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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

Commission File No. 0-10736

MGI PHARMA, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: 952/346-4700

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value

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

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

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

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2004, the last business day of the registrant’s most recent second quarter, was approximately $1,906,000,000 (based on the closing price of the registrant’s common stock as reported by the Nasdaq National Market on such date).

The number of shares outstanding of each of the registrant’s classes of common stock, as of March 7, 2005, was: Common Stock, $.01 par value; 71,450,679 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Pursuant to General Instruction G the responses to Items 10, 11, 12 and 14 of Part III of this report are incorporated herein by reference to certain information contained in the registrant’s definitive Proxy Statement for its 2005 Annual Meeting of Stockholders to be held on May 10, 2005.

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PART I

This Form 10-K contains forward-looking statements within the meaning of federal securities laws that may include statements regarding intent, belief or current expectations of the Company and its management. These forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that may cause the Company’s actual results to differ materially from the results discussed in these statements. Risks and uncertainties that might affect our results are detailed from time to time in the Company’s filings with the Securities and Exchange Commission, and are included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Cautionary Statements, of this Form 10-K. The Company does not intend to update any of the forward-looking statements after the date of this Form 10-K to conform them to actual results.

Overview

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

We currently market several cancer-related pharmaceutical products in the United States using our 112-person oncology-focused sales organization. (See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Revenues for a breakdown of sales by product over the last three years.) We focus our sales efforts solely within the United States, where we have retained product rights to our currently marketed products and product candidates under development. We have created alliances with other pharmaceutical or biotechnology companies for the sale and marketing of our products in other countries. (See Note 14 to the consolidated financial statements for further information on revenues attributable to U.S. and foreign customers.)

We began face-to-face sales calls or direct promotion of Aloxi^® (palonosetron hydrochloride) injection in September 2003 in the United States for the prevention of chemotherapy-induced nausea and vomiting, or CINV. Sales of Aloxi injection accounted for approximately 83 percent of our $192.1 million of product sales in 2004. We marketed Salagen^® Tablets (pilocarpine hydrochloride) in the United States to oncologists as a treatment for the symptoms of radiation-induced dry mouth in head and neck cancer patients and to rheumatologists as a treatment for dry mouth associated with the autoimmune disease Sjögren’s syndrome. Beginning in December 2004, generic 5 milligram pilocarpine hydrochloride tablets entered the United States markets where Salagen Tablets compete and we have suspended direct promotion of Salagen Tablets. If the introduction of these competing products adheres to the classic pattern of initial generic competition in a pharmaceutical product class, we would expect Salagen Tablets sales to decline significantly from our 2004 sales of $29.3 million in the United States. In March 2001, we began direct promotion of Hexalen^® capsules after acquiring the Hexalen capsules business in November 2000. Hexalen capsules are second-line chemotherapy for ovarian cancer patients who are refractory to first-line therapies.

On November 17, 2003, we and Helsinn Healthcare SA announced an expansion of our exclusive United States and Canada license and distribution agreement to include rights for the post operative nausea and vomiting, or PONV, application of Aloxi injection and an oral Aloxi formulation. Phase 2 trials of Aloxi injection for prevention of PONV indicated that Aloxi injection was safe and well tolerated. We expect phase 3 trials to begin in 2005 for use of Aloxi injection in the prevention of PONV and Aloxi capsules for the prevention of CINV.

In September 2004, we began direct promotion of Kadian^® (morphine sulfate sustained release) capsules in the United States to oncology health care professionals for moderate to severe pain associated with cancer, under a promotion arrangement with Alpharma, Inc. Kadian capsules continue to be marketed by Alpharma to pain specialists in the United States, other than oncology health care professionals.

In September 2004, we obtained exclusive worldwide rights to the development, commercialization, manufacturing and distribution of Dacogen^™ (decitabine) injection for all indications from SuperGen, Inc. Dacogen injection is an investigational anti-cancer therapeutic, which is currently in development for the treatment of patients with myelodysplastic syndrome, or MDS. The MDS New Drug Application, or NDA, and Marketing Authorization Application, or MAA, for Dacogen injection were submitted and accepted for review by the Food and Drug Administration, or FDA, and European Medicines Agency, or EMEA, respectively. The FDA established a Prescription Drug User Fee Act, or PDUFA, goal date for the NDA of September 1, 2005. Given the broad activity of Dacogen injection in hematologic cancers, we also intend to initiate during 2005 a pivotal phase 3 program in patients with acute myeloid leukemia, or AML.

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Saforis^™ oral suspension is a late-stage, novel, proprietary formulation of L-glutamine, an amino acid critical to the repair of cellular damage. Saforis oral suspension decreased the duration and severity of chemotherapy induced inflammation of the tissues lining the mouth, or oral mucositis. In 2004, a phase 3 trial of Saforis oral suspension was completed in 326 patients and it met its primary clinical objective of clinically significant reduction of oral mucositis in patients receiving Saforis oral suspension compared to placebo. A second phase 3 trial is planned to begin in 2005.

We are currently developing ZYC101a as a treatment for young women with high-grade cervical dysplasia. In a recently completed phase 2, multicenter, randomized placebo controlled trial of 161 women with high-grade cervical dysplasia that was conducted in the United States and Europe, ZYC101a was shown to be safe and well tolerated. In a prospectively defined cohort of patients under 25 years of age, the drug promoted resolution of high-grade dysplasia in 70 percent of patients, versus 23 percent in the placebo arm. In all patients, resolution was 43 percent for patients on drug and 27 percent for patients on placebo. A phase 3 trial to further assess the safety and efficacy of ZYC101a will begin in 2005 and is being designed to become a key part of submissions to regulatory authorities for seeking marketing approval.

Irofulven, the lead cancer therapy product candidate from our proprietary family of compounds, called acylfulvenes, is in a series of clinical trials. Based on our analysis of results from our trials of irofulven, we believe that irofulven is adequately tolerated for a chemotherapeutic, with evidence of monotherapy activity against a wide range of cancers including prostate, liver, ovarian, and pancreatic tumors. These results have been seen in patients with refractory tumors, meaning tumors that are unresponsive or no longer responsive to prior chemotherapy regimens. We also are conducting a series of trials with irofulven in combination therapy with currently approved cancer agents. We believe that an advantage of combination therapy is the potential to achieve better anti-cancer benefit with an acceptable side effect profile compared to either agent used alone. The most advanced of these combination trials is a phase 2, multi-arm, randomized trial of irofulven in combination with capecitabine and prednisone in hormone refractory prostate cancer, or HRPC, patients previously treated with docetaxel. Most HRPC patients in the United States who are receiving chemotherapy are treated with docetaxel, and we believe significant unmet need exists among prostate cancer patients who have failed hormone therapy and who have progressed on docetaxel.

