technology from MethylGene
Inc, which includes MG98 and the small molecule DNA methyltransferase inhibitor
program.
Tax expense: Our effective tax rate was seven percent in the third quarter of
1999 and nine percent in the first nine months of 1999. These tax rates reflect
a 10 percent foreign tax rate on Dainippon licensing payments and a two percent
tax rate for alternative minimum tax. The tax amounts for 2000 reflect the 10
percent foreign tax rate on licensing payments.
In 1999, we had net income of $4,731,499. However, we have a loss of $4,508,487
for the first nine months of 2000, and as of September 30, 2000 we had an
accumulated deficit of $73,605,336. Our ability to sustain profitable operations
is likely dependent upon the successful launch of our first significant oncology
product, and therefore, we will continue to maintain a valuation allowance
against our deferred tax asset.
Interest Income
Interest income increased 154 percent from $270,403 in the third quarter of 1999
to $686,703 in the third quarter of 2000, and increased 137 percent from
$675,962 in the first nine months of 1999 to $1,599,229 in the first nine months
of 2000. The increases are a result of a higher average amount of funds
available for investment, due in part to the proceeds from the sale of stock in
the second quarter of 2000, and an increase in the investment yield.
Net Income (Loss)
Net income of $952,670 in the third quarter of 1999 compares to a net loss of
$5,985,193 in the third quarter of 2000. Net income of $2,246,825 in the first
nine months of 1999 compares to a net loss of $4,508,487 in the first nine
months of 2000. The decreases in net income are due to costs and expenses
increasing 165 percent for the quarter and 69 percent for the first nine months,
with smaller revenue increases of 16 percent for the quarter and 17 percent for
the first nine months. During the next several years, we intend to direct our
efforts towards activities intended to grow long-term revenues, including
expanded development of irofulven and other product candidates. Increased
spending on these initiatives, including development of the recently licensed
anti-cancer technology from MethlyGene, will likely create net losses.
Liquidity and Capital Resources
At September 30, 2000, we had cash and short-term investments of $37,647,507 and
working capital of $36,117,823 compared with $24,150,573 and $23,239,905,
respectively, at December 31, 1999. For the nine month period ended September
30, 2000, we received $16,448,138 in cash from the sale of one million shares in
a second quarter follow-on stock offering, $3,972,219 in cash from issuance of
shares under stock award plans, and $1,000,000 in cash as a deposit from one of
our international partners. We used $3,566,393 of cash to fund our operating
activities. We also purchased $485,543 in equipment and furniture, primarily
related to the expansion of our commercial organization.
Significant cash payments in the fourth quarter of 2000 are expected to include
$1,175,000 to MethylGene related to technology acquisition. Substantial amounts
of capital are required for pharmaceutical development and commercialization
efforts. For continued development and commercialization of our product
candidates and Salagen Tablets and the acquisition and development of additional
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. We filed a
shelf registration with the Securities and Exchange Commission in July 2000 to
sell three million common shares. Under a shelf registration, we may sell
securities from time to time in one or more separate offerings in amounts, at
prices and on terms to be determined at the time of sale.
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Cautionary Statement
This Form 10-Q contains forward-looking statements within the meaning of federal
securities laws that may include statements regarding intent, belief or current
expectations of the company and its management. These forward-looking statements
are not guarantees of future performance and involve a number of risks and
uncertainties that may cause the company's actual results to differ materially
from the results discussed in these statements. Factors that might affect our
results include, but are not limited to the ability of irofulven, or our other
product candidates, to be proven safe and effective in humans and to ultimately
compete successfully with other therapies, continued sales of Salagen(R)
Tablets, development or acquisition of additional products, reliance on contract
manufacturing, changes in strategic alliances, and other risks and uncertainties
detailed from time to time in the company's filings with the Securities and
Exchange Commission, including Exhibit 99 to this Form 10-Q. We do not intend to
update any of the forward-looking statements after the date of this Form 10-Q to
conform them to actual results.
Item 3.
-------
Quantitative and Qualitative Disclosures About Market Risk
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 short-term investments in instruments that meet high
credit quality standards, as specified in our investment policy guidelines. We
do not expect material losses with respect to our investment portfolio or
exposure to market risks associated with interest rates.
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MGI PHARMA, INC.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
None
Item 5. Other Information
--------------------------
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the company is hereby filing cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in forward looking statements of the
company made by, or on behalf of the company. See Exhibit 99 to this report.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) LISTING OF EXHIBITS:
10.1* HEXALEN(R) (altretamine) Asset Purchase Agreement, dated
October 26, 2000, between the Company and MedImmune
Oncology, Inc.
27 Financial Data Schedule
99 Cautionary Statements
(b) REPORTS ON FORM 8-K
The company filed a report on Form 8-K on July 25, 2000, to report
under Item 5, and in a press release filed as an exhibit thereto, its
earnings for the second quarter of 2000.
* Pursuant to Rule 24-b of the Securities Exchange Act of 1934, as
amended, confidential portions of Exhibit 10.1 have been deleted and
filed separately with the Securities and Exchange Commission pursuant
to a request for confidential treatment.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MGI PHARMA, INC.
Date: November 13, 2000 By: /s/ William C. Brown
-------------------------------
William C. Brown,
Chief Financial Officer
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MGI PHARMA, INC.
Quarterly Report on Form 10-Q
for the
Quarter Ended September 30, 2000
EXHIBIT INDEX
-------------
Exhibit
Number Description
------ -----------
10.1* HEXALEN(R) (altretamine) Asset Purchase Agreement,
dated October 26, 2000, between the Company and
MedImmune Oncology, Inc.
27 Financial Data Schedule
99 Cautionary Statements
* Pursuant to Rule 24-b of the Securities Exchange Act of 1934, as amended,
confidential portions of Exhibit 10.1 have been deleted and filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment.
