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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2004

OR

For the transition period from              to             

Commission File Number: 0-10736

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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MGI PHARMA, INC.

FORM 10-Q INDEX

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

MGI PHARMA, INC.

BALANCE SHEETS

(unaudited)

(Continued)

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BALANCE SHEETS

(Unaudited)

Page 2

See accompanying notes to financial statements.

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MGI PHARMA, INC.

STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes to financial statements.

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MGI PHARMA, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to financial statements.

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MGI PHARMA, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

(1) Basis of Presentation

In the opinion of management, the accompanying Unaudited Financial Statements (“financial statements”) of MGI PHARMA, INC. (“MGI” or “Company”) have been prepared on a consistent basis with the December 31, 2003 audited financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly present the information set forth therein. The financial statements have been prepared in accordance with the regulations of the SEC, and, therefore, omit certain information and footnote disclosure necessary to present the statements in accordance with generally accepted accounting principles. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, which was filed with the SEC on February 24, 2004. Certain amounts reported in previous periods have been reclassified to conform to the current period presentation. The results of operations for the first three months of 2004 are not necessarily indicative of the results to be expected for the entire fiscal year.

Accounting Policies:

In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management must make decisions that impact the reported amounts and the 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, management applies judgments based on its understanding and analysis of the relevant circumstances, historical experience, and actuarial valuations. Actual amounts could differ from those estimated at the time the financial statements are prepared. Note 1 to the financial statements in the Company’s Annual Report on Form 10-K provides a summary of the significant accounting policies followed in the preparation of the financial statements. Other footnotes in the Company’s Annual Report on Form 10-K describe various elements of the financial statements and the assumptions made in determining specific amounts.

Recent Accounting Pronouncements:

FIN 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” requires companies to consolidate certain types of variable interest entities. A variable interest entity is an entity that has inadequate invested equity at risk to meet expected future losses, or whose holders of the equity investments lack any of the following three characteristics: (i) the ability to make decisions about the entity’s activities; (ii) the obligation to absorb the entity’s losses if they occur; (iii) the right to receive the entity’s future returns if they occur. The provisions of the interpretation are effective for financial statements issued for the first period ending after December 15, 2003, or March 15, 2004, depending on the nature of the variable interest entity. The adoption of FIN46 did not have any impact on our financial position or results of operations.

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(2) Stock Incentive Plans

Under stock incentive plans, designated persons (including officers, directors, employees and consultants) have been or may be granted rights to acquire our common stock. These rights include stock options and other equity rights. At March 31, 2004, shares issued and shares available under stock incentive plans are as follows:

We apply the intrinsic value method described in Accounting Principles Board (APB) Opinion No. 25 in accounting for the issuance of stock options to employees and directors. Accordingly, as all grants are made at or above market price, no compensation expense has been recognized in the financial statements. Had we determined compensation cost based on fair value at the grant date for our stock options and the fair value of the discount related to the employee stock purchase plan under SFAS 123, our net loss would have been reported as follows:

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(3) Loss Per Common Share

Loss per share for the three-month periods ended March 31, 2004 and 2003 is based on weighted average shares outstanding as summarized in the following table:

Potentially dilutive securities, which are excluded from the calculation because their inclusion in a calculation of net loss per share would have been antidilutive, include options for 3,993,846 and 4,333,157 shares of common stock for 2004 and 2003, respectively, and convertible debt and warrants for 2,971,428 shares of common stock in 2003.

As of March 31, 2004, the 4,134,971 shares that would be issued upon conversion of the convertible notes issued on March 2, 2004 are not included in the calculation of diluted net loss per share because all conditions required to permit conversion have not been satisfied (see Note 7).

(4) Marketable Investments

Marketable investments and restricted marketable investments consist of held-to-maturity investments and are stated at amortized cost, which approximates fair value. Short-term marketable investments at March 31, 2004 and December 31, 2003 are summarized in the following table:

Long-term marketable investments of $31,319,141 as of March 31, 2004 and $37,819,837 as of December 31, 2003 consisted of United States government agencies and corporate notes that mature between June and September of 2005.

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Restricted marketable investments of $17,080,986 at March 31, 2004 consist of United States government agency investments (see note 7).

(5) Inventories

Inventories at March 31, 2004 and December 31, 2003 are summarized as follows:

Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis.

(6) Accrued Expenses

Accrued expenses at March 31, 2004 and December 31, 2003 are summarized as follows:

(7) Convertible Debt

Convertible debt, which is stated at face value less unamortized discount and warrants, at March 31, 2004 and December 31, 2003 is summarized as follows:

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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.

On March 2, 2004, we issued $348 million of senior subordinated convertible notes, or 348,000 notes (“the Notes”). The net proceeds to us were $252.1 million after discount of $87.8 million and issuance costs of $8.1 million. We will pay cash interest on the Notes at the rate of 1.6821% per year on the principal amount at maturity (2.25% per year of the issue price) payable semiannually from September 2, 2004 until March 2, 2011. After March 2, 2011, we will not pay cash interest on the notes prior to maturity at March 2, 2024 and we will begin to amortize the discount as interest expense consistent with the effective interest method. Debt issuance costs are being amortized to interest expense over 7 years.