We believe we have a robust portfolio of oncology related product candidates. Our current product candidates are predominately in advanced stages of development and are intended to have diverse roles in treating cancer patients or cancer related conditions. Our portfolio includes therapeutic and supportive care product candidates.

The following table summarizes the principal indications and commercial rights for our marketable products.

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The following table summarizes the principal indications, development status and sponsor for our products under development.

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

Business Strategy

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

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Cancer Overview

According to the American Cancer Society, or ACS, there are approximately 1.4 million new cases of cancer diagnosed in the United States each year. Cancer is the second leading cause of death in the United States and is projected to result in approximately 570,000 deaths in the United States in 2005.

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

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

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

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

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

Because different chemotherapeutic agents may target different cellular processes required for DNA replication and cell division or apoptosis, chemotherapeutic agents are often used in combination to exploit potential synergy with different mechanisms of action, and minimize the side effect profile of the individual agents. Agents that specifically induce apoptosis or interfere with DNA replication or cell division in novel ways are therefore excellent candidates to be used in combination with existing chemotherapy agents.

One of the principal causes of chemotherapy treatment failure is the development of drug resistance by cancer cells, where cancer cells become resistant or refractory to the intended cytotoxic action of a variety of conventional chemotherapeutic agents. In many cases, resistance developed to a specific chemotherapeutic agent results in multi-drug resistance where the cancer cell becomes resistant to a wide variety of chemotherapeutic agents. Given the current limitations of chemotherapy, there is a clear need for new

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therapies that are effective against a broad range of resistant and refractory cancers, as well as chemotherapeutics that act by novel mechanisms that can offer benefits as a combination therapy with existing chemotherapeutic agents.

Reactivation of tumor suppressor genes that exist naturally in a patient’s cells is an area of active research. Excessive methylation, or hypermethylation, can stop the expression of a tumor suppressor gene and production of the anti-cancer protein it encodes. This biological effect has been implicated as a fundamental factor in the development of cancers. Methylation is the attachment of a small cluster of carbon and hydrogen elements known as a methyl group. Attachment of a methyl group to a gene may stop its functioning. Researchers are identifying and evaluating ways to prevent or reverse hypermethylation, thereby allowing tumor suppressor genes to produce the natural proteins that can stop or reduce the growth of tumors.

Standard response criteria are used to report the results of oncology clinical trials. In solid tumor clinical trials, a complete response means that all measurable tumor tissue has disappeared and the patient appears to be disease free. A partial response means that measurable tumor tissue has shrunk by at least 50 percent in two-dimensional measurements or 30 percent in single dimensional measurements. Stable disease means that the size of the measurable tumor tissue has not shrunk sufficiently to be considered a partial response, but it has not grown more than 25 percent from its smallest size during treatment. Progressive disease means that the tumor has grown by more than 25 percent from its smallest size during treatment.

Achieving agreement on the appropriate clinical measures to use in myelodysplasic syndrome, or MDS, clinical trials is challenging because MDS spans a diverse range of abnormal blood cell production by patients. As a result, appropriate clinical measures will vary depending upon the cross-section of MDS patients enrolled in a trial.

To help group similar cross-sections of MDS patients for clinical trial (also prognostic and treatment) purposes, various classification systems have been developed. While these classification systems help in the conduct and evaluation of individual clinical trials, a lack of standardization and the evolving nature of the classification systems can make it difficult to compare the results of one trial to another trial. Therefore it is very important to understand the classification system and definitions used for a particular MDS clinical trial before drawing conclusions about those results relative to other trials.

The more common classification or prognostic systems include:

A key difference between FAB and WHO classification is the percent of immature bone marrow blood cells, or blasts, required before the patient is classified as having evolved from MDS to acute myeloid leukemia, or AML. Under the FAB system if blasts are 30 percent or less of all blood cells in the sample, the patient is classified as having MDS. The threshold under the WHO system is 20 percent.

The factors used in the IPSS to predict the potential for MDS to evolve into AML and survival periods include:

The IPSS categories ranging from low risk to high risk of the patient’s MDS evolving into AML are as follows:

Given what may be a prolonged course of MDS for patients evaluated as IPSS Low or Intermediate-1 risk, alleviation of disease-related symptoms and improved quality of life may be the most appropriate clinical measures. For patients evaluated as IPSS Intermediate-2 or High risk, extending the period of time before the disease progresses, to more severe MDS or AML, or survival period may be the most appropriate clinical measures.

A group of MDS clinical experts known as the International Working Group, or IWG, reported the results of their deliberations on standardizing response criteria for MDS in the journal Blood (Blood.2000; 96:3671-3674). Given the diverse nature of MDS they identified and defined clinical measures in the following categories:

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Subsequent clinical trial results will likely adopt the standard response criteria recommended by the IWG, thereby facilitating comparisons between independent clinical trials.

Marketable Products

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

Aloxi (palonosetron hydrochloride) injection is a potent, highly selective serotonin subtype 3, or 5-HT₃, receptor antagonist differentiated by its strong receptor binding affinity and extended half life for the prevention of chemotherapy-induced nausea and vomiting, or CINV. We obtained exclusive U.S. and Canada Aloxi injection license and distribution rights from Helsinn Healthcare SA in April 2001. On July 25, 2003, approval was received from the FDA to market Aloxi injection for the prevention of acute and delayed CINV. We began promoting Aloxi injection in September 2003 through our oncology-focused sales organization. Aloxi injection competes in the growing U.S. 5-HT₃ receptor antagonist market estimated to be $1.7 billion in 2004. Of this amount, the market for prevention of CINV is estimated to be approximately $900 million. Product sales of Aloxi injection in 2004 and 2003 were $159.3 million and $9.7 million, respectively.

