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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, 2002
-------------
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 incorporation or (I.R.S. employer identification number)
organization)
5775 West Old Shakopee Road
Suite 100
Bloomington, Minnesota 55437 (952) 346-4700
- ------------------------------------------------------- -----------------------------------------------------
(Address of principal executive offices and zip code) (Registrant's telephone number, 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 25,163,883 shares
--------------------------------------- ------------------------------------
(Class) (Outstanding at July 31, 2002)
MGI PHARMA, INC.
FORM 10-Q INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - December 31, 2001
and June 30, 2002 3
Statements of Operations - Three Months and
Six Months Ended June 30, 2001 and 2002 5
Statements of Cash Flows - Six Months
Ended June 30, 2001 and 2002 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 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MGI PHARMA, INC.
BALANCE SHEETS
(unaudited)
December 31, June 30,
2001 2002
-------------------- ------------------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 40,699,408 $ 28,364,175
Cash - restricted 4,000,000 --
Short-term marketable investments 30,006,144 25,942,873
Receivables, less allowances of
$117,397 and $149,225 1,829,654 3,875,669
Inventories 1,500,054 1,714,450
Prepaid expenses 246,739 589,376
-------------------- -----------------
Total current assets 78,281,999 60,486,543
Equipment and furniture, at cost
less accumulated depreciation of
$1,322,559 and $1,686,216 3,325,334 3,190,630
Long-term marketable investments 3,006,928 --
Long-term equity investments 6,800,000 6,800,000
Intangible assets, at cost
less accumulated amortization of
$1,280,476 and $1,871,466 5,811,394 5,220,404
Other assets 442,368 461,439
-------------------- -----------------
Total assets $ 97,668,023 $ 76,159,016
==================== =================
(Continued)
3
BALANCE SHEETS
(Unaudited)
Page 2
December 31, June 30,
2001 2002
----------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 1,674,412 $ 1,229,314
Accrued expenses 12,609,838 8,594,009
Deferred revenue 794,383 794,383
Other current liabilities 21,857 6,740
----------------- ------------------
Total current liabilities 15,100,490 10,624,446
----------------- ------------------
Noncurrent liabilities:
Long-term deposit payable 3,750,000 4,300,000
Deferred revenue 9,828,223 9,431,031
Other noncurrent liabilities 54,599 82,157
----------------- ------------------
Total noncurrent liabilities 13,632,822 13,813,188
----------------- ------------------
Total liabilities 28,733,312 24,437,634
----------------- ------------------
Stockholders' equity:
Preferred stock, 10,000,000
authorized and unissued shares -- --
Common stock, $.01 par value,
70,000,000 authorized shares,
25,005,050 and 25,151,475
issued shares 250,051 251,515
Additional paid-in capital 192,060,653 193,633,512
Accumulated deficit (123,375,993) (141,922,611)
Unearned compensation - restricted shares -- (241,034)
----------------- ------------------
Total stockholders' equity 68,934,711 51,721,382
----------------- ------------------
Total liabilities and
stockholders' equity $ 97,668,023 $ 76,159,016
================= ==================
_____________________________________
See accompanying notes to financial statements.
4
MGI PHARMA, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
Revenues:
Sales $ 10,161,386 $ 4,648,717 $ 17,145,494 $ 9,951,490
Licensing 850,902 1,038,511 1,442,571 1,537,610
------------ ------------ ------------ ------------
11,012,288 5,687,228 18,588,065 11,489,100
------------ ------------ ------------ ------------
Costs and Expenses:
Cost of sales 1,031,483 756,500 1,820,836 1,442,329
Selling, general and administrative 7,282,846 7,340,354 13,775,621 14,510,680
Research and development 18,189,689 9,791,732 21,743,507 14,054,394
Amortization of intangible assets 295,495 295,494 590,989 590,989
------------ ------------ ------------ ------------
26,799,513 18,184,080 37,930,953 30,598,392
------------ ------------ ------------ ------------
Loss from operations (15,787,225) (12,496,852) (19,342,888) (19,109,292)
Interest income 377,640 242,804 813,806 562,674
------------ ------------ ------------ ------------
Net loss $(15,409,585) $(12,254,048) $(18,529,082) $(18,546,618)
============ ============ ============ ============
Net loss per common share:
Basic $ (0.81) $ (0.49) $ (1.04) $ (0.74)
Assuming dilution $ (0.81) $ (0.49) $ (1.04) $ (0.74)
Weighted average number of
common shares outstanding:
Basic 18,987,549 25,063,258 17,766,891 25,048,686
Assuming dilution 18,987,549 25,063,258 17,766,891 25,048,686
_______________________________________________
See accompanying notes to financial statements.