The Notes are convertible at the option of the holders into shares of our common stock, after June 30, 2004, only under the following circumstances: (1) if the closing sale price of our common stock was more than 120% of the then current conversion price of the Notes for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous calendar quarter (once the forgoing condition is satisfied for any one quarter, then the notes will thereafter be convertible at any time at the option of the holder, through maturity), (2) if we elect to redeem the Notes, (3) upon the occurrence of specified corporate transactions or significant distributions to holders of our common stock occur or (4) subject to certain exceptions, for the five consecutive business day period following any five consecutive trading day period in which the average trading price of the Notes was less than 98% of the average of the sale price of our common stock during such five-day trading period multiplied by the Notes then current conversion rate. Subject to the above conditions, the Notes are convertible into an aggregate of 4,134,971 shares of common stock at an initial conversion price of $62.92 per share of common stock.

At our election, any time after March 1, 2007, we may redeem some or all of the Notes for cash at a redemption price equal to the following, plus accrued and unpaid interest and liquidating damages, if any:

Each holder of the Notes may require us to purchase all or a portion of their Notes for cash on the following dates and purchase prices, plus accrued and unpaid interest and liquidating damages, if any:

In connection with the issuance of the Notes, we pledged marketable investments of $17.1 million as security for the first six scheduled interest payments due on the Notes. At March 31, 2004, $5.8 million was classified as short-term marketable securities due within one year and $11.3 million was classified as long-term due within three years.

We have agreed to file and seek effectiveness of a shelf registration statement for the resale by investors of the Notes and the common stock issuable upon conversion of the Notes. The issuance and sale of the Notes and the subsequent offering of the Notes by the initial purchasers were exempt from the registration provisions of the Securities Act of 1933 pursuant to Section 4(2) of such Act and Rule 144A promulgated thereunder.

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(8) Stockholders’ Equity

Changes in selected stockholders’ equity accounts for the three months ended March 31, 2004 were as follows:

(9) Licensing

In April 2001, we obtained the exclusive United States and Canada oncology license and distribution rights for Aloxi injection from Helsinn Healthcare SA. Aloxi injection is a unique 5-HT₃ antagonist and at that time was being developed for the prevention of chemotherapy-induced nausea and vomiting (“CINV”). Aloxi injection was approved for marketing by the FDA on July 25, 2003. Our $11 million upfront obligation was satisfied through a $5 million deposit made upon the execution of the letter of intent in October 2000, $3 million in cash paid in April 2001, and $3 million of our common shares delivered in April 2001. All time-based or performance milestone payments related to Helsinn’s development of Aloxi injection for the prevention of CINV were cash payments as follows: $2 million in October 2001, $4 million in April 2002, $10 million in December 2002 and $11 million in August 2003.

In November 2003, we expanded our exclusive United States and Canada license agreement for Aloxi injection to include the prevention of postoperative nausea and vomiting (“PONV”), an oral Aloxi formulation and extended the term through December 31, 2015 for all of our rights under the expanded agreement. Under the terms of this amendment, we made initial payments to Helsinn totaling $22.5 million and we expect to make additional payments totaling $25 million over the course of the next several years upon achievement of certain development milestones that culminate with the approvals in the United States of Aloxi injection for the prevention of PONV and an oral Aloxi formulation. We will also pay royalties and product supply fees based upon net sales. Helsinn will continue to fund and conduct the majority of development of Aloxi injection for the prevention of PONV and oral Aloxi formulation, and will supply finished product upon commercialization.

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(10) Research and Development Expense

Research and development expense for the three-month periods ended March 31, 2004 and 2003 consists of the following:

(11) Subsequent Event

In April 2004, we agreed with MethylGene to terminate the small molecule inhibitor of DNA methyltransferase portion of our license relationship and those rights revert back to MethylGene without any additional payments by either party. We retain rights to MG98, an antisense approach to blocking DNA methyltransferase activity, and any further payment obligations by us are suspended pending completion by MethylGene of a planned clinical trial with MG98. If we resume development of MG98, our financial responsibilities under the License Agreement would also resume.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business 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. Our sole facility is in Bloomington, Minnesota.

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. 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. 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. We obtained exclusive U.S. and Canadian license and distribution rights to Aloxi injection for CINV 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. 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. Further, 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. We have also funded development of MG98 and inhibitors of DNA methyltransferase for North American markets.

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

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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Results of Operations

Quarter ended March 31, 2004 compared to March 31, 2003

Revenues

Total revenues in the first quarter of 2004 increased 298% over total revenues in the first quarter of 2003.

Sales: Sales revenue increased 321% percent in the first quarter of 2004 from the first quarter of 2003.

We expect sales for our currently marketed products for 2004, including Aloxi injection, to range from $142 million to $157 million. Sales for Aloxi injection are expected to range from $115 million to $130 million for 2004.

Licensing: Licensing revenue increased 68% percent to $1,035,536 in the first quarter of 2004 from $615,961 in the first quarter of 2003. Licensing revenue is a combination of deferred revenue amortization that is recognized over the term of the underlying arrangement and royalties that are recognized when the related sales occur. The increase from 2003 to 2004 reflects increased royalties, which increased to $974,285 in the first quarter of 2004 from $318,614 in the first quarter of 2003.

Future licensing revenue will fluctuate from quarter to quarter depending on the level of recurring royalty generating activities and changes in amortization of deferred revenue, including the initiation or termination of licensing arrangements. We expect licensing revenue of approximately $2 million for 2004.

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Costs and Expenses

Cost of sales: Cost of sales as a percent of sales was 28.2 percent for the first quarter of 2004 and 12.5 percent for the first quarter of 2003. The increase in cost of sales as a percentage of sales is a result of sales of Aloxi injection, which began in September 2003. If Aloxi injection sales continue to represent an increasing percentage of our sales revenue, cost of sales will increase as a percentage of sales. Cost of sales may vary from quarter to quarter, depending on the product mix and production costs. We believe that cost of sales for 2004 will be approximately 30 percent of sales.

