Back to GetFilings.com
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, 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 (I.R.S. employer
incorporation or organization) identification number)
5775 West Old Shakopee Road
Suite 100
Bloomington, Minnesota 55437 (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 25,176,978 shares
---------------------------------------- -----------------------------------
(Class) (Outstanding at November 1, 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 September 30, 2002 3
Statements of Operations - Three Months and
Nine Months Ended September 30, 2001 and 2002 5
Statements of Cash Flows - Nine Months
Ended September 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 18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
CERTIFICATIONS 21
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
MGI PHARMA, INC.
BALANCE SHEETS
(Unaudited)
December 31, September 30,
2001 2002
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $40,699,408 $33,022,371
Cash - restricted 4,000,000 --
Short-term marketable investments 30,006,144 19,103,499
Receivables, less allowances of
$117,397 and $108,566 1,829,654 2,986,125
Inventories 1,500,054 1,519,510
Prepaid expenses 246,739 647,099
----------- -----------
Total current assets 78,281,999 57,278,604
Equipment and furniture, at cost
less accumulated depreciation of
$1,322,559 and $1,903,544 3,325,334 3,268,239
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 $2,166,960 5,811,394 4,924,910
Other assets 442,368 502,555
----------- -----------
Total assets $97,668,023 $72,774,308
=========== ===========
(Continued)
3
BALANCE SHEETS
(Unaudited)
Page 2
December 31, September 30,
2001 2002
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,674,412 $ 827,526
Accrued expenses 12,609,838 8,397,928
Deferred revenue 794,383 794,383
Other current liabilities 21,857 210,107
------------- -------------
Total current liabilities 15,100,490 10,229,944
------------- -------------
Noncurrent liabilities:
Long-term deposit payable 3,750,000 4,300,000
Deferred revenue 9,828,223 9,232,435
Other noncurrent liabilities 54,599 91,874
------------- -------------
Total noncurrent liabilities 13,632,822 13,624,309
------------- -------------
Total liabilities 28,733,312 23,854,253
------------- -------------
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 25,164,240
issued shares 250,051 251,643
Additional paid-in capital 192,060,653 193,731,059
Accumulated deficit (123,375,993) (144,867,524)
Unearned compensation - restricted shares -- (195,123)
------------- -------------
Total stockholders' equity 68,934,711 48,920,055
------------- -------------
Total liabilities and
stockholders' equity $ 97,668,023 $ 72,774,308
============= =============
- -------------------------------------
See accompanying notes to financial statements.
4
MGI PHARMA, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
Revenues:
Sales $ 5,992,329 $ 8,223,368 $ 23,137,823 $ 18,174,858
Licensing 957,060 824,196 2,399,631 2,361,806
------------ ------------ ------------ ------------
6,949,389 9,047,564 25,537,454 20,536,664
------------ ------------ ------------ ------------
Costs and Expenses:
Cost of sales 757,392 950,202 2,578,228 2,392,531
Selling, general and administrative 6,551,976 6,639,489 20,327,597 21,150,169
Research and development 5,807,071 4,508,089 27,550,578 18,562,483
Amortization of intangible assets 295,495 295,495 886,484 886,484
------------ ------------ ------------ ------------
13,411,934 12,393,275 51,342,887 42,991,667
------------ ------------ ------------ ------------
Loss from operations (6,462,545) (3,345,711) (25,805,433) (22,455,003)
Interest income 415,102 400,798 1,228,908 963,472
------------ ------------ ------------ ------------
Net loss $ (6,047,443) $ (2,944,913) $(24,576,525) $(21,491,531)
============ ============ ============ ============
Net loss per common share:
Basic $ (0.29) $ (0.12) $ (1.30) $ (0.86)
Assuming dilution $ (0.29) $ (0.12) $ (1.30) $ (0.86)
Weighted average number of
common shares outstanding:
Basic 20,986,992 25,163,613 18,852,053 25,087,416
Assuming dilution 20,986,992 25,163,613 18,852,053 25,087,416
- -------------------------------------
See accompanying notes to financial statements.