5
MGI PHARMA, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
----------------------------
2001 2002
------------ ------------
OPERATING ACTIVITIES:
Net loss $(18,529,082) $(18,546,618)
Adjustments for non-cash items:
Stock issuance for palonostreon license 2,999,992 --
Depreciation and intangible amortization 918,757 1,021,572
Benefit plan contribution 166,269 230,783
Stock option term modification -- 214,744
Noncash consulting payments 61,200 5,000
Other 25,414 32,175
Change in operating assets and liabilities:
Receivables (3,041,400) (2,046,015)
Inventories (156,922) (214,396)
Prepaid expenses 5,309,984 (342,637)
Accounts payable and accrued expenses 755,505 (2,757,031)
Deferred revenue 305,933 (397,192)
Other current liabilities (17,433) (15,117)
------------ ------------
Net cash used in operating activities (11,201,783) (22,814,732)
------------ ------------
INVESTING ACTIVITIES:
Purchase of investments (19,566,338) (4,923,608)
Maturity of investments 21,253,159 11,993,807
Acquisition of Hexalen(R) capsules (2,400,000) (1,200,000)
Purchase of equipment and furniture (1,233,368) (296,669)
Other (66) (19,071)
------------ ------------
Net cash provided by (used in) investing activities (1,946,613) 5,554,459
------------ ------------
FINANCING ACTIVITIES:
Net proceeds from stock issuance 29,168,655 --
Restricted cash (6,000,000) 4,000,000
Receipt of deposit payable 1,100,000 550,000
Issuance of shares under stock
plans 380,189 375,040
------------ ------------
Net cash provided by financing activities 24,648,844 4,925,040
------------ ------------
Increase (decrease) in cash and
cash equivalents 11,500,448 (12,335,233)
Cash and cash equivalents at
beginning of period 11,031,714 40,699,408
------------ ------------
Cash and cash equivalents at
end of period $ 22,532,162 $ 28,364,175
============ ============
Supplemental disclosure of cash information:
Cash paid for income taxes $ 1,000 $ 5,500
- ------------
See accompanying notes to financial statements.
6
MGI PHARMA, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
We are an oncology-focused pharmaceutical company that acquires, develops and
commercializes proprietary products that address unmet needs of cancer patients.
We focus our direct sales efforts solely within the United States and create
alliances with other pharmaceutical or biotechnology companies for the
commercialization of our products in other countries.
We promote products directly to physician specialists in the United States using
our own sales force. These products include our Salagen(R) Tablets (pilocarpine
hydrochloride), Hexalen(R) (altretamine) capsules and Didronel(R) (etidronate
disodium) I.V. Infusion. Salagen Tablets are approved in the United States for
two indications: the symptoms of dry mouth associated with radiation treatment
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 85 percent of our
product sales during the first half of 2002. Hexalen capsules, which we began
selling after we acquired the product from MedImmune, Inc. in November 2000, is
an orally administered chemotherapeutic agent approved in the United States for
treatment of refractory ovarian cancer patients. Didronel I.V. Infusion is
approved for the treatment of hypercalcemia (elevated blood calcium) in
late-stage cancer patients. We rely on third parties to manufacture our
commercialized and development stage products.