Selling, general and administrative: Selling, general and administrative expenses increased 98 percent to $17,464,875 in the first quarter of 2004 from $8,817,980 in the first quarter of 2003. The increase is primarily due to costs associated with the promotion of Aloxi injection. We expect selling, general and administrative expense of approximately $63 million for 2004.

Research and development: Research and development expense increased 45 percent to $5,015,677 in the first quarter of 2004 from $3,459,569 in the first quarter of 2003. The increase primarily represents increased spending on the development of Aloxi products and irofulven. We expect research 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 increased 295 percent to $815,193 in the first quarter of 2004 from $206,628 in the first quarter of 2003. The increase is due to an increase in the average amount of funds available for investment, resulting from the $168.6 million in net proceeds from the August 2003 follow-on public offering and the $252.1 million from the March 2004 convertible debt issuance. Interest income for 2004 will fluctuate depending on the timing of cash flows and changes in interest rates for marketable investments.

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Interest Expense

Interest expense increased 191 percent to $724,618 in the first quarter of 2004 from $249,391 in the first quarter of 2003. The increase is due to our issuance of convertible debt in March 2004. We expect interest expense for 2004 to be approximately $6.1 million, of which $5.1 million will be paid using cash. The non-cash portion of interest expense is primarily related to the amortization of issuance costs incurred and capitalized in conjunction with the issuance of convertible debt in March 2004.

Tax Expense

There is no provision for tax expense in the first three months of 2004 or the first three months of 2003 due to the net loss of $3.1 million in first quarter 2004, and a net loss of $6.6 million in first quarter 2003. 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 will occur is primarily dependent upon significant growth in sales of Aloxi injection and the consequent demonstration of a period of profitability. Given current operating expectations, it is possible that an adjustment to reduce the valuation allowance would occur by 2005.

Net Loss

We had a net loss of $3,145,645 for the first quarter of 2004 and a net loss of $6,627,939 for the first quarter of 2003. The decreased net loss from the first quarter of 2003 to the first quarter of 2004 reflects a 298 percent increase in revenues from 2003 to 2004, and a 130 percent increase in costs and expenses from 2003 to 2004. We expect net income for 2004 to be approximately $9 million.

Liquidity and Capital Resources

At March 31, 2004, we had cash, cash equivalents and marketable investments of $400.7 million and working capital of $383.9 million, compared with $177.8 million and $128.6 million, respectively, at December 31, 2003. A majority of the increase was due to net proceeds of $252.1 million received from the issuance of convertible debt in March 2004.

Net Cash Used in Operating Activities

Net cash used in operations was $21.5 million and $8.1 million for the three months ended March 31, 2004 and 2003, respectively. The increase in cash use was primarily due to an increase in accounts receivable and decreases in accounts payable and accrued expenses, offset by decreases in net loss and inventories. The $17.9 million increase in accounts receivable is a result of increased sales and longer payment terms related to Aloxi injection. We expect receivable balances to increase significantly as a result of increased Aloxi injection sales and credit terms.

Net Cash Provided by Investing Activities

Net cash provided by investing was $7.4 million and $3.0 million for the three months ended March 31, 2004 and 2003, respectively. The increase in cash provided was due to increased maturities of investments.

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Net Cash Provided by Financing Activities

Net cash provided by financing was $244.8 million and $0.1 million for the three months ended March 31, 2004 and 2003, respectively. The 2004 amount was due to net proceeds $252.1 million received from the issuance of convertible debt in March 2004, $5.9 million from issuance of shares under stock award plans and $3.9 million upon the exercise of warrants and issuance of shares. This total was reduced by the purchase of $17.1 million of restricted marketable securities, which were pledged as security for the first six scheduled interest payments related to issuance of convertible debt.

Cash Management and Requirements

Substantial amounts of capital are required for our pharmaceutical development and commercialization efforts. For continued development and commercialization of our product candidates and marketed products, and the acquisition and development of additional product candidates, we plan to utilize cash provided from product sales, collaborative arrangements and existing liquid assets, plus we may seek other sources of funding, including additional equity or debt issuances as appropriate. We expect 2004 annual cash use to be approximately $120 million primarily related to increased Aloxi injection accounts receivable and inventory. We have no arrangements or operating covenants that would trigger acceleration of our lease obligations or long-term liabilities.

Our liquidity is affected by a variety of factors, including sales of our products, the pace of our research and development programs, the in-licensing of new products and our ability to raise additional debt or equity capital. As identified in our risk factors, adverse changes that affect our 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. We believe we have sufficient liquidity and capital resources to fund operations through to positive cash flow. The following table summarizes our contractual obligations at March 31, 2004 and the effect these obligations are expected to have on our liquidity and cash flow in future periods:

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.

Application of Critical Accounting Policies and Estimates

There were no significant changes to our critical accounting policies during the three months ended March 31, 2004. See our most recent Annual Report filed on Form 10-K for the year ended December 31, 2003 for a discussion of our critical accounting policies.

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Cautionary Statements for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the statement. We desire to take advantage of these “safe harbor” provisions and accordingly, we hereby identify the following important factors which could cause our actual results to differ materially from any such results which may be projected, forecast, estimated or budgeted by us in forward-looking statements made by us from time to time in reports, proxy statements, registration statements and other written communications, or in oral forward-looking statements made from time to time by the Company’s officers and agents. We do not intend to update any of these forward-looking statements after the date of this Form 10-Q to conform them to actual results.

