MGI PHARMA INC - 10-Q Quarterly Report

Corporate notes

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-10736

MGI PHARMA, INC.

(Exact name of registrant as specified in its charter)

Minnesota

41-1364647

(State or other jurisdiction of

incorporation or organization)

(I.R.S. employer

identification number)

5775 West Old Shakopee Road

Suite 100

Bloomington, Minnesota 55437

(952) 346-4700

(Address of principal executive offices and zip code)

(Registrant’s telephone number, including area code)

Indicate by check mark, whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

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


Common Stock, $.01 par value		70,654,780 shares
(Class)		(Outstanding at July 30, 2004)

MGI PHARMA, INC.

FORM 10-Q INDEX


		Page Number
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Balance Sheets – June 30, 2004 and December 31, 2003		3

Statements of Operations – Three and Six Months Ended June 30, 2004 and 2003		5

Statements of Cash Flows – Three and Six Months Ended June 30, 2004 and 2003		6

Notes to Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3. Quantitative and Qualitative Disclosures About Market Risk		40

Item 4. Controls and Procedures		40

PART II. OTHER INFORMATION

Item 2. Changes in Securities		41

Item 4. Submission of Maters to a Vote of Security Holders		41

Item 6. Exhibits and Reports on Form 8-K		42

SIGNATURES		44

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

MGI PHARMA, INC.

BALANCE SHEETS

(unaudited)


	June 30, 2004		December 31, 2003
ASSETS

Current assets:
Cash and cash equivalents	$	328,176,616	$	116,570,518
Short-term marketable investments		37,153,496		23,362,898
Restricted marketable investments		5,834,730		—
Receivables, less contractual and bad debt allowances of $5,974,550 and $3,315,399		39,624,381		6,223,964
Inventories		3,051,579		7,437,550
Prepaid expenses		448,919		922,070

Total current assets		414,289,721		154,517,000

Equipment, furniture and leasehold improvements, at cost less accumulated depreciation of $3,629,034 and $3,041,360		2,661,912		2,828,602
Long-term marketable investments		46,733,005		37,819,837
Restricted marketable investments, less current portion		11,327,991		—
Debt issuance costs, less accumulated amortization of $387,403 and $10,799		7,748,070		39,044
Long-term equity investment		911,512		3,646,052
Intangible assets, at cost less accumulated amortization of $4,350,319 and $3,667,412		4,970,551		5,653,457
Other assets		54,206		54,206

Total assets	$	488,696,968	$	204,558,198

(Continued)

BALANCE SHEETS

(Unaudited)

Page 2


	June 30, 2004			December 31, 2003
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	3,357,813		$	4,039,139
Accrued expenses		24,849,305			21,632,345
Deferred revenue		245,000			245,000
Other current liabilities		113,474			28,910

Total current liabilities		28,565,592			25,945,394

Noncurrent liabilities:
Senior subordinated convertible notes, face value of $348,000,000 and $21,000,000, net of unamortized discount of $87,828,240 as of June 30, 2004 and unamortized warrant costs of $1,322,244 as of December 31, 2003.		260,171,760			19,677,756
Deferred revenue		2,073,750			2,196,250
Other noncurrent liabilities		136,251			128,636

Total noncurrent liabilities		262,381,761			22,002,642

Total liabilities		290,947,353			47,948,036

Stockholders’ equity:
Preferred stock, 10,000,000 authorized and unissued shares		—			—
Common stock, $.01 par value, 140,000,000 authorized shares, 70,576,368 and 63,393,964 issued and outstanding shares		705,764			633,940
Additional paid-in capital		413,132,960			377,347,640
Unearned compensation		(2,703,751	)		(24,129	)
Accumulated other comprehensive income		2,555,591			—
Accumulated deficit		(215,940,949	)		(221,347,289	)

Total stockholders’ equity		197,749,615			156,610,162

Total liabilities and stockholders’ equity	$	488,696,968		$	204,558,198

See accompanying notes to financial statements.

MGI PHARMA, INC.

STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
Revenues:
Sales	$	46,861,894		$	8,529,200		$	72,695,528		$	14,671,987
Licensing		1,076,907			1,340,634			2,112,443			1,956,595

		47,938,801			9,869,834			74,807,971			16,628,582

Costs and expenses:
Cost of sales		14,141,802			1,248,901			21,766,640			2,315,276
Selling, general and administrative		16,682,962			11,383,651			34,147,837			20,201,631
Research and development		8,032,822			4,172,687			13,048,499			7,632,256

		38,857,586			16,805,239			68,962,976			30,149,163

Income (loss) from operations		9,081,215			(6,935,405	)		5,844,995			(13,520,581	)

Interest income		1,375,470			212,595			2,190,664			419,223
Interest expense		(1,754,701	)		(249,390	)		(2,479,319	)		(498,781	)

Income (loss) before taxes		8,701,984			(6,972,200	)	$	5,556,340		$	(13,600,139	)

Provision for income taxes		(150,000	)		—			(150,000	)		—

Net income (loss)	$	8,551,984		$	(6,972,200	)	$	5,406,340		$	(13,600,139	)

Net income (loss) per common share:
Basic	$	0.12		$	(0.14	)	$	0.08		$	(0.27	)

Assuming dilution	$	0.11		$	(0.14	)	$	0.07		$	(0.27	)

Weighted average number of common shares outstanding:
Basic		70,450,306			50,840,832			69,497,883			50,741,108
Diluted		75,944,468			50,840,832			74,777,235			50,741,108

See accompanying notes to financial statements.

MGI PHARMA, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended June 30,
	2004			2003
OPERATING ACTIVITIES:
Net income (loss)	$	5,406,340		$	(13,600,139	)
Adjustments for non-cash items:
Depreciation and intangible amortization		1,276,450			1,022,788
Benefit plan contribution		451,275			266,364
Amortization of non-cash financing charges		499,853			183,782
Employee stock compensation expense		870,940			71,770
Deferred rent		7,615			17,743
Noncash consulting payments		15,000			10,000
Other		2,749			—
Change in operating assets and liabilities:
Receivables		(33,400,417	)		(1,188,593	)
Inventories		4,385,971			132,730
Prepaid expenses		473,151			(627,272	)
Accounts payable and accrued expenses		2,935,380			184,232
Deferred revenue		(122,500	)		(397,192	)
Other current liabilities		84,564			(5,256	)

Net cash used in operating activities		(17,113,629	)		(13,929,043	)

INVESTING ACTIVITIES:
Purchase of held-to-maturity investments		(70,539,888	)		(2,000,000	)
Maturity of held-to-maturity investments		53,126,253			3,101,995
Purchase of equipment, furniture and leasehold improvements		(429,603	)		(450,357	)
Other		—			2,343

Net cash provided by (used in) investing activities		(17,843,238	)		653,981

FINANCING ACTIVITIES:
Restricted marketable securities held by trustee for debt service		(17,162,721	)		—
Issuance of shares under stock plans		7,839,399			2,667,114
Proceeds of debt offering		260,171,760			—
Issuance costs of debt offering		(8,135,473	)		—
Issuance of shares through stock purchase warrant exercise		3,850,000			—

Net cash provided by financing activities		246,562,965			2,667,114

Increase (decrease) in cash and cash equivalents		211,606,098			(10,607,948	)

Cash and cash equivalents at beginning of period		116,570,518			52,933,393

Cash and cash equivalents at end of period	$	328,176,616		$	42,325,445

Supplemental disclosure of cash information:
Cash paid for interest	$	80,677		$	315,000

See accompanying notes to financial statements.