In April 2001, we obtained the exclusive U.S. and Canadian license and
distribution rights to palonosetron, a cancer supportive care product candidate
for the prevention of chemotherapy-induced nausea and vomiting. We recently
announced achievement of the primary end point for the palonosetron pivotal
trials program. Submission of the New Drug Application to the United States Food
and Drug Administration is expected near the end of the third quarter of 2002.
Our product development efforts also include preclinical and clinical trials for
irofulven, the lead product candidate in our novel family of proprietary cancer
therapy compounds called the acylfulvenes. We are also developing MG98 and other
inhibitors of DNA methyltransferase for North American markets. DNA
methyltransferase is an enzyme that has been associated with uncontrolled tumor
growth. We also provide ongoing clinical support of Salagen Tablets.
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
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. 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, 2001.
7
(2) Loss Per Common Share
Loss per share for the three-month and six-month periods ended June 30, 2001 and
2002 is based on weighted average shares outstanding as summarized in the
following table:
Three months ended June 30 2001 2002
------------- -------------
Weighted-average shares - basic 18,987,549 25,063,258
Effect of dilutive stock options -- --
------------- -------------
Weighted-average shares - assuming dilution 18,987,549 25,063,258
============= =============
Six months ended June 30 2001 2002
------------- -------------
Weighted-average shares - basic 17,766,891 25,048,686
Effect of dilutive stock options -- --
------------- -------------
Weighted-average shares - assuming dilution 17,766,891 25,048,686
============= =============
For loss periods, basic and diluted share amounts are identical, as the effect
of potentially dilutive common stock is anti-dilutive. The total number of
options excluded from the calculation of potentially dilutive securities because
their inclusion would have been anti-dilutive were 3,492,859 and 4,121,122 for
2001 and 2002, respectively.
(3) Investments
Because we have the intent and ability to hold our investments to maturity, they
are considered held-to-maturity investments. As such, they are stated at
amortized cost, which approximates estimated fair value. Short-term investments
at December 31, 2001 and June 30, 2002 are summarized in the following table:
2001 2002
-------------- --------------
Medium-term notes $16,107,596 $12,945,143
Commercial paper 13,898,548 9,954,275
Certificates of deposit -- 3,043,455
-------------- --------------
$30,006,144 $25,942,873
============== ==============
Long-term marketable investments at December 31, 2001, consist of certificates
of deposit that mature in January 2003.
8
(4) Inventories
Inventories at December 31, 2001 and June 30, 2002 are summarized as follows:
2001 2002
------------- --------------
Raw materials and supplies $ 50,458 $ 116,951
Work in process 445,429 483,026
Finished products 1,004,167 1,114,473
------------- --------------
$1,500,054 $1,714,450
============= ==============
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, 2001 and June 30, 2002 are summarized in the
following table:
2001 2002
----------- ----------
Product development commitments $ 4,503,281 $2,619,463
Bonuses 1,774,916 1,109,655
Severance payments -- 1,076,300
Product return accrual 963,430 1,009,756
Lease accrual 983,271 565,135
Hexalen(R) capsules business purchase obligation 1,200,000 --
Other accrued expenses 3,184,940 2,213,700
----------- ----------
$12,609,838 $8,594,009
=========== ==========
(6) Stock Incentive Plans
Under stock incentive plans, designated persons (including officers, directors,
employees and consultants) are granted rights to acquire our common stock. These
rights include stock options and other equity rights.
At June 30, 2002, 5,616,779 shares of common stock remain reserved for issuance,
of which 1,495,657 remain available for grant. Options to purchase 4,121,122
shares of common stock were outstanding, of which 1,846,266 were exercisable.
Options outstanding had a weighted average exercise price of $11.59 per share.