RISKS RELATED TO OUR BUSINESS

Our business is dependent on the commercial success of Aloxi injection. If we are unable to successfully commercialize Aloxi injection we may be unable to continue our operations as planned.

The success of our business is dependent on the successful commercialization of Aloxi injection. Aloxi injection is new to the market and may be unfamiliar to members of the medical community. Market acceptance will depend largely on our ability to demonstrate, to the oncology community in particular, the efficacy and safety of Aloxi injection as an alternative to currently marketed therapies. We cannot be certain that Aloxi injection will provide benefits considered adequate by providers of oncology services or that enough providers will use the product to ensure its commercial success.

The FDA subjects an approved product and its manufacturer to continual regulatory review. After approval and use in an increasing number of patients, the discovery of previously unknown problems, such as unacceptable toxicities or side effects, with a product may result in restrictions or sanctions on the product or manufacturer that could affect the commercial viability of the product or could require withdrawal of the product from the market.

We must continually submit any labeling, advertising and promotional material to the FDA for review. There is risk that the FDA will prohibit use of the marketing material in the form we desire. Unfavorable outcomes resulting from factors such as those identified above could limit sales of Aloxi injection or cause sales of Aloxi injection to decline. In those circumstances, our stock price would decline and we may have to find additional sources of funding or scale back or cease operations.

We have a history of net losses. If we do not have net income in the future, we may be unable to continue our operations.

We are not currently profitable and have a very limited history of profitability. We expect to incur significant expenses over the next several years as we devote substantial resources to 1) support of the development efforts of Aloxi products through milestone payments to Helsinn, 2) the continued development of product candidates, including irofulven, and other product candidates and 3) continued commercialization of Aloxi injection and our other marketed products. Therefore, we will not generate net income unless we are able to significantly increase revenues from sales of Aloxi injection or other products compared to our sales in 2003. Furthermore, if we continue to sustain losses, we may be unable to fund development of our product candidates or to continue our business operations as planned.

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Sales of Aloxi injection accounted for a significant portion of our product revenues since its launch in September of 2003. If any factor adversely impacts sales of Aloxi injection, our product revenues will decrease.

Aloxi injection sales represented 72 and 24 percent of our total product sales and 69 and 20 percent of our total revenue for the quarter ended March 31, 2004 and year ended December 31, 2003, respectively. Any factor adversely affecting sales of Aloxi injection could cause our product revenues to decrease and our stock price to decline significantly.

Sales of Salagen Tablets have accounted for a significant portion of our product revenues. If any factor adversely impacts sales of Salagen Tablets, our product revenues will decrease.

Historically we derived the majority of our product revenues from the sale of Salagen Tablets. U.S. sales of Salagen Tablets represented 26 and 67 percent of our total product sales and 25 and 54 percent of our total revenue for the quarter ended March 31, 2004 and year ended December 31, 2003, respectively. Any factor adversely affecting sales of Salagen Tablets could cause our product revenues to decrease and our stock price to decline significantly. In March 2001, our orphan drug status for Salagen Tablets as a treatment for the symptoms of radiation-induced xerostomia, or severe dry mouth, in head and neck cancer patients expired. Our orphan status for Salagen as a treatment of symptoms associated with Sjögren’s syndrome expires in April 2005. Because Salagen Tablets does not have patent protection, competing generic products may enter these markets. In addition, we are aware of two currently marketed products that compete in the same or similar markets as Salagen Tablets. If sales of Salagen Tablets decline as a result of this competition, or for any other reason, our product revenues will decrease and our stock price could decline.

Our operating results may fluctuate significantly, which may adversely affect our stock price.

If our operating results do not meet the expectations of investors or securities analysts, our stock price may decline. Our operating results may fluctuate significantly from period to period due to a variety of factors including:

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For the quarter ended March 31, 2004, we had a net loss of $3.1 million, compared to a net loss of $6.6 million for the quarter ended March 31, 2003. For year ended December 31, 2003, we had a net loss of $61.9 million, compared to a net loss of $36.1 million for the year ended December 31, 2002. The continuing pattern of losses is primarily a result of spending for research and development and spending for launch activities for Aloxi injection exceeding product revenue available from our currently marketed products.

Variations in the timing of our future revenue and expense could also cause significant fluctuations in our operating results from period to period and may result in unanticipated earnings shortfalls or losses.

Clinical trials are complex and unpredictable and may be difficult to complete or produce unexpected results that could delay or prevent our ability to commercialize our product candidates.

Before obtaining regulatory approvals for the commercial sale of any product under development, including irofulven, we, or Helsinn Healthcare SA in the case of the Aloxi products, must demonstrate through preclinical studies and clinical trials that the product is safe and effective for use in each target indication. We depend on collaboration from Helsinn Healthcare SA, medical institutions and laboratories to conduct our clinical and preclinical testing in compliance with good clinical and laboratory practices as required by the FDA. We, or Helsinn Healthcare SA, may depend on contract research organizations to manage a substantial portion of the medical institutions utilized to conduct clinical testing. The results from preclinical animal studies and human clinical trials may not be predictive of the results that will be obtained in large-scale testing. Some of the results reported from phase 2 clinical trials are interim results and may not be predictive of future results, including final results from such phase 2 trials, because, among other factors, patient enrollment and the time period for evaluating patient results are not complete. If we, or Helsinn Healthcare SA, fail to adequately demonstrate the safety and efficacy of a product candidate, the FDA would not provide regulatory approval of the product. The appearance of unacceptable toxicities or side effects during clinical trials could interrupt, limit, delay or abort the development of a product. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after experiencing promising results in previous animal and human studies.

