<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 June 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 of (I.R.S. employer identification number)
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 16,450,577 shares
------------------------------- ---------------------------------------
(Class) (Outstanding at August 9, 2000)
<PAGE>
MGI PHARMA, INC.
FORM 10-Q INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - December 31, 1999
and June 30, 2000 3
Statements of Operations - Three Months and
Six Months Ended June 30, 1999 and 2000 5
Statements of Cash Flows - Six Months
Ended June 30, 1999 and 2000 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security 16
Holders
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MGI PHARMA, INC.
BALANCE SHEETS
(unaudited)
December 31, June 30,
1999 2000
------------ ----------
ASSETS
Current assets:
Cash and cash equivalents $ 8,249,248 $14,427,294
Short-term investments 15,901,325 29,405,800
Receivables, less allowances of
$128,771 and $162,053 2,427,901 4,002,619
Inventories 836,865 738,278
Prepaid expenses 153,923 237,745
----------- -----------
Total current assets 27,569,262 48,811,736
Equipment and furniture, at cost
less accumulated depreciation of
$839,300 and $985,735 1,027,482 1,239,840
Other assets 376,992 449,133
----------- -----------
Total assets $28,973,736 $50,500,709
=========== ===========
(Continued)
3
<PAGE>
BALANCE SHEETS
(Unaudited)
Page 2
December 31, June 30,
1999 2000
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 964,242 $ 904,499
Accrued expenses 2,853,794 2,591,219
Deferred revenue 495,000 --
Other current liabilities 16,321 31,230
------------- -------------
Total current liabilities 4,329,357 3,526,948
------------- -------------
Noncurrent liabilities:
Deposit payable -- 450,000
------------- -------------
Total liabilities 4,329,357 3,976,948
------------- -------------
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 16,446,152
issued shares 149,796 164,461
Additional paid-in capital 93,591,432 113,979,443
Accumulated deficit (69,096,849) (67,620,143)
------------- -------------
Total stockholders' equity 24,644,379 46,523,761
------------- -------------
Total liabilities and
stockholders' equity $ 28,973,736 $ 50,500,709
============= =============
-------------------------------------
See accompanying notes to financial statements.
4
<PAGE>
MGI PHARMA, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 4,754,179 $ 6,134,082 $ 9,257,122 $10,700,377
Promotion 250,000 269,874 375,000 519,874
Licensing 1,037,067 1,573,802 1,908,783 2,327,472
----------- ----------- ----------- -----------
6,041,246 7,977,758 11,540,905 13,547,723
----------- ----------- ----------- -----------
Costs and Expenses:
Cost of sales 254,681 393,142 562,559 697,213
Selling, general and administrative 3,569,703 4,639,718 6,743,199 8,160,302
Research and development 1,746,720 2,225,347 3,207,625 4,029,565
----------- ----------- ----------- -----------
5,571,104 7,258,207 10,513,383 12,887,080
----------- ----------- ----------- -----------
Income before interest and taxes 470,142 719,551 1,027,522 660,643
Interest income 210,766 539,680 405,289 912,526
----------- ----------- ----------- -----------
Income before taxes 680,908 1,259,231 1,432,811 1,573,169
Provision for income taxes 69,718 35,184 138,656 96,463
----------- ----------- ----------- -----------
Net income $ 611,190 $ 1,224,047 $ 1,294,155 $ 1,476,706
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.04 $ 0.08 $ 0.09 $ 0.10
Assuming dilution $ 0.04 $ 0.07 $ 0.08 $ 0.09
Weighted average number of common shares outstanding:
Basic 14,647,411 15,812,118 14,611,370 15,514,659
Assuming dilution 15,549,121 17,160,856 15,512,507 16,996,090
</TABLE>
------------------------------------------------------------------------------
See accompanying notes to financial statements.