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 only of 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, as amended, for the year ended December 31, 2003. Certain amounts reported in previous periods have been reclassified to conform to the current period presentation. The results of operations for the first six 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, as amended, 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, as amended, describe various elements of the financial statements and the assumptions made in determining specific amounts.

For both the current period and comparatively for historical financial statements, amortization expense related to acquired developed drugs is classified in cost of sales. Previously, amortization expense related to acquired developed drugs was classified as a separate line item under cost and expenses.

On May 11, 2004, the Company announced a two-for-one stock split. Shareholders, received one additional common share for each common share held on the record date of June 2, 2004. The split shares began trading as such on June 10, 2004. Option holders received the right to purchase one additional common share for each common share exercisable under their option agreements on the record date. The exercise price for each post-split share was concurrently reduced to half of its pre-split amount. The Board of Directors amended the Company’s certificate of incorporation to double the number of authorized common shares, from 70,000,000 to 140,000,000, in order to accomodate the stock split. All share and per share data for all periods presented have been restated to reflect this stock split.

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.

At its March 2004 meeting, the EITF reached a consensus on recognition and measurement guidance previously discussed under EITF 03-01. The consensus clarifies the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under SFAS No. 115 and investments accounted for under the cost method or the equity method. The recognition and measurement guidance for which the consensus was reached in the March 2004 meeting is to be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. The Company does not believe that this consensus on the recognition and measurement guidance will have an impact on its results of operations or financial position.

(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, restricted stock units and other equity rights. At June 30, 2004, shares issued and shares available under stock incentive plans are as follows:


	Shareholder Approved Plans		Other Plans		Total For All Plans
Shares issuable under stock incentive plans		8,347,742		40,616		8,388,358
Shares available for future issuance		4,056,369		—		4,056,369

Total		12,404,111		40,616		12,444,727

Average exercise price for outstanding options	$	10.43	$	5.24	$	10.40

We account for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and comply with the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation”. Under APB No. 25, compensation cost is recognized when the market value of the Company’s stock exceeds the amount an employee must pay to acquire the stock. During the second quarter of 2004, a stock option grant was made below market value and the aggregate amount of $284,800 is being expensed in accordance with APB No. 25 over a four-year vesting period. All other stock incentive awards were made at market value so no compensation expense has been recognized for these awards. 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 income (loss) would have been reported as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
Net income (loss), as reported	$	8,551,985		$	(6,972,200	)	$	5,406,340		$	(13,600,139	)
Add: Total stock-based employee compensation expense included in reported net income (loss)		20,602			—			20,602			—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards		(5,191,858	)		(1,618,891	)		(8,289,580	)		(2,863,177	)

Pro forma net income (loss)	$	3,380,729		$	(8,591,091	)	$	(2,862,638	)	$	(16,463,316	)

Net income (loss) per common share:
As reported basic	$	0.12		$	(0.14	)	$	0.08		$	(0.27	)
Pro forma basic	$	0.05		$	(0.17	)	$	(0.04	)	$	(0.32	)

As reported diluted	$	0.11		$	(0.14	)	$	0.07		$	(0.27	)
Pro forma diluted	$	0.04		$	(0.17	)	$	(0.04	)	$	(0.32	)

	2004			2003			2004			2003
Expected dividend yield		0	%		0	%		0	%		0	%
Risk-free interest rate		3.73	%		2.40	%		3.36	%		2.53	%
Annualized volatility		0.90			0.70			0.90			0.74
Expected life, in years		5			5			5			5

(3) Earnings (loss) Per Common Share

Earnings (loss) per share for the three-month and six-month periods ended June 30, 2004 and 2003 is based on weighted average shares outstanding as summarized in the following table:


Three months ended June 30,	2004	2003
Weighted-average shares - basic	70,450,306	50,840,832
Effect of dilutive stock options	5,494,162	—

Weighted-average shares - assuming dilution	75,944,468	50,840,832


Six months ended June 30,	2004	2003
Weighted-average shares - basic	69,497,883	50,741,108
Effect of dilutive stock options	5,279,352	—

Weighted-average shares - assuming dilution	74,777,235	50,741,108

Potentially dilutive securities for 2003, which are excluded from the calculations because their inclusion in a calculation of net loss per share would have been antidilutive, include options for 8,724,186 shares of common stock and convertible debt and warrants for 5,942,856 shares of common stock.

As of June 30, 2004, the 8,269,942 shares that would be issued upon conversion of the convertible notes issued in early 2004 are not included in the calculation of diluted net income 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 consisted of held-to-maturity debt investments that are reported at amortized cost, which approximates fair value, and available-for-sale, publicly traded, equity securities that are reported at fair market value. Unrealized gains from the available-for-sale, equity securities are included in “Accumulated other comprehensive income,” as a separate component of stockholders’ equity. Short-term marketable investments at June 30, 2004 and December 31, 2003 are summarized in the following table:

Long-term marketable investments at June 30, 2004 and December 31, 2003 consisted of publicly traded, equity securities and corporate notes and United States government agencies debt. The corporate notes and United States government agencies debt mature between July of 2005 and April of 2006. Long-term marketable securities are summarized in the following table:


	2004		2003
Corporate notes	$	11,252,935	$	8,040,660
Equity securities		5,290,131		—
Government instruments		30,189,939		29,779,177

Total	$	46,733,005	$	37,819,837

Restricted marketable investments of $17,162,721 at June 30, 2004 consist of United States government treasury investments (see note 7).