The time required to complete clinical trials is dependent upon, among other factors, the rate of patient enrollment. Patient enrollment is a function of many factors, including:

Other factors, such as lack of efficacy and unacceptable toxicities, may result in increased costs and delays or termination of clinical trials prior to completion. In addition, delays in manufacturing of product for our clinical trials could impact our ability to complete our clinical trials as planned. Any failure to meet expectations related to our product candidates could adversely affect our stock price.

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Since our product candidates such as irofulven may have many potential applications and we have limited resources, our focus on a particular area may result in our failure to capitalize on more profitable areas and may not result in viable products.

We have limited financial and product development resources. This requires us to focus on product candidates in specific areas and forego opportunities with regard to other product candidates or applications. For example, our most significant product candidate, irofulven, is in clinical and preclinical trials for a number of applications. We expect that a substantial portion of our product development efforts over the next several years may be devoted to the further development of irofulven, including its application to the treatment of cancers or sub-populations of certain types of cancers with limited therapeutic options such as refractory cancers, for which we believe irofulven could most quickly be developed and approved for marketing. We are also investigating the efficacy of irofulven in combination with other cancer therapies. While some of these studies have indicated some effectiveness in relation to the target medical conditions, additional clinical trials must be conducted before product registration may be requested.

If we fail to identify, develop and successfully commercialize applications for irofulven, we may not achieve expectations of our future performance and our stock price may decline. For example, in April 2002 we stopped enrollment in our phase 3 trial of irofulven in advanced-stage, gemcitabine-refractory pancreatic cancer patients and our stock price declined significantly. In addition, we may focus our development of irofulven on a particular application that may result in our failure to capitalize on another application or another product candidate. Our decisions impacting resource allocation may not lead to the development of viable commercial products and may divert resources away from more profitable market opportunities.

We depend on a single supplier to provide us with the finished drug product for Aloxi injection and a single supplier to provide us with the active ingredient for the production of Salagen Tablets. If either supplier terminates its relationship with us, or is unable to fill our demand for the ingredients or products, we may be unable to sell those products.

We rely on Helsinn Birex Pharmaceuticals Ltd. as our sole and exclusive supplier of the Aloxi injection finished drug product. In addition, we rely on the Fine Chemicals Division of Merck KgaA as our sole and exclusive supplier of oral-grade pilocarpine hydrochloride, the active ingredient in Salagen Tablets. The refined raw material for Salagen Tablets is a semi-synthetic salt of an extract from plants grown and processed exclusively on plantations in South America. To our knowledge, there is currently no other producer of oral-grade pilocarpine hydrochloride that is capable of meeting our commercial needs. If our relationship with Helsinn Birex Pharmaceuticals Ltd. or Merck KgaA terminates, or Helsinn Birex Pharmaceuticals Ltd. or Merck KgaA is unable to meet our needs for any reason, we will need to find an alternative source of the active ingredients and products supplied by those companies. If we are unable to identify an alternative source, we may be unable to continue offering Aloxi injection or producing Salagen Tablets for commercial sale. Even if we were able to procure adequate supplies of Aloxi injection finished drug product or pilocarpine hydrochloride from an alternative source, any disruption in supply could have a material adverse effect on our ability to meet customer demand for Aloxi injection or Salagen Tablets for commercial sale, which could cause our product revenues to decrease and our stock price to decline.

If our third-party manufacturer of Aloxi injection or Salagen Tablets or any of our other products ceases operations or fails to comply with applicable manufacturing regulations, we may not be able to meet customer demand in a timely manner, if at all.

We do not have manufacturing facilities and we rely on Helsinn Birex Pharmaceuticals Ltd. for the production of Aloxi injection, Patheon Inc. for the production of Salagen Tablets, and other third-party manufacturers for our other products. We intend to continue to rely on others to manufacture any future products, including any

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products that we may acquire or license, and we have no plans to establish manufacturing facilities. Our dependence on third parties for the manufacture of our products may adversely affect our ability to develop and deliver such products.

The manufacture of our products is, and will be, subject to current “good manufacturing practices” regulations prescribed by the FDA or other standards prescribed by the appropriate regulatory agency in the country of use. There is a risk that our manufacturers, including the current manufacturers of Aloxi injection and Salagen Tablets, will not comply with all applicable regulatory standards, and may not be able to manufacture Aloxi injection, Salagen Tablets, or any other product for commercial sale. If this occurs, we might not be able to identify another third-party manufacturer on terms acceptable to us, or any other terms.

Material changes to an approved product, such as manufacturing changes or additional labeling claims, require further FDA review and approval. Even after approval is obtained, the FDA may withdraw approval if previously unknown problems are discovered. Further, if we, our corporate collaborators or our contract manufacturers fail to comply with applicable FDA and other regulatory requirements at any stage during the regulatory or manufacturing process, the FDA may impose sanctions, including:

Our business strategy depends on our ability to identify, acquire, license and develop product candidates and identify, acquire or license approved products.

As part of our business strategy we plan to identify, acquire, license and develop product candidates and identify, acquire and license approved products for markets that we can reach through our marketing and distribution channels. If we fail to obtain, develop and successfully commercialize additional products, we may not achieve expectations of our future performance and our stock price could decline. Because we do not directly engage in basic research or drug discovery, we must rely upon third parties to sell or license product opportunities to us. Other companies, including some with substantially greater financial, marketing and sales resources, are competing with us to acquire or license such products or product candidates. We may not be able to acquire or license rights to additional products or product candidates on acceptable terms, if at all. Furthermore, we may not be able to successfully develop any product candidates we acquire or license. In

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addition, we may acquire or license new products with different marketing strategies, distribution channels and bases of competition than those of our current products. Therefore, we may not be able to compete favorably in those product categories.

