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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 March 31, 2003
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
offices and zip code) 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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 25,386,225 shares
- --------------------------------------- --------------------------------------
(Class) (Outstanding at May 5, 2003)
MGI PHARMA, INC.
FORM 10-Q INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - December 31, 2002
and March 31, 2003 3
Statements of Operations - Three Months
Ended March 31, 2002 and 2003 5
Statements of Cash Flows - Three Months
Ended March 31, 2002 and 2003 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 Disclosures About
Market Risk 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
CERTIFICATIONS 20
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MGI PHARMA, INC.
BALANCE SHEETS
(unaudited)
December 31, March 31,
2002 2003
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 52,933,393 $ 47,884,608
Short-term marketable investments 7,539,508 4,449,829
Receivables, less allowances of
$109,276 and $109,922 3,042,698 3,147,350
Inventories 1,779,413 1,482,350
Prepaid expenses 448,559 1,370,341
-------------- --------------
Total current assets 65,743,571 58,334,478
Equipment, furniture and leasehold improvements,
at cost less accumulated depreciation of
$2,121,915 and $2,339,625 3,110,938 3,016,559
Long-term equity investments 6,800,000 6,800,000
Intangible assets, at cost
less accumulated amortization of
$2,462,455 and $2,757,949 4,629,415 4,333,921
Other assets 490,329 490,329
-------------- --------------
Total assets $ 80,774,253 $ 72,975,287
============== ==============
(Continued)
3
BALANCE SHEETS
(Unaudited)
Page 2
December 31, March 31,
2002 2003
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,904,297 $ 1,127,453
Accrued expenses 8,725,323 7,463,983
Deposit payable 4,300,000 4,300,000
Deferred revenue 794,383 794,383
Other current liabilities 20,138 210,335
-------------- --------------
Total current liabilities 15,744,141 13,896,154
-------------- --------------
Noncurrent liabilities:
Convertible debt, face value of $21,000,000
net of unamortized warrant and issuance costs
of $1,708,851 and $1,621,960 19,291,149 19,378,040
Deferred revenue 9,033,839 8,835,243
Other noncurrent liabilities 101,589 111,305
-------------- --------------
Total noncurrent liabilities 28,426,577 28,324,588
-------------- --------------
Total liabilities 44,170,718 42,220,742
-------------- --------------
Stockholders' equity:
Preferred stock, 10,000,000
authorized and unissued shares
Common stock, $.01 par value,
70,000,000 authorized shares,
25,236,906 and 25,345,264
issued and outstanding shares 252,369 253,453
Additional paid-in capital 195,919,707 196,657,955
Unearned compensation - restricted shares (128,756) (89,139)
Accumulated deficit (159,439,785) (166,067,724)
-------------- --------------
Total stockholders' equity 36,603,535 30,754,545
-------------- --------------
Total liabilities and
stockholders' equity $ 80,774,253 $ 72,975,287
============== ==============
See accompanying notes to financial statements.
4
MGI PHARMA, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
-------------------------------
2002 2003
-------------- --------------
Revenues:
Sales $ 5,302,773 $ 6,142,787
Licensing 499,099 615,961
-------------- --------------
5,801,872 6,758,748
-------------- --------------
Costs and Expenses:
Cost of sales 685,829 770,881
Selling, general and administrative 7,170,326 8,817,980
Research and development 4,262,662 3,459,569
Amortization 295,495 295,494
-------------- --------------
12,414,312 13,343,924
-------------- --------------
Loss from operations (6,612,440) (6,585,176)
Interest income 319,870 206,628
Interest expense - (249,391)
-------------- --------------
Net loss $ (6,292,570) $ (6,627,939)
============== ==============
Net loss per common share:
Basic $ (0.25) $ (0.26)
Assuming dilution $ (0.25) $ (0.26)
Weighted average number of
common shares outstanding:
Basic 25,033,952 25,320,138
Assuming dilution 25,033,952 25,320,138
See accompanying notes to financial statements.