5
MGI PHARMA, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2001 2002
------------ ------------
OPERATING ACTIVITIES:
Net loss $(24,576,525) $(21,491,531)
Adjustments for non-cash items:
Stock issuance for palonostreon license 2,999,992 --
Depreciation and intangible amortization 1,389,739 1,534,394
Benefit plan contribution 237,436 321,835
Stock option term modification -- 214,744
Noncash consulting payments 63,700 7,500
Other 84,453 87,803
Change in operating assets and liabilities:
Receivables (325,326) (1,156,471)
Inventories (123,579) (19,456)
Prepaid expenses 5,247,201 (400,360)
Accounts payable and accrued expenses 3,645,844 (3,350,777)
Deferred revenue 107,337 (595,788)
Other current liabilities 119,073 188,250
------------ ------------
Net cash used in operating activities (11,130,655) (24,659,857)
------------ ------------
INVESTING ACTIVITIES:
Purchase of investments (25,474,914) (4,923,608)
Maturity of investments 25,104,542 18,833,181
Acquisition of Hexalen(R)capsules (3,600,000) (1,200,000)
Purchase of equipment and furniture (2,319,230) (591,606)
Other (32,186) (60,187)
------------ ------------
Net cash provided by (used in) investing activities (6,321,788) 12,057,780
------------ ------------
FINANCING ACTIVITIES:
Net proceeds from stock issuance 29,168,655 --
Restricted cash (6,000,000) 4,000,000
Receipt of deposit payable 1,650,000 550,000
Issuance of shares under stock
plans 892,149 375,040
------------ ------------
Net cash provided by financing activities 25,710,804 4,925,040
------------ ------------
Increase (decrease) in cash and
cash equivalents 8,258,361 (7,677,037)
Cash and cash equivalents at
beginning of period 11,031,714 40,699,408
------------ ------------
Cash and cash equivalents at
end of period $ 19,290,075 $ 33,022,371
============ ============
Supplemental disclosure of cash information:
Cash paid for income taxes $ 1,500 $ 6,750
- -------------------------------------
See accompanying notes to financial statements.
6
MGI PHARMA, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
MGI PHARMA is 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 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 87 percent of our
product sales during the first nine months 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 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. The New Drug
Application for palonosetron was submitted to the United States Food and Drug
Administration on September 27, 2002. Our product development efforts also
include preclinical and clinical trials for irofulven, our novel anti-cancer
agent with demonstrated activity in a variety of cancers and a unique mechanism
of action. 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 nine-month periods ended September 30,
2001 and 2002 is based on weighted average shares outstanding as summarized in
the following table:
Three months ended September 30 2001 2002
---------- ----------
Weighted-average shares - basic 20,986,992 25,163,613
Effect of dilutive stock options -- --
---------- ----------
Weighted-average shares - assuming dilution 20,986,992 25,163,613
========== ==========
Nine months ended September 30 2001 2002
---------- ----------
Weighted-average shares - basic 18,852,053 25,087,416
Effect of dilutive stock options -- --
---------- ----------
Weighted-average shares - assuming dilution 18,852,053 25,087,416
========== ==========
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 was 3,492,859 and 4,115,657 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 September 30, 2002 are summarized in the following
table:
2001 2002
----------- -----------
Medium-term notes $16,107,596 $11,054,353
Commercial paper 13,898,548 4,987,125
Certificates of deposit -- 3,062,021
----------- -----------
$30,006,144 $19,103,499
=========== ===========
Long-term marketable investments at December 31, 2001, consisted of certificates
of deposit that mature in January 2003.
8
(4) Inventories
Inventories at December 31, 2001 and September 30, 2002 are summarized as
follows:
2001 2002
---------- ----------
Raw materials and supplies $ 50,458 $ 94,216
Work in process 445,429 309,161
Finished products 1,004,167 1,116,133
---------- ----------
$1,500,054 $1,519,510
========== ==========
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 September 30, 2002 are summarized in
the following table:
2001 2002
----------- ----------
Product development commitments $4,503,281 $1,883,285
Bonuses 1,774,916 1,600,110
Product return accrual 963,430 996,579
Severance payments -- 680,273
Lease accrual 983,271 457,303
Hexalen(R)capsules business purchase obligation 1,200,000 --
Other accrued expenses 3,184,940 2,780,378
----------- ----------
$12,609,838 $8,397,928
=========== ==========
(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 September 30, 2002, 5,616,422 shares of common stock remain reserved for
issuance, of which 1,500,765 remain available for grant. Options to purchase
4,115,657 shares of common stock were outstanding, of which 1,877,678 were
exercisable. Options outstanding had a weighted average exercise price of $11.56
per share.