5
<PAGE>
MGI PHARMA, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
----------------------------
1999 2000
------------ ------------
OPERATING ACTIVITIES:
Net income $ 1,294,155 $ 1,476,706
Adjustments for non-cash items:
Depreciation 118,269 146,435
Benefit plan contribution 83,871 86,659
Stock option acceleration 162,953 --
Other 52,924 10,000
Change in operating assets and liabilities:
Receivables (1,171,816) (1,574,718)
Inventories 240,736 98,587
Prepaid expenses (23,649) (83,822)
Accounts payable and accrued expenses (258,271) (361,610)
Deferred revenue (495,000) (495,000)
Other current liabilities (2,791) 14,909
------------ ------------
Net cash provided by (used in)
operating activities 1,381 (681,854)
------------ ------------
INVESTING ACTIVITIES:
Purchase of investments (9,818,845) (29,838,543)
Maturity of investments 8,240,578 16,334,068
Purchase of equipment and furniture (78,111) (358,793)
Payment on notes receivable 56,999 --
Other 14,456 (72,141)
------------ ------------
Net cash used in investing activities (1,584,923) (13,935,409)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of shares, net -- 16,448,138
Issuance of shares under stock
plans 873,611 3,897,171
Receipt of deposit payable -- 450,000
Other -- --
------------ ------------
Net cash provided by financing
activities 873,611 20,795,309
------------ ------------
Increase (decrease) in cash and
cash equivalents (709,931) 6,178,046
Cash and cash equivalents at
beginning of period 6,513,204 8,249,248
------------ ------------
Cash and cash equivalents at
end of period $ 5,803,273 $ 14,427,294
============ ============
Supplemental disclosure of cash information:
Cash paid for income taxes $ 110,000 $ 150,000
----------------------------------
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 a pharmaceutical company focused on the
acquisition, development and commercialization of drugs primarily for the
treatment of cancer and rheumatology disorders. 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 account for 97 percent of company product
sales. Didronel I.V. Infusion is used to treat hypercalcemia (elevated blood
calcium) in cancer patients. Copromoted products continue to be owned and
distributed by the copromotion partners, so MGI recognizes promotion fee
revenue, rather than product sales revenue for these products. Outside the
United States, MGI commercializes its products through various alliances, and
has agreements with several international pharmaceutical companies to
commercialize Salagen Tablets in Europe, Japan and Canada.
The company's current product development efforts include clinical and
preclinical studies for irofulven, the lead cancer therapy product candidate in
MGI's novel family of proprietary 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 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.
7
<PAGE>
(2) Income Per Common Share
-----------------------
Income per share for the three month and six month periods ended June 30, 1999
and 2000 are summarized in the following table:
<TABLE>
<CAPTION>
Three Months Ended 1999 2000
------------------------------------------- -------------------------------------------
June 30 Per Per
Net Share Net Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic $611,190 14,647,411 $0.04 $1,224,047 15,812,118 $0.08
Effect of
dilutive stock options -- 901,710 $0.00 -- 1,348,738 ($0.01)
------------------------------------------- -------------------------------------------
Assuming dilution $611,190 15,549,121 $0.04 $1,224,047 17,160,856 $0.07
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended 1999 2000
------------------------------------------- -------------------------------------------
June 30 Per Per
Net Share Net Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic $1,294,155 14,611,370 $0.09 $1,476,706 15,514,659 $0.10
Effect of
dilutive stock options -- 901,137 ($0.01) -- 1,481,431 ($0.01)
------------------------------------------- -------------------------------------------
Assuming dilution $1,294,155 15,512,507 $0.08 $1,476,706 16,996,090 $0.09
</TABLE>
(3) Short-Term Investments
----------------------
Because the company has the intent and ability to hold its investments to
maturity, they are considered held-to-maturity investments. As such, they are
stated at amortized cost, which approximates estimated fair value.