If we fail to obtain additional capital to grow our business, we will be unable to complete our product portfolio development and expansion plans.

We may need to raise additional funds for various reasons including the following:

Adequate funds for these purposes may not be available when needed or on terms acceptable to us. Insufficient funds may cause us to delay, scale back, or abandon some or all of our product acquisition and licensing programs and product development programs. We may seek additional funding through public and private financing, including equity and debt financing or enter into collaborative arrangements. Any sale of additional convertible debt securities or equity securities may result in additional dilution to our shareholders and any debt financing may require us to pledge our assets and enter into restrictive covenants. Entry into collaborative arrangements may require us to give up rights to some of our products or to some potential markets or to enter into licensing arrangements on unfavorable terms.

If we are unable to maintain relationships with third-party collaborators or enter into new relationships, we may not be able to develop any of our product candidates or commercialize our products in a timely manner, if at all.

Our continued success will depend in large part upon the efforts of third parties. For the research, development, manufacture and commercialization of our products, we currently have, and will likely continue to enter into, various arrangements with other corporations, licensors, licensees, outside researchers, consultants and others. However, we cannot be certain of the actions these parties will take, and there is a risk that:

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Our third-party collaborators include public research institutions, research organizations, teaching and research hospitals, community-based clinics, testing laboratories, contract product formulation organizations, contract packaging and distribution companies, manufacturers, suppliers and license collaborators. We consider our arrangements with Helsinn Healthcare SA, Patheon Inc., and Merck KgaA to be significant. If any of our collaborators breaches or terminates its agreement with us, or otherwise fails to conduct its collaborative activities in a timely manner, we may experience significant delays in the development or commercialization of the products or product candidates or the research program covered by the agreement and we may need to devote additional funds or other resources to these activities. If we are unable to enter into new or alternative arrangements to continue research and development activities, or are unable to continue these activities on our own, we may have to terminate the development program. As a consequence, we may experience a loss of future commercial product potential and a decline in our stock price.

We have licensed the right to promote, sell and distribute Aloxi products in the United States and Canada from a third party. We are particularly dependent on that third party for our ability to commercialize Aloxi products.

We have entered a license agreement with Helsinn Healthcare SA under which we have acquired a license to sell and distribute Aloxi products in the United States and Canada through December 31, 2015. Furthermore, under the terms of our license, we are required to purchase all of our Aloxi products from Helsinn Healthcare SA. The license agreement may be terminated for specified reasons, including if the other party is in substantial or persistent breach of the agreement, if we have experienced a change of control and the acquiring entity has competing products or our marketing and sales related commitments to the licensor are not maintained by the acquiring entity, or if either party has declared bankruptcy. Although we are not currently in breach of the license, and we believe that Helsinn Healthcare SA is not currently in breach of the license, there is a risk that either party could breach the license in the future. In addition, if we were to breach the supply agreement with Helsinn Birex Pharmaceutical Ltd. contemplated by the license, Helsinn Healthcare SA would be permitted to terminate the license.

If the license agreement were terminated, we would lose all of our rights to sell and distribute Aloxi products, as well as all of the related intellectual property and all regulatory approvals. In addition, Helsinn Healthcare SA holds the rights to palonosetron (the active ingredient in Aloxi products) through an agreement with Syntex (U.S.A.) Inc. and F. Hoffmann-La Roche AG. We cannot be certain of the actions that these parties will take, and there is a risk that these third parties will end their relationship, which would leave us without rights to the pharmaceutical preparations, products and know-how required to produce Aloxi products. As a consequence of such a termination, we would lose all of our rights to sell and distribute Aloxi products, which would harm our business and could cause our stock price to decline significantly.

We rely on multinational and foreign pharmaceutical companies to develop and commercialize our products and product candidates in markets outside the United States.

With respect to products in which we own rights outside the United States, our strategy for commercialization of such products in markets outside the United States is to enter into development and marketing alliances with multinational and foreign pharmaceutical companies. We have entered into alliances with various companies related to the development and commercialization of our products and product candidates in markets outside the United States. Our continued relationships with strategic collaborators are dependent in part on the successful achievement of development milestones. If we or our collaborators do not achieve these milestones, or we are unable to enter into agreements with our collaborators to modify their terms, these agreements could terminate, which could cause a loss of licensing revenue, a loss of future commercial product potential and a decline in our stock price.

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We recognize licensing revenue from our marketing collaborators as a portion of our total revenue. Future licensing revenues from these collaborators will likely fluctuate from quarter-to-quarter and year-to-year depending on:

If we fail to compete successfully with our competitors, our product revenues could decrease and our stock price could decline.

Competition in the pharmaceutical industry is intense. Most of our competitors are large, multinational pharmaceutical companies that have considerably greater financial, sales, marketing and technical resources than we do. Most of our present and potential competitors also have dedicated research and development capabilities that may allow them to develop new or improved products that compete with our products. Currently, Aloxi injection competes with three other products from the 5-HT₃ receptor antagonist class of compounds, as well as products from other chemical classes that are also used for the prevention of chemotherapy-induced nausea and vomiting. Most of these products are marketed by large, multinational competitors, including GlaxoSmithKline, Roche and Aventis. If Aloxi injection does not compete successfully with existing products on the market, our stock price could decline significantly. Additionally, MedImmune, Inc. and Daichi Pharmaceutical have drugs that are approved for sale and compete in the same markets as Salagen Tablets.