5
MGI PHARMA, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
-------------------------------
2002 2003
-------------- --------------
OPERATING ACTIVITIES:
Net loss $ (6,292,570) $ (6,627,939)
Adjustments for non-cash items:
Depreciation and intangible amortization 508,822 513,204
Benefit plan contribution 135,608 143,313
Noncash consulting payments 2,500 5,000
Deferred rent 14,592 9,716
Amortization of restricted stock expense -- 39,617
Amortization of non-cash financing charges -- 91,891
Other 791 --
Change in operating assets and liabilities:
Receivables (1,080,629) (104,652)
Inventories 301,698 297,063
Prepaid expenses (476,200) (921,782)
Accounts payable and accrued expenses (899,512) (1,553,951)
Deferred revenue (198,596) (198,596)
Other current liabilities 158,209 190,197
-------------- --------------
Net cash used in operating activities (7,825,287) (8,116,919)
-------------- --------------
INVESTING ACTIVITIES:
Purchase of investments (4,923,608) --
Maturity of investments 5,958,010 3,089,679
Acquisition of Hexalen(R) capsules (1,200,000) --
Purchase of equipment, furniture and leasehold improvements (241,722) (123,331)
Other (19,000) --
-------------- --------------
Net cash provided by (used in) investing activities (426,320) 2,966,348
-------------- --------------
FINANCING ACTIVITIES:
Receipt of deposit payable 550,000 --
Issuance of shares under stock plans 45,894 101,786
-------------- --------------
Net cash provided by financing activities 595,894 101,786
-------------- --------------
Decrease in cash and cash equivalents (7,655,713) (5,048,785)
Cash and cash equivalents at
beginning of period 40,699,408 52,933,393
-------------- --------------
Cash and cash equivalents at
end of period $ 33,043,695 $ 47,884,608
============== ==============
Supplemental disclosure of cash information:
Cash paid for income taxes $ 3,745 $ 1,250
Cash paid for interest $ 0 $ 0
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 biopharmaceutical company that acquires,
develops and commercializes proprietary products that meet cancer patient needs.
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 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 quarter of 2003. Hexalen capsules 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 oncology license and
distribution rights to palonosetron, a cancer supportive care product candidate
for the prevention of chemotherapy-induced nausea and vomiting. The U.S. Food
and Drug Administration accepted the filing of the New Drug Application (NDA) on
November 26, 2002, and is currently reviewing the NDA to determine whether
palonosetron will be approved for marketing in the U.S. Our current 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 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 palonosetron and 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. 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, 2002.
7
(2) Loss Per Common Share
Loss per share for the three-month periods ended March 31, 2002 and 2003 is
based on weighted average shares outstanding as summarized in the following
table:
2002 2003
--------------- --------------
Weighted-average shares - basic 25,033,952 25,320,138
Effect of dilutive stock options -- --
Effect of convertible debt -- --
--------------- --------------
Weighted-average shares - assuming dilution 25,033,952 25,320,138
=============== ==============
Potentially dilutive securities, which are excluded from the calculation because
their inclusion in a calculation of net loss per share would have been
antidilutive, include options for 3,437,420 and 4,333,157 shares of common stock
for 2002 and 2003, respectively, and convertible debt and warrants for 2,971,428
shares of common stock in 2003.
(3) Investments
Marketable investments consist of held-to-maturity investments and are stated at
amortized costs, which approximates fair value. Short-term investments at
December 31, 2002 and March 31, 2003 are summarized in the following table:
2002 2003
-------------- --------------
Corporate notes $ 4,458,921 $ 4,449,829
Certificates of deposit 3,080,587 --
-------------- --------------
$ 7,539,508 $ 4,449,829
============== ==============
(4) Inventories
Inventories at December 31, 2002 and March 31, 2003 are summarized as follows:
2002 2003
-------------- --------------
Raw materials and supplies $ 89,757 $ 89,757
Work in process 520,092 442,850
Finished products 1,169,564 949,743
-------------- --------------
$ 1,779,413 $ 1,482,350
============== ==============
Inventories are stated at the lower of cost or market. Cost is determined on a
first-in, first-out basis.
8
(5) Accrued Expenses
Accrued expenses at December 31, 2002 and March 31, 2003 are summarized as
follows:
2002 2003
-------------- --------------
Product development commitments $ 1,717,380 $ 1,816,152
Product return accrual 1,109,913 1,006,086
Bonuses 1,540,439 936,886
Lease accrual 415,309 374,234
Other accrued expenses 3,942,282 3,330,625
-------------- --------------
$ 8,725,323 $ 7,463,983
============== ==============
(6) Convertible Debt
Convertible debt, which is stated at face value less unamortized warrant and
issuance costs, at December 31, 2002 and March 31, 2003 is summarized as
follows:
2002 2003
-------------- --------------
Convertible notes $ 21,000,000 $ 21,000,000
Warrants (1,659,838) (1,575,440)
Issuance costs (49,013) (46,520)
-------------- --------------
$ 19,291,149 $ 19,378,040
============== ==============
(7) Stock Incentive Plans
Under stock incentive plans, designated persons (including officers, directors,
employees and consultants) have been or may be granted rights to acquire our
common stock. These rights include stock options and other equity rights. At
March 31, 2003, shares issued and shares available under stock incentive plans
are as follows:
Shareholder Total
Approved Other For All
Plans Plans Plans
-------------- -------------- --------------
Shares issuable under outstanding options 4,306,102 27,055 4,333,157
Shares available for future issuance 1,259,796 -- 1,259,796
-------------- -------------- --------------
Total 5,565,898 27,055 5,592,953
============== ============== ==============
Average exercise price for outstanding options $ 11.35 $ 10.14 $ 11.34
============== ============== ==============
9
We apply the intrinsic value method described in Accounting Principles Board
(APB) Opinion No. 25 in accounting for the issuance of stock options to
employees and directors. Accordingly, as all grants are made at or above market
price, no compensation expense has been recognized in the financial statements.