Held-to-maturity investments at December 31, 1999 and June 30, 2000 are
summarized in the following table:
1999 2000
----------- -----------
Commercial paper $10,747,279 $23,008,485
Certificates of deposit 3,116,817 6,397,315
Corporate notes 2,037,229 --
----------- -----------
$15,901,325 $29,405,800
=========== ===========
8
<PAGE>
(4) Inventories
-----------
Inventories at December 31, 1999 and June 30, 2000 are summarized as
follows:
1999 2000
-------- --------
Raw materials and supplies $160,744 $ 0
Work in process 153,447 463,336
Finished products 522,674 274,942
-------- --------
$836,865 $738,278
======== ========
Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
(5) Accrued Expenses
----------------
Accrued expenses at December 31, 1999 and June 30, 2000 are summarized in the
following table:
1999 2000
---------- ----------
Product development commitments $ 860,981 $ 667,989
Bonuses 467,820 380,075
Product return accrual 342,648 494,117
Other accrued expenses 1,182,345 1,049,038
---------- ----------
$2,853,794 $2,591,219
========== ==========
(6) 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 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, MGI receives a split of product contribution from Connetics
Corporations's sales of Luxiq in the rheumatology market. The Ridaura and Luxiq
agreements are expected to conclude 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.
(7) 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 June 30, 2000,
4,132,909 shares of common stock remain reserved for issuance, of which
9
<PAGE>
1,839,958 remain available for grant. Options to purchase 2,292,951 shares of
common stock were outstanding, of which 957,963 were exercisable. Options
outstanding had a weighted average exercise price of $11.03 per share.
(8) Stockholders' Equity
--------------------
Changes in selected stockholders' equity accounts for the six months ended June
30, 2000 were as follows:
<TABLE>
<CAPTION>
Common stock Additional
---------------------------- paid-in
Shares Par value capital
---------- ------------ ------------
<S> <C> <C> <C>
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 456,251 4,563 3,795,596
Employee retirement savings
plan contribution 0 0 47,367
Employee stock purchase plan 9,711 97 96,916
Other issuance 550 5 9,994
------------ ------------ ------------
Balance at June 30, 2000 16,446,152 $ 164,461 $113,979,443
============ ============ ============
</TABLE>
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.
(9) 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 $182,000
2001 441,000
2002 448,000
2003 455,000
2004 455,000
Thereafter 265,000
----------
$2,246,000
==========
(10) Licensing Revenue
-----------------
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
10
<PAGE>
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 a pending accounting pronouncement, Staff Accounting Bulletin
101, accounting for this payment may require reversal, deferral and subsequent
amortization over a yet to be estimated expected period of benefit.
Implementation of this proposed accounting treatment has been deferred by the
Securities and Exchange Commission until the fourth quarter of 2000.
(11) Subsequent Events
-----------------
On July 25, 2000, MGI filed a shelf registration with the Securities and
Exchange Commission to sell three million common shares. Under a shelf
registration, MGI 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.
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>
Item 2.
-------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
MGI PHARMA, INC. (we, us or our) is 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 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 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 97 percent of our product sales during 1999.
Didronel I.V. Infusion is used to treat hypercalcemia (elevated blood calcium)
in cancer patients. Co-promoted products continue to be owned and distributed by
the co-promotion partners, so we recognize promotion fee revenue, rather than
product sales revenue for these products. We began our co-promotion
relationships in 1999 for Azulfidine EN-tabs and Ridaura for the treatment of
rheumatoid arthritis and Luxiq for the treatment of dermatosis. Our co-promotion
agreements for Ridaura and Luxiq are expected to conclude in September 2000.
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 studies and clinical
trials for irofulven, the lead product candidate in our novel family of
proprietary cancer therapy compounds called the acylfulvenes. Exclusive rights
in Japan to irofulven and the other acylfulvene analogs were granted to
Dainippon under a development and commercialization agreement in 1995. We also
provide ongoing clinical support of Salagen Tablets. We rely on third-parties to
manufacture our commercialized and development stage products.
We are expanding our current research and development activities to include the
technologies licensed from MethylGene Inc. in August 2000. These activities will
include financial and staffing support that is expected to increase our research
and development expense over the next several years. 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.
12
<PAGE>
Results of Operations
Periods Ended June 30, 2000 Compared to Periods Ended June 30, 1999
Revenues
Sales: Total sales revenue increased 29 percent from $4,754,179 in the second
quarter of 1999 to $6,134,082 in the second quarter of 2000 and increased 16
percent from $9,257,122 in the first half of 1999 to $10,700,377 in the first
half of 2000. The increases in sales revenue result from higher unit sales
derived from an increase in demand for Salagen Tablets and an increase in the
price of Salagen Tablets in December 1999. The increases in sales revenues also
reflect an estimated $800,000 in accelerated Salagen Tablets sales before the
end of the 2000 second quarter, as a result of wholesalers purchasing Salagen
Tablets in advance of a price increase.