(5) Inventories

Inventories at June 30, 2004 and December 31, 2003 are summarized as follows:


	2004		2003
Raw materials and supplies	$	51,472	$	348,087
Work in process		457,460		593,028
Finished products		2,542,647		6,496,435

Total	$	3,051,579	$	7,437,550

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 June 30, 2004 and December 31, 2003 are summarized as follows:


	2004		2003
Product development commitments	$	881,155	$	11,056,023
Field sales bonuses		823,541		843,000
Other bonuses		1,161,729		1,297,575
Product returns		2,515,269		1,484,638
Lease accrual		177,081		251,011
Retirement plan		472,155		1,572,626
Product rebate and other fees		10,269,822		1,080,215
Interest		1,951,288		52,500
License fee		3,069,532		491,215
Other accrued expenses		3,527,733		3,503,542

Total	$	24,849,305	$	21,632,345

(7) Convertible Debt

Convertible debt, which is stated at face value less unamortized discount and warrants, at June 30, 2004 and December 31, 2003 is summarized as follows:


	2004			2003
Convertible notes	$	348,000,000		$	21,000,000
Unamortized discount		(87,828,240	)		—
Unamortized warrants		—			(1,322,244	)

Total	$	260,171,760		$	19,677,756

In early 2004, an aggregate of 5,142,856 shares of our common stock were issued to Deerfield International Limited and Deerfield Partners, L.P. pursuant to their election to fully convert our 3% convertible subordinated notes issued in December 2002 for gross proceeds of $21 million. Also in early 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 800,000 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 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 if 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 8,269,942 shares of common stock at an initial conversion price of $31.46 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:

•

March 2, 2007 through March 1, 2008: 101.286% of the note issue price;

•

March 2, 2008 through March 1, 2009: 100.964% of the note issue price;

•

March 2, 2009 through March 1, 2010: 100.643% of the note issue price;

•

March 2, 2010 through March 1, 2011: 100.321% of the note issue price;

•

On or after March 2, 2011: 100% of the accreted principal amount of the notes.

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:

•

March 2, 2011 - $747.62 per Note;

•

March 2, 2014 - $799.52 per Note;

•

March 2, 2019 - $894.16 per Note.

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 June 30, 2004, $5.8 million was classified as short-term marketable securities due within one year and $11.3 million was classified as long-term marketable securities due within three years.

We have filed and are seeking 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 to qualified institutional buyers 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.

(8) Stockholders’ Equity

Changes in selected stockholders’ equity accounts for the six months ended June 30, 2004 were as follows:


	Common Stock					Additional paid-in capital			Unearned compensation - restricted stock
	Shares		Par value			Additional paid-in capital			Unearned compensation - restricted stock
Balance at December 31, 2003	63,393,964		$	633,940		$	377,347,640		$	(24,129	)
Conversion of debt	5,142,856			51,429			19,699,734
Exercise of stock purchase warrants	800,000			8,000			3,842,000
Exercise of stock options	1,166,872			11,669			7,190,428
Employee stock purchase plan	36,231			362			636,940
Restricted stock unit and stock option expense							3,400,562			(2,703,751	)
Income tax expense related to employee stock awards							150,000
Employee retirement plan contribution	44,638			446			1,103,167
Cancel restricted stock	(8,715	)		(87	)		(252,506	)
Restricted stock expense										24,129
Other issuances	522			5			14,995

Balance at June 30, 2004	70,576,368		$	705,764		$	413,132,960		$	(2,703,751	)

(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, a subsequent milestone payment of $2.5 million and we expect to make additional milestone payments totaling $22.5 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.

(10) Research and Development Expense

Research and development expense for the three-month and six-month periods ended June 30, 2004 and 2003 consists of the following:


	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
License fees	$	2,550,000	$	—	$	3,050,000	$	—
Other research and development		5,482,822		4,172,687		9,998,499		7,632,256

Total	$	8,032,822	$	4,172,687	$	13,048,499	$	7,632,256

(11) Comprehensive Income

Total comprehensive income (loss) consists of net income (loss) and other comprehensive income, which consists of unrealized gains and losses on available-for-sale investments. Other comprehensive income has no impact on our net income (loss) but is reflected in our balance sheet through an adjustment to shareholders’ equity. The components of comprehensive income (loss) are as follows:


	Three Months Ended June 30,					Six Months Ended June 30,
	2004		2003			2004		2003
Net income (loss), as reported	$	8,551,984	$	(6,972,200	)	$	5,406,340	$	(13,600,139	)
Unrealized gain from securities classified as available for sale		2,555,591		—			2,555,591		—

Comprehensive income (loss)	$	11,107,575	$	(6,972,200	)	$	7,961,931	$	(13,600,139	)

(12) Subsequent Event

In July 2004, we entered into a three year promotion agreement for Kadian^®, a sustained release formulation of morphine, with Alpharma, Inc. Under the terms of this promotion agreement, we will market Kadian capsules in the United States to oncology health care professionals for moderate to severe pain associated with cancer. Kadian capsules are currently marketed by Alpharma to other pain specialists in the United States.

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^® (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 it. Given the large market in which Aloxi injection competes and its favorable clinical profile, sales of Aloxi injection are substantially exceeding 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 April 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.

In July 2004, we entered into a three year promotion agreement for Kadian^®, a sustained release formulation of morphine, with Alpharma, Inc. Under the terms of this promotion agreement, we will market Kadian capsulesin the United States to oncology health care professionals for moderate to severe pain associated with cancer. Kadian capsules are currently marketed by Alpharma to other pain specialists in the United States. We will begin promoting Kadian capsules to oncologists in the Fall of 2004.

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.

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


Products	Principal Indications	Status	Commercial Rights
Aloxi injection	• Chemotherapy- induced nausea and vomiting	• Currently marketed	U.S. & Canada: MGI

Salagen Tablets	• Symptoms of radiation-induced dry mouth in head and neck cancer patients	• Currently marketed	U.S.: MGI Europe: Novartis Canada: Pfizer

	• Dry mouth, plus dry eyes outside the U.S., in Sjögren’s syndrome patients	• Currently marketed	Rest of World: Various other collaborators

Hexalen capsules	• Ovarian cancer	• Currently marketed	U.S.: MGI Outside U.S.: Various collaborators

Kadian capsules	• Moderate to severe pain	• Currently marketed	Oncology promotion in U.S.: MGI

Aloxi injection	• Post operative nausea and vomiting	• To begin Phase 3	U.S. & Canada: MGI

Oral Aloxi formulation	• Nausea and vomiting	• To begin Phase 3	U.S. & Canada: MGI

Irofulven	• Monotherapy • Combination therapy	• Phase 2 • Phases 1 & 2	Worldwide: MGI

Other Acylfulvene Analogs	• Various cancers	• Preclinical	Worldwide: MGI

MG98	• Various cancers	• Phase 1	U.S. & Canada: MGI

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

•

Continue to successfully commercialize Aloxi injection for prevention of CINV. We intend to aggressively market Aloxi injection as an enhanced alternative to currently marketed 5-HT₃ receptor antagonists indicated for prevention of CINV.

•

Expand the Aloxi franchise by developing Aloxi injection for prevention of PONV and by developing an oral Aloxi formulation for nausea and vomiting. Phase 3 trials of Aloxi injection for prevention of PONV and of an oral Aloxi formulation are expected to initiate near the end of 2004.

•

Selectively add to our product portfolio through various means, including product acquisition, in-licensing, co-promotion or business combinations. We intend to focus our product acquisition efforts on currently marketed pharmaceutical products or product candidates for which we believe we can effectively add value through our commercial and development capabilities.