9
(7) Stockholders' Equity
Changes in selected stockholders' equity accounts for the nine months ended
September 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 59,798 598 829,256 --
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 -- -- -- 49,737
Other issuances 893 9 7,491 --
---------- -------- ------------ ---------
Balance at September 30, 2002 25,164,240 $251,643 $193,731,059 ($195,123)
========== ======== ============ =========
At September 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 after
the date of grant, and the remainder of these shares vest in two years after the
date of grant, 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 September 30, 2002, we have an
accrual of $457,303 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 $397,000
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)
----------
$7,620,978
==========
(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 strong binding affinity for the target receptor and an
extended plasma half-life, is in development for the prevention of
chemotherapy-induced nausea and vomiting. The new drug application (NDA) for
palonosetron was submitted to the United States Food and Drug Administration on
September 27, 2002. MGI paid $11 million in upfront payments 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. In the fourth quarter of 2002, MGI expects to pay a $10 million milestone
upon acceptance of the filing of the NDA 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). An $11 million milestone will become payable upon receiving marketing
approval for palonosetron in the United States.
11
(10) Research and Development Expense
Research and development expense for the three-month and nine-month periods
ended September 30, 2001 and 2002 consist of the following:
Three months ended September 30 2001 2002
----------- -----------
License fees $ 50,000 $ 50,000
Other research and development 5,757,071 4,458,089
----------- -----------
$5,807,071 $4,508,089
=========== ===========
Nine months ended September 30 2001 2002
----------- -----------
License fees $13,066,250 $ 4,050,000
Other research and development 14,484,328 14,512,483
----------- -----------
$27,550,578 $18,562,483
=========== ===========
(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 would be $1,181,978 per year in 2002 through
2005, and $1,083,482 in 2006.
12
Item 2.
- -------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
MGI PHARMA is 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 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 87 percent of our
product sales during the first nine months 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 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. The New Drug
Application for palonosetron was submitted to the United States Food and Drug
Administration on September 27, 2002. Our product development efforts also
include preclinical and clinical trials for irofulven, our novel anti-cancer
agent with demonstrated activity in a variety of cancers and a unique mechanism
of action. 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 increased 37 percent from $5,992,329 in the third quarter
of 2001, to $8,223,368 in the third quarter of 2002, but decreased 21 percent
from $23,137,823 in the first nine months of 2001, to $18,174,858 in the first
nine months of 2002. 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. The quarterly increase in
sales revenue reflects increased revenue for Salagen Tablets, resulting from
continued growth in patient demand and closer alignment of wholesaler inventory
amounts with underlying patient demand. The nine-month decrease in sales revenue
reflects decreased revenue from Salagen Tablets, resulting from a drawdown of
wholesaler inventory amounts, which was 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 wholesaler inventory amounts occurred. A reduction in wholesaler
inventory amounts occurred throughout the first half of 2002. Normalization of
the wholesale distributor inventories occurred towards the end of the second
quarter of 2002. As a result, product sales in the third quarter of 2002
approximated underlying patient demand. Sales of Salagen Tablets in the United
States provided 88 percent and 87 percent of our sales revenue in the first nine
months 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 decreased 14 percent from $957,060 in the third
quarter of 2001 to $824,196 in the third quarter of 2002, and decreased two
percent from $2,399,631 in the first nine months of 2001 to $2,361,806 in the
first nine months 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 quarterly decrease from 2001 to
2002 reflects decreased royalties related to herbicide resistant crop technology
from our former agricultural business, and decreased royalties from our license
arrangements for the development and commercialization of Salagen Tablets in
Europe and Canada. The nine-month decrease from 2001 to 2002 reflects decreased
royalties related to a Lyme disease vaccine for dogs and decreased royalties
from our license arrangement for the development and commercialization of
Salagen Tablets in Canada, partially offset by increased royalties from our
license relationship with for the development and commercialization of Salagen
Tablets in Europe. 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 13 percent for the third
quarter of 2001 and 12 percent for the third quarter of 2002. Cost of sales as a
percent of sales was 11 percent for the first nine months of 2001 and 13 percent
for the first nine months of 2002. The changes result from changes in our
product mix and changes in production costs. 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 $6,551,976 in the third quarter of 2001 to
$6,639,489 in the third quarter of 2002, and increased 4 percent from
$20,327,597 in the first nine months of 2001 to $21,150,169 in the first nine
months of 2002. Both increases reflect increases in selling expense that were
partially offset by decreases in promotion costs and facility costs. Promotion
costs decreased from 2001 due to our initiating promotion of Hexalen
14
and Mylocel in 2001. Facility costs decreased from 2001 due to an accrual in
2001 for lease obligations for the former office space in excess of estimated
sublease rental income, and physical move costs related to our move to a new
office location in June 2001. The nine-month increase also reflects $515,766 in
expense related to a reduction in our workforce in the second quarter of 2002.
We expect selling, general and administrative expense for 2002 to be
approximately $29 million.