9
(7) Stockholders' Equity
Changes in selected stockholders' equity accounts for the six months ended June
30, 2002 were as follows:
Unearned
Common Stock Additional compensation -
---------------------------- paid-in restricted
Shares Par value capital stock
------------ ------------ ------------ ------------
Balance at December 31, 2001 25,005,050 $ 250,051 $192,060,653 $ 0
Exercise of stock options 15,175 152 87,388 --
Employee retirement savings
plan contribution 47,390 474 734,205 --
Employee stock purchase plan 47,837 478 287,022 --
Stock option term modification -- -- 214,744 --
Restricted stock issuance 35,487 355 244,505 (244,860)
Amortization of restricted stock
to compensation expense -- -- -- 3,826
Other issuances 536 5 4,995 --
------------ ------------ ------------ ------------
Balance at June 30, 2002 25,151,475 $ 251,515 $193,633,512 ($241,034)
============ ============ ============ ============
At June 30, 2002, 100,000 shares remain registered for sale from shelf
registration statements that were filed for 5 million shares with the Securities
and Exchange Commission. These remaining shares pertain to an option that we
granted to Ramius Securities to purchase 100,000 shares of our common stock at
prices ranging from $16.95 to $24.72 per share. This option, which expires on
February 28, 2003, relates to a financing facility with Ramius Securities, LLC,
and Ramius Capital Group, LLC.
On June 24, 2002, we issued 35,487 shares of restricted common stock to certain
non-executive officer employees. One-half of these shares vest in one year, and
the remainder of these shares vest in two years, given continued employment
through the vesting dates. We recognize compensation expense for the market
value ($6.90 per share) of the shares at the date of grant over the vesting
periods.
10
(8) Leases
We lease office space under noncancellable lease agreements that contain renewal
options and require us to pay operating costs, including property taxes,
insurance and maintenance. In January 2001, we executed a lease agreement for
new office space, beginning in May 2001. At June 30, 2002, we have an accrual of
$565,135 for lease obligations for the former office space in excess of
estimated sublease rental income. Future minimum lease payments under
noncancellable leases, including both the current and former office spaces, are
as follows:
Remainder of 2002 $ 795,000
2003 1,601,000
2004 1,622,000
2005 1,498,000
2006 1,229,000
Thereafter 1,776,000
Less Sublease Income (502,022)
-----------
$8,018,978
===========
(9) Licensing Arrangements
In April 2001, MGI obtained the exclusive North American license and
distribution rights for palonosetron, from HELSINN Healthcare SA. Palonosetron,
a 5-HT3 antagonist with an extended half-life and strong binding affinity for
the target receptor, is in development for the prevention of
chemotherapy-induced nausea and vomiting. Submission of a new drug application
to the United States Food and Drug Administration is planned near the end of the
third quarter of 2002. The $11 million in upfront payments made by MGI were
funded using the $5 million deposit made upon the execution of the letter of
intent in October 2000, $3 million in cash paid in April 2001, and $3 million of
MGI's common shares delivered in April 2001. An additional $2 million milestone
was paid in October 2001, and a $4 million milestone payment was paid from
restricted cash in April 2002. Milestone payments aggregating to $21 million
will become payable upon achievement of the following development objectives:
$10 million upon filing a new drug application in the United States (MGI can
elect to pay up to one-half of this milestone by using shares of MGI common
stock instead of cash), and $11 million upon receiving marketing approval for
palonosetron in the United States. Helsinn will continue to fund and conduct all
development of palonosetron.
11
(10) Research and Development Expense
Research and development expense for the three-month and six-month periods ended
June 30, 2001 and 2002 consist of the following:
Three months ended June 30 2001 2002
----------- -----------
License fees $13,016,250 $ 4,000,000
Other research and development 5,173,439 5,791,732
----------- -----------
$18,189,689 $ 9,791,732
=========== ===========
Six months ended June 30 2001 2002
----------- -----------
License fees $13,016,250 $ 4,000,000
Other research and development 8,727,257 10,054,394
----------- -----------
$21,743,507 $14,054,394
=========== ===========
(11) Intangible Assets
Intangible assets represent the $7,091,870 excess of the $7.2 million purchase
price over the $108,130 fair value of the net assets related to the acquisition
of the business associated with the product Hexalen capsules. Amortization is
recognized as the greater of the amount computed on a straight-line basis over
six years, which is the estimated commercial life of Hexalen capsules, or in
proportion to the actual product contribution compared to the estimated product
contribution over the estimated commercial life of Hexalen capsules. Under the
straight-line method, amortization will be $1,181,978 per year in 2002 through
2005, and $1,083,482 in 2006.