•

Advance the irofulven clinical program, including a phase 2 hormone refractory prostate cancer program during 2004.

•

Successfully launch and promote Kadian capsules for relief of pain related to cancer.

Results of Operations

The six months and quarter ended June 30, 2004 compared to June 30, 2003:

Revenues

Total revenues in the second quarter and first half of 2004 increased 386 percent and 350 percent, respectively, over total revenues in the corresponding periods of 2003.


	Three Months Ended June 30,				Change			% Change
	2004		2003		Change			% Change
Sales:
Aloxi injection	$	37,141,292	$	—	$	37,141,292		N/A
Salagen		8,572,632		7,382,661		1,189,971		16	%
Other		1,147,970		1,146,539		1,431		—	%

Total sales		46,861,894		8,529,200		38,332,694		449	%
Licensing		1,076,907		1,340,634		(263,727	)	(20	)%

Total revenues	$	47,938,801	$	9,869,834	$	38,068,967		386	%


	Six Months Ended June 30,				Change			% Change
	2004		2003		Change			% Change
Sales:
Aloxi injection	$	55,702,250	$	—	$	55,702,250		N/A
Salagen		15,289,658		12,597,971		2,691,687		21	%
Other		1,703,620		2,074,016		(370,396	)	(18	)%

Total sales		72,695,528		14,671,987		58,023,541		395	%
Licensing		2,112,443		1,956,595		155,848		8	%

Total revenues	$	74,807,971	$	16,628,582	$	58,179,389		350	%

Sales: Sales revenue in the second quarter and first half of 2004 increased 449 percent and 395 percent, respectively, over sales revenue in the corresponding periods of 2003.

•

Sales of Aloxi injection, which we began selling in September 2003, are the primary reason for the increase in sales revenue. We recognized $37.1 million in Aloxi injection net sales revenue in the second quarter of 2004 and $55.7 million in Aloxi injection in the first half of 2004. This represented 79 percent and 77 percent of our sales revenue in the second quarter of 2004 and first half of 2004, respectively. Continued commercialization of Aloxi injection is expected to result in sales of Aloxi injection representing a greater percentage of our sales revenue in future periods.

•

Salagen sales were $8.6 million or 18% of our sales revenue and $7.4 million or 87% of our sales revenue for the second quarter of 2004 and 2003, respectively. Salagen sales were $15.3 or 21% of our sales revenue and $12.6 million or 86% of our sales revenue in the first half of 2004 and 2003,

respectively. In addition to increased sales of Salagen 5.0 mg Tablets, 2004 sales increased due to the launch of Salagen 7.5mg Tablets in the first quarter of 2004. 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. We believe that $1 million to $2 million of Salagen sales in the second quarter of 2004 represented wholesaler initiated purchases that increased the amount of product in the distribution channels.

We expect sales for our currently marketed products for 2004, including Aloxi injection, to range from $167 million to $177 million. Sales for Aloxi injection are expected to range from $140 million to $150 million for 2004.

Licensing: Licensing revenue decreased 20 percent to $1,076,907 in the second quarter of 2004 from $1,340,634 in the second quarter of 2003 and increased 8 percent to $2,112,443 in the first half of 2004 from $1,956,565 in the first half 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.

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 $3 million for 2004.

Costs and Expenses


	Three Months Ended June 30,				Change		% Change
	2004		2003		Change		% Change
Costs and expenses:
Cost of sales	$	14,141,802	$	1,248,901	$	12,892,901	1,032	%
Selling, general and administrative		16,682,962		11,383,651		5,299,311	47	%
Research and development		8,032,822		4,172,687		3,860,135	93	%

	$	38,857,586	$	16,805,239	$	22,052,347	131	%


	Six Months Ended June 30,				Change		% Change
	2004		2003		Change		% Change
Costs and expenses:
Cost of sales	$	21,766,640	$	2,315,276	$	19,451,364	840	%
Selling, general and administrative		34,147,837		20,201,631		13,946,206	69	%
Research and development		13,048,499		7,632,256		5,416,243	71	%

	$	68,962,976	$	30,149,163	$	38,813,813	129	%

Cost of sales: Cost of sales as a percent of sales was 30.2 percent and 14.6 percent for the second quarter of 2004 and for the second quarter of 2003, respectively and 29.9 percent and 15.8 percent for the first half of 2004 and for the first half of 2003, respectively. The increase in cost of sales as a percentage of sales is primarily 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 31 percent of sales.

For both the current period and comparatively for historical financial statements, amortization expense related to acquired developed drugs is included in cost of sales. Previously, amortization expense related to acquired developed drugs was broken out as a separate line item under cost and expenses.

Selling, general and administrative: Selling, general and administrative expenses increased 47 percent to $16,682,962 in the second quarter of 2004 from $11,383,651 in the second quarter of 2003 and increased 69 percent to $34,147,837 in the first half of 2004 from $20,201,631 in the first half of 2003. The increase is primarily due to costs associated with the launch and promotion of Aloxi injection. We expect selling, general and administrative expense of approximately $65 million for 2004.

Research and development: Research and development expense increased 93 percent to $8,032,822 in the second quarter of 2004 from $4,172,687 in the second quarter of 2003 and increased 71 percent to $13,048,499 in the first half of 2004 from $7,632,256 in the first half of 2003. The increase in the second quarter of 2004 from the second quarter of 2003 primarily represents a $2.5 million milestone payment to Helsinn in the second quarter of 2004. 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.


	Three Months Ended June 30,						Change			% Change
	2004			2003			Change			% Change
Interest income	$	1,375,470		$	212,595		$	1,162,875		547	%
Interest expense		(1,754,701	)		(249,390	)		(1,505,311	)	604	%

	$	(379,231	)	$	(36,795	)	$	(342,436	)	931	%


	Six Months Ended June 30,						Change			% Change
	2004			2003			Change			% Change
Interest income	$	2,190,664		$	419,223		$	1,771,441		423	%
Interest expense		(2,479,319	)		(498,781	)		(1,980,538	)	397	%

	$	(288,655	)	$	(79,558	)	$	(209,097	)	263	%

Interest Income

Interest income increased 547 percent to $1,375,470 in the second quarter of 2004 from $212,595 in the second quarter of 2003 and increased 423 percent to $2,190,664 in the first half of 2004 from $419,223 in the first half of 2003. The increases are 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 in net proceeds 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.

Interest Expense

Interest expense increased 604 percent to $1,754,701 in the second quarter of 2004 from $249,390 in the second quarter of 2003 and increased 397 percent to $2,479,319 in the first half of 2004 from $498,781 in the first half of 2003. The increases are 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 issuance of the convertible debt in March 2004.