Had we determined compensation cost based on fair value at the grant date for
our stock options and the fair value of the discount related to the employee
stock purchase plan under SFAS 123, our net loss would have been reported as
follows:
Three Months Ended March 31,
2002 2003
-------------- --------------
Net loss, as reported $ (6,292,570) $ (6,627,939)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards (1,384,591) (1,244,286)
-------------- --------------
Pro forma net loss $ (7,677,161) $ (7,872,225)
============== ==============
Net loss per common share:
As reported basic and diluted $ (0.25) $ (0.26)
Pro forma basic and diluted $ (0.31) $ (0.31)
2002 2003
-------------- --------------
Expected dividend yield 0% 0%
Risk-free interest rate 2.70% 2.70%
Annualized volatility 0.80 0.80
Expected life, in years 5 5
10
(8) Stockholders' Equity
Changes in selected stockholders' equity accounts for the three months ended
March 31, 2003 were as follows:
Unearned
Common Stock Additional compensation -
----------------------------- paid-in restricted
Shares Par value capital stock
------------ -------------- -------------- --------------
Balance at December 31, 2002 25,236,906 $ 252,369 $ 195,919,707 $ (128,756)
Exercise of stock options 21,869 219 101,567 --
Employee retirement plan
contribution 86,093 861 626,685 --
Amortization of restricted stock
to compensation expense -- -- -- 39,617
Other issuances 396 4 9,996 --
------------ -------------- -------------- --------------
Balance at September 30, 2002 25,345,264 $ 253,453 $ 196,657,955 $ (89,139)
============ ============== ============== ==============
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 of the shares at the date of
grant ($6.90 per share) over the vesting periods.
(9) 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. At March 31, 2003, we have an accrual of $374,234 for lease
obligations for the former office space in excess of estimated sublease rental
income. Gross future minimum lease payments under noncancellable leases,
including both the current and former office spaces, are as follows:
Remainder of 2003 $ 1,397,000
2004 1,879,000
2005 1,754,000
2006 1,482,000
2007 1,504,000
Thereafter 630,000
Less: Expected receipt on sublease (688,000)
-----------------
$ 7,958,000
=================
11
(10) Licensing
In April 2001, MGI obtained the exclusive U.S. and Canadian oncology license and
distribution rights for palonosetron, from Helsinn Healthcare SA. Palonosetron
is a 5-HT//3// antagonist with an extended half-life for the prevention of
chemotherapy-induced nausea and vomiting. The U. S. Food and Drug Administration
accepted the filing of the New Drug Application (NDA) on November 26, 2002, and
is currently reviewing the NDA to determine whether palonosetron will be
approved for marketing in the U.S. 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. A $2 million milestone
was paid in October 2001, a $4 million milestone was paid in April 2002, and a
$10 million milestone was paid in December 2002. A final milestone payment of
$11 million will become payable upon marketing approval for palonosetron in the
United States. All upfront and milestone payments are recognized as research and
development expense when due.
In the first quarter of 2003, Dainippon Pharmaceutical Co. Ltd. and MGI agreed
to terminate their license to develop and commercialize the acylfulvenes in
Japan effective August 2003. MGI will repay $4,300,000 of deposit payments in
cash in August 2003. As a result of the early termination of the agreement, MGI
will amortize $7,141,972 of deferred revenue into licensing revenue during 2003
related to the Dainippon agreement, of which $6,867,280 is expected to be
recognized in the third quarter of 2003.
(11) Research and Development Expense
Research and development expense consists of licensing fees for product
candidates and other research and development expense. For the three-month
periods ended March 31, 2002 and 2003, we did not pay any licensing fees.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
MGI PHARMA is an oncology-focused biopharmaceutical company that acquires,
develops and commercializes proprietary products that meet cancer patient needs.