(12) Reduction in Workforce
To reduce costs, we reduced our workforce by approximately 10 percent, or 19
positions, in the second quarter of 2002. We recognized total expense of
$1,291,044 for this reduction, consisting of $1,076,300 for severance payments,
and $214,744 for extending the terms of selected stock options awards. The total
expense was allocated as follows: $775,278 to research and development expense
and $515,766 to selling, general and administrative expense based on the
positions held by the terminated employees. Accruals related to severance will
be completely paid by the end of the second quarter of 2003.
12
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Cautionary Statement
This document 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 palonosetron, irofulven,
or our other product candidates to be proven safe and effective in humans, to
receive marketing authorizations from regulatory authorities 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, continued access to capital, 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.
Overview
We are an oncology-focused pharmaceutical company that acquires, develops and
commercializes proprietary products that address unmet needs of cancer patients.
We focus our direct sales efforts solely within the United States and create
alliances with other pharmaceutical or biotechnology companies for the
commercialization of our products in other countries.
We promote products directly to physician specialists in the United States using
our own sales force. These products include our Salagen(R) Tablets (pilocarpine
hydrochloride), Hexalen(R) (altretamine) capsules and Didronel(R) (etidronate
disodium) I.V. Infusion. Salagen Tablets are approved in the United States for
two indications: the symptoms of dry mouth associated with radiation treatment
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 85 percent of our
product sales during the first half of 2002. Hexalen capsules, which we began
selling after we acquired the product from MedImmune, Inc. in November 2000, is
an orally administered chemotherapeutic agent approved in the United States for
treatment of refractory ovarian cancer patients. Didronel I.V. Infusion is
approved for the treatment of hypercalcemia (elevated blood calcium) in
late-stage cancer patients. We rely on third parties to manufacture our
commercialized and development stage products.
In April 2001, we obtained the exclusive U.S. and Canadian license and
distribution rights to palonosetron, a cancer supportive care product candidate
for the prevention of chemotherapy-induced nausea and vomiting. We recently
announced achievement of the primary end point for the palonosetron pivotal
trials program. Submission of the New Drug Application to the United States Food
and Drug Administration is expected near the end of the third quarter of 2002.
Our product development efforts also include preclinical and clinical trials for
irofulven, the lead product candidate in our novel family of proprietary cancer
therapy compounds called the acylfulvenes. We are also developing MG98 and other
inhibitors of DNA methyltransferase for North American markets. DNA
methyltransferase is an enzyme that has been associated with uncontrolled tumor
growth. We also provide ongoing clinical support of Salagen Tablets.
13
Results of Operations
Revenues
Sales: Sales revenue decreased 54 percent from $10,161,386 in the second quarter
of 2001, to $4,648,717 in the second quarter of 2002, and decreased 42 percent
from $17,145,494 in the first half of 2001, to $9,951,490 in the first half of
2002. The decreases in sales revenue reflect decreased revenue from Salagen
Tablets, resulting from a decrease in stocking of inventory by wholesalers and
retail pharmacies, which were partially offset by an increase in selling price
and a continued increase in patient demand. Beginning in the second quarter of
2001 and continuing throughout the rest of 2001, a substantial increase in
wholesale distributor inventories occurred. A reduction in this distributor
channel inventory throughout the first half of 2002 has resulted in decreased
sales while Salagen Tablets prescriptions continue to grow. 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. Sales of Salagen Tablets in the United States
provided 89 percent and 85 percent of our sales revenue in the first half of
2001 and 2002, respectively. We expect sales revenue for all of our products in
2002 to be within the range of $25 million to $27 million.
Licensing: Licensing revenue increased 22 percent from $850,902 in the second
quarter of 2001 to $1,038,511 in the second quarter of 2002, and increased seven
percent from $1,442,571 in the first half of 2001 to $1,537,610 in the first
half of 2002. Licensing revenue is a combination of deferred revenue
amortization from multiple element arrangements and from royalties that are
recognized when the related sales occur. The increases from 2001 to 2002 reflect
increased royalties from our license relationship with Novartis Ophthalmics AG
for the development and commercialization of Salagen Tablets in Europe, and
increased royalties on herbicide resistant crop technology from our former
agricultural business, partially reduced by decreased royalties related to a
Lyme disease vaccine for dogs. Future licensing revenue will fluctuate from
quarter to quarter depending on the level of recurring royalty generating
activities and changes in amortization of deferred revenue, including the
initiation or termination of licensing arrangements. We expect licensing revenue
for 2002 to be approximately $3 million.
Costs and Expenses
Cost of sales: Cost of sales as a percent of sales was 10 percent for the second
quarter of 2001 and 16 percent for the second quarter of 2002. Cost of sales as
a percent of sales was 11 percent for the first half of 2001 and 14 percent for
the first half of 2002. The increases result from increases in production costs
and changes in our product mix. We believe that cost of sales, as a percent of
product sales for our marketed products for 2002, will range from 10 to 15
percent.
Selling, general and administrative: Selling, general and administrative
expenses increased one percent from $7,282,846 in the second quarter of 2001 to
$7,340,354 in the second quarter of 2002, and increased 5 percent from
$13,775,621 in the first half of 2001 to $14,510,680 in the first half of 2002.
The increases resulted from increased selling expenses, and $515,766 in expense
related to a reduction in our workforce of 10 general and administrative
positions in the second quarter of 2002. Accrued expenses related to the
reduction in our workforce will be paid by the end of the second quarter of
2003. The increases in these expenses were offset by decreases in product
promotion costs, recruiting and relocation costs, and facility costs. Promotion
costs decreased from 2001 due to our initiating promotion of Hexalen and Mylocel
in 2001. Facility costs decreased from 2001due to an accrual made in the second
quarter of 2001 of $559,000 for lease obligations for the former office space in
excess of estimated sublease rental income, and physical move costs in 2001
related to our move to a new office location in June 2001. We expect selling,
general and administrative expense for 2002 to be approximately $30 million.
14
Research and development: Research and development expense decreased 46 percent
from $18,189,689 in the second quarter of 2001 to $9,791,732 in the second
quarter of 2002, and decreased 35 percent from $21,743,507 in the first half of
2001 to $14,054,394 in the first half of 2002. Both decreases reflect
variability in licensing expense. In conjunction with the license of
palonosetron, we expensed $13 million for the initiation of the license in the
second quarter of 2001, and $4 million for the achievement of the pre-NDA
meeting milestone in the second quarter of 2002. Exclusive of licensing
payments, research and development expense increased 12 percent from $5,173,439
in the second quarter of 2001 to $5,791,732 in the second quarter of 2002, and
increased 15 percent from $8,727,257 in the first half of 2001 to $10,054,394 in
the first half of 2002. These increases reflect expense of $775,278 in the
second quarter of 2002 related to a reduction in our workforce of 9 research and
development positions. Accrued expenses related to the reduction in our
workforce will be paid by the end of the second quarter of 2003. The increase
from the first half of 2001 to the first half of 2002 also reflects increased
expenses related to our development efforts, including palonosetron, which we
licensed from Helsinn in April 2001, and irofulven.
In April 2002, we stopped our Phase 3 trial of irofulven in advanced-stage,
gemcitabine-refractory pancreatic cancer patients. We will continue our broad
development program for irofulven aimed at other tumor targets. We are
conducting a series of clinical trials that are at varying stages of completion.
These trials are designed to evaluate the efficacy and safety of irofulven
administered as a single chemotherapy agent and in combination with marketed
chemotherapy agents for the treatment of patients with solid tumor cancers who
are generally refractory to current therapies.
We expect research and development expense for 2002 to be approximately $33
million, which includes $14 million of expected non-recurring license payments
related to the achievement of palonosetron development milestones.
Tax expense: There is no provision for tax expense in the first half of 2001 or
the first half of 2002, given our annual net loss of $35 million in 2001, and
our projected annual net loss of approximately $36 million to $38 million in
2002. Our ability to achieve profitable operations is dependent upon our
successful launch of palonosetron, and therefore, we continue to maintain a
valuation allowance against our deferred tax asset.
Interest Income
Interest income decreased 36 percent from $377,640 in the second quarter of 2001
to $242,804 in the second quarter of 2002, and decreased 31 percent from
$813,806 in the first half of 2001 to $562,674 in the first half of 2002. The
decreases result from lower investment yields, partially offset by increases in
the average amount of funds available for investment. Funds available for
investment in 2002 increased as a result of the sales of stock in the second and
fourth quarters of 2001. Interest income for 2002 will fluctuate depending on
the timing of cashflows and changes in interest rates for marketable securities.
Net Loss
We had a net loss of $15,409,585 for the second quarter of 2001, and a net loss
of $12,254,048 for the second quarter of 2002. We had a net loss of $18,529,082
for the first half of 2001, and a net loss of $18,546,618 for the first half of
2002. The decreased net loss from the second quarter of 2001 to the second
quarter of 2002 reflects a 48 percent decrease in revenues from 2001 to 2002,
and a 32 percent decrease in costs and expenses from 2001 to 2002. The
relatively unchanged net loss from the first half of 2001 to the first half of
2002 reflects a 38 percent decrease in revenue from 2001 to 2002, and a 19
percent decrease in costs and expenses from 2001 to 2002. The decreases in costs
and expenses for both the three-month and six-month periods primarily resulted
from variability in licensing expense. In conjunction with
15
the license of palonosetron, we expensed $13 million in the second quarter of
2001, and $4 million in the second quarter of 2002. During the next several
years, we expect to direct our efforts towards activities intended to grow
long-term revenues, including the continued development and launch of
palonosetron and continued development of irofulven and other product
candidates. Increased spending on these initiatives will likely result in
substantial net losses until after our launch of palonosetron. We expect our net
loss for 2002 to be within the range of $36 million to $38 million.
Liquidity and Capital Resources
At June 30, 2002, we had cash and marketable investments of $54,307,048 and
working capital of $49,862,097, compared with $77,712,480 and $63,181,509,
respectively, at December 31, 2001. For the six-month period ended June 30,
2002, we received $550,000 in cash as a deposit from one of our international
partners, and $375,040 in cash from issuance of shares under stock award plans.
We used $22,814,732 of cash to fund our operating activities, including
$4,000,000 of restricted cash for payment of a palonosetron milestone. We also
paid the final installment of $1,200,000 related to the acquisition of
Hexalen(R) Capsules, and purchased $296,669 in equipment and furniture.
Significant cash payments for 2002 will be required to fund operating activities
and pay up to $10 million upon filing of the new drug application for
palonosetron, expected in the second half of 2002. Substantial amounts of
capital are required for pharmaceutical development and commercialization
efforts. For continued development and commercialization of our product
candidates and marketed products, 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 will seek other
sources of funding, including additional equity or debt issuances as
appropriate. We expect cash use for 2002 to range from $33 million to $35
million, which includes cash required to fund operating activities. We have no
arrangements or covenants that would trigger acceleration of our lease
obligations or long-term liabilities.
Our liquidity is affected by a variety of factors, including sales of our
products, the pace of our research and development programs, the in-licensing of
new products and our ability to raise additional debt or equity capital. As
identified in our risk factors, adverse changes that affect our continued access
to the capital markets, continued development and expansion of our product
candidates, and future demand for our marketed products would affect our
longer-term liquidity. We believe we have sufficient liquidity and capital
resources to fund all known cash requirements for the next 12 months. Our future
noncancellable significant contractual commitments are summarized in the
following table:
- -------------------------------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 Thereafter
---- ---- ---- ---- ---- ----------
- -------------------------------------------------------------------------------------------------------------------
Lease Payments $795,000 $1,601,000 $1,622,000 $1,498,000 $1,229,000 $1,776,000
- -------------------------------------------------------------------------------------------------------------------
Item 3.
Quantitative and Qualitative Disclosure 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 marketable 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. The impact on our net
loss as a result of a one percent change in short-term interest rates would have
an effect of approximately $543,000 over a twelve-month period, based on our
cash, cash equivalents and marketable investment balances at June 30, 2002.
16
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 14, 2002, and
sufficient favorable votes were cast to approve all management proposals as
follows:
Election of management's entire slate of six directors by the following
vote tallies:
For Withhold
Charles N. Blitzer 19,583,647 2,827,599
Andrew J. Ferrara 21,703,154 708,092
Hugh E. Miller 21,700,258 710,098
Lee J. Schroeder 21,694,784 716,462
David B. Sharrock 21,696,854 714,392
Arthur Weaver 21,698,304 712,942
Amendment of the Company's Restated Articles of Incorporation to
increase the authorized common stock by 40,000,000 shares and eliminate
the cumulative preferred stock by a vote of 12,528,993 for, 1,746,003
against, 76,853 abstaining, and 8,059,397 broker nonvotes.
Amendment of the Company's 1997 Stock Incentive Plan to extend the
terms of the plan through May 31, 2005 and to increase the number of
shares available for awards granted under the plan by 2,000,000 shares
by a vote of 10,441,775 for, 3,777,392 against, 132,682 abstaining, and
8,059,397 broker nonvotes.
Amendment of the Company's Amended and Restated Stock Purchase Plan to
increase the number of shares which may be purchased under the plan by
200,000 shares by a vote of 13,175,891 for, 1,066,066 against, 109,892
abstaining and 8,059,397 broker nonvotes.
Ratification of the independent auditors by a vote of 21,923,279 for,
410,006 against, 77,961 abstaining, and 0 broker nonvotes.
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.
17
Item 6. Exhibits and Reports on Form 8-K
(a) LISTING OF EXHIBITS:
Exhibit Number Description
3.1 Second Amended and Restated Articles of Incorporation
of MGI PHARMA, INC.
10.1 Amended and Restated Employee Stock Purchase Plan
10.2 1997 Stock Incentive Plan
99.1 Cautionary Statements
99.2 Certification of Charles N. Blitzer Pursuant to 18
U.S.C.(S)1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
99.3 Certification of William C. Brown Pursuant to 18
U.S.C.(S).1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on April 17, 2002 to report
under Item 5, and in press releases filed as exhibits thereto, the
following:
On April 17, 2002, the Company reported its earning for the
quarter ended March 31, 2002.
On April 17, 2002, the Company and HELSINN HEALTHCARE SA
announced that preliminary analysis of the pivotal Phase 3
trials of their investigational agent palonosetron shows that
palonosetron met the 24-hour complete response primary
efficacy endpoint. In addition, the complete response rate for
the 24-120 hour (days 2 through 5) time period favored
palonosetron over the comparator agents, which are currently
marketed 5-HT3 antagonists. The companies confirmed that
submission of the New Drug Application for palonosetron in the
United States is planned to occur in the third quarter of
2002.
On April 17, 2002, the Company announced that it had stopped
its Phase 3 trial of irofulven in advanced-stage,
gemcitabine-refractory pancreatic cancer patients. The Company
indicated that it will continue its broad development program
aimed at other tumor targets.
18
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 1, 2002 By: /s/ William C. Brown
-----------------------------------
William C. Brown,
Chief Financial Officer and Secretary
(principal financial and accounting officer)
19
MGI PHARMA, INC.
Quarterly Report on Form 10-Q
for the
Quarter Ended June 30, 2002
EXHIBIT INDEX
Exhibit
Number Description
3.1 Second Amended and Restated Articles of Incorporation
of MGI PHARMA, INC.
10.1 Amended and Restated Employee Stock Purchase Plan
10.2 1997 Stock Incentive Plan
99.1 Cautionary Statements
99.2 Certification of Charles N. Blitzer Pursuant to 18
U.S.C.(S)1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
99.3 Certification of William C. Brown Pursuant to 18
U.S.C.(S)1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002