Other pharmaceutical companies are developing products, which, if approved by the FDA, will compete directly with Aloxi injection or Salagen Tablets. Our competitors could also develop and introduce generic drugs comparable to Aloxi injection or Salagen Tablets, or drugs or other therapies that address the underlying causes of the symptoms that Aloxi injection or Salagen Tablets treat. If a product developed by a competitor is more effective than our product, or priced lower than our product, then our product revenue could decrease and our stock price could decline.

We are dependent on our key personnel. If we are not able to attract and retain key employees and consultants, our product development, marketing and commercialization plans could be harmed.

We are highly dependent on the members of our scientific, commercial and management staff. If we are not able to retain any of these persons, our product development, marketing and commercialization plans may suffer and our stock price could decline. None of our executive officers has an employment agreement with us. If we are unable to retain our scientific, commercial and management staff, we will need to hire additional qualified personnel for us to pursue our product acquisition, development, marketing and commercialization plans.

We may not be able to attract and retain personnel on acceptable terms, given the competition for such personnel among biotechnology, pharmaceutical and healthcare companies, universities and non-profit research institutions. If we are not able to attract and retain qualified personnel, our product acquisition, development, marketing and commercialization plans will suffer and our stock price could decline.

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If we are unable to keep up with rapid technological changes in the pharmaceutical or biotechnology industries, we may be unable to continue our operations.

The pharmaceutical and biotechnology industries have experienced rapid and significant technological change. We expect that pharmaceutical technology and biotechnology will continue to develop rapidly. Our future success will depend, in large part, on our ability to develop and maintain technology that is competitive. If other companies achieve technological advances with their products or obtain FDA approval before we are able to obtain such approval, our products may become obsolete before they are marketed or before we recover any of our development and commercialization expenses incurred with respect to such products. In addition, alternative therapies or new medical treatments could alter existing treatment regimens, and thereby reduce the need for one or more of our products, which could result in the termination of the development in one or more of our product candidates, or in the decline in sales of one of our approved products, which could cause our stock price to decline.

RISKS RELATED TO OUR INDUSTRY

If we do not receive regulatory approvals for our product candidates, or if regulatory approval is delayed for any reason, we will be unable to commercialize and sell our products as we expect.

Prior to marketing, each of our product candidates must undergo an extensive regulatory approval process conducted by the FDA in the United States and by comparable agencies in other countries. The product development and approval process can take many years and require the expenditure of substantial resources. There is risk that the FDA or a foreign regulatory authority will not approve in a timely manner, if at all, any product we develop. Generally, the FDA approves for sale only a very small percentage of newly discovered pharmaceutical compounds that enter preclinical development. We may encounter delays or denials in regulatory approvals due to changes in FDA policy during the period of development, or changes in the requirements for regulatory review of each submitted new drug application, or NDA.

There is also risk that regulatory authorities in the United States and elsewhere may not allow us to conduct planned additional clinical testing of any of our product candidates, including irofulven or Aloxi products, or that, if permitted, this additional clinical testing will not prove that these product candidates are safe and effective to the extent necessary to permit us to obtain marketing approvals from regulatory authorities.

Except for those products already approved, none of our product candidates are currently being tested in phase 3 or registration clinical trials. We cannot apply for a regulatory approval to market a product candidate until we successfully complete phase 3 or registration clinical trials for that product.

If we are unable to obtain intellectual property protection, or protect our proprietary technology, we may be unable to compete effectively.

The FDA awarded us orphan drug status for Salagen Tablets in 1994 as a treatment for the symptoms of xerostomia, or severe dry mouth, induced by radiation therapy in head and neck cancer patients and in 1998 for the symptoms of dry mouth associated with Sjögren’s syndrome. An orphan drug designation entitles us to marketing exclusivity of the protected drug for the stated condition for a period of seven years. Our orphan drug protection for Salagen Tablets expired in March 2001 for the treatment of symptoms of radiation-induced xerostomia in head and neck cancer patients and will expire in 2005 for the Sjögren’s syndrome indication. Upon expiration of any of our orphan drug protection for Salagen Tablets, we may face competition from manufacturers of generic versions of Salagen Tablets.

We hold an exclusive United States and Canada license on patents covering Aloxi injection proprietary rights.

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In addition, we hold an exclusive, worldwide license on patents and patent applications covering acylfulvene proprietary rights, including irofulven. The license applicable to these technologies is subject to certain statutory rights held by the U.S. government. Even though we have licensed these patents, we may not have exclusive rights to all possible acylfulvene analogs, all possible methods of using acylfulvene analogs to treat tumors or all possible synthetic methods for preparing acylfulvenes. In addition, we licensed rights to patents and patent applications covering MG98 and inhibitors of DNA methyltransferase. Protection of these rights and creation of additional rights involve joint responsibilities between us and the respective license party.

Our pending patent applications, those we may file in the future, or those we license from third parties, may not result in patents being issued. Patents, if issued, may be challenged, invalidated or circumvented. In addition, other entities may develop similar technologies that fall outside the scope of our patents. Thus, any patent rights that we own or license from third parties may not provide sufficient protection against potential competitors.

In the event that our technologies or methods used in the course of developing or selling our products infringe the patents or violate other proprietary rights of third parties, we and our corporate collaborators may be prevented from pursuing product development or commercialization.