Tax Expense

The second quarter 2004 tax expense of $150,000 represents alternative minimum tax on year-to-date income at a rate of approximately 2.7 percent. Our ability to sustain 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. Then 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 this valuation allowance adjustment is primarily dependent upon continued growth in sales of Aloxi injection and the consequent demonstration of consecutive quarters of profitability. Given current operating expectations, during 2005 is the earliest that an adjustment to reduce the valuation allowance could occur.

Net Income/ Loss

We had net income of $8,551,984 in the second quarter of 2004 and a net loss of $6,927,200 in the second quarter of 2003. We had net income of $5,406,340 in the first half of 2004 and a net loss of $13,600,139 in the first half of 2003. The net income for the first half of 2004 reflects a 350 percent increase in revenues from 2003 to 2004, partially offset by a 129 percent increase in costs and expenses from 2003 to 2004. We expect net income for 2004 to be approximately $30 million. Business development and licensing activities resulting in expansion of our product portfolio may decrease net income or result in a net loss for 2004.

Liquidity and Capital Resources

At June 30, 2004, we had cash, cash equivalents and marketable investments of $412 million and working capital of $386 million, compared with $178 million and $129 million, respectively, at December 31, 2003. A majority of the increase was due to net proceeds of $252 million received from the issuance of convertible debt in March 2004.

Net Cash Used in Operating Activities

Net cash used in operations was $17.1 million and $13.9 million for the six months ended June 30, 2004 and 2003, respectively. The increase in cash use was primarily due to an increase in accounts receivable, offset by net income and decreases in accounts payable, accrued expenses and inventories. The $33.4 million increase in accounts receivable is a result of increased sales and longer payment terms related to Aloxi injection. As is common in the industry for drugs prior to receipt of a permanent Medicare reimbursement code, during the second quarter of 2004, we began offering 180-day payment terms for Aloxi injection leading up to the anticipated utilization of a reimbursement code effective January 1, 2005. We will monitor Aloxi injection product trends in the distribution channel and disclose significant differences between these trends and end-user demand. We expect receivable balances to increase significantly as a result of increased Aloxi injection sales and lengthened payment terms for those sales.

Net Cash Provided by (Used In) Investing Activities

Net cash used in investing was $17.8 million and provided by investing was $0.7 million for the six months ended June 30, 2004 and 2003, respectively. The increase in cash used in investing was due to purchases of held-to-maturity investments.

Net Cash Provided by Financing Activities

Net cash provided by financing was $246.6 million and $2.7 million for the six months ended June 30, 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, $7.8 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 $17.2 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 for operating activities to be approximately $40 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 acquisition of new products and our ability to raise additional debt or equity capital. As identified in our risk factors, adverse changes that decrease future demand for our marketed products, continued access to the capital markets, continued development of our product candidates, acquisition of new products and accounts receivable collection issues within our concentrated customer base 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 June 30, 2004 and the effect that payments due on these obligations are expected to have on our liquidity and cash flow in future periods:


	Remainder of 2004		2005		2006		2007		2008		Thereafter		Total
Operating lease payments	$	933,000	$	1,732,000	$	1,461,000	$	1,483,000	$	622,000	$	—	$	6,231,000
Convertible debt		—		—		—		—		—		348,000,000		348,000,000
Helsinn minimum sales obligation (a)		—		2,862,000		5,181,000		6,120,000		5,554,000		16,260,000		35,977,000

Total	$	933,000	$	4,594,000	$	6,642,000	$	7,603,000	$	6,176,000	$	364,260,000	$	390,208,000

(a)

In connection with the April 2001 in-licensing agreement with Helsinn Healthcare SA where we obtained the exclusive U.S. and Canadian oncology license and distribution rights for Aloxi injection, we agreed to pay minimum payments over the first ten years following commercialization. The minimum is only payable to the extent that it exceeds the actual payments that would otherwise be payable under the agreement. Minimum sales targets peak at approximately $90 million in the fourth year of commercialization.

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

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.

Our accounting policy on revenue recognition is fully described in Notes 1 and 6 to the financial statements of our most recent Annual Report filed on Form 10-K, as amended, for the year ended December 31, 2003. 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 and clinics 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, administrative fees and other rebates. We estimate wholesaler chargebacks, cash discounts, administrative fees and other rebates by considering the following factors: current contract prices and terms with both direct and indirect customers, estimated customer and wholesaler inventory levels and current average chargeback rates by product and by indirect customer. The majority of the expense and quarter-end liabilities associated with these estimates are defined contractually and resolved within several months following quarter-end and therefore it is unlikely the actual results will differ significantly from the estimates. We update these estimates for changes in facts and circumstances as appropriate. Our process to estimate product returns is tailored to the specific facts and circumstances of each product, including its product life cycle stage. For new products, product returns allowance is estimated based on historical information for similar or competing products in the same distribution channel. We obtain and evaluate product return data from distributors and, based on this evaluation, estimate return rates. For established products, product returns allowance is estimated by considering the following factors: current marketing efforts, estimated product in the distribution channel, underlying demand, historical experience and competitor behavior. Product in the distribution channel and underlying demand are estimated on a monthly basis by evaluating data obtained from a company that surveys pharmaceutical inventory movement and prescription data. We also use this data to monitor underlying demand in relation to significant external factors such as price changes from competitors and the introduction of new products by competitors. External and internal factors could have a material adverse effect on the demand for our products and on product returns. As of June 30, 2004, we had an allowance balance of $2.5 million for product returns. For the second quarter of 2004 and for the first six months of 2004, the increase in current provision related to sales made in the current period over the corresponding periods in 2003, is a result of the increased sales of Aloxi injection. The decrease in actual returns in the current period related to sales from prior periods and current provision related to sales made in prior periods from the second quarter of 2003 and for the first six months of 2003 to the corresponding periods in 2004 is a result of a decision to stop marketing Didronel. The following tables details the product returns allowance:


	Three Months Ended June 30,
	2004			2003
Balance beginning of period	$	1,921,349		$	1,006,086
Actual returns in current period related to sales from prior periods		(86,365	)		(217,485	)
Actual returns in current period related to sales from current period		—			—
Current provision related to sales made in prior periods		—			78,461
Current provision related to sales made in current period		680,285			136,337

Balance end of period		2,515,269			1,003,399


	Six Months Ended June 30,
	2004			2003
Balance beginning of period	$	1,484,638		$	1,109,913
Actual returns in current period related to sales from prior periods		(185,644	)		(530,920	)
Actual returns in current period related to sales from current period		—			—
Current provision related to sales made in prior periods		—			189,049
Current provision related to sales made in current period		1,216,275			235,357

Balance end of period		2,515,269			1,003,399

There were no significant changes to our critical accounting policies or estimates during the six months ended June 30, 2004. See our most recent Annual Report filed on Form 10-K, as amended, for the year ended December 31, 2003 for a discussion of our critical accounting policies.

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

Sales of Aloxi injection account for a significant and growing portion of our product revenues. Our business is dependent on the commercial success of Aloxi injection. If any factor adversely affects sales of Aloxi injection, we may be unable to continue our operations as planned.

Aloxi injection sales represented 77 and 24 percent of our total product sales and 74 and 20 percent of our total revenue for the six months ended June 30, 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.

The success of our business is dependent on the continued successful commercialization of Aloxi injection. Aloxi injection is relatively new to the market and its long-term acceptance by the oncology community will depend largely on our ability to demonstrate the efficacy and safety of Aloxi injection as an alternative to other 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 continued 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 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 other product candidates, including irofulven, and 3) continued commercialization of Aloxi injection and our other marketed products. Therefore, we may not

reliably generate net income unless we are able to increase sales of Aloxi injection or other products compared to our current sales, and we may be unable to fund development of our product candidates or to continue our business operations as planned.

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.

Prior to the launch of Aloxi injection in September of 2003, we derived the majority of our product revenues from the sale of Salagen Tablets. U.S. sales of Salagen Tablets represented 21 and 67 percent of our total product sales and 20 and 54 percent of our total revenue for the six months ended June 30, 2004 and year ended December 31, 2003, respectively. 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 February 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 competition, or for any other reason, our 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:

•

the acceptance of, and demand for, Aloxi injection;

•

changing demand for our current products, particularly Salagen;

•

third parties introducing competing products;

•

the pace and breadth of our development programs;

•

expenditures we incur to acquire, license, develop or promote additional products;

•

availability of product supply from third-party manufacturers;

•

changes in sales and marketing expenditures; and

•

the timing of licensing and royalty revenues.

For the six months ended June 30, 2004, we had net income of $5.4 million, compared to a net loss of $13.6 million for the six months ended June 30, 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. Variations in the timing of our future revenue and expense could 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 with 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:

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the size of the patient population;

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the nature of clinical protocol requirements;

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the diversion of patients to other trials or marketed therapies;

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our ability to recruit and manage clinical centers and associated trials;

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the proximity of patients to clinical sites; and

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the patient eligibility criteria for the study.

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.

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 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 will be devoted to 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.

Our customer base is highly concentrated. Bankruptcy of any of our customers would adversely affect our financial condition and fluctuations in their purchases of our products would cause volatility in our results of operations.

Our principal customers, specialty distributors and wholesalers,. compromise a significant part of the distribution network for oncology injectibles and pharmaceutical products in the United States. If any of these customers becomes insolvent or disputes payment of the amount it owes us would adversely affect results of operations and our financial condition. Further, fluctuations in customer buying patterns and their inventory levels of distributors could cause volatility in our results of operations and could materially, adversely impact our results of operations.

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 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:

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marketing or manufacturing delays;

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warning letters;

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fines;

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product recalls or seizures;

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injunctions;

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refusal of the FDA to review pending market approval applications or supplements to approval applications;

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total or partial suspension of production;

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civil penalties;

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withdrawals of previously approved marketing applications; or

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criminal prosecutions.

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 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.

We may need to obtain additional capital to grow our business and complete our product portfolio development and expansion plans. Issuance of new securities may dilute the interests of our shareholders and constrain our operating flexibility.

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

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to expand our portfolio of marketed products and product candidates;

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to develop products we have acquired or may license;

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to develop irofulven and other acylfulvene analogs;

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to obtain necessary working capital; and

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to fund operating losses.

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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we will be unable to negotiate acceptable collaborative arrangements to develop or commercialize our products;

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any arrangements with third-parties will not be successful;

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third-party collaborators will not fulfill their obligations to us under any arrangements entered into with them;

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strategic collaborators, including Helsinn Healthcare SA, will terminate their relationship with us; or

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current or potential collaborators will pursue treatments for other diseases or seek alternative means of developing treatments for the diseases targeted by our programs or products.

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.

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:

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the achievement of milestones by us or our collaborators;

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the amount of product sales and royalty-generating activities;

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the timing of initiating additional licensing relationships; and

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our continuing obligation related to license payments.

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. These products are marketed by GlaxoSmithKline, Roche and Aventis, large multinational competitors. 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.

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. 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. 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:

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these confidentiality agreements will be breached;

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we will not have adequate remedies for any breach of these agreements;

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our trade secrets will otherwise become known; or

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our trade secrets will be independently discovered and used by competitors.

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.

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 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. Third-party reimbursement is important to the commercialization of Aloxi 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:

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fluctuations in our operating results;

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announcements of technological innovations or acquisitions or licensing of therapeutic products or product candidates by us or our competitors;

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published reports by securities analysts;

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positive or negative progress with our clinical trials;

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governmental regulation, including healthcare reimbursement policies;

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developments in patent or other proprietary rights;

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developments in our relationship with collaborators and suppliers, and announcements of new strategic collaborations;

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public concern as to the safety and efficacy of our products; and

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general market conditions.

The trading price of our common stock has been, and could continue to be, subject to wide fluctuations in response to these factors, including the sale or attempted sale of a large amount of our common stock into the market. Our stock price ranged from $2.34 to $34.49 per share during the two-year period ended June 30, 2004. Broad market fluctuations may also adversely affect the market price of our common stock.

In the past, following large falls in the price of a company’s shares, securities class action litigation has often been initiated against that company. Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which could harm our business. Any adverse determination in litigation could subject us to significant liabilities.

We have outstanding options and convertible notes that have the potential to dilute shareholder value and cause our stock value to decline.

We routinely grant stock options to our employees and other individuals. At June 30, 2004, we had options outstanding at option prices ranging from $1.81 to $33.22 for 8,388,358 shares of our common stock that have been registered for resale. We have also issued convertible debt and are seeking effectiveness of a registration statement in relation to these securities and the common shares that may be issued in exchange for such debt. The convertible debt is convertible into 8,269,942 shares of common stock at an initial conversion price of $31.46 per share of common stock. Conversion is contingent on a number of factors that have not yet been satisfied. Consequently, we are not able to estimate when, if ever, the convertible debt will be converted into common stock, but any such conversion would almost certainly dilute shareholder value.

If some or all of such shares are registered and sold into the public market over a short time period, the value of our stock is likely to decline, as the market may not be able to absorb those shares at the prevailing market prices. Such sales may also make it more difficult for us to sell equity securities in the future on terms that we deem acceptable.

Our convertible notes are subordinated and we may incur additional debt.

Our convertible notes are subordinated in right of payment to all of our senior indebtedness. As a result, in the event of our bankruptcy, liquidation or reorganization or upon acceleration of the notes due to an event of default under the indenture governing the notes and in certain other events, our assets will be available to pay obligations on the notes only after all senior indebtedness has been paid in full. In addition, payments on the notes will be blocked in the event of a payment default on certain senior indebtedness and may be blocked for up to 179 of 365 consecutive days in the event of certain nonpayment defaults on such debt. After retiring our senior indebtedness, we may not have sufficient assets remaining to pay amounts due on any or all of the notes then outstanding.

The notes are exclusively obligations of MGI PHARMA, are not guaranteed by any subsidiaries and will not be guaranteed by any of our future subsidiaries. In the event we have subsidiaries, such subsidiaries would be separate legal entities and would have no obligation to make any payments on the notes or to make any funds available for payment on the notes. Our right to receive assets of any such subsidiaries upon their liquidation or reorganization (and the consequent right of the holders of the notes to participate in those assets) would be effectively subordinated to the claims of such subsidiaries’ creditors (including trade creditors), except to the extent that we are reorganized as a creditor of such subsidiary, in which case our claims would still be subordinate to any security interests in the assets of such subsidiary and any indebtedness of such subsidiary senior to that held by us.

The indenture does not prohibit or limit us and would not limit any of our subsidiaries from incurring senior indebtedness or incurring other indebtedness and other liabilities. As of June 30, 2004, we do not have senior indebtedness outstanding, and have no senior subordinated indebtedness other than the notes. We anticipate that from time to time we will incur additional senior indebtedness and other additional liabilities.

There is no public market for the notes, which could limit their market price or the ability to sell them for their inherent value.

We cannot provide any assurances that a market will be available for the notes or that holders of our notes will be able to sell their notes. If there is an available market, future trading prices of the notes will depend on many factors, including prevailing interest rates, the market for similar securities, general economic conditions and our financial condition, performance and prospects. Historically, the market for convertible debt has been subject to disruptions that have caused substantial fluctuations in the prices of the securities. Accordingly, holders of our notes may be required to bear the financial risk of an investment in the notes for an indefinite period of time. In addition, this market-making activity will be subject to the limitations imposed by the Securities Act of 1933 and the Securities Exchange Act of 1934, and may be limited during the effectiveness of a registration statement relating to the notes.

The notes were sold under an exemption from registration under applicable federal and state securities laws. The notes have not been registered under the Securities Act and, therefore, until we fulfill our obligations under the registration rights agreement, the notes may only be offered or sold pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws or pursuant to an effective registration statement. If no such exemption is available, you will not be able to sell your notes and/or any common stock issuable upon conversion of the notes. In addition, even after we have registered the notes and shares of underlying common stock, we will have the right, pursuant to the registration rights agreement, to suspend the use of the shelf registration statement in certain circumstances. In the event of such a suspension note holders would not be able to sell the notes or associated common stock under the registration statement.

Our convertible notes are not protected by restrictive covenants.

The indenture governing the notes does not contain any financial or operating covenants or restrictions on the payment of dividends, the incurrence of indebtedness, the granting of security to other creditors, the movement of assets to subsidiaries which incur debt or the issuance or repurchase of securities by us or any of subsidiaries that we may acquire in the future.

We may not have the ability to purchase notes at the option of the holders or upon a change in control or to raise the funds necessary to finance the purchases.

On March 2, 2011, March 2, 2014 and March 2, 2019, holders of the notes may require us to purchase their notes. However, it is possible that we would not have sufficient funds at that time to make the required purchase of notes or would otherwise be prohibited under future debt instruments from making such payments in cash. We may only pay the purchase price in cash and not in shares of our common stock.

In addition, upon the occurrence of certain specific kinds of change in control events, holders may require us to purchase for cash all or any portion of their notes. However, it is possible that, upon a change in control, we may not have sufficient funds at that time to make the required purchase of notes, and we may be unable to raise the funds necessary.

The terms of future indebtedness we incur may restrict our ability to fund the purchase of notes upon a change in control or if we are otherwise required to purchase notes at the option of the holder. If such restrictions exist, we would have to seek the consent of the lenders or repay those borrowings. If we were unable to obtain the necessary consent or unable to repay those borrowings, we would be unable to purchase the notes and, as a result, would be in default under the notes.

The holders of our notes could receive less than the value of the shares of common stock into which the notes are convertible as a result of the conditional conversion feature of the notes.

The notes are convertible into shares of common stock only if specified conditions are met. If the specified conditions for conversion are not met, holders of our notes will not be able to convert the notes, and may not be able to receive the value of the shares of common stock into which the notes would otherwise be convertible.

Our charter documents, our shareholder rights plan and Minnesota law contain provisions that could delay or prevent an acquisition of our company.

Our charter documents contain provisions that may discourage third parties from seeking to acquire our company. These provisions include:

•

advance notice requirements for shareholder proposals and nominations; and

•

the authority of the board of directors to issue, without shareholder approval, preferred stock with such terms as the board of directors may determine.

In addition, our board of directors has adopted a shareholder rights plan, or poison pill, which enables our board of directors to issue preferred stock purchase rights that would be triggered by an acquisition of 15 percent or more of the outstanding shares of our common stock. These provisions and specific provisions of Minnesota law relating to business combinations with interested shareholders may have the effect of delaying, deterring or preventing a merger or change in control. Some of these provisions may discourage a future acquisition of our company even if shareholders would receive an attractive value for their shares or if a significant number of our shareholders believed such a proposed transaction to be in their best interests. As a result, shareholders who desire to participate in such a transaction may not have the opportunity to do so.

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

Our operations are not subject to risks of material foreign currency fluctuations, nor do we use derivative financial instruments in our treasury practices. We invest in marketable securities that meet high credit quality standards, as specified in our investment policy. We do not expect material losses due to interest rate or default risk within our investment portfolio. The impact on our net income (loss) as a result of a 25, 50 or 100 basis point (where 100 basis points equals 1%) change in short-term interest rates would be approximately $1,062,500, $2,125,000 or $4,250,000 annually based on our cash, cash equivalents, restricted marketable investment and marketable investment (excluding available-for-sale equity securities) balances at June 30, 2004.

Item 4.

Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our President and Chief Executive Officer, Leon O. Moulder, Jr., and our Executive Vice President and Chief Financial Officer, William C. Brown, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period (the “Evaluation Date”) covered by this quarterly report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in timely alerting them to the material information relating to us required to be included in our periodic SEC filings.

(b) Changes in Internal Controls Over Financial Reporting

During the period covered by this report, there were no significant changes made in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

MGI PHARMA, INC.

PART II – OTHER INFORMATION

Item 2.

Changes in Securities

(a) See the discussion of the two-for-one stock split under Note (1) Basis of Presentation, Accounting Policies, of the Notes to the Company’s Financial Statements in Part I.

Item 4.

Submission of Matters to a Vote of Security Holders

The Company held its Annual Meeting of Shareholders on May 11, 2004, and sufficient favorable votes were cast to approve all management proposals as follows:

Election of management’s entire slate of nine directors by the following vote tallies:


	For	Withhold
Andrew J. Ferrara	29,757,008	437,488
Gilla Kaplan, Ph.D.	29,788,994	405,502
Edward W. Mehrer	29,754,647	439,849
Hugh E. Miller	28,208,872	1,985,624
Leon O. Moulder, Jr.	29,800,658	393,838
Lee J. Schroeder	27,871,183	2,323,313
David B. Sharrock	17,874,844	12,319,652
Waneta C. Tuttle, Ph.D.	29,801,357	393,145
Arthur Weaver	28,577,698	1,616,798

Amendment of the Company’s 1997 Stock Incentive Plan to extend the term of this plan through May 31, 2008 and to increase the number of shares available for awards granted under the plan by 4,110,000 by a vote of 16,081,369 for, 7,573,237 against, 59,298 abstaining, and 6,480,592 broker non-votes.

Amendment of the Company’s Amended and Restated Employee Stock Purchase Plan to increase the number of shares which may be purchased by 1,000,000 shares by a vote of 22,912,941 for, 746,810 against, 54,153 abstaining, and 6,480,592 broker non-votes.

Ratification of the independent auditors by a vote of 29,864,552 for, 271,136 against, 58,808 abstaining, and 0 broker non-votes.

Item 6. Exhibits and Reports on Form 8-K

(a) LISTING OF EXHIBITS:


Exhibit Number		Description

3.1		Second Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form10-Q for the quarter ended June 30, 2002).

3.2		Articles of Amendment to the Second Amended and Restated Articles of Incorporation, filed June 2, 2004.

3.3		Restated Bylaws of the Company, as amended to date (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form10-Q for the quarter ended June 30, 1998).

4.1		Specimen certificate for shares of Common Stock of the Company (Incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).

4.2		Rights Agreement, dated as of July 14, 1998, between the Company and Norwest Bank, Minnesota, N.A. (including the form of Rights Certificate attached as Exhibit B thereto) (Incorporated by reference to Exhibit 1 to the Company’s Registration Statement on Form 8-A, filed July 15, 1998).

4.3		First Amendment to Rights Agreement, dated March 14, 2000, between the Company and Norwest Bank, Minnesota, N.A. (Incorporated by reference to Exhibit 2 to the Company’s Registration Statement on Form 8-A/A-1, filed March 20, 2000).

4.4		Form of Convertible Subordinated Promissory Notes issued to Deerfield Partners, L.P. and Deerfield International Limited on December 2,2002 (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 4, 2002).

4.5		Form of Common Stock Purchase Warrants issued to Deerfield Partners, L.P. and Deerfield International Limited on December 2, 2002(Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on December 4, 2002).

4.6		Senior Subordinated Convertible Notes Purchase Agreement, dated February 25, 2004, by and between MGI PHARMA, INC. and Merrill Lynch, Pierce, Fenner & Smith(Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 4, 2004).

4.7		Senior Subordinated Convertible Notes Indenture, dated March 2, 2004, by and between MGI PHARMA, INC. and Wells Fargo Bank, National Association, as Trustee(Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on March 4, 2004).

4.8		Registration Rights Agreement, dated March 2, 2004, by and between MGI PHARMA, INC. and Merrill Lynch, Pierce, Fenner & Smith(Incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on March 4, 2004).



31.1		Certification of Leon O. Moulder, Jr. Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002).

31.2		Certification of William C. Brown Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002).

32.1		Certification of Leon O. Moulder, Jr. Pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of William C. Brown Pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) REPORTS ON FORM 8-K

The Company “furnished” (in accordance with Item 12 of Form 8-K) a report on Form 8-K on April 14, 2004 to report under Items 7 and 12 the Company’s results of operations and financial condition for the quarter ended March 31, 2004.

The Company filed a report on Form 8-K on May 11, 2004 to report under Items 5 and 7 that the Company’s Board of Directors had approved a two-for-one stock split of its common stock. As a result of the split, shareholders will receive one additional common share for each common share held on the record date of June 2, 2004. The Company also announced the results of its Annual Shareholders Meeting, which was held on May 11, 2004 in Minneapolis, Minnesota. Shareholders approved all of management’s proposals and its recommended slate of directors.

The Company filed a report on Form 8-K on May 21, 2004 under Items 7 and 9, that made available, a presentation to attendees at the Banc of America Securities Health Care Conference, which was originally made available to the public by a live web cast over the Internet.

The Company filed a report on Form 8-K on June 16, 2004 under Items 7 and 9, that made available, a presentation to attendees at the Needham Biotechnology Conference, which was originally made available to the public by a live web cast over the Internet.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	MGI PHARMA, INC.

Date: August 5, 2004	By:	/s/ William C. Brown
		William C. Brown,
		Executive Vice President and Chief Financial Officer
		(principal financial officer, and duly authorized officer)

MGI PHARMA, INC.

Quarterly Report on Form 10-Q

for the

Quarter Ended June 30, 2004

EXHIBIT INDEX


Exhibit Number		Description
3.1		Second Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form10-Q for the quarter ended June 30, 2002).

3.2		Articles of Amendment to the Second Amended and Restated Articles of Incorporation, filed June 2, 2004.

3.3		Restated Bylaws of the Company, as amended to date (Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form10-Q for the quarter ended June 30, 1998).

4.1		Specimen certificate for shares of Common Stock of the Company (Incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).

4.2		Rights Agreement, dated as of July 14, 1998, between the Company and Norwest Bank, Minnesota, N.A. (including the form of Rights Certificate attached as Exhibit B thereto) (Incorporated by reference to Exhibit 1 to the Company’s Registration Statement on Form 8-A, filed July 15, 1998).

4.3		First Amendment to Rights Agreement, dated March 14, 2000, between the Company and Norwest Bank, Minnesota, N.A. (Incorporated by reference to Exhibit 2 to the Company’s Registration Statement on Form 8-A/A-1, filed March 20, 2000).

4.4		Form of Convertible Subordinated Promissory Notes issued to Deerfield Partners, L.P. and Deerfield International Limited on December 2,2002 (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 4, 2002).

4.5		Form of Common Stock Purchase Warrants issued to Deerfield Partners, L.P. and Deerfield International Limited on December 2, 2002(Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on December 4, 2002).

4.6		Senior Subordinated Convertible Notes Purchase Agreement, dated February 25, 2004, by and between MGI PHARMA, INC. and Merrill Lynch, Pierce, Fenner & Smith(Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 4, 2004).

4.7		Senior Subordinated Convertible Notes Indenture, dated March 2, 2004, by and between MGI PHARMA, INC. and Wells Fargo Bank, National Association, as Trustee(Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on March 4, 2004).



4.8		Registration Rights Agreement, dated March 2, 2004, by and between MGI PHARMA, INC. and Merrill Lynch, Pierce, Fenner & Smith(Incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on March 4, 2004).

31.1		Certification of Leon O. Moulder, Jr. Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002).

31.2		Certification of William C. Brown Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002).

32.1		Certification of Leon O. Moulder, Jr. Pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of William C. Brown Pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.