Research and development: Research and development expense decreased 22 percent
from $5,807,071 in the third quarter of 2001 to $4,508,089 in the third quarter
of 2002, and decreased 33 percent from $27,550,578 in the first nine months of
2001 to $18,562,483 in the first nine months 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 these palonosetron
licensing payments and other miscellaneous licensing payments, research and
development expense decreased 23 percent from $5,757,071 in the third quarter of
2001 to $4,458,089 in the third quarter of 2002, and was essentially unchanged
from $14,484,328 in the first nine months of 2001 to $14,512,483 in the first
nine months of 2002. The quarterly decrease represents decreased spending on the
development of irofulven. The small change in the nine-month periods reflects
decreased spending on irofulven, offset by $775,278 in expense related to the
reduction in our workforce in the second quarter of 2002, and increased expenses
related to our development of palonosetron.
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 any of the time periods
presented since our annual net loss was $35 million in 2001, and a net loss is
projected for 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 3 percent from $415,102 in the third quarter of 2001
to $400,798 in the third quarter of 2002, and decreased 22 percent from
$1,228,908 in the first nine months of 2001 to $963,472 in the first nine months
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 cash flows and changes in interest rates for
marketable securities.
Net Loss
We had a net loss of $6,047,443 for the third quarter of 2001, and a net loss of
$2,944,913 for the third quarter of 2002. We had a net loss of $24,576,525 for
the first nine months of 2001, and a net loss of $21,491,531 for the first nine
months of 2002. The decreased net loss from the third quarter of 2001 to the
15
third quarter of 2002 reflects a 30 percent increase in revenues from 2001 to
2002, and an 8 percent decrease in costs and expenses from 2001 to 2002. The
decreased net loss from the first nine months of 2001 to the first nine months
of 2002 reflects a 20 percent decrease in revenue from 2001 to 2002, and a 16
percent decrease in costs and expenses from 2001 to 2002. The decreases in costs
and expenses for the three-month period resulted from a decrease in expenditures
for the development of irofulven. The decreases in costs and expenses for the
nine-month period primarily resulted from variability in licensing expense. In
conjunction with 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 $35 million to $37million.
Liquidity and Capital Resources
At September 30, 2002, we had cash and marketable investments of $52,125,870 and
working capital of $47,048,660, compared with $77,712,480 and $63,181,509,
respectively, at December 31, 2001. For the nine-month period ended September
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 $24,659,857 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 $591,606 in equipment and furniture.
Significant cash use in 2002 will be required to fund operating activities and
pay up to $10 million upon filing acceptance of the new drug application for
palonosetron by the FDA, which is expected in the fourth quarter 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 $397,000 $1,601,000 $1,622,000 $1,498,000 $1,229,000 $1,776,000
- --------------------------- ------------ ------------ ------------ ------------ ------------
Cautionary Statement
This document contains forward-looking statements within the meaning of federal
securities laws that may include statements regarding our intent, belief or
current expectations. 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
16
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 our
filings with the Securities and Exchange Commission, including Exhibit 99 to
this form 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.
17
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 be
approximately $521,000 over a twelve-month period, based on our cash, cash
equivalents and marketable investment balances at September 30, 2002.
Item 4.
- -------
Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including
our Chief Executive Officer, Charles N. Blitzer, and our Chief Financial
Officer, William C. Brown, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-14(c) under the Exchange Act) as of a date (the "Evaluation Date") within 90
days prior to the filing date of this report. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures were effective in timely
alerting them to the material information relating to us required to be included
in our periodic SEC filings.
(b) Changes in Internal Controls
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
18
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 99.1 to this report.
Item 6. Exhibits and Reports on Form 8-K
- -------
(a) LISTING OF EXHIBITS:
Exhibit Number Description
-------------- -----------
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
There were no reports of Form 8-K filed during the three months ended
September 30, 2002.
19
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 4, 2002 By: /s/ William C. Brown
----------------------------------------
William C. Brown,
Chief Financial Officer and Secretary
(principal financial and accounting officer)
20
CERTIFICATIONS
I, Charles N. Blitzer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MGI PHARMA, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 4, 2002 /s/ Charles N. Blitzer
------------------------------
Charles N. Blitzer,
Chairman and
Chief Executive Officer
21
CERTIFICATIONS
I, William C. Brown, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MGI PHARMA, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 4, 2002 /s/ William C. Brown
------------------------------
William C. Brown
Chief Financial Officer
22
MGI PHARMA, INC.
Quarterly Report on Form 10-Q
for the
Quarter Ended September 30, 2002
EXHIBIT INDEX
-------------
Exhibit
Number Description
------ -----------
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