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 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 three months of 2003. Hexalen capsules 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 U.S. Food
and Drug Administration accepted the filing of the New Drug Application (NDA) on
November 26, 2002, and is currently reviewing the NDA to determine whether
palonosetron will be approved for marketing in the U.S. Our current 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 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 palonosetron and Salagen Tablets.
13
RESULTS OF OPERATIONS
REVENUES
Sales: Sales revenue increased 16 percent from $5,302,773 in the first quarter
of 2002 to $6,142,787 in the first quarter of 2003. The increase in sales
revenue is primarily due to increased revenue from Salagen Tablets. 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. As previously reported, sales in the first-half of
2002 were negatively impacted due to substantial distribution channel inventory
increases that occurred during 2001. As such, the 16 percent quarter-to-quarter
increase is greater than the underlying growth of the product. Patient demand
for Salagen Tablets, as measured by total prescriptions, has grown approximately
4 percent during the annual period ended March 31, 2003 as compared to the
comparable prior annual period. Sales of Salagen Tablets in the United States
provided 87 percent and 85 percent of our sales revenue in the first three
months of 2002 and 2003, respectively. We expect sales revenue for our currently
marketed products in 2003 to range from $28 million to $30 million. Sales
revenue for palonosetron is expected to range from $40 million to $55 million
for the first 12-month period following launch of the product.
Licensing: Licensing revenue increased 23 percent from $499,099 in the first
quarter of 2002 to $615,961 in the first quarter of 2003. 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
increase from 2002 to 2003 reflects increased royalties related to herbicide
resistant crop technology from our former agricultural business, and increased
royalties from our license arrangements for the development and
commercialization of Salagen Tablets in Europe and Canada, partially reduced by
decreased royalties related to a Lyme disease vaccine for dogs.
In the first quarter of 2003, Dainippon Pharmaceutical Co. Ltd. and MGI agreed
to terminate their collaborative acylfulvene license agreement in August 2003.
Under Staff Accounting Bulletin No. 101 (SAB 101), all remaining unamortized
licensing revenue for Dainippon will be amortized into license revenue in 2003.
For 2003, we expect to amortize $7,141,972 of deferred revenue into licensing
revenue related to the Dainippon agreement, of which $6,867,280 is expected to
the recognized in the third quarter of 2003.
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 2003, including recognition of
approximately $7 million related to the Dainippon agreement, to be approximately
$9.5 million.
COSTS AND EXPENSES
Cost of sales: Cost of sales as a percent of sales was 13 percent for both the
first quarter of 2002 and the first quarter of 2003. Cost of sales may vary from
quarter to quarter, depending on the product mix and production costs. We
believe that cost of sales, as a percent of product sales for our currently
marketed products for 2003, will range from 10 to 15 percent.
Selling, general and administrative: Selling, general and administrative
expenses increased 23 percent from $7,170,326 in the first quarter of 2002 to
$8,817,980 in the first quarter of 2003. The increase is a result of increased
expenditures in preparation for the anticipated launch of palonosetron. We
expect selling, general and administrative expense for 2003 to be approximately
$49 million.
14
Research and development: Research and development expense decreased 19 percent
from $4,262,662 in the first quarter of 2002 to $3,459,569 in the first quarter
of 2003. The decrease represents decreased spending on the development of
irofulven. In April 2002, we stopped enrollment in our Phase 3 trial of
irofulven in advanced-stage, gemcitabine-refractory pancreatic cancer patients.
Development of irofulven continues in a series of clinical trials 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 2003 to range
from $28 million to $30 million, including an $11 million non-recurring license
payment that will become due upon the approval of the NDA for palonosetron.
INTEREST INCOME
Interest income decreased 35 percent from $319,870 in the first quarter of 2002
to $206,628 in the first quarter of 2003. The decrease is a result of a decrease
in the average amount of funds available for investment and a decrease in the
investment yield. Interest income for 2003 will fluctuate depending on the
timing of cash flows and changes in interest rates for marketable securities.
INTEREST EXPENSE
We recognized interest expense of $249,391 in the first quarter of 2003 related
to our issuance of convertible debt in the fourth quarter of 2002. We did not
have any debt or interest expense in the first quarter of 2002. We expect
interest expense for 2003 to be approximately $1 million, of which $630,000 will
be paid using cash. The non-cash portion of interest expense is primarily
related to the issuance of warrants in conjunction with the issuance of our
convertible debt.
TAX EXPENSE
There is no provision for tax expense in the first quarter of 2002 or the first
quarter of 2003 due to the net loss of $36 million in 2002, and a projected net
loss of $44 million in 2003. 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.
NET LOSS
We had a net loss of $6,292,570 for the first quarter of 2002, and a net loss of
$6,627,939 for the first quarter of 2003. The increased net loss reflects a 16
percent increase in revenues from 2002 to 2003, and a 7 percent increase in
costs and expenses from 2002 to 2003. 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 2003 to be approximately $44
million, excluding any product contribution from the potential product launch of
palonosetron.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, we had cash and marketable investments of $52,334,437 and
working capital of $44,438,324, compared with $60,472,901 and $49,999,430,
respectively, at December 31, 2002. For the three-month period ended March 31,
2003, we received $101,786 in cash from issuance of shares under stock award
plans. We used $8,116,919 of cash to fund our operating activities and purchased
$123,331 in equipment and furniture.
15
Significant cash use in 2003 will be required to fund operating activities and
pay $11 million to Helsinn Healthcare upon approval by the FDA of the NDA for
palonosetron, and pay $4.3 million to Dainippon following the termination of our
licensing agreement. Substantial amounts of capital are required for our
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, plus we will seek other sources of funding,
including additional equity or debt issuances as appropriate. Excluding the
potential favorable effect on cash from palonosetron sales, we expect annual
cash use for 2003 to be approximately $50 million, which includes cash required
to launch and promote palonosetron. We have no arrangements or covenants that
would trigger acceleration of our lease obligations or long-term liabilities.
Under the terms of our convertible debt agreement, we are precluded from raising
additional capital at less than $9.00 per share, until the earlier to occur of
our disclosure of Phase 3 palonosetron data, anticipated in June 2003, or
December 31, 2003.
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 through December 31, 2003. If the
approval of palonosetron is delayed from our expectations, we may not have
sufficient capital to continue operations as planned. Our future,
noncancellable, contractual commitments, including the anticipated payment to
Helsinn upon approval by the FDA, are summarized in the following table:
2003 2004 2005 2006 2007 Thereafter
------------ ------------ ------------ ------------ ------------ ------------
Lease payments $ 1,397,000 $ 1,879,000 $ 1,754,000 $ 1,482,000 $ 1,504,000 $ 630,000
Approval of palonosetron
payment 11,000,000 -- -- -- -- --
Dainippon payment 4,300,000 -- -- -- -- --
Convertible Debt -- -- -- -- 21,000,000 --
------------ ------------ ------------ ------------ ------------ ------------
Total $ 16,697,000 $ 1,879,000 $ 1,754,000 $ 1,482,000 $ 22,504,000 $ 630,000
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 our Company and our 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 affect our results
include, but are not limited to, the ability of palonosetron, 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 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 99.1 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.
16
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 treasury
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 percentage point change in short-term interest rates
would be approximately $523,000 annually based on our cash, cash equivalents and
marketable investment balances at March 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including
our Chairman and Chief Executive Officer, Charles N. Blitzer, and our Executive
Vice President and 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.
17
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
The Company filed a report on Form 8-K on January 14, 2003 to report
under Item 5 that a notice was sent to the directors and officers of MGI
PHARMA, INC. that a blackout period will be in effect between February
18, 2003 and March 3, 2003 as a result of the merger of the MGI PHARMA,
INC. Retirement Savings Plan and the MGI Funded Retirement Trust into a
single plan.
The Company filed a report on Form 8-K on February 14, 2003 to report
under Item 5 that Charles N. Blitzer, the chairman of the board of
directors and chief executive officer at MGI PHARMA, INC., established a
pre-arranged plan to sell shares of MGI PHARMA, INC. common stock in
accordance with Rule 10b5-1 under the Securities Exchange Act of 1934.
As part of Mr. Blitzer's ongoing program of financial planning and asset
diversification, all 70,058 shares provided for under this plan had been
sold by April 17, 2003.
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: May 6, 2003 By: /s/ William C. Brown
--------------------
William C. Brown,
Chief Financial Officer and Secretary
(principal financial and accounting
officer)
19
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: May 6, 2003 /s/ Charles N. Blitzer
----------------------
Charles N. Blitzer,
Chairman and
Chief Executive Officer
20
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: May 6, 2003 /s/ William C. Brown
--------------------
William C. Brown
Chief Financial Officer
21
MGI PHARMA, INC.
Quarterly Report on Form 10-Q
for the
Quarter Ended March 31, 2003
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