Sales of Salagen Tablets in the United States provided 97 percent of our product
sales in both the second quarter of 2000 and the first half 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 20 percent increase from the third quarter of 1999 to the fourth
quarter of 1999, a 10 percent decrease from the fourth quarter of 1999 to the
first quarter of 2000, and a 32 percent increase from the first quarter of 2000
to the second quarter of 2000. Although we expect growth in Salagen Tablets
sales, in part as a result of our expanded sales force, we do not expect the
growth to continue at historic rates, due to competition from new products, and
moderating growth in the Sjogren's syndrome portion of the market.
Promotion: Promotion revenue increased eight percent from $250,000 in the second
quarter of 1999 to $269,874 in the second quarter of 2000, and increased 39
percent from $375,000 in the first half of 1999 to $519,874 in the first half 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. We have not yet
recognized revenue for two other products: Luxiq, which we promote under an
agreement with Connetics Corporation, and Azulfidine EN-tabs, which we promote
under an agreement with Pharmacia Corporation. The Ridaura and Luxiq agreements
are expected to conclude in September 2000.
Licensing: Licensing revenue increased 52 percent from $1,037,067 in the second
quarter of 1999 to $1,573,802 in the second quarter of 2000, and increased 22
percent from $1,908,783 in the first half of 1999 to $2,327,472 in the first
half of 2000. Both increases reflect the recognition of $750,000 in income
related to the license relationship with CIBA Vision initiated in the second
quarter of 2000 for the development and commercialization of Salagen Tablets in
Europe. This immediate recognition treatment is consistent with our accounting
policy for irrevocable license payments. Under a pending accounting
pronouncement, Staff Accounting Bulletin 101, accounting for this payment may
require reversal, deferral and subsequent amortization over a yet to be
estimated expected period of benefit. Implementation of this proposed accounting
treatment has been deferred by the Securities and Exchange Commission until the
fourth quarter of 2000.
The increases in licensing revenue during the first half of 2000 compared to the
first half of 1999 also reflect an increase in royalties on technology from our
former agricultural business, and a decrease in licensing revenue from
Dainippon. Quarterly licensing payments from Dainippon, equal to $550,000 in the
first and second quarter of 1999 and the first quarter of 2000, concluded with a
$100,000 payment in the second quarter of 2000.
13
<PAGE>
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 increased 54 percent from $254,681 in the second
quarter of 1999 to $393,142 in the second quarter of 2000, and increased 24
percent from $562,559 in the first half of 1999 to $697,213 in the first half of
2000. The increases result from higher unit sales of Salagen Tablets during the
first and second quarters of 2000. 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 30 percent from $3,569,703 in the second quarter of 1999 to
$4,639,718 in the second quarter of 2000, and increased 21 percent from
$6,743,199 in the first half of 1999 to $8,160,302 in the first half of 2000.
The increases result 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.
Research and development: Research and development expense increased 27 percent
from $1,746,720 in the second quarter of 1999 to $2,225,347 in the second
quarter of 2000, and increased 26 percent from $3,207,625 in the first quarter
of 1999 to $4,029,565 in the second half of 2000. The increases reflect higher
costs for the 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, and an additional Phase 2 trial of irofulven was 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 studies sponsored by the NCI. We
intend to initiate a larger and more expansive pivotal trial program for
irofulven near the end of 2000. Conduct of these studies is expected to
substantially increase research and development costs in 2000 and beyond.
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 the
development of the recently licensed anti-cancer technology from MethylGene Inc.
Tax expense: Our effective tax rate was 10 percent in the second quarter of 1999
and three percent in the second quarter of 2000, and 10 percent in the first
half of 1999 and six percent in the first half of 2000. These tax rates refect a
10 percent foreign tax rate on Dainippon licensing payments and a two percent
tax rate for alternative minimum tax.
In 1999, we had net income of $4,731,499. However, we have a history of losses,
and as of December 31, 1999 we had 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.
Interest Income
Interest income increased 156 percent from $210,766 in the second quarter of
1999 to $539,680 in the second quarter of 2000, and increased 125 percent from
$405,289 in the first half of 1999 to $912,526 in the first half 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.
14
<PAGE>
Net Income
Net income of $611,190 in the second quarter of 1999 compares to net income of
$1,224,047 in the second quarter of 2000. Net income of $1,294,155 in the first
half of 1999 compares to net income of $1,476,706 in the first half of 2000. The
increases in net income are due to increases in revenues of 32 percent and 17
percent for the quarter and the first half, respectively, as compared to costs
and expenses increasing 30 percent and 23 percent for the quarter and the first
half, respectively. 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, will likely create net losses.
Liquidity and Capital Resources
At June 30, 2000, we had cash and investments of $43,833,094 and working capital
of $45,284,788 compared with $24,150,573 and $23,239,905, respectively, at
December 31, 1999. For the six month period ended June 30, 2000, we received
$16,448,138 in cash from the sale of 1 million shares in a second quarter
follow-on stock offering, $3,897,171 in cash from issuance of shares under stock
award plans, and $450,000 in cash as a deposit from one of our international
partners. We used $681,854 of cash to fund our operating activities. We also
purchased $358,793 in equipment and furniture, primarily related to the
expansion of our commercial organization.
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 2001. However, 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.
Cautionary Statement
This Form 10-Q contains forward-looking statements within the meaning of federal
securities laws. These statements include statements regarding intent, belief,
or current expectations of the company and its management. These forward-looking
statements are not guarantees of future performance and involve a number of
risks and uncertainties that may cause 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 our 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 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.
15
<PAGE>
MGI PHARMA, INC.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
The company held its Annual Meeting of Shareholders on May 9, 2000, and
sufficient favorable votes were cast to approve all management proposals as
follows:
Election of management's entire slate of eight directors by the
following vote tallies:
For Withhold
--- --------
Charles N. Blitzer 12,298,958 1,294,068
Andrew J. Ferrara 13,016,802 576,224
Joseph S. Frelinghuysen 13,025,458 567,568
Michael E. Hanson 13,044,212 548,814
Hugh E. Miller 13,006,479 586,547
Timothy G. Rothwell 12,969,112 623,914
Lee J. Schroeder 13,007,179 585,847
Arthur Weaver 13,023,179 569,847
Approval to amend the MGI PHARMA, INC. 1997 Stock Incentive Plan by a
vote of 4,646,138 for, 2,552,444 against, 73,049 abstaining, and
6,321,405 broker nonvotes.
Ratification of the independent auditors by a vote of 13,471,220 for,
80,996 against, 40,810 abstaining, and 0 broker nonvotes.
16
<PAGE>
MGI PHARMA, INC.
PART II - OTHER INFORMATION
Item 5. Other Information
--------------------------
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the company is hereby filing cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in forward looking statements of the
company made by, or on behalf of the company. See Exhibit 99 to this report.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) LISTING OF EXHIBITS:
10.1* License, Research and Development Agreement, dated August
2, 2000, between the Company and MethylGene Inc.
10.2 Stock Purchase Agreement, dated August 2, 2000, between
the Company and MethylGene Inc.
27 Financial Data Schedule
99 Cautionary Statements
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the three months ended
June 30, 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.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MGI PHARMA, INC.
Date: August 11, 2000 By: /s/ William C. Brown
---------------------
William C. Brown,
Chief Financial Officer
18
<PAGE>
MGI PHARMA, INC.
Quarterly Report on Form 10-Q
for the
Quarter Ended June 30, 2000
EXHIBIT INDEX
-------------
Exhibit
Number Description
------- -----------
10.1* License, Research and Development Agreement, dated August
2, 2000, between the Company and MethylGene Inc.
10.2 Stock Purchase Agreement, dated August 2, 2000, between
the Company and MethylGene 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.