In addition to patents, we rely on trade secrets and proprietary know-how. We protect our proprietary technology and processes in part by confidentiality agreements with our collaborators, employees and consultants. There is a risk that:

The biotechnology and pharmaceutical industries have been characterized by litigation regarding patents and other intellectual property rights. If we become involved in any litigation, interference or other administrative proceedings, we will incur substantial expense and the efforts of our technical and management personnel will be diverted. An adverse determination may subject us to significant liabilities or require us to cease using the technology or to seek licenses that may not be available from third parties on commercially favorable terms, if at all, or to cease manufacturing and selling our products. This could cause us to terminate the development of one or more of our product candidates, to discontinue marketing an existing product, or to pay royalties to a third party. Any of these events could result in a decline in the price of our stock.

If the use of one of our products harms people, we may be subject to costly and damaging product liability claims.

We face exposure to product liability claims in the event that the use of our product is alleged to have harmed someone. Although we have taken, and continue to take, what we believe are appropriate precautions, there is a risk that we will not be able to avoid significant product liability exposure. We currently have product liability insurance in the amount of $30 million per occurrence and in the aggregate for the year. There is a risk that our insurance will not be sufficient to cover claims. There is also a risk that adequate insurance coverage will not be available in the future on commercially reasonable terms, if at all. The successful assertion of an uninsured product liability or other claim against us could cause us to incur a significant expense to pay such a claim, could adversely affect our product development and could cause a decline in our product revenue and the price of our stock.

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In addition to product liability risks associated with sales of our products, we may be liable to the claims of individuals who participate in clinical trials of our products. A number of patients who participate in trials are already critically ill when they enter a trial. The waivers we obtain may not be enforceable and may not protect us from liability or the costs of product liability litigation. Our product liability insurance may not provide adequate protection against potential liabilities. Moreover, we may not be able to maintain our insurance on acceptable terms. As a result of these factors, a product liability claim, even if successfully defended, could cause us to incur a significant expense to defend such a claim, could adversely affect our product development and could cause a decline in our product revenue and the price of our stock.

We could become the subject of legal proceedings or investigations that could result in substantial fines, penalties, injunctive or administrative penalties and criminal charges, which would increase our expenses and redirect management’s attention away from business operations.

Our business operations are subject to a wide range of laws and regulations. Other pharmaceutical companies have been the subjects of legal proceedings or investigations related to pricing, marketing, promotional and clinical trial practices. If we become the subject of legal proceedings or investigations, our expenses would increase and commercialization of our products could be adversely affected. Further, management’s attention would be diverted from our business operations.

If we issue a product recall, we may not sell as much of our products in the future and we may incur significant expenses.

The FDA or other government agencies having regulatory authority for product sales may request product recalls or we may issue product recalls. These product recalls may occur due to manufacturing issues, safety concerns or other reasons. We do not carry any insurance to cover the risk of a product recall. Any product recall could have a material adverse effect on our product revenue and could cause the price of our stock to decline.

If we or patients using our products are unable to obtain adequate reimbursement from government health administration authorities, private health insurers and other organizations, our product sales and price of our stock could decline.

There is much uncertainty about the reimbursement status of healthcare products. Our profitability will depend in part on: (1) the price we are able to charge for our products, and (2) the availability of adequate reimbursement for our products from third-party payors, such as government entities, private health insurers and managed care organizations. Federal and state regulations govern or influence the reimbursement status of healthcare products in many situations and third-party payors are increasingly challenging the pricing of medical products and services.

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, sales or the price of our stock, but we cannot predict the impact, if any of future reimbursement changes.

Salagen Tablets generally have been eligible for reimbursement from third-party payors and we have applied for, or in certain cases already received confirmation of, reimbursement eligibility for Aloxi injection. Although

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third-party reimbursement previously has not been an issue for us, it becomes important to the commercialization of Aloxi products. Reimbursement of newly approved health products is uncertain. There is a risk that reimbursement will not be available for Aloxi products or for our future products. If government entities and other third-party payors do not provide adequate reimbursement levels for our products, our product and license revenues would be materially and adversely affected and our stock price could decline.

In recent years, various parties have proposed a number of legislative and regulatory proposals aimed at changing national healthcare systems. In the United States, we expect that there will continue to be a number of federal and state proposals to implement government control of pricing and profitability of prescription pharmaceuticals. Cost controls, if mandated by a government agency, could decrease the price that we receive for our current or future products. These proposals, if enacted, could have a material adverse effect on our product and license revenues and could cause our stock price to decline. In certain countries, regulatory authorities must also approve the sales price of a product after they grant marketing approval. There is a risk that we will not be able to obtain satisfactory prices in foreign markets even if we obtain marketing approval from foreign regulatory authorities.

Our operations, and the operations of our third-party contractors, involve hazardous materials that could expose us to liability if environmental damage occurs.

Our operations, and the operations of our third-party contractors involve the controlled use of hazardous materials. We cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident or environmental discharge, third parties may hold us liable for any resulting damages, which may exceed our financial resources and may have a material adverse effect on our ability to fund our operations.

RISKS RELATED TO OUR OUTSTANDING SECURITIES

Our stock price is volatile, which may result in significant losses to shareholders and holders of our convertible notes.

The market price for our convertible notes will be significantly impacted by the price of our common stock, which has historically been volatile. There has been significant volatility in the market prices of pharmaceutical and biotechnology companies’ securities. Various factors and events may have a significant impact on the market price of our common stock, and some of these factors are beyond our control. These factors include: