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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

MGI PHARMA, INC.

(Exact name of registrant as specified in its charter)

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes  x            No  ¨

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2003, the last business day of the registrant’s most recent second quarter, was approximately $669,000,000 (based on the closing price of the registrant’s common stock as reported by the Nasdaq National Market on such date).

The number of shares outstanding of each of the registrant’s classes of common stock, as of February 20, 2004, was: Common Stock, $.01 par value; 35,040,426 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Pursuant to General Instruction G the responses to Items 10, 11, 12 and 14 of Part III of this report are incorporated herein by reference to certain information contained in the registrant’s definitive Proxy Statement for its 2004 Annual Meeting of Shareholders to be held on May 11, 2004.

PART I

This Form 10-K 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. Risks and uncertainties that might affect our results are detailed from time to time in the Company’s filings with the Securities and Exchange Commission, and are included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Cautionary Statement of this Form 10-K. The Company does not intend to update any of the forward-looking statements after the date of this Form 10-K to conform them to actual results.

Item 1.    Business

Overview

MGI PHARMA, INC. (“MGI” or “Company”) is an oncology-focused biopharmaceutical company that acquires, develops and commercializes proprietary pharmaceutical products that meet cancer patient needs. It is our goal to become a leader in oncology through application of our three core competencies of oncology product acquisition, development and commercialization, which we apply toward our portfolio of oncology products and product candidates. We acquire intellectual property or product rights from others after they have completed the basic research to discover the compounds that will become our product candidates or marketed products. This allows us to focus our skills on product development and commercialization rather than directly performing drug discovery.

We currently market several cancer-related products in the United States using our 104 person oncology-focused sales organization. (See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Revenues for a breakdown of sales by product over the last three years.) We focus our sales efforts solely within the United States, where we have retained product rights to our currently marketed products and product candidates under development. We create alliances with other pharmaceutical or biotechnology companies for the sales and marketing of our products in other countries. (See Note 13 to the financial statements for further information on revenues attributable to U.S. and foreign customers.)

We began promotion of Aloxi^™ (palonosetron hydrochloride) injection in September 2003 in the United States for the prevention of chemotherapy-induced nausea and vomiting (“CINV”). We market Salagen^® Tablets (pilocarpine hydrochloride) in the United States to oncologists as a treatment for the symptoms of radiation-induced dry mouth in head and neck cancer patients and to rheumatologists as a treatment for dry mouth associated with the autoimmune disease Sjögren’s syndrome. Historically, the cash flow generated from the U.S. sales of Salagen Tablets has been the primary source of funding for our selling, general and administrative activities. Sales of Salagen Tablets accounted for approximately 67 percent of our $39.9 million of product sales in 2003. In March 2001 we began direct promotion, or face-to-face sales calls, of Hexalen^® capsules after acquiring the Hexalen capsules business in November 2000.

Hexalen capsules are a second-line chemotherapy for ovarian cancer patients who are refractory to first-line therapies.

We believe we have a complementary portfolio of oncology product candidates. Our current product candidates are at various stages with an emphasis on advanced stages of development and are intended to have diverse roles in treating cancer patients. Our portfolio includes therapeutic and supportive care product candidates.

On November 17, 2003, we and Helsinn Healthcare SA announced an expansion of our exclusive United States and Canada license and distribution agreement to include rights for the post operative nausea and vomiting (“PONV”) application of Aloxi injection and an oral Aloxi formulation. Phase 2 studies of Aloxi injection for

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prevention of PONV indicated that Aloxi injection was safe and well tolerated. We expect phase 3 trials to begin in 2004 for use of Aloxi injection in the prevention of PONV and the oral Aloxi formulation.

Irofulven, the lead cancer therapy product candidate from our proprietary family of compounds, called acylfulvenes, is in a series of clinical trials. Based on our analysis of results from our trials of irofulven, we believe that irofulven is adequately tolerated for a chemotherapeutic, with evidence of monotherapy activity against a wide range of cancers including liver, pancreatic, ovarian, and prostate tumors. These results have been seen in patients with refractory tumors, meaning tumors that are unresponsive to first-line chemotherapy. Trials in refractory cancer patients are the usual way to begin development of new chemotherapy agents, followed by trials comparing the activity of currently approved therapies to the investigational chemotherapy agent. If the investigational chemotherapy agent establishes improved safety and/or efficacy compared to the established therapy, regulatory approval may be sought.

We also are conducting a series of phase 1 dose escalation trials of irofulven in combination therapy with currently approved cancer agents. We believe that an advantage of combination therapy is the potential to achieve better anti-cancer benefit with an acceptable side effect profile compared to either agent used as single agents. In preclinical studies, irofulven has demonstrated synergistic activity with a number of marketed chemotherapies, meaning the extent of tumor cell death was greater than would be predicted by simply adding the activity of each agent individually.

The most promising combination therapy clinical activity has been observed in colorectal, hormone-refractory prostate, and thyroid cancers. We plan to initiate phase 2 combination studies of irofulven in patients with hormone refractory prostate cancer during 2004 as a potential path toward U.S food and Drug Administration (“FDA”) registration. Throughout phase 1 and 2 monotherapy and combination therapy trials, consistent evidence of clinical activity in hormone refractory prostate cancer (“HRPC”) has been reported, including activity in patients previously exposed to chemotherapy. Phase 2 data presented at the 39^th Annual Meeting of the American Society of Clinical Oncology (“ASCO”) in 2003 indicated that irofulven in combination with prednisone, a steroid, induced decreases of more than 50 percent in prostate specific antigen (“PSA”) levels, in 25 percent of evaluable patients and disease stabilization in 86 percent of patients evaluable for objective tumor response. PSA is a blood marker used by clinicians for treatment decisions. Activity has also been shown in prostate cancer patients treated with irofulven plus the marketed chemotherapies, capecitabine or cisplatin, in phase 1 trials. Following comprehensive analysis of our available data, we are preparing to initiate a phase 2 combination program for irofulven in HRPC patients previously treated with docetaxel.

Most HRPC patients in the United States who are receiving chemotherapy are treated with docetaxel, and we believe significant unmet need exists among prostate cancer patients who have failed hormone therapy and who have progressed on docetaxel.

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The following table summarizes the principal indications and commercial rights for our currently marketed products and development programs.

We were incorporated under the name Molecular Genetics, Inc. in Minnesota in November 1979.

Business Strategy

Our goal is to become a leading oncology-focused biopharmaceutical company serving well-defined markets. The key elements of our strategy are to:

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Cancer Overview

According to the American Cancer Society, or ACS, there are approximately 1.3 million new cases of cancer diagnosed in the United States each year. Cancer is the second leading cause of death in the United States and is projected to result in approximately 556,500 deaths in the United States in 2003.

Cancer is characterized by the uncontrolled growth and spread of abnormal cells. These abnormal or malignant cells accumulate and form tumors that can compress, invade and destroy normal tissue. If malignant cells break away from the primary tumor, they can travel through the bloodstream or lymphatic system to other areas of the body. There they may settle and form new tumors. The spread of a tumor to a new site is called metastasis.

Different types of cancer vary in their rates of growth and patterns of spread, and, consequently, typically respond in varying degrees to different types of treatment. The three most common forms of treatment for cancer in order of their typical use are:

A cancer patient often receives a combination of treatments depending upon the type and progression of the disease. While surgery attempts to remove the cancer from the patient and radiation attempts to kill the cancer cells, there are significant limitations and complications associated with these treatments that result in high rates of treatment failure. This failure is due primarily to metastasis and dose-limiting severe side effects. Chemotherapeutic agents attempt to address the limitations of surgery and radiation, which are local treatments, by interfering with the replication of cancer cells that may have spread to distant sites in the patient. In addition to treatment of their cancer, cancer patients often need supportive care to prevent or treat the side effects of radiation or chemotherapy. Examples include treatment of chemotherapy-induced nausea and vomiting, pain control or stimulation of blood cell growth.

Cancer is a disease characterized by uncontrolled cell replication, which requires cells to first replicate their DNA. Therefore, many chemotherapeutic agents target the cancer cells’ ability to replicate DNA, or following the replication of their DNA, the ability of the cancer cells to divide. Different classes of chemotherapeutic agents are distinguished by their mechanism of action or how they specifically interfere with the cancer cells’ ability to replicate DNA or divide.

When a cancer cell’s DNA is damaged by a chemotherapeutic agent, DNA synthesis is inhibited or cell division is inhibited, and a cellular process known as apoptosis, or programmed cell death, may be activated. Apoptosis of tumor cells can lead to reduction in tumor size or to the arrest of tumor growth. Certain chemotherapeutic agents may act to directly promote apoptosis in tumor cells.

Because different chemotherapeutic agents may target different cellular processes required for DNA replication and cell division or of apoptosis, chemotherapeutic agents are often used in combination to maximize tumor cell death or inhibition of growth, while more effectively managing the side effect profile of the individual agents. Agents that specifically induce apoptosis or interfere with DNA replication or cell division in novel ways are therefore excellent candidates to be used in combination with existing chemotherapy agents.

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One of the principal causes of chemotherapy treatment failure is the development of drug resistance by cancer cells, where cancer cells become resistant or refractory to the intended cytotoxic action of a variety of conventional chemotherapeutic agents. In many cases, resistance developed to a specific chemotherapeutic agent results in multi-drug resistance where the cancer cell becomes cross-resistant to a wide variety of chemotherapeutic agents. Given the current limitations of chemotherapy, there is a clear need for new therapies that are effective against a broad range of resistant and refractory cancers, as well as chemotherapeutics that act by novel mechanisms that can offer benefits as a combination therapy with existing chemotherapeutic agents.

Standard response criteria are used to report the results of oncology clinical trials. In solid tumor clinical trials, a complete response means that all measurable tumor tissue has disappeared and the patient appears to be disease free. A partial response means that measurable tumor tissue has shrunk by at least 50 percent. Stable disease means that the size of the measurable tumor tissue has not shrunk sufficiently to be considered a partial response, but it has not grown more than 25 percent from its smallest size during treatment. Progressive disease means that the tumor has grown by more than 25 percent from its smallest size during treatment.

Developed Products

Chemotherapy-Induced Nausea and Vomiting Overview

Depending on the type of cancer and treatment goals determined by physicians, patients may receive chemotherapy as part of their treatment regimen. One of the most feared side-effects of most chemotherapy treatments is chemotherapy-induced nausea and vomiting, or CINV. In recent years supportive care products to treat the side-effects of chemotherapy, such as CINV, have emerged to improve patient comfort and compliance with treatment regimens. While there are many types of supportive care products for cancer patients, this discussion is focused on the prevention of CINV.

Efforts to treat tumors such as those found in breast and lung cancer have led physicians to administer more aggressive chemotherapy regimens. These cytotoxic agents often cause CINV by triggering release of serotonin from certain cells in the gastrointestinal tract. The released serotonin stimulates nerve receptors that activate the vomiting center via the chemoreceptor trigger zone. When, and if, serotonin stimulates the vagal afferents through the 5-HT₃ receptors, vomiting (emesis) ensues. Although CINV has been managed to a greater degree in recent years, it is estimated that up to 85 percent of cancer patients receiving chemotherapy will experience some degree of emesis if not prevented with an antiemetic. The severity of emesis is dependent upon the type of chemotherapy administered, the dosing schedule of the chemotherapy, how quickly it was administered, and the patient’s age and gender, among other predisposing factors. If emesis is not properly managed, it can cause dehydration and poor quality of life, eventually leading to interruption or discontinuation of chemotherapy. Most chemotherapy regimens are classified as low or moderately-emetogenic and, although the majority of patients receiving moderately-emetogenic chemotherapy are administered a currently available 5-HT₃ antagonist, there remains a need to improve upon the prevention of acute, within 24 hours of chemotherapy, CINV and, especially, delayed, more than 24 hours after chemotherapy, CINV.

Aloxi Injection for the Prevention of Chemotherapy-Induced Nausea and Vomiting

Aloxi (palonosetron hydrochloride) injection is a potent, highly selective serotonin subtype 3, or 5-HT₃, receptor antagonist differentiated by its strong receptor binding affinity and extended half life for the prevention of CINV. We obtained exclusive U.S. and Canadian Aloxi injection license and distribution rights from Helsinn Healthcare SA in April 2001. On July 25, 2003, approval was received from the FDA to market Aloxi injection for the prevention of acute and delayed CINV. We launched Aloxi injection in September 2003 through our 104-person oncology-focused sales organization. Aloxi injection competes in the growing U.S. 5-HT₃ receptor antagonist market estimated to be $1.5 billion in 2003. Of this amount, the market for prevention of CINV is estimated to be approximately $900 million.

A primary cause of CINV is the release of serotonin in the body in response to chemotherapy. 5-HT₃ receptor antagonists, like Aloxi injection, act by binding to serotonin receptors in the peripheral and possibly central

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nervous system involved with nausea and vomiting, thereby blocking serotonin stimulation of these nerves and reducing or eliminating CINV. CINV can be characterized as acute nausea and vomiting occurring zero to 24 hours post-chemotherapy, or delayed nausea and vomiting occurring 24 to 120 hours post chemotherapy. Despite the availability of preventative treatments, including first generation 5-HT₃ receptor antagonists, nearly fifty percent of all patients receiving chemotherapy experience nausea and vomiting.

The results of phase 3 clinical trials demonstrate that Aloxi injection is more effective than ondansetron (Zofran^®), the current 5-HT₃ receptor antagonist market leader by sales, and dolasetron (Anzemet^®), the number two product by sales, for treating CINV due to moderately emetogenic chemotherapy. The most frequently prescribed chemotherapies, including those used to treat the most common cancers such as breast, lung and colon, are considered moderately emetogenic or having a moderate to moderately-high potential to cause nausea and vomiting. Based on the phase 3 trials conducted, Aloxi injection is shown statistically to have greater efficacy or to be as effective as ondansetron and dolasetron for prevention of acute and delayed CINV. Overall, the incidence, pattern, duration, and intensity of adverse reactions were similar among patients treated with Aloxi injection and other 5-HT₃ receptor antagonists. In 633 patients treated with Aloxi injection during phase 3 trials, the most common adverse reactions related to the study drug were headache (9%), and constipation (5%). The table below provides a summary of the efficacy results from these pivotal phase 3 clinical trials, where complete response rate is defined as the proportion of treated patients which had no vomiting and no rescue medication.

* Indicates results that demonstrate statistically greater efficacy than the alternative 5-HT₃ product compared in trial.

We believe that Aloxi injection will be competitive in the U.S. CINV market for 5-HT₃ receptor antagonists given that Aloxi injection:

The potency and extended half-life of Aloxi injection may enable patients and their healthcare providers to control both acute and delayed CINV for several days following chemotherapy with a single fixed intravenous dose. We believe this single fixed dose treatment will be more convenient compared to currently marketed 5-HT₃ receptor antagonists, which usually demand patients to adhere to an oral follow-up therapy regimen for several days.

Salagen Tablets for the Symptoms of Xerostomia and Sjögren’s Syndrome

MGI conceived, developed and markets Salagen Tablets (pilocarpine hydrochloride) in the United States. Salagen Tablets’ clinically-proven efficacy and safety allow it to maintain leadership in the market for treatment

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of chronic dry mouth symptoms associated with head and neck cancer patients treated with radiation and with Sjögren’s syndrome patients.

Salagen Tablets were the first prescription drug approved to treat the symptoms of chronic dry mouth in these patient populations. Chronic dry mouth can be a painful and debilitating condition. Salagen Tablets stimulate the exocrine glands, including the salivary glands, to increase their moisture-producing activity. Saliva is important to oral health and quality of life in general. People with chronic dry mouth can experience difficulty eating and sleeping, rapid tooth decay, periodontal disease and oral infections. Sales of Salagen Tablets in the United States were $26.5 million in 2003. Underlying demand for Salagen Tablets in the United States, as measured by prescription growth, grew at an annual rate of approximately one percent in 2003 over 2002.

Head and neck cancer

Although often effective in treating primary tumors of the head and neck, radiation therapy can permanently damage a patient’s salivary glands, resulting in xerostomia, a significant, chronic reduction of saliva production. Patients using Salagen Tablets for radiation-induced dry mouth typically take one tablet three times per day during the course of radiation therapy, which will last approximately six to eight weeks and may then take it indefinitely to treat the residual dry mouth symptoms that follow radiation therapy.

Salagen Tablets have been shown to stimulate the residual functioning tissue in the damaged salivary glands to increase saliva production and provide patients with a longer-lasting solution for the symptoms of radiation-induced chronic dry mouth. In two 12-week trials that were the primary basis for the approval of Salagen Tablets in 1994, 369 patients who had been treated with radiation therapy for head and neck cancer were assessed for the ability of Salagen Tablets, versus placebo, to relieve the symptoms of dry mouth and to stimulate saliva production. In both studies, patients who received Salagen Tablets experienced significant improvement in their overall condition of dry mouth. Those patients also demonstrated statistically significant improvements in salivary flow compared to the patients receiving placebo tablets. Less than one percent of the patients who received Salagen Tablets withdrew from these studies due to lack of efficacy. Sweating was the most commonly reported side effect; however, less than one percent of patients taking the approved dosing regimen withdrew from the study due to sweating.

Sjögren’s syndrome

Sjögren’s syndrome is a chronic autoimmune disorder in which the body’s own immune system attacks the moisture-producing glands, including the salivary glands, causing them to lose their ability to produce adequate moisture. Symptoms of Sjögren’s syndrome vary in degree and type, but the common component is chronic dryness. Patients can exhibit dry mouth, swollen glands, dry eyes, vaginal dryness and fatigue. The syndrome can be manifested alone (primary Sjögren’s) or in combination with other autoimmune disorders (secondary Sjögren’s). We believe that approximately 50,000 of the 200,000 Sjögren’s syndrome patients could benefit from Salagen Tablets.

In patients with Sjögren’s syndrome-related dry mouth, Salagen Tablets can help to relieve the symptoms of oral dryness. Salagen Tablets can stimulate the salivary glands to increase production of saliva, which is essential to maintaining good oral health. For Sjögren’s syndrome patients, previously available therapies included tear and saliva substitutes. These types of products provide transient relief at best and often fail to prevent complications.

In two 12-week trials that were the primary basis for the supplemental approval of Salagen Tablets for Sjögren’s syndrome in 1998, a total of 629 primary or secondary Sjögren’s syndrome patients were assessed for the ability of Salagen Tablets, versus placebo, to relieve the symptoms of dry mouth and to stimulate saliva production. Patients receiving Salagen Tablets four times a day reported a significant improvement in their symptoms associated with oral dryness, and they also demonstrated a significant increase in saliva for the full 12 weeks. Similar to the Salagen Tablet trials in head and neck cancer patients, less than one percent of the patients

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receiving Salagen Tablets withdrew from the trial due to lack of efficacy. The most common side effect was mild to moderate sweating. Less than four percent of patients taking the approved dosing regimen withdrew from the study due to sweating.

The FDA granted us orphan drug status for Salagen Tablets in 1994 as a treatment for the symptoms of xerostomia induced by radiation therapy in head and neck cancer patients and in 1998 for the symptoms of dry mouth associated with Sjögren’s syndrome. Our orphan drug protection for Salagen Tablets for the treatment of symptoms of radiation-induced xerostomia in head and neck cancer patients expired in March 2001 and our orphan drug protection for Sjögren’s syndrome will expire in 2005. Expiration of our orphan drug protection for Salagen Tablets may result in competition from manufacturers of generic versions of Salagen Tablets.

Hexalen Capsules for Ovarian Cancer

In November 2000, we purchased worldwide rights to Hexalen (altretamine) capsules from MedImmune Oncology, Inc. Hexalen capsules are an orally administered chemotherapy that is approved as a second-line treatment of ovarian cancer. Hexalen capsules are approved for the treatment of ovarian cancer in 21 countries including the United States. Sales of Hexalen capsules in the United States were $2.8 million in 2003.

In the two trials that were the primary basis for its approval in the United States, Hexalen capsules were administered as a single agent for 14 or 21 days of a 28-day cycle. In the 51 patients with measurable or evaluable disease, there were seven complete responses and two partial responses for an overall response rate of 18 percent. The duration of these responses ranged from two months in a patient with a palpable pelvic mass to 36 months in a patient who achieved a complete response. In some patients, tumor regression was associated with improvement in symptoms and performance status. Side effects of Hexalen capsules are comparable to those seen with other approved chemotherapies and include mild to moderate bone marrow suppression, nausea and vomiting, and peripheral sensations of touch.

A more recent trial in 97 ovarian cancer patients, which was published in Gynecologic Oncology (Vol. 82 pages 317-322, 2001), investigated the ability of six months of treatment with Hexalen capsules to extend survival following achievement of a complete response with front-line therapy. At two years, following completion of front-line therapy, patients in this trial demonstrated a higher survival rate compared to that seen in earlier trials.

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Products Under Development

The following table summarizes the status of ongoing development of Aloxi products, irofulven, other acylfulvene analogs, MG98 and DNA methyltransferase inhibitors:

Post Operative Nausea and Vomiting (PONV) Overview

Post operative nausea and vomiting is a common consequence of anesthetic and surgical procedures. Patients undergoing abdominal, gynecological, ear, nose and throat, cardiovascular, and eye surgery are at the highest risk for PONV. If not prevented, PONV can cause hospital re-admissions and increase healthcare costs for patients who undergo surgery. In the United States, more than 40 million surgical procedures are performed annually, and the incidence of PONV is estimated at 25% to 30%. If approved for the prevention of PONV, Aloxi injection would compete in an approximately $400 million PONV market in the United States.

Aloxi (palonosetron hydrochloride) injection is a potent, highly selective serotonin subtype 3, or 5-HT₃, receptor antagonist differentiated by its strong receptor binding affinity and extended half-life and has already been approved for the prevention of chemotherapy-induced nausea and vomiting. We are working with Helsinn Healthcare, the licensor of palonosetron hydrochloride, to design phase 3 programs with a goal to seek FDA approval of Aloxi injection for the prevention of PONV and to develop an oral Aloxi formulation. Phase 3 trials are expected to begin during 2004 for each program.

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Irofulven for Chemotherapy Treatment

Irofulven is our lead cancer therapy product candidate under development and is part of our family of proprietary cancer therapy compounds called acylfulvenes. Acylfulvenes, including irofulven, are semi-synthetic derivatives of the natural product illudin S obtained from the Omphalotus olearius mushroom. We licensed rights to the entire class of acylfulvene agents, including irofulven, from the Regents of the University of California in 1993.

Irofulven:

Mechanism of action studies have indicated that irofulven is rapidly taken up by sensitive tumor cell types where it reacts with tumor cell DNA and protein targets in a novel manner, producing rapid inhibition of DNA synthesis and DNA lesions that are difficult for the tumor cell to repair. The initiation of DNA damage by irofulven begins tumor selective apoptosis that ultimately causes cell death. Clinical trials will determine whether the differential effect of irofulven on tumor cells compared to healthy cells translates into important clinical benefit. We further believe that irofulven could be the first of a series of acylfulvene analogs that merit development as cancer therapies.

We believe irofulven has a unique mechanism of action that makes it well-suited for study in refractory patient populations and in combination with other cancer therapies. Preclinical data and early clinical data demonstrate irofulven’s activity against tumors that are known to be resistant to other therapies. Preclinical studies have also demonstrated the additive or synergistic effect of irofulven with a number of marketed cancer therapies. To date, irofulven has demonstrated a side effect profile relative to certain marketed cancer therapies, which we believe enhances the prospect of irofulven combining well with these cancer therapies. Therefore, we believe that pursuing multiple development paths in different refractory cancers and in combination with other cancer therapies is warranted. Preclinical toxicology studies in rats and dogs and initial clinical data from the dosing of over 1,000 cancer patients with irofulven have demonstrated that irofulven is adequately tolerated as a chemotherapeutic compound and its side effects are reversible. The primary dose-limiting side effect has been bone marrow suppression, usually observed as decreased blood platelet or white cell counts. Other drug-related side effects have been nausea, vomiting, visual disturbances and fatigue. Bone marrow suppression has been controlled through dose adjustments or treatment delays to allow recovery of platelet or white cell counts. Nausea and vomiting are prophylactically controlled with standard, currently available treatments. Visual disturbances and fatigue are managed by dose adjustments and are reversible after discontinuation of treatment.

One method of identifying cancer therapy targets for further human trials is to conduct preclinical tests on mice that have been implanted with human, solid tumors. Testing of irofulven in these disease models has demonstrated dose-related anti-cancer activity, including an increase in survival or tumor regressions in the following types of cancers:

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Irofulven Single Agent Trials

An investigational new drug application for irofulven was submitted to the FDA in September 1995 and phase 1 human safety testing was initiated in December 1995. Phase 1 clinical trials are conducted in small patient populations and are generally not designed to measure efficacy. In October 1997, we initiated a second phase 1 trial to evaluate the effect of longer infusion times. Both initial phase 1 trials completed enrollment in 1998 after establishing a maximum tolerated dose level and a recommended dosing regimen for the initial phase 2 trials.

The investigators participating in our initial phase 1 trials observed anti-cancer activity. Seven out of a total of 32 patients who received daily treatments at a dose between 8 and 18 mg/m² in these trials demonstrated stabilization of disease or tumor shrinkage as a response to irofulven.

In late 1999, we initiated a phase 1 dose optimization trial using intermittent or weekly dosing in patients with malignant solid tumors that were refractory to anti-cancer treatment or for which no standard treatment exists. In this challenging patient population, greatly improved tolerance to acute effects of treatment were observed compared to the five consecutive day dosing schedule used to initiate our phase 2 trials program. In addition, comparable dose intensity was achieved and evidence of anti-cancer activity was observed in this trial. Based on these results and consultation with our panel of outside oncology experts, weekly or bi-weekly dosing schedules will generally be used in ongoing and future trials.

We have tested irofulven in a variety of phase 2 solid tumor trials. We chose to investigate pancreas, ovary, prostate and liver because:

Anti-cancer activity of irofulven has been observed in each of these trials, including objective tumor shrinkage.

To obtain marketing approval for irofulven in the United States, pivotal registration trials will need to be successfully completed and submitted to the FDA. Phase 3 trials typically use survival as the primary endpoint, compared to a randomly determined control group and have a higher number of enrolled patients than in earlier phases.

Irofulven for Pancreatic Cancer

Our initial pivotal registration trial of irofulven was for the treatment of refractory pancreatic cancer. Pancreatic cancer is the fifth most common cause of cancer-related death in the United States, and is an aggressive disease that has few effective treatment options. In February 2001, we began a pivotal phase 3 trial of irofulven for treating refractory pancreatic cancer patients. Initiation of this trial was based on phase 2 results in pancreatic cancer patients, improved acute tolerance with every-other-week dosing of irofulven seen in the dose optimization trial, and discussions with the FDA and our panel of outside oncology experts.

The phase 3 trial was a randomized, multi-center, international trial in advanced-stage pancreatic cancer patients whose disease progressed after treatment with gemcitabine, the current standard-of-care treatment. The primary endpoint was overall survival times following treatment with irofulven compared to continuous infusion 5-fluorouracil (5-FU). Two patients were randomized into the irofulven treatment arm for every patient enrolled in the 5-FU control arm. In April 2002, we stopped enrollment in this phase 3 clinical trial of irofulven for gemcitabine-refractory pancreatic cancer patients. Despite evidence of irofulven activity, preliminary analysis of

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the phase 3 data by an independent Data and Safety Monitoring Board, or DSMB, indicated that the comparator agent 5-FU demonstrated a greater than expected survival benefit, making it statistically improbable that the final study results could achieve our planned objectives for the trial. For this reason, we will no longer pursue this specific indication for irofulven monotherapy in gemcitabine-refractory pancreatic cancer. Following closure of the trial to enrollment, we continued to make irofulven available to the remaining enrolled pancreatic cancer patients in this trial who had experienced clinical benefit.

Irofulven Combination Trials

We believe that an advantage of combination therapy is the potential to achieve enhanced anti-cancer benefit with an acceptable side effect profile compared to either agent used alone. Because irofulven has a unique mechanism of action, retains activity against tumors that are known to be resistant to other cancer therapies and in preclinical trials demonstrated additive or synergistic effects in combination with a number of marketed chemotherapies, we are conducting drug combination trials with irofulven. The first clinical step in exploring combination therapy is to conduct phase 1, dose-ranging trials to determine the maximum tolerated dose of both drugs together. The anti-tumor activity in a completed phase 1 trial of irofulven in combination with irinotecan led to the initiation of a phase 2 trial of irofulven with irinotecan in patients with advanced gastrointestinal tumors. We are currently conducting four dose-ranging trials of irofulven in combination with gemcitabine, capecitabine, docetaxel, and oxaliplatin. Data from these trials and possible follow-up phase 2 trials in specific tumor types will be evaluated to determine whether further drug combination development with these marketed therapies is warranted.

Irofulven for Hormone Refractory Prostate Cancer

Throughout phase 1 and 2 monotherapy and combination therapy trials, consistent evidence of clinical activity in hormone refractory prostate cancer, or HRPC, has been reported, including activity in patients previously exposed to chemotherapy. Phase 2 data presented at the 39^th Annual Meeting of the American Society of Clinical Oncology (ASCO) in 2003 indicated that irofulven in combination with prednisone, a steroid, induced decreases of more than 50 percent in prostate specific antigen (PSA) levels in 25 percent of evaluable patients and disease stabilization in 86 percent of patients evaluable for objective tumor response. PSA is a blood marker used by clinicians for treatment decisions. Activity has also been shown in prostate cancer patients treated with irofulven plus the marketed chemotherapies, capecitabine or cisplatin, in phase 1 trials. Following comprehensive analysis of our available data, we are preparing to initiate a phase 2 combination program for irofulven in HRPC patients previously treated with docetaxel. Most HRPC patients in the United States who are receiving chemotherapy are treated with docetaxel, and we believe significant unmet need exists among prostate cancer patients who have failed hormone therapy and who have progressed on docetaxel.

NCI Clinical Trials

Under a 1996 Clinical Trials Agreement, the National Cancer Institute, or NCI, is sponsoring and overseeing, at its own expense, a clinical trials program using irofulven in its network of designated cancer centers and other institutions. We have agreed to provide drug product for these trials and will have access to any resulting data. We intend to utilize the results from NCI-sponsored trials to further characterize the safety of irofulven as well as evaluate the potential of irofulven in additional refractory solid tumor types. The NCI has sponsored 14 trials of irofulven in a range of solid tumor cancers and leukemias and two trials are ongoing.

Other Acylfulvene Analogs

In addition to irofulven, we have obtained license rights to acylfulvene analogs. The synthesis and the initial biological testing of over 100 of these analogs has been performed at the University of California, San Diego, or UCSD. At UCSD, both in vitro and in vivo anti-tumor activity has been demonstrated for a significant number of the acylfulvene analogs. Further testing by the NCI of some of these analogs has confirmed broad spectrum anti-

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tumor activity. The broad-spectrum anti-tumor activity of the acylfulvene analogs suggests that this class of compounds has the potential to produce additional clinical development candidates. We are currently evaluating these analogs for further preclinical development.

MG98 and Small Molecule DNA Methyltransferase Inhibitor Programs

In August 2000, as part of our strategy to expand our portfolio of marketed and development stage anti-cancer products, we entered into an exclusive license, research and development agreement with MethylGene Inc. for North America rights to its proprietary anti-cancer product candidate MG98 and its DNA methyltransferase small molecule inhibitor program. Included within our license rights is a United States patent on a method for reversing the tumor-causing state of a cell by administering an agent that corrects an aberrant methylation pattern in the DNA of the cell. MethylGene is a chemistry-driven, rational drug design and development company focused on the inhibition of enzyme targets that are associated with disease. It pursues two approaches to enzyme inhibition: rationally designed mRNA inhibitors that block the production of enzymes and rationally designed small molecule inhibitors that block the activity of enzymes.

In a December 2003 amendment to the License Agreement, MethylGene acknowledged full satisfaction of our payment obligations and suspended further payment obligations by us pending a planned June 2004 data review of the small molecule inhibitor program and following completion by MethylGene of a planned clinical trial with MG98. If we resume development, our financial responsibilities under the License Agreement would also resume.

Sales and Marketing

We currently promote our products in the United States directly to medical oncologists, hematologic oncologists, radiation oncologists, rheumatologists, internal medicine physicians, and other physician specialists using our 104-person oncology-focused sales organization. In 2003, we expanded the sales organization in preparation for the commercial launch of Aloxi injection. Our sales organization will continue to be used to promote our current and future oncology products in the United States.

In addition, we have an in-house marketing, manufacturing and commercial management staff of 38 persons who support our commercial activities. We use a variety of marketing programs to reach our targeted audiences, including distribution of product-specific brochures in face-to-face meetings and direct mailings, exhibits at select medical meetings and journal advertising. Our sales and marketing organizations are highly trained and experienced.

We use international collaborations to commercialize our products outside the United States. We currently have agreements with Novartis Pharma AG (formerly CIBA Vision AG), Kissei Pharmaceutical Co., Ltd. and Pfizer Inc. to develop and commercialize Salagen Tablets for the European, Japanese and Canadian markets, respectively. Under these agreements, we receive payments based on development milestones and/or product sales in the pertinent territory. We also have distribution agreements for Salagen Tablets in Israel, Korea, Singapore, Taiwan, Hong Kong, Colombia, Thailand, and Malaysia. We receive payments based upon product sales to these distributors.

Research and Development

We maintain active drug development programs for our new drug candidates and commercialized products. Current drug development efforts are primarily focused on Aloxi products and irofulven. Licensing development milestone payments for Aloxi products are recognized as research and development expense. We also participate in post-marketing studies to support the continued commercialization of Aloxi injection, Salagen Tablets and Hexalen capsules. We seek product candidate acquisitions in order to expand our development pipeline.

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We have incurred significant research and development costs in the past and believe that substantial capital resources will be required to support current and future development programs. We spent approximately $36.1 million in 2001, $32.2 million in 2002, and $50.1 million in 2003 on research and development. In recent years, 74 to 80 percent of our research and development expense was attributable to contracts with third parties. Approximately 80 percent of our research and development expense in 2003 was attributable to third party services, license fees or FDA user fees. Funding for research and development is expected to come from internally generated funds, joint ventures, strategic alliances or other sources of capital, including equity or debt offerings.

Successful drug development requires a broad spectrum of scientific, clinical and product development expertise. As part of our strategy, we do not directly conduct basic research or traditional drug discovery activities because we primarily intend to acquire rights to product candidates that are in the human clinical stage of development. This approach substantially reduces our research risk due to product failure and eliminates the need for direct investment in discovery research laboratories and personnel.

We manage our human clinical development of product candidates by selectively outsourcing certain activities. We have in-house medical communications capabilities and regulatory affairs expertise which allow us to maintain support systems, monitor adverse drug experience reporting, and file new drug applications with the FDA. We outsource other development activities, such as the conduct of preclinical studies and clinical trials, product formulation and production of clinical supplies.

We expect to continue to contract with third parties until it is necessary and economical to add these capabilities internally. As of December 31, 2003, we employed 55 persons in research and development, regulatory affairs and product formulation.

International Alliances

Dainippon Pharmaceutical Co., Ltd.

During 1995, we entered into a cooperative development and commercialization agreement with Dainippon, whereby we granted Dainippon an exclusive license to develop and commercialize acylfulvenes, including irofulven, in Japan. Dainippon granted us an irrevocable, exclusive, royalty-free license allowing us to use any technology or data developed by Dainippon relating to the acylfulvenes. Dainippon and MGI agreed in the first quarter of 2003 to terminate this agreement effective August 2003. Under the agreement, Dainippon paid initial and continuing quarterly milestone payments totaling $11.1 million through April 2000. From April 2000 through January 2002, $4.3 million in deposit payments were received from Dainippon, which we repaid to Dainippon in August 2003.

Kissei Pharmaceutical Co., Ltd.

In December 1994, we entered into a license agreement with Kissei under which we granted to Kissei an exclusive, royalty-bearing license to develop and commercialize Salagen Tablets in Japan. Kissei granted back to us an irrevocable, non-exclusive, royalty-free license allowing us to use any technology or data developed by Kissei relating to Salagen Tablets. Kissei paid us an initial license fee upon execution of the agreement and agreed to pay us additional milestone payments and we have received all $2.5 million of the required license fees and milestone payments. In addition, Kissei agreed to pay us royalties equal to a certain percentage of net sales revenues, subject to annual minimum requirements. In May 2003 Kissei filed a submission to the Japanese regulatory authorities for the use of Salagen Tablets in treating the symptoms of radiation-induced xerostomia in head and neck cancer patients. The product is currently undergoing regulatory review for marketing approval in Japan. Unless earlier terminated by the parties for cause or by mutual agreement, the term of the agreement is for ten years from the date Salagen Tablets are first launched in Japan. Thereafter, the agreement automatically renews for additional one-year periods.

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Novartis Pharma AG (formerly CIBA Vision AG)

In April 2000, we entered into a license agreement with Novartis under which we granted Novartis an exclusive, royalty-bearing license to develop and commercialize Salagen Tablets in Europe, Russia and certain other countries. Novartis granted to us an irrevocable, non-exclusive, royalty-free license allowing us to use any technology or data developed by Novartis relating to Salagen Tablets. Simultaneous with this agreement, the previous agreements with Chiron B.V. for Salagen Tablet rights in Europe were terminated. Novartis paid us $1.5 million of net license fees upon completion of transfer activities. Additional milestone payments may be received if specified sales targets are achieved. Further, Novartis agreed to pay us royalties equal to a percentage of net sales revenues. Unless earlier terminated by the parties, the term of the agreement is for 12 years and may be extended for additional two-year periods.

In addition, we simultaneously entered into a supply agreement with Novartis under which we agree to supply Novartis’ requirement of Salagen Tablets until the termination of the license agreement with Novartis.

Pfizer Inc. (formerly Pharmacia Corporation)

In November 1994, we entered into a license agreement with Pfizer Inc, or Pfizer, under which we granted to Pfizer an exclusive, royalty-bearing license to develop and commercialize Salagen Tablets in Canada. Pfizer granted to us an irrevocable, non-exclusive, royalty-free license allowing us to use any technology or data developed by Pfizer relating to Salagen Tablets. Pfizer paid us an initial license fee of $75,000 upon execution of the agreement and agreed to pay us royalties equal to a percentage of net sales revenues, subject to annual minimum requirements. In addition, we agreed to pay Pfizer royalties if we promote Salagen Tablets in Canada in the first or second year following termination of the agreement. Either party may terminate the agreement upon one-year prior written notice. Thereafter, for an additional two-year period we would pay a portion of Salagen Tablet net sales in Canada to Pfizer. In addition, we simultaneously entered into a supply agreement with Pfizer under which we agree to supply Pfizer’s requirement of the product until the termination of the License Agreement with Pfizer.

Technology In-licensing Agreements

Acylfulvenes, Including Irofulven

In August 1993, we entered into an exclusive license agreement with the Regents of the University of California. Under the agreement, the university granted to us an exclusive, worldwide, royalty-bearing license for the commercial development, manufacture, use and sale of acylfulvene analogs, methods of synthesizing acylfulvene analogs and methods of treating tumors using acylfulvene analogs. We have been developing irofulven under this license. We paid the university an initial license fee upon execution of the agreement and agreed to pay license maintenance fees on each anniversary of the execution of the agreement until we submit the first NDA relating to the analogs to the FDA. In addition, we make development milestone payments prior to commercialization of the product. We have also agreed to pay royalties on net sales revenues, subject to annual minimum requirements. Through December 31, 2003, we have made approximately $850,000 in cash payments to the university under this agreement. Unless earlier terminated by the parties, the term of the agreement extends until the later of: (a) the expiration of the last-to-expire patent we have licensed; or (b) ten years from the date of the first commercial sale of products developed from the acylfulvene analogs.

MG98 and Other DNA Methyltransferase Inhibitors

In August 2000, we entered into a license, research and development agreement with MethylGene for two anti-cancer product programs. Under the agreement, MethylGene granted to us an exclusive, royalty-bearing license to develop and commercialize MG98 in North America for all therapeutic indications.

The agreement also included similar rights to small molecule DNA methyltransferase inhibitors for oncology and rheumatology indications. In exchange for the licenses, we agreed to:

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Through the time of the initial regulatory approvals in the United States and Canada, the initial and milestone cash payments would aggregate to approximately $16 million for each of the two development programs. Unless earlier terminated by the parties, the term of the agreement extends until the later of: (a) the expiration of the last-to-expire patent we have licensed; or (b) ten years from the date of the first commercial sale of any licensed product. Simultaneous with the execution of the license agreement, we entered into a stock purchase agreement and have purchased the $6.8 million of MethylGene common stock required by this agreement.

In a December 2003 amendment to the License Agreement, MethylGene acknowledged full satisfaction of our payment obligations and suspended further payment obligations by us pending a planned June 2004 data review of the small molecule inhibitor program and following completion by MethylGene of a planned clinical trial with MG98.

Aloxi Products

In April 2001, we obtained from Helsinn Healthcare SA (“Helsinn”) the exclusive oncology license and distribution rights for Aloxi injection in the United States and Canada. Aloxi injection is a differentiated 5-HT₃ antagonist for the prevention of chemotherapy-induced nausea and vomiting. Under the terms of the agreement, we have made an aggregate of $38 million in license payments as of December 31, 2003. We have also agreed to pay royalties and supply fees based on net sales revenues.

We expanded our agreement with Helsinn in November 2003 to include rights for the post operative nausea and vomiting (PONV) application of Aloxi injection and an oral Aloxi formulation and extended the term through December 31, 2015. Under the terms of the expanded agreement, we made initial payments to Helsinn aggregating to $22.5 million in the fourth quarter of 2003 and the first quarter of 2004. We expect to make additional payments totaling $25 million over the course of the next several years upon achievement of certain development milestones leading up to the approvals of Aloxi injection for prevention of PONV and an oral Aloxi formulation in the United States. We will also pay royalties and product supply fees based upon net sales. Helsinn will continue to fund and conduct all development of Aloxi products for the new applications and will supply finished product for commercialization.

Mylocel Tablets

In January 2001, MGI entered into an agreement with Barr Laboratories, Inc. for the exclusive marketing and distribution rights for Mylocel^™ (hydroxyurea) tablets in the United States. Mylocel tablets were approved for the treatment of melanoma, resistant chronic myelocytic leukemia, and recurrent, metastatic, or inoperable carcinoma of the ovary. MGI began marketing and distributing Mylocel tablets in March 2001. Under the terms of the agreement, Barr Laboratories received royalty payments based upon the product contribution derived from MGI’s sale of product. This agreement was terminated in April 2002.

Hexalen Product Purchase Agreement

In November 2000, we purchased certain assets and assumed certain liabilities related to the Hexalen capsules business from MedImmune Oncology, Inc. Hexalen (altretamine) capsules are an orally administered cytotoxic drug that was approved for treatment of ovarian cancer in patients with persistent or recurrent disease following first-line therapy with Platinol and/or alkylating agent-based combination chemotherapy. Hexalen capsules are approved for the treatment of ovarian cancer in the United States and a number of other countries. We purchased

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worldwide rights subject to existing distribution agreements for territories outside the United States. The purchase price of $7.2 million has been fully paid and royalties are due on net sales or distribution margins.

Distribution Agreements

We entered into distribution agreements granting a license to the following exclusive, independent distributors to promote and distribute Salagen Tablets in the designated territories:

We have distribution agreements granting a license to promote and distribute Hexalen capsules in designated territories.

The distributors are required to obtain local authorizations in connection with the import/export and distribution of product in their designated territory. We receive product supply payments and may receive distribution initiation fees.

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Manufacturing

We do not own or operate any facilities for the manufacture of our products or product candidates. Our marketed and development-stage pharmaceuticals are manufactured under agreements with third party manufacturers. Our manufacturing and quality assurance personnel authorize, audit and approve virtually all aspects of the manufacturing process. In-process and finished product inventories are analyzed through contract testing laboratories and the results are reviewed and approved by us prior to release for further processing or distribution. We intend to carry at least a six-month inventory of each of our marketable products.

Aloxi Injection

Palonosetron hydrochloride, the active pharmaceutical ingredient for Aloxi products, is manufactured by Helsinn. Helsinn is responsible for the worldwide requirements of both the active pharmaceutical ingredient and finished drug product, a sterile formulation in a single-use vial. Helsinn contracts with Cardinal Healthcare, Inc. for filling vials with a solution of the active pharmaceutical ingredient. Helsinn Birex Pharmaceuticals Ltd., a unit of Helsinn, located in Ireland, finishes (labels and packages) the vials for distribution.

Salagen Tablets

We obtain pilocarpine hydrochloride, the active pharmaceutical ingredient for the manufacture of Salagen Tablets, under an exclusive supply and license agreement with Merck KgaA. The exclusive term of this agreement ends on December 31, 2007, and may be extended for additional five-year terms unless earlier terminated by the parties. Upon termination of the exclusive term, the agreement may continue for an indefinite period on a non-exclusive basis. The refined raw material is a semi-synthetic salt of an extract from plants grown and processed exclusively on carefully managed plantations in South America. We believe that the supply of pilocarpine hydrochloride is adequate for the foreseeable future. Salagen Tablets are currently manufactured for us by Patheon Inc. The initial term of the Patheon agreement was four years, with automatic renewal periods of three years. This agreement may be terminated by either party upon three years written notice. The current agreement’s renewal expires November 19, 2005.

Hexalen Capsules

Pharmaceutical grade altretamine for the manufacture of Hexalen capsules is obtained from Heumann Pharma GmbH, a wholly owned subsidiary of Pfizer. Heumann Pharma supplies the bulk active drug substance pursuant to an agreement that we assumed. Hexalen capsules are currently manufactured pursuant to an agreement with aaiPharma Inc. that expires March 8, 2005 (three year initial term). Absent written notice of termination by either party at least 90 days in advance of a renewal date, the term of the agreement is automatically renewed for annual periods on January 1 of each year.

Didronel IV Infusion

Pharmaceutical grade etidronate disodium for the manufacture of Didronel IV infusion is obtained under a supply agreement with Procter & Gamble Pharmaceuticals, Inc. from OSG Norwich, Inc. We may extend these rights two years to December 31, 2006. Didronel IV infusion is currently manufactured at Akorn Inc. (formerly known as Taylor Pharmaceuticals, a unit of Akorn Inc.). Ben Venue Laboratories, Inc., a unit of Boehringer Ingelheim Pharmaceuticals, Inc., is an approved alternate contract manufacturer of Didronel IV infusion.

Development-Stage Pharmaceuticals

As a regular part of our business, we establish contract manufacturing arrangements for our development-stage pharmaceuticals. These arrangements include purchase orders, supply agreements and development-scale manufacturing contracts.

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Irofulven

In April 2000, we entered into a development agreement with Abbott Laboratories, Inc. for scale-up of the current fermentation process used to produce raw material for the production of irofulven. The agreement also gives Abbott the opportunity to demonstrate its ability to produce the raw material on a commercial scale. Irofulven is synthesized at Regis Technologies, Inc. from the purified raw material produced by Abbott. Regis has successfully demonstrated synthesis of irofulven’s active pharmaceutical ingredient at commercial scale. Regis has the capacity to produce irofulven to meet our long-term worldwide requirements. Irofulven injection, the sterile finished pharmaceutical dosage form, is manufactured by Cardinal Healthcare, Inc., or Cardinal. Cardinal is capable of producing the finished packaged drug product, a liquid formulation in a single-use vial, at commercial scale in the quantities consistent with our long term production requirements for worldwide distribution. Clinical test articles are currently stored, labeled and distributed by McKesson BioServices, Inc.

MG98

The manufacture of the MG98 oligonucleotide is performed under a contract between MethylGene Inc., and Boston Bioservices, Inc., a unit of Avecia. The sterile clinical test article is manufactured by Cardinal.

Patents and Proprietary Rights

We rely on patent rights, orphan drug designation, trade secrets, trademarks, and nondisclosure agreements to establish and protect our proprietary rights in our products in both the United States and selected foreign jurisdictions. Current patent and orphan drug status with respect to certain of our products is as follows:

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The term of a U.S. patent issued from an application filed before June 8, 1995 is the longer of 17 years from its issue date or 20 years from its effective filing date. The term of a U.S. patent issuing from an application filed on or after June 8, 1995 is 20 years from its effective filing date. All of the U.S. patents covering irofulven or its use were issued from applications filed before June 8, 1995. The Drug Price and Competition and Patent Term Restoration Act of 1984, the Generic Animal Drug Act, and the Patent Term Restoration Act generally provide that a patent relating to, among other items, a human drug product, may be extended for a period of up to five years by the U.S. Commissioner of Patents and Trademarks if the patented item was subject to regulatory review by the FDA before the item was marketed. Under these acts, a product’s regulatory review period (which consists generally of the period from the time when the exemption to permit clinical investigations becomes effective until the FDA grants marketing approval for the product) forms the basis for determining the length of the extension an applicant may receive. There can be no assurance that any issued patents will be extended in term.

We have licensed or obtained patent protection for palonosetron hydrochloride, irofulven and the other acylfulvene analogs. Patent positions of pharmaceutical companies are generally uncertain and involve complex legal and factual issues. Therefore, although we believe our patents are valid, we cannot predict with any precision the scope or enforceability of the claims. In addition, there can be no assurance that our patent applications will result in issued patents, that issued patents will provide an adequate measure of protection against competitive technology which could circumvent such patents, or that issued patents would withstand review and be held valid by a court of competent jurisdiction. Furthermore, there can be no assurance that infringement of any issued patents cannot be circumvented by others.

Orphan drugs are currently provided seven years of marketing exclusivity for an approved indication following approval to market by the FDA Orphan drug designation for our products does not, however, insulate us from other manufacturers attempting to develop an alternate drug for the designated indication, or the designated drug for another, separate indication.

We also rely on trade secrets and continuing innovation that we seek to protect with reasonable business procedures for maintaining trade secrets, including confidentiality agreements with our collaborators, employees and consultants. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach or that our trade secrets and proprietary know-how will not otherwise be known or be independently discovered by competitors.

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In addition to the patents which form the basis of the pharmaceutical focus of this company, we also own four U.S. patents which claim maize plants that are resistant to certain herbicides and that also claim methods for producing such resistant plants. These patents were issued between 1988 and 1998. While these patents have been licensed to BASF (originally licensed to American Cyanamid), we may still incur expenses associated with any litigation, interference or other administrative proceedings related to these patents.

Trademarks

We have obtained registration of the Salagen trademark in the United States and certain foreign jurisdictions. In addition, we have been assigned the Hexalen trademark in the United States and certain foreign jurisdictions, we use the federally registered Didronel trademark under a license with Procter & Gamble and we use the Aloxi trademark under a license with Helsinn Healthcare SA.

Competition

The pharmaceutical industry is intensely competitive, based mostly on product performance and pricing. Many members of the industry have resources far greater than we do, providing them with potentially greater flexibility in developing and marketing their products. While we will seek to protect our products from direct competition through filing patents, seeking marketing exclusivity under the Orphan Drug Act, and maintaining technical information as trade secrets, there is no way to protect us from competition from products with different chemical composition or products made using different technology.

Cevimeline hydrochloride, owned by Snow Brand Pharmaceuticals, Inc. and marketed by Daiichi Pharmaceuticals in the United States, was approved in January 2000 by the FDA as a treatment for dry mouth symptoms associated with Sjögren’s syndrome. We cannot estimate what ultimate effect this competing compound will have on the overall size of the Sjögren’s syndrome market and future demand for Salagen Tablets, but modest growth in prescription of Salagen Tablets continued in 2003. A product marketed by MedImmune, Inc., amifostine, was approved in June 1999 by the FDA for reducing the incidence of radiation-induced dry mouth in post-operative head and neck cancer patients. Salagen Tablets are approved in part for the treatment of dry mouth symptoms resulting from radiation used to treat head and neck cancer patients. Due to the more restricted patient population for amifostine, as well as other factors such as price and invasive administration, we currently believe that amifostine will not have a significant impact on sales of Salagen Tablets. We are aware of other products currently under development that may compete with Salagen Tablets.

The exclusivity period afforded by orphan drug status for Salagen Tablets as a treatment for symptoms of radiation-induced xerostomia in head and neck cancer patients ended in March 2001. Competitors could develop and introduce generic drugs comparable to Salagen Tablets, or drugs or other therapies that address the underlying causes of the symptoms that Salagen Tablets treat. There can be no assurance that we will be successful in our plan to gain product specific protection for each of our pharmaceuticals or that developments by others will not render our products noncompetitive or obsolete.

Hexalen capsules are approved in the United States for the treatment of ovarian cancer in patients with persistent or recurrent disease following first-line therapy with certain other chemotherapies. Other chemotherapies are also used for second-line treatment of ovarian cancer and are marketed by pharmaceutical companies with greater resources than we have. Further, competitors could develop and introduce generic drugs that are comparable to Hexalen capsules.

Aloxi injection was the fourth 5-HT₃ antagonist approved for marketing in the United States. The companies that market the other 5-HT₃ antagonists have far greater resources than we have. Further, there is no certainty that the patent protection afforded palonosetron will be effective in keeping generic equivalents from entering the market.

Many companies of all sizes, including large pharmaceutical companies as well as specialized biotechnology companies, are developing cancer therapy drugs that will compete with irofulven, if it is approved for sale. There

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are also a number of products already on the market that will compete directly with irofulven if it is approved. In addition, colleges, universities, governmental agencies and other public and private research institutions will continue to conduct research and may develop new cancer therapies which would render our cancer therapy drug candidates obsolete or non-competitive. Many of our competitors in the cancer therapy market also have substantially greater financial, research and development, human and other resources than we do.

Government Regulation

Our research and marketing activities are subject to significant regulation by numerous governmental authorities in the United States and other countries. Pharmaceutical products intended for therapeutic use in humans are governed by FDA regulations in the United States and by comparable regulations in foreign countries. The process of completing clinical testing and obtaining FDA approval for a new drug product requires a number of years and the expenditure of substantial resources without any assurance that approval for marketing will be granted.

The FDA has established mandatory procedures to regulate the manufacturing and testing process regarding the identity, strength, quality and purity of a product. Following initial formulation, the steps required before any new prescription pharmaceutical product may be marketed in the United States include (1) preclinical laboratory and animal tests; (2) submission to the FDA of an investigational new drug application, or IND; (3) adequate and well-controlled clinical trials to establish the safety and efficacy of the drug; (4) submission of a new drug application, or NDA and (5) FDA review and approval of the NDA prior to any commercial sale.

Preclinical studies are conducted in the laboratory and in animal model systems to gain information on the drug’s efficacy, mode of action, and to identify any significant safety problems. The results of these studies are submitted to the FDA as part of the IND. Testing in humans may commence 30 days after the IND has been filed unless the FDA issues a clinical hold. Additional animal studies may be performed throughout the development process.

A three-phase clinical program is usually required for FDA approval of a pharmaceutical product, unless accelerated approval is granted. Phase 1 clinical trials are conducted to determine the safety profile, including the safe dosage range, metabolism and pharmacologic action of the product, and, if possible, to gain early evidence on efficacy. Although most phase 1 trials are conducted with healthy volunteers, phase 1 cancer trials are conducted with cancer patients. Following establishment of a safe dose from phase 1 studies, a phase 2 clinical program is conducted for dose-ranging and to assess the safety and efficacy of the product in patients with the disease being studied. Phase 3 confirmatory clinical trials are conducted on patients more representative of the intended patient population in terms of medical treatment, age groups, gender and ethnicity. Data from the larger phase 3 program is to provide adequate statistical evidence of safety and efficacy necessary to evaluate the overall benefit and risk relationship in the target patient population. Phase 2 and phase 3 trials are usually multi-center trials in order to achieve greater statistical validity and to have data from a broader patient population that is more representative of the intended patient group. Phase 4, or post-approval trials, may be required under accelerated approval or to provide additional data on safety or efficacy of the product.

Upon completion of clinical testing, and with data successfully demonstrating that the product is safe and effective for a specific indication, an NDA may be filed with the FDA. The NDA contains all the scientific evidence including product formulation, manufacturing, control information, preclinical and clinical data. FDA approval of the NDA is required before the applicant may market the new product.

Even after initial FDA approval has been obtained, further studies may be required to provide additional data on safety or efficacy for current indications, or to obtain approval for uses other than those for which the product was initially approved. Moreover, such approval may entail limitations on the indicated uses for which a drug may be marketed. Even if FDA approval is obtained, there can be no assurance of commercial success for any product. Post-marketing testing may be required, and surveillance programs such as reporting adverse events are

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required. The FDA may require withdrawal of an approved product from the market if any significant safety issues arise while a product is being marketed. In addition, before, during and after the process of approval, our prescription drug products must all be manufactured in accordance with current good manufacturing practices as set forth by the FDA. Marketing of products is also regulated by the FDA.

The orphan drug provisions of the Federal Food, Drug, and Cosmetic Act provide incentives to drug and biologics manufacturers to develop and manufacture drugs for the treatment of rare diseases or conditions, currently defined as a disease or condition that affects fewer than 200,000 individuals in the U.S. or, for a disease or condition that affects more than 200,000 individuals in the U.S., where the sponsor does not realistically anticipate that revenue generated from sales of the product will exceed the cost of its development. Under these provisions, a manufacturer of a designated orphan product can seek tax benefits, and the holder of the first FDA approval of a designated orphan product will be granted a seven-year period of marketing exclusivity for that product for the orphan indication. While the marketing exclusivity of an orphan drug would deter other sponsors from obtaining approval of the same compound for the same indication, it would not prevent other types of drugs from being approved for the same indication.

The health care industry is changing rapidly as the public, government, medical professionals and the pharmaceutical industry examine ways to broaden medical coverage while controlling health care costs. Potential approaches that may affect us include managed care initiatives, pharmaceutical buying groups, formulary requirements, various proposals to offer an expanded. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 together with rulemaking by the Centers for Medicare and Medicaid Services (CMS) require a number of changes in Medicare practices, including reimbursement. The changes made to date, are not expected to have an adverse affect on our operations or sales, but we cannot predict the impact, if any of future reimbursement changes.

Federal, state and local environmental laws and regulations do not materially affect our operations and we believe that we are currently in material compliance with such applicable laws and regulations.

Employees

As of February 5, 2004, we had 225 employees. Of our employees, 142 are engaged in our marketing, selling and manufacturing effort, 55 are involved in pharmaceutical development, including regulatory affairs and product formulation, and 28 are in other management or administrative positions. None of our employees is represented by a labor union or is subject to a collective bargaining agreement. We believe that our relations with our employees are satisfactory.

Available Information

Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through MGI’s website (www.mgipharma.com) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the Securities and Exchange Commission.

Item 2.    Properties

We currently lease approximately 75,000 square feet of office space for our current headquarters in Bloomington, Minnesota for approximately $118,000 per month. The initial term of this lease expires in May 2008, with two options for renewal, each for an additional three-year period. We also lease approximately 27,000 square feet of office space (our former headquarters) in Bloomington, Minnesota, for $27,000 per month. The initial term of this lease expires in July 2005, with an option for renewal. We have subleased this former headquarter space and we do not expect to recognize future expense related to this lease.

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Item 3.    Legal Proceedings

None.

Item 4.    Submission of Matters to a Vote of Security Holders

None.

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PART II

Item 5.    Market for Registrant’s Common Stock and Related Stockholder Matters

Our common stock trades on the NASDAQ National Market under the symbol “MOGN.” As of February 20, 2004, we had 719 shareholders of record and 35,040,426 shares of common stock outstanding. We have never paid cash dividends on our common stock and have no present intention of paying cash dividends on our common stock.

The following table lists the high and low trading prices for our common stock as reported by the NASDAQ National Market during the quarters listed. Prices represent transactions between dealers and do not reflect retail markups, markdowns, or commissions, and may not necessarily represent actual transactions.

In August 2003, we completed a sale of 5,060,000 newly issued shares of common stock in a follow-on public offering at $35.50 per share. Our net proceeds, after fees and expenses, were $168,581,477.

On January 5, and February 6, 2004, an aggregate of 2,571,428 shares of our common stock were issued to Deerfield International Limited and Deerfield Partners, L.P. pursuant to their election to, first partially and then fully, convert our 3% convertible subordinated notes issued in December 2002 for gross proceeds of $21 million. Also on February 6, 2004, the common stock purchase warrants that were issued in connection with that December 2002 financing were exercised. We received $3,850,000 upon the exercise of the warrants and issued 400,000 common shares.

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Item 6.    Selected Financial Data

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Item 7.    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. Our marketed products include Aloxi^TM (palonosetron hydrochloride) injection, Salagen^® Tablets (pilocarpine hydrochloride), and Hexalen^® (altretamine) capsules. Given the large market in which Aloxi injection competes and its favorable clinical profile, sales of Aloxi injection are expected to substantially exceed 2004 sales of our other current products. In the third quarter of 2003, Aloxi injection was approved by the U.S. Food and Drug Administration (“FDA”) for the prevention of acute and delayed chemotherapy-induced nausea and vomiting (“CINV”) and we began promoting Aloxi injection in September 2003. We obtained exclusive U.S. and Canadian license and distribution rights to Aloxi injection from Helsinn Healthcare SA (“Helsinn”) in May 2001. In November 2003, we and Helsinn expanded the agreement to include rights for the prevention of postoperative nausea and vomiting (“PONV”) application of Aloxi injection and an oral Aloxi formulation.

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 Sjögren’s syndrome, an autoimmune disease that damages the salivary glands. Sales of Salagen Tablets in the United States accounted for 67 percent of our product sales during 2003. Hexalen capsules is an orally administered chemotherapeutic agent approved in the United States for treatment of refractory ovarian cancer patients.

Our current product development efforts include preclinical and clinical programs for the acylfulvenes, including irofulven, our novel anti-cancer agent with demonstrated activity in a variety of cancers and a unique mechanism of action. We have also funded development of MG98 and inhibitors of DNA methyltransferase for North American markets. DNA methyltransferase is an enzyme that has been associated with uncontrolled tumor growth. We provide ongoing clinical support of Aloxi injection and Salagen Tablets. Our research and development expense also includes license fees related to Helsinn’s now concluded development of Aloxi injection for CINV and its ongoing development of Aloxi injection for PONV and for an oral Aloxi formulation.

In August 2003, we completed a sale of 5,060,000 newly issued shares of common stock in a follow-on public offering at $35.50 per share. Our net proceeds, after fees and expenses, were $168,581,477. Since our current operations are expected to begin producing positive cash flow near the end of 2004, these proceeds are primarily intended to fund expansion of our product portfolio.

2003 revenues were $49 million and we anticipate 2004 revenues will range between $109 million to $119 million. The anticipated increase would result from increasing Aloxi injection product sales. Net loss for 2003 was $62 million and we expect a net loss in 2004 of approximately $4 million, given our current product portfolio. This expectation is exclusive of any increase in net loss that would result from expanding our product portfolio.

Results of Operations

Critical Accounting Policies

In preparing our financial statements in conformity with accounting principles generally accepted in the United States of America, our management must make decisions which impact reported amounts and related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, our management applies judgment based on our understanding and analysis of relevant circumstances. Note 1 to the financial statements provides a summary of the significant accounting policies followed in the preparation of the financial statements. Our critical accounting policies include the following:

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Our accounting policy on revenue recognition is fully described in Notes 1 and 6 to the financial statements. The majority of our revenue relates to product sales. We recognize product sales revenue upon shipment to wholesalers, upon fulfillment of acceptance terms, if any, and when no significant contractual obligations remain. 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 such, our product sales revenue may be less than or greater than the underlying demand for our products. We report sales revenue net of wholesaler chargebacks, allowances for product returns, cash discounts, and other rebates. To determine our estimates for wholesaler chargebacks, product returns and other allowances, we use a combination of historical data and an estimate of future activity. Our estimates are reviewed periodically and are subject to change.

We also recognize revenue related to licensing agreements. Licensing revenue recognition requires management to estimate effective terms of agreements and identify points at which performance is met under the contracts such that the revenue earnings process is complete. Under this policy for out-licensing arrangements, revenue related to up-front, time-based and performance-based licensing payments is recognized over the entire contract performance period. For our major licensing contracts, this results in the deferral of revenue amounts (approximately $2.4 million at December 31, 2003) where non-refundable cash payments have been received, but the revenue is not immediately recognized due to the long-term nature of the respective agreements. Following our initial estimate of the effective terms of these arrangements, subsequent developments such as contract modifications or terminations could increase or decrease the period over which the deferred revenue is recognized.

Research and development expense includes work performed for us by outside vendors and research organizations. At each reporting period, we estimate expenses incurred but not reported or billed to us by these outside vendors. These expense estimates typically cover a period of 1 to 4 weeks of expense. Actual results are recorded on a timely basis and, historically, have not been materially different from our estimates. In addition, costs related to in-licensing arrangements for product candidates are expensed as research and development until their first commercial sale.

Revenues

Sales: Sales revenue decreased 15 percent from $30,021,813 in 2001 to $25,402,300 in 2002, but increased 57 percent to $39,857,620 in 2003. 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 decrease in sales revenue from 2001 to 2002 reflects decreased revenue from Salagen Tablets, resulting from a drawdown of wholesaler inventory amounts, 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 of wholesaler inventories occurred throughout the first half of 2002. In the second half of 2002, sales realigned with underlying demand, which grew approximately 5 percent from 2001 to 2002, as measured by prescription growth.

The increase in sales revenue from 2002 to 2003 reflects increased revenue from Aloxi injection, Salagen Tablets and Hexalen capsules. We began the promotion of Aloxi injection in September 2003, following its approval by the U.S. Food and Drug Administration. We recognized $9.7 million in Aloxi injection net sales in 2003, which provided 24 percent of our sales revenue in 2003. Sales of Salagen Tablets in the United States provided 87 percent of our sales revenue in 2001, 88 percent in 2002 and 67 percent in 2003. Underlying demand for Salagen Tablets in the United States, as measured by prescription growth, grew at an annual rate of approximately one percent from 2002 to 2003. Sales of Aloxi injection for the first quarter of 2004 are expected to be $12 million. Annual 2004 sales for Aloxi injection are expected to range from $80 million to $90 million and for all other product sales are expected to be approximately $27 million.

Licensing: Licensing revenue decreased four percent from $2,932,007 in 2001 to $2,801,189 in 2002, and increased 240 percent to $9,527,433 in 2003. We and Dainippon Pharmaceutical Co. Ltd. terminated our collaborative acylfulvene license agreement in August 2003. Since we had no future obligations to Dainippon after termination, all remaining unamortized licensing revenue related to this relationship was amortized into

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license revenue in 2003. For 2003, we amortized $7,141,972 of deferred revenue into licensing revenue related to previously received non-refundable license fees from Dainippon, which included $6,867,280 being amortized in the third quarter of 2003.

Licensing revenue is a combination of deferred revenue amortization from licensing arrangements and from royalties that are recognized when the related sales occur. In 2001, we received a milestone payment of $750,000 from Novartis Ophthalmics AG related to the licensing of Salagen Tablets in Europe. We recognized $841,258, $794,384 and $7,386,972 of amortized deferred revenue in 2001, 2002 and 2003, respectively, related to all payments received under these license agreements. We will recognize the December 31, 2003 unamortized balance of $2,441,250 from our license agreements into licensing revenue over the expected periods of benefit for the related collaborative arrangements, which is expected to continue into 2015. 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 2004 to be approximately $2 million.

Costs and Expenses

Cost of sales: Cost of sales as a percent of sales was 12 percent for 2001, 13 percent for 2002 and 17 percent for 2003. The increase from 2002 to 2003 in cost of sales as a percentage of sales is a result of sales of Aloxi injection, which launched in September 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 2004 will be approximately 30 percent.

Selling, general and administrative: Selling, general and administrative expenses increased 1 percent from $28,463,387 in 2001 to $28,827,337 in 2002, and increased 75 percent to $50,409,508 in 2003. Although total costs remained essentially unchanged from 2001 to 2002, our costs increased for field selling expense and decreased for direct product promotion and facility expenses. Promotion costs decreased from 2001 to 2002 due to our initiating promotion of Hexalen capsules and Mylocel tablets in 2001. Facility costs decreased from 2001 to 2002 due to an accrual in 2001 for lease obligations for the former office space in excess of estimated sublease income, and physical move costs related to our move to a new office location in the second quarter of 2001. Costs in 2002 also include $515,766 in expense related to a reduction in our workforce in the second quarter of 2002.

The increase from 2002 to 2003 is primarily a result of increased expenditures for the commercial launch of Aloxi injection in September 2003 and its continued commercialization. We expect selling, general and administrative expenses for 2004 to be approximately $59 million.

Research and development: Research and development expense decreased 11 percent from $36,101,373 in 2001 to $32,213,635 in 2002, and increased 56 percent to $50,120,596 in 2003. All three periods include expense related to milestone payments under our license agreement for Aloxi injection: $13.0 million in 2001, $14.0 million in 2002 and $31.3 million in 2003. Exclusive of these license payments, research and development expense decreased 21 percent from $23,035,123 in 2001 to $18,163,635 in 2002, and increased 4 percent to $18,799,596 in 2003.

Excluding the license payments for the milestones, the decrease from 2001 to 2002 represents decreased spending for irofulven. In April 2002, we stopped our phase 3 trial of irofulven in advanced-stage, gemcitabine-refractory pancreatic cancer patients. We are currently conducting a series of clinical trials designed to evaluate the efficacy and safety of irofulven administered as a single chemotherapy agent or in combination with marketed chemotherapy agents for the treatment of patients with solid tumor cancers who are generally refractory to current therapies. The decrease in irofulven spending was partially offset by $775,278 in expense related to a reduction in our workforce in the second quarter of 2002. The increase from 2002 to 2003 primarily represents clinical trial expenditures for Aloxi injection as we assumed responsibility from Helsinn for further development of Aloxi injection for prevention of CINV following its approval by the FDA. We expect research

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and development expense for 2004 to be approximately $24 million, including expected license fees that will become due upon Helsinn’s achievement of milestones in the Aloxi development programs.

Interest Income

Interest income decreased 20 percent from $1,600,363 in 2001 to $1,278,645 in 2002, and increased 21 percent to $1,553,483 in 2003. The decrease from 2001 to 2002 is a result of decreases in the investment yields, partially reduced by increases in the average amount of funds available for investment. The increase from 2002 to 2003 is a result of increases in the average amount of funds available for investment partially reduced by declining yields. Funds available in 2001 increased as a result of the sales of stock in the second and fourth quarters of 2001. Funds available in 2002 additionally increased as a result of the issuance of convertible notes and warrants in the fourth quarter of 2002. Funds available in 2003 increased as a result of the sale of stock in the third quarter. Interest income for 2004 will fluctuate depending on the timing of cash flows and changes in interest rates for marketable securities.

Interest Expense

We had no debt in 2001. Interest expense increased from $83,130 in 2002 to $997,563 in 2003. The increase resulted from a full year of interest expense in 2003 related to our issuance of convertible debt in the fourth quarter of 2002. Given the full conversion of the debt on the first quarter of 2004, we expect interest expense related to this convertible debt for 2004 to be approximately $141,000, of which $81,000 will be paid using cash. The non-cash portion of interest expense primarily related to the issuance of warrants in conjunction with the issuance of our convertible debt. (See Note 7 to the financial statements) Our interest expense would increase if we issue new debt securities.

Impairment of Investment

In 2003 we recorded a $3,153,948 impairment to our investment in MethylGene Inc. We own an approximate 13 percent, minority interest in MethylGene Inc., a privately owned Canadian biopharmaceutical company. This minority interest is reported in the financial statements as “Long term equity investment” at the lower of cost or if its value is other than temporarily impaired, then at estimated fair value. Because MethylGene is a privately held company the value in this investment is inherently more difficult to estimate than an investment in a public company. We estimated that the value of the investment declined to $3,646,052 in the year ended December 31, 2003 and an impairment of this asset had occurred that was other than temporary.

Tax Expense

There is no provision for tax expense in 2001, 2002 or 2003, due to net losses of $35 million, $36 million, and $62 million, respectively. Our ability to achieve profitable operations is dependent upon our successful commercialization of Aloxi injection, among other things, and therefore, we continue to maintain a valuation allowance against our deferred tax assets. If and when it is judged to be more-likely-than-not that we will be able to utilize some or all of our deferred tax assets, the related valuation allowance will be reduced and a tax benefit will be recorded, and the portion of the allowance pertaining to the exercise of stock options will increase additional paid-in capital. For subsequent tax periods, our tax provision would likely reflect normal statutory tax rates and utilization of our deferred tax attributes would reduce our deferred tax asset balance. The timing of when this valuation allowance adjustment would occur is primarily dependent upon significant growth in sales of Aloxi injection. It is unlikely that an adjustment to reduce the valuation allowance would occur in 2004, given current operating expectations.

Net Loss

We had net losses of $34,825,322, $36,063,792 and $61,907,504 in 2001, 2002 and 2003, respectively. The increased net loss from 2001 to 2002 reflects a 14 percent decrease in revenues from 2001 to 2002, and a six percent decrease in costs and expenses. The increased net loss from 2002 to 2003 reflects a 75 percent increase in revenues from 2002 to 2003, and a 66 percent increase in costs and expenses. During the next several years, we

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expect to direct our efforts towards activities intended to grow long-term revenues, including the continued development and commercialization of Aloxi products and continued development of irofulven and other product candidates. We expect our net loss for 2004 to be approximately $4 million exclusive of increases in net loss that would result from expanding our product portfolio.

Liquidity and Capital Resources

At December 31, 2003, we had cash and marketable investments of $177,753,253 and working capital of $128,571,606, compared with $60,472,901 and $49,999,430, respectively, at December 31, 2002. For the year ended December 31, 2003, we received $168,581,477 in cash from the issuance of 5,060,000 shares of common stock in a follow-on public offering, and $12,255,220 in cash from issuance of shares under stock award plans. We used $56,718,784 of cash to fund our operating activities, repaid a $4,300,000 deposit to Dainippon as a result of the termination of our license agreement, and purchased $744,684 in equipment and furniture. Our investment in inventories increased in 2003 by $5,658,137 due to the launch of Aloxi. Increased sales of Aloxi had accounts receivables increasing by $3,475,143. This was offset by an increase in accounts payable and accrued expenses of $14,977,016 that includes the $10,000,000 Helsinn payment due in the first quarter of 2004.

Our cash use in 2004 will be very dependent upon the pattern of Aloxi injection sales. We expect the rate of Aloxi injection sales to increase during 2004, which will result in increased working capital deployed for Aloxi injection finished product inventory and receivables. However, as sales increase we expect our operations to generate positive cash flow and by the quarter ending December 31, 2004, cash flow from operations could be positive. We expect annual cash use in 2004 to be approximately $15 million, which includes cash needed for operations and is reduced by the receipt in the first quarter of 2004 of $3,850,000 upon the exercise of our outstanding stock purchase warrants. We have sufficient liquidity in our cash and marketable investments to fund these operations.

Substantial amounts of capital will be needed to continue executing on our goal of growing our pharmaceutical business. These capital needs will include funding of continued development and commercialization of our product candidates and marketed products. We intend to expand our product portfolio through various means such as additional product acquisitions or business combinations. These transactions will require the use of capital and their timing is difficult to predict. Our capital needs may exceed the capital available from our future operations, collaborative arrangements and existing liquid assets. For these needs or in anticipation of these needs, we may seek capital from additional equity or debt issuances.

As identified in our risk factors, adverse changes that affect our future demand for our marketed products, continued access to the capital markets, and continued development and expansion of our product candidates would affect our longer-term liquidity.

On January 5, and February 6, 2004, an aggregate of 2,571,428 shares of our common stock were issued to Deerfield International Limited and Deerfield Partners, L.P. pursuant to their election to, first partially and then fully, convert our 3% convertible subordinated notes issued in December 2002 for gross proceeds of $21 million. Also on February 6, 2004, the common stock purchase warrants that were issued in connection with that December 2002 financing were exercised. We received $3,850,000 upon the exercise of the warrants and issued 400,000 common shares.

Payment Obligations

Our future, noncancellable, contractual commitments, are summarized in the following table:

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We expect to make additional payments to Helsinn related to Aloxi product candidates totaling $25 million over the course of the next several years upon achievement of certain development milestones.

Off Balance Sheet Arrangements

We do not have any “off-balance sheet arrangements” (as such term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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Item 6.    Selected Quarterly Operating Results

The following table shows our unaudited financial information for each of the quarters in the two year period ended December 31, 2003. In our opinion, this unaudited quarterly information has been prepared on the same basis as the audited financial statements and includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the quarters presented, when read in conjunction with the financial statements and notes included elsewhere in this annual report. We believe that quarter-to-quarter comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of future performance.