Chemotherapy-Induced Nausea and Vomiting Overview

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

Efforts to treat tumors such as those found in breast and lung cancer have led physicians to administer more aggressive chemotherapy regimens. These cytotoxic agents often cause CINV by triggering release of serotonin from cells in the gastrointestinal tract. The released serotonin stimulates nerve receptors that activate the vomiting center via the chemoreceptor trigger zone. When, and if, serotonin stimulates serotonin subtype 3, or 5-HT_3, receptors to initiate nerve impulses to the central nervous system through the 5-HT₃ receptors, vomiting, or emesis, may ensue. Serotonin subtype 3, or 5-HT₃ receptor antagonists, such as Aloxi injection, act by binding to serotonin receptors in the peripheral and possibly central nervous system, thereby blocking serotonin stimulation of the associated nerves and reducing or eliminating CINV. CINV can be characterized as acute nausea and vomiting, occurring within 24 hours following administration of chemotherapy, or delayed nausea and vomiting, occurring 24 to 120 hours following administration of chemotherapy.

Although CINV has been managed to a greater degree in recent years, it is estimated that up to 85 percent of cancer patients receiving chemotherapy will experience some degree of emesis if not prevented with an antiemetic. The severity of emesis is dependent upon the type of chemotherapy administered, the dosing schedule of the chemotherapy, how quickly it was administered, and the patient’s age and gender, among other predisposing factors. If emesis is not properly managed, it can cause dehydration and poor quality of life, eventually leading to interruption or discontinuation of chemotherapy. Although the vast majority of patients receiving emetogenic chemotherapy are administered a 5-HT₃ receptor antagonist, there remains a need to improve upon the prevention of acute CINV and, especially delayed CINV. Despite the availability of preventive treatments, including first generation 5-HT₃ receptor antagonists, nearly fifty percent of all patients receiving chemotherapy experience nausea and vomiting.

Aloxi Injection Clinical Data for CINV

The results of phase 3 clinical trials demonstrate that Aloxi injection is more effective than ondansetron (Zofran^®) and dolasetron (Anzemet^®) injections, which combined account for approximately 59 percent percent of CINV sales of 5-HT₃ receptor antagonists in 2004. The most frequently prescribed chemotherapies, including those used to treat the most common cancers such as breast, lung and colon, are considered moderately emetogenic, or have a moderate to moderately high potential to cause nausea and vomiting. Based on the phase 3 trials conducted, Aloxi injection is shown statistically to have greater efficacy or to be as effective as ondansetron and dolasetron for prevention of acute and delayed CINV. Overall, the incidence, pattern, duration, and intensity of adverse reactions were similar among patients treated with Aloxi injection and other 5-HT₃ receptor antagonists. In 633 patients treated with Aloxi injection during phase 3 trials, the most common adverse reactions related to the study drug were headache (9 percent), and constipation (5 percent). The table below provides a summary of the efficacy results from these pivotal phase 3 clinical trials, where complete response rate is defined as the proportion of treated patients which had no vomiting and no rescue medication.

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

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

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

MGI conceived, developed and markets Salagen Tablets (pilocarpine hydrochloride) in the United States. Salagen Tablets were the first prescription drug approved to treat the symptoms of chronic dry mouth in patients with radiation-induced xerostomia and in patients with Sjögren’s syndrome. Chronic dry mouth can be a painful and debilitating condition. Salagen Tablets stimulate the exocrine glands, including the salivary glands, to increase their moisture-producing activity. Saliva is important to oral health and quality of life in general. People with chronic dry mouth can experience difficulty eating and sleeping, rapid tooth decay, periodontal disease and oral infections. Sales of Salagen Tablets in the United States were $29.3 million, $26.5 million and $22.3 million in 2004, 2003 and 2002, respectively. Salagen Tablets’ clinically-proven efficacy and safety has allowed it to maintain leadership in the market for treatment of chronic dry mouth symptoms associated with head and neck cancer patients treated with radiation and with Sjögren’s syndrome patients.

The FDA granted us orphan drug status for Salagen Tablets in 1994 as a treatment for the symptoms of xerostomia induced by radiation therapy in head and neck cancer patients and in 1998 for the symptoms of dry mouth associated with Sjögren’s syndrome. Our orphan drug protection for Salagen Tablets for the treatment of symptoms of radiation-induced xerostomia in head and neck cancer patients expired in March 2001 and our orphan drug protection for Sjögren’s syndrome expired in February 2005. In December 2004, the FDA approved a competitor’s Abbreviated New Drug Application, or ANDA, for a generic 5 milligram pilocarpine hydrochloride tablet and a second ANDA was approved in January 2005. If the introduction of these competing products adheres to the classic pattern of initial generic competition in a pharmaceutical product class, we would expect Salagen Tablet sales in 2005 to decline significantly. As a result, we suspended promotion of Salagen Tablets.

Also, in December 2004, we entered into a five-year manufacturing supply and distribution agreement for 5 milligram pilocarpine hydrochloride tablets, with Purepac Pharmaceutical Co. (“Purepac”), a subsidiary of Alpharma, Inc. Under the terms of this manufacturing, supply and distribution agreement, we will manufacture and supply 5 milligram pilocarpine hydrochloride tablets to Purepac for exclusive distribution in the United States and we will receive the supply price and a portion of gross margin of sales by Purepac.

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Head and neck cancer

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

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

Sjögren’s syndrome

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

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

In two 12-week trials that were the primary basis for the supplemental approval of Salagen Tablets for Sjögren’s syndrome in 1998, a total of 629 primary or secondary Sjögren’s syndrome patients were assessed for the ability of Salagen Tablets, versus placebo, to relieve the symptoms of dry mouth and to stimulate saliva production. Patients receiving Salagen Tablets four times a day reported a significant improvement in their symptoms associated with oral dryness, and they also demonstrated a significant increase in saliva for the full 12 weeks. Similar to the Salagen Tablet trials in head and neck cancer patients, less than one percent of the patients receiving Salagen Tablets withdrew from the trial due to lack of efficacy. The most common side effect was mild to moderate sweating. Less than four percent of patients taking the approved dosing regimen withdrew from the study due to sweating.

Hexalen Capsules for Ovarian Cancer

In November 2000, we purchased worldwide rights to Hexalen (altretamine) capsules from MedImmune Oncology, Inc. Hexalen capsules are an orally administered chemotherapy that is approved as a second-line treatment of ovarian cancer. Hexalen capsules are approved for the treatment of ovarian cancer in 21 countries including the United States. Sales of Hexalen capsules in the United States were $2.4 million in 2004.

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

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

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Kadian Capsules for Cancer Pain

In July 2004, we entered into a three-year promotion agreement for Kadian capsules, a sustained release formulation of morphine, with Alpharma, Inc. Under the terms of this promotion agreement, we promote Kadian capsules in the United States to oncology health care professionals for moderate to severe pain associated with cancer. We began promoting Kadian capsules to oncologists in September of 2004. Kadian capsules continue to be marketed by Alpharma to pain specialists in the United States, other than oncology health care professionals.

Products Under Development

Dacogen Injection Overview

In September 2004, we obtained exclusive worldwide rights to the development, commercialization, manufacturing and distribution of Dacogen (decitabine) injection for all indications from SuperGen, Inc. Dacogen injection is an investigational anti-cancer therapeutic which is currently in development for the treatment of patients with myelodysplastic syndrome, or MDS. Dacogen injection regulatory applications for the treatment of MDS are being reviewed for marketing approval by the FDA in the United States and the EMEA in Europe. A pivotal phase 3 trial and two supporting phase 2 trials for the MDS indication form the clinical basis of these applications. The FDA has established September 1, 2005 as the Prescription Drug User Fee Act, or PDUFA, action goal date for the NDA. SuperGen will, with our assistance, continue to pursue these MDS regulatory applications and all MDS responsibilities will transition to us by the end of 2005. We have assumed responsibility for development of all other indications for Dacogen injection.

The anticancer activity of Dacogen injection is due to both inhibition of cell growth, or cytotoxicity, which is observed at higher doses and decreasing methylation of deoxyribonucleic acid, or DNA, which is predominately observed at lower doses. Decreasing DNA methylation, or hypomethylation, is a relatively new approach to cancer treatment. Excess DNA methylation has been implicated as a fundamental factor in the development of cancers. Researchers have determined that an increase in specific methylation of DNA can result in blocking the expression of genes, such as tumor suppressor genes. In clinical trials, researchers have demonstrated that Dacogen injection can reverse the methylation of DNA, potentially leading to re-expression of tumor suppressor genes. In clinical trials, Dacogen injection has demonstrated activity in MDS, acute myeloid leukemia, or AML, and chronic myeloid leukemia, or CML. Preclinical data suggest that Dacogen injection may be effective in the treatment of solid tumor cancers where DNA methylation status is believed to be important, such as melanoma, colon and ovarian cancer.

Myelodysplastic Syndrome

MDS is a bone marrow disorder characterized by bone marrow production of abnormally functioning, immature blood cells. According to the American Cancer Society and the Aplastic Anemia and MDS International Foundation, approximately 10,000 to 30,000 new cases of MDS are diagnosed each year in the United States, although it is difficult to accurately determine the incidence because MDS is not recorded by the national tumor registry in the United States. In the majority of afflicted patients, MDS results in death from bleeding and infection. In approximately 30 percent of patients, MDS will convert to acute myeloid leukemia or AML, a disease with a high mortality rate.

In multiple Phase 2 trials in Europe, Dacogen injection demonstrated activity for treating patients with MDS. Based on positive results from these European Phase 2 trials, a randomized Phase 3 study was conducted at over 22 cancer centers in North America that compared Dacogen injection plus best supportive care treatment to supportive care treatment alone in a total of 170 MDS patients. Best supportive care involved treatment with antibiotics, blood growth factors and blood transfusions. Dacogen injection was administered intravenously over three hours at a dose of 15 milligrams for each square meter of body surface area, every eight hours for three consecutive days. The co-primary endpoints of the trial were overall response rate, or the sum of the percent of patients experiencing complete and partial responses, as defined by the International Working Group, or IWG, criteria and time to AML diagnosis or death. Secondary endpoints included duration of response, cytogenetic response rate, transfusion requirements, quality of life, survival, and safety. An independent review of bone marrow and response data was conducted. In December 2004 at the American Society of Hematology, or ASH, Annual Meeting, data from the phase 3 trial were presented. The overall response rate (complete responses plus partial responses) as defined by intent to treat criteria, or ITT, for patients treated with Dacogen injection following independent and blinded review, was 17 percent with a median response duration of 266 days, compared to zero percent in the patients receiving only supportive care treatment. This overall response rate is statistically significant. Median time to AML diagnosis or death was 340 days for the Dacogen injection treatment arm compared to 219 days for patients who received only supportive care. All patients who responded to Dacogen injection treatment became or remained transfusion independent and had

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higher quality of life scores for several parameters, including improvement of global health status, physical functioning, fatigue, and shortness of breath. The primary toxicity associated with Dacogen injection treatment was suppression of bone marrow production of blood cells, or myelosuppression, including suppressed production of white blood cells, or neutropenia, blood clotting cells, or thrombocytopenia, and red blood cells, or anemia. The results from this phase 3 trial are consistent with those from the phase 2 trials and confirm activity of Dacogen injection for MDS.

Also presented at the December 2004 ASH Annual Meeting were interim results of a trial designed to compare three different dosing regimens for Dacogen injection. MDS patients in this trial were randomized to receive one of three Dacogen injection regimens every four to six weeks. Of the 51 patients who had data available for evaluation at the time of the interim analysis, the overall response rate was 43 percent; including a 35 percent complete response rate and an 8 percent partial response rate. Adverse events were primarily a result of myelosuppression and included fever (7 percent) and infection (12 percent). These data support the hypothesis that these alternative Dacogen injection regimens are active in treating MDS patients and may offer dose scheduling flexibility.

The phase 3 trial was designed to support regulatory approval of Dacogen injection for the treatment of patients with MDS. Dacogen injection received orphan drug designation for MDS in the United States and Europe, which may provide us with seven years of marketing exclusivity in the United States and ten years marketing exclusivity in Europe, if Dacogen injection is approved for treatment of MDS by the respective regulatory authorities. However, the regulatory approval processes may take a significant amount of time and Dacogen injection may not be approved.

In May 2004, azacitidine was approved by the FDA as the first drug to be approved for the treatment of MDS. If Dacogen injection is also approved for treatment of MDS, it will compete directly with azacitidine. Sales of azacitidine began on July 1, 2004 and totaled $47 million during 2004.

Other Potential Indications

Beyond the activity of Dacogen injection for MDS, we believe phase 1 and 2 trials demonstrate that Dacogen injection may be active in a variety of other hematological malignancies such as AML and CML. We expect to begin a phase 3 trial of Dacogen injection in AML patients in the first half of 2005 and we are currently conducting a multi-center phase 2 trial with Dacogen injection for the treatment of refractory CML in patients who have failed previous front-line therapy. Phase 1 results also suggest that Dacogen injection may be useful for treatment of non-malignant diseases such as sickle cell anemia, for which we are supplying Dacogen injection to investigators for their phase 2 clinical trials in this area of study. Dacogen received orphan drug designation from the FDA for sickle cell anemia in September 2002, which may provide seven years of marketing exclusivity in the United States if Dacogen injection is approved by the FDA for the treatment of sickle cell anemia. Further, the Dacogen injection clinical and scientific program is the subject of a Clinical Research and Development Agreement, or CRADA, with the National Cancer Institute, or NCI. Pursuant to the CRADA, we will supply Dacogen injection for pre-clinical and clinical trials that will be managed by the NCI and that will focus primarily on the treatment of solid tumors.

Saforis^™ Oral Suspension Overview

Saforis^™ oral suspension is a late-stage, novel, proprietary oral formulation of L-glutamine, an amino acid which is critical to the repair of cellular damage. In multiple clinical trials, Saforis oral suspension decreased the duration and/or severity of chemotherapy-induced inflammation of the tissues lining the mouth, or oral mucositis. Additionally, Saforis oral suspension reduced the healing time of oral mucositis, reduced patients’ requirements for analgesics to treat pain due to oral mucositis, improved patients’ ability to swallow, thereby improving nutrition and improved patients’ overall quality of life. In 2004, a phase 3 trial of Saforis oral suspension was completed in 326 randomized patients and it met its primary clinical objective of clinically significant reduction of oral mucositis in patients receiving Saforis oral suspension compared to those patients receiving the placebo. A second phase 3 trial is planned to begin in 2005. Our goal is for Saforis oral suspension to be the first product marketed in the United States for the prevention and treatment of chemotherapy-induced oral mucositis. Saforis received Fast Track Designation from the Food and Drug Administration in 2002, which is designed to facilitate the development and expedite the review of applications of drugs that are intended to treat serious or life-threatening conditions and demonstrate the potential to address an unmet medical need for such a condition.

Oral Mucositis

Oral mucositis is one of the most common dose-limiting toxicities of cancer chemotherapy and radiotherapy. The incidence of oral mucositis in patients receiving chemotherapy ranges from 15 percent in those patients receiving standard chemotherapy doses to 76 percent in patients receiving high chemotherapy doses related to bone marrow transplantation, or BMT. In addition, virtually all patients experience oral mucositis following radiotherapy of the head and neck region.

Oral mucositis usually occurs within 5 to 7 days after the administration of chemotherapy or radiotherapy, and can last for 2 to 3 weeks, or longer in patients with below-normal numbers of white blood cells. As mucositis becomes more severe, breaks in the tissue

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surface, or ulcers, develop. These ulcers may be extremely painful; may temporarily interfere with oral intake and nutrition; may reduce the patient’s quality of life; and may result in serious clinical complications, including systemic infection. Severe oral mucositis with extensive ulceration may require hospitalization and direct into the bloodstream, or intravenous, administration of narcotics for pain management and supplements for nutrition. Further, oral mucositis frequently leads to dose reductions in subsequent chemotherapy cycles, and the pain of mucositis may discourage patients from continuing cancer treatment.

L-glutamine

L-glutamine has multiple functions in the human body, including enabling the transfer of nitrogen between tissues and regulation of protein synthesis. L-glutamine is a conditionally essential amino acid, because it is critical in times of serious illness when tissue repair is necessary or during times of high levels of cell replication. When such increased demands occur, the requirements for L-glutamine can exceed the body’s ability to produce sufficient amounts and intake of L-glutamine is needed to maintain normal plasma concentrations.

The rapidly dividing cells of tissues lining the mouth cavity, or oral mucosa, use L-glutamine not only as the primary fuel for cell replication, but also as the nitrogen source for cellular repair. Thus, the availability of L-glutamine becomes critical when these tissues have been injured as a result of chemotherapy or radiotherapy.

When L-glutamine is taken orally, it does not readily dissolve and it is quickly converted into an ineffective molecule. Both topical delivery to the oral mucosa or swallowing of L-glutamine has previously been limited by these factors and by widespread metabolism throughout the body. Even when administered intravenously, this widespread metabolism may limit the L-glutamine available within the oral mucosa.

Saforis oral suspension, with its proprietary delivery system, delivers 100 times more L-glutamine into mucosal epithelial cells compared to L-glutamine without this proprietary delivery system. The availability of adequate L-glutamine should allow damaged cells to regain normal function after injury, regulate and support protein synthesis, and provide critical metabolic energy and nitrogen that can optimize growth rates of replicating cells in rebuilding tissues.

ZYC101a Overview

The goal of treatment with ZYC101a is to enhance the natural immune response of a patient infected with human papilloma virus, or HPV, by allowing the immune process to produce a substance that is seen as foreign, an HPV antigen, which results in a heightened immune system response to HPV in the patient. The enhanced immune response, in the form of activated cells is expected to recognize and heal the patient’s abnormal growth of cervical tissue, or cervical dysplasia. ZYC101a is a circular form of double-strand DNA that can exist outside the nucleus of a cell, or plasmid DNA, contained within biodegradable poly (lactide-co-glycolide), or PLG, microparticles. This microencapsulation-based formulation of ZYC101a facilitates uptake of plasmid DNA by certain antigen-presenting cells, or APCs. Once internalized by an APC, the plasmid DNA is used to produce a protein, fragments of which attach to carrier molecules. This complex migrates to the surface of the APC and is recognized by T cells specific for HPV. These T cells, representing an enhanced immune response, migrate to the cervix and eliminate the HPV positive disease causing cells, thereby enabling the patient to heal.

We are currently developing ZYC101a as a treatment for young women with high-grade cervical dysplasia. A phase 2, multicenter, randomized placebo controlled trial of 161 women with high-grade cervical dysplasia was conducted in the United States and Europe. Patients enrolled in this phase 2 trial received an intramuscular injection of ZYC101a every three weeks for a total of three doses. ZYC101a was shown to be safe and well tolerated. In a prospectively defined cohort of patients under 25 years of age, the drug promoted resolution of high-grade dysplasia in 70 percent of patients, versus 23 percent in the placebo arm. In all patients, resolution was 43 percent for patients on drug and 27 percent for patients on placebo. In other open label trials, the drug was found to be safe and well-tolerated and disease resolution was observed in a high percentage of young patients. The most frequently observed adverse event in these trials was mild to moderate injection site pain, which was manageable with ibuprofen or acetaminophen. A phase 3 trial to further assess the safety and efficacy of ZYC101a will begin in 2005 and is being designed to become a key part of a submission for seeking marketing approval.

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Human Papilloma Virus and Cervical Dysplasia Overview

Human papilloma virus, or HPV, refers to a group of viruses that includes more than 100 different strains or types. More than 30 of these viruses are sexually transmitted and can infect the genital area. The areas include the skin of the penis, vulva, or anus, and the lining of the vagina, cervix, and rectum. Most people who become infected with HPV will not have any symptoms, and the infection will resolve on its own. In the United States, approximately 20 million people are currently infected with HPV. At least 50 percent of sexually active men and women acquire genital HPV infection at some point in their lives. It is estimated that as many as 70 percent of women have had HPV or are currently infected by HPV and that by age 30, at least 80 percent will have acquired genital HPV infection. HPV is the cause of cervical dysplasia.

The three types of cervical dysplasia (also called cervical intraepithelial neoplasia, or CIN) are mild, or CIN 1, moderate, or CIN 2, and severe, or CIN 3. Mild dysplasia is by far the most common type. Mild dysplasia is not considered to be a true pre-cancerous disease by many experts, because in about 70 percent of cases the abnormal cervical tissue reverts to normal tissue over time without any specific medical intervention. However, in a subset of women, mild dysplasia can progress to a more serious disease. Often, moderate and severe types of cervical dysplasia, or CIN 2/3, are grouped together and called high-grade cervical dysplasia.

A diagnosis of CIN 2/3 is based upon cellular changes, or transformation, that leads to sufficiently abnormal cervical cell replication and the generation of a cervical lesion that is deemed a pre-cancerous condition. This diagnosis requires that women be treated to eliminate the lesion and the causative transformed cells, which have the potential to develop into cervical cancer over a long period of time. CIN 2/3 lesions are generally treated by a surgical excision procedure called the loop electrocautery excisional procedure, or LEEP. This surgical and other CIN 2/3 treatments are associated with efficacy rates of 70 percent to 90 percent. However, these procedures are invasive and can cause a number of short-term and long-term side effects. LEEP places women at risk because it is a surgical procedure and can result in complications such as bleeding, a narrowing of the cervical opening, cervical incompetence, loss of mucous glands, and secondary infertility.

ZYC300

Our second immunotherapy compound in clinical development is ZYC300. ZYC300, an encapsulated plasmid encoding a commonly expressed tumor antigen, has completed a phase 1/2a trial in 17 patients with late stage metastatic hematological and solid tumors. The enzyme cytochrome P450 1B1, or CYP1B1, is encoded by the ZYC300 plasmid. Data from this trial were selected for oral presentation at the American Society of Clinical Oncology, or ASCO, 2003 Annual Meeting and demonstrated that ZYC300 was well tolerated and biologically active. During 2005, we intend to advance ZYC300 into a clinical trial in patients with solid tumors.

The Immune System and ZYC300

Recent studies, in both human and animal systems, have provided compelling evidence that the immune system can be activated to specifically recognize human tumor cells and kill them. Most attention has focused on thymus-derived cells, or T cells, as the principal cause of anti-tumor immunity especially in light of findings that tumor-derived proteins function as tumor-associated antigens, or TAA, and targets for T cells. The demonstration that TAA-specific immune responses can lead to tumor regression has been borne out extensively in animal models and data from clinical trials suggest that this approach is safe, feasible, and potentially effective in humans. Until recently, clinical efforts have been somewhat limited, in part because most tumor antigens are restricted in expression to one or a few tumor types and to a fraction of subjects with these types of tumors. CYP1B1, the enzyme encoded in the ZYC300 plasmid, is widely expressed in human cancer but rarely in normal tissues. Administration of ZYC300 in preclinical studies resulted in anti-tumor T cell responses and results from preclinical toxicity studies warranted clinical development.

A phase 1/2a clinical trial in 17 subjects with advanced malignancies who had failed prior cancer treatments was conducted to test the safety, bioactivity and clinical activity of ZYC300. Each patient was administered ZYC300 intramuscularly every other week for the target number of at least 6 but not more than 12 doses at a fixed dose level. From a safety perspective, ZYC300 was well tolerated. With the exception of a single subject who experienced abscesses at the injection site, no systemic or local toxicity was considered related to treatment with ZYC300, and only mild to moderate localized injection site reactions were observed. From a bioactivity perspective, despite their advanced cancer stage and history of prior chemotherapy treatment, most patients were determined to have an immune response to ZYC300. Increased levels of CYP1B1, or biologic responses, were observed in 46 percent of 13 patients who received more than 6 doses and in 80 percent of the 5 patients receiving 12 doses of ZYC300. From a clinical activity perspective, 3 patients had stable disease following their last dose of ZYC300 and all other patients had progressive disease. Each of the 3 patients who had disease stabilization was an immune responder. Clinical response to subsequent chemotherapy was remarkable with all 6 patients who earlier had demonstrated a biologic response to ZYC300 showing clinical benefit and exhibited durable clinical responses, including 1 complete response that lasted more than twelve months. None of the non-biologic responders benefited from subsequent chemotherapy. In summary, the data support proceeding with additional clinical development of ZYC300.

Aloxi Injection for the Prevention of Post Operative Nausea and Vomiting (“PONV”)

Aloxi (palonosetron hydrochloride) injection is a potent, highly selective serotonin subtype 3, or 5-HT₃, receptor antagonist differentiated by its strong receptor binding affinity and extended half-life and has already been approved for the prevention of

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chemotherapy-induced nausea and vomiting. We are working with Helsinn Healthcare, the licensor of palonosetron hydrochloride, to design phase 3 programs with a goal to seek FDA approval of Aloxi injection for the prevention of post operative nausea and vomiting, or PONV. A special protocol assessment process, or SPA, is being discussed with the FDA and phase 3 trials are expected to begin during 2005.

Post operative nausea and vomiting, or PONV, is a common consequence of anesthetic and surgical procedures. Patients undergoing abdominal, gynecological, ear, nose and throat, cardiovascular, and eye surgery are at the highest risk for PONV. If not prevented, PONV can delay discharge from the medical facility, cause hospital re-admissions and increase healthcare costs for patients who undergo surgery. Approximately 30 million doses of 5-HT₃ receptor antagonists are used annually for prevention of PONV in the United States, with sales of approximately $400 million.

Irofulven for Chemotherapy Treatment of Cancer

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

Irofulven:

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

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

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

Irofulven Single Agent Trials

We conducted single agent phase 1 dose-ranging trials using daily and intermittent weekly administration of irofulven to determine recommended dose amounts for subsequent trials. Late-stage cancer patients who were refractory to other chemotherapies enrolled in

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these trials and clinical activity was demonstrated in addition to determining dose amount and schedule for subsequent trials. Based on these results we tested irofulven in a variety of phase 2 solid tumor trials. We chose to investigate prostate, liver, ovary and pancreas because:

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

Irofulven Combination Trials

We believe that an advantage of combination therapy is the potential to achieve enhanced anti-cancer benefit with an acceptable side effect profile compared to either agent used alone. Because irofulven has a unique mechanism of action, retains activity against tumors that are known to be resistant to other cancer therapies and in preclinical trials demonstrated additive or synergistic effects in combination with a number of marketed chemotherapies, we are conducting drug combination trials with irofulven. The first clinical step in exploring combination therapy is to conduct phase 1, dose-ranging trials to determine the maximum tolerated dose of both drugs together. We have completed phase 1 trials of irofulven in combination with each of irinotecan, cisplatin, and capecitabine. Phase 1 trials of irofulven are ongoing in combination with gemcitabine, docetaxel and oxaliplatin. Phase 2 trials of irofulven in combination with other chemotherapies are described in the following summary by type of cancer.

Summaries by Type of Cancer

Hormone Refractory Prostate Cancer

Throughout phase 1 and 2 monotherapy and combination therapy trials, consistent evidence of clinical activity in hormone refractory prostate cancer, or HRPC, has been reported, including activity in patients previously treated with other chemotherapies. Phase 2 data presented at the American Society of Clinical Oncology (ASCO) Annual Meeting in 2003 indicated that irofulven in combination with prednisone, a steroid, induced decreases of more than 50 percent in prostate specific antigen (PSA) levels in 25 percent of evaluable patients and disease stabilization in 86 percent of patients evaluable for objective tumor response. PSA is a blood marker used by clinicians for treatment decisions. Activity has also been shown in prostate cancer patients treated with irofulven plus the marketed chemotherapies capecitabine or cisplatin in phase 1 trials. Following comprehensive analysis of our available data, we initiated a phase 2, multi-arm, randomized combination trial of irofulven in combination with capecitabine either with or without prednisone in HRPC patients previously treated with docetaxel. Most HRPC patients in the United States who are receiving chemotherapy are treated with docetaxel, and we believe significant unmet need exists among prostate cancer patients who have failed hormone therapy and who have progressed on docetaxel.

Liver Cancer

In Phase 2 trials we evaluated irofulven in patients with liver cancer using alternative dosing schedules. Objective partial responses and sustained disease stabilization were demonstrated in these trials. We are continuing a phase 2 trial of irofulven in combination with irinotecan in patients with liver cancer. In a phase 1 trial of irofulven administered in combination with capecitabine to patients with a variety of different solid tumors, objective partial responses and sustained disease stabilization were demonstrated in patients with advanced thyroid cancer. Based on this activity, a phase 2 trial has been initiated to evaluate the safety and efficacy of irofulven in combination with capecitabine in patients with advanced thyroid cancer.

Ovarian Cancer

Phase 2 trials have been conducted by us and the National Cancer Institute, or NCI, to evaluate alternative dosing schedules. Objective responses were demonstrated in these trials. An NCI trial is ongoing with irofulven in advanced ovarian cancer patients.

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Pancreatic Cancer

Our initial pivotal registration trial of irofulven was for the treatment of refractory pancreatic cancer. In February 2001, we began a pivotal phase 3 trial of irofulven for treating refractory pancreatic cancer patients. Initiation of this trial was based on phase 2 results in pancreatic cancer patients, improved acute tolerance with every-other-week dosing of irofulven seen in the dose optimization trial, and discussions with the FDA and our panel of outside oncology experts. This phase 3 trial was a randomized, multi-center, international trial in advanced-stage pancreatic cancer patients whose disease progressed after treatment with gemcitabine, the current standard-of-care treatment. The primary endpoint was overall survival times following treatment with irofulven compared to continuous infusion 5-fluorouracil, or 5-FU. Two patients were randomized into the irofulven treatment arm for every patient enrolled in the 5-FU control arm. In April 2002, we stopped enrollment in this phase 3 clinical trial of irofulven for gemcitabine-refractory pancreatic cancer patients. Despite evidence of irofulven activity, preliminary analysis of the phase 3 data by an independent Data and Safety Monitoring Board, or DSMB, indicated that the comparator agent 5-FU demonstrated a greater than expected survival benefit, making it statistically improbable that the final trial results could achieve our planned objectives for the trial. For this reason, we will no longer pursue this specific indication for irofulven monotherapy in gemcitabine-refractory pancreatic cancer.

NCI Clinical Trials

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

Other Acylfulvene Analogs

In addition to irofulven, we have obtained license rights to acylfulvene analogs. The synthesis and the initial biological testing of over 100 of these analogs has been performed at the University of California, San Diego, or UCSD. At UCSD, both in vitro and in vivo anti-tumor activity has been demonstrated for a significant number of the acylfulvene analogs. Further testing by the NCI of some of these analogs has confirmed broad spectrum anti-tumor activity. The broad-spectrum anti-tumor activity of the acylfulvene analogs suggests that this class of compounds has the potential to produce additional clinical development candidates. We are currently evaluating these analogs for further preclinical development.

MG98 and Small Molecule DNA Methyltransferase Inhibitor Programs

In August 2000, as part of our strategy to expand our portfolio of marketed and development stage anti-cancer products, we entered into an exclusive license, research and development agreement with MethylGene Inc., or MethylGene, for North America rights to its proprietary anti-cancer product candidate MG98 and MethylGene’s DNA methyltransferase small molecule inhibitor program. Included within our license rights is a United States patent on a method for reversing the tumor-causing state of a cell by administering an agent that corrects an aberrant methylation pattern in the DNA of the cell. In amendments to the License Agreement, MethylGene acknowledged full satisfaction of our then current payment obligations and suspended further payment obligations by us pending completion by MethylGene of a planned clinical trial with MG98. Rights to the small molecule inhibitor program have reverted back to MethylGene. If we resume MG98 development, our financial responsibilities related to MG98 under the License Agreement would also resume.

Sales and Marketing

We believe that for successful commercialization of our products, commercial development involvement must begin from the moment we identify a product candidate for possible acquisition and development. In this manner, factors that are important throughout the entire life cycle of a product can be appropriately managed. From initial sales forecasting, to market research, to brand strategy, to advocate development, our commercial development function prepares our product candidates for transition to our product marketing group. Our marketing group is responsible for additional market research, brand strategy and tactics, marketing programs, design and production of promotional materials and analysis of market performance. We use a variety of marketing programs to reach our targeted audiences, including distribution of product-specific brochures in face-to-face meetings and direct mailings, exhibits at select medical meetings and journal advertising. We have a 50-person in-house marketing, manufacturing, commercial management and commercial support staff who support our commercial activities.

We currently promote our products in the United States directly to oncologists using our 112-person oncology-focused sales organization. This includes 85 sales representatives, 9 regional sales directors, 2 national directors and 16 account management or reimbursement specialists, with an average tenure of pharmaceutical experience of more than 15 years. This sales organization

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actively promotes our products in both clinical and hospital settings to approximately 10,000 physicians plus affiliated health care professionals. Specifically, these promotion activities are directed to medical, hematologic, and gynecologic oncologists, plus associated nurses, pharmacists, practice managers and support staff. As is common in the pharmaceutical industry, our domestic product sales are made to pharmaceutical wholesalers, including specialty oncology distributors, for further distribution to the ultimate consumers of our products. In 2003, we expanded the sales organization in preparation for the commercial launch of Aloxi injection.

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

Research and Development

We maintain active drug development programs for our product candidates and commercialized products. Current drug development efforts are primarily focused on Dacogen injection, ZYC101a, Saforis oral suspension, irofulven and Aloxi products. Licensing development milestone payments are recognized as research and development expense. We also participate in post-marketing trials to support the continued commercialization of our marketed products. We seek product candidate acquisitions in order to expand our development pipeline. As of February 2005, we employed 86 persons in research and development, regulatory affairs and product formulation.

We have incurred significant research and development costs in the past and believe that substantial capital resources will be required to support current and future development programs. We spent approximately $62.6 million in 2004, $50.1 million in 2003, and $32.2 million in 2002 on research and development. In recent years, 44 to 62 percent of our research and development expense was attributable to license payments. Approximately 73 percent of our research and development expense in 2004 was attributable to third party services, license fees or FDA user fees. Funding for research and development is expected to come from internally generated funds, joint ventures, strategic alliances or other sources of capital, including equity or debt offerings.

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

We manage our human clinical development of product candidates by selectively outsourcing certain activities. We have in-house clinical, product development, data management, biostatistics, medical writing and regulatory capabilities, which allows us to direct product formulation, manage clinical trials, monitor adverse drug experience reporting, and file new drug applications with regulatory bodies. We outsource other development activities, such as laboratory projects, conduct of preclinical studies, production of clinical supplies and certain aspects of clinical trial conduct. We expect to continue to contract with third parties until it is necessary and economical to add these capabilities internally.

International Alliances

Kissei Pharmaceutical Co., Ltd.

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

Dainippon Pharmaceutical Co., Ltd.

During 1995, we entered into a cooperative development and commercialization agreement with Dainippon, whereby we granted Dainippon an exclusive license to develop and commercialize acylfulvenes, including irofulven, in Japan. Dainippon granted us an

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irrevocable, exclusive, royalty-free license allowing us to use any technology or data developed by Dainippon relating to the acylfulvenes. Dainippon and MGI agreed in the first quarter of 2003 to terminate this agreement effective August 2003. Under the agreement, Dainippon paid initial and continuing quarterly milestone payments totaling $11.1 million through April 2000. From April 2000 through January 2002, $4.3 million in deposit payments were received from Dainippon, which we repaid to Dainippon in August 2003. Since we had no obligations to Dainippon after termination, we amortized $7.1 million of deferred revenue into licensing revenue during 2003 related to the previously received non-refundable payments, of which $6.9 million was recognized in the third quarter of 2003.

Pfizer Inc. (formerly The Upjohn Company)

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

Novartis Pharma AG (formerly CIBA Vision AG)

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

Technology In-licensing Agreements

Acylfulvenes, Including Irofulven

In August 1993, we entered into an exclusive license agreement with the Regents of the University of California. Under the agreement, the university granted to us an exclusive, worldwide, royalty-bearing license for the commercial development, manufacture, use and sale of acylfulvene analogs, methods of synthesizing acylfulvene analogs and methods of treating tumors using acylfulvene analogs. We have been developing irofulven under this license. We paid the university an initial license fee upon execution of the agreement and agreed to pay license maintenance fees on each anniversary of the execution of the agreement until we submit the first NDA relating to the analogs to the FDA. In addition, we make development milestone payments prior to commercialization of the product. We have also agreed to pay royalties on net sales revenues, subject to annual minimum requirements. Through December 31, 2004, we have made approximately $900,000 in cash payments to the university under this agreement. Unless earlier terminated by the parties, the term of the agreement extends until the later of: (a) the expiration of the last-to-expire patent we have licensed; or (b) ten years from the date of the first commercial sale of products developed from the acylfulvene analogs.

MG98 and Other DNA Methyltransferase Inhibitors

In August 2000, we entered into a license, research and development agreement with MethylGene Inc., or MethylGene, for two anti-cancer product programs. Under the agreement, MethylGene granted to us an exclusive, royalty-bearing license to develop and commercialize MG98 in North America for all therapeutic indications. The agreement also included similar rights to small molecule DNA methyltransferase inhibitors for oncology and rheumatology indications. In exchange for the licenses, we agreed to:

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

In subsequent amendments to the License Agreement, MethylGene acknowledged full satisfaction of our then current payment obligations and suspended further payment obligations by us pending completion by MethylGene of a planned clinical trial with MG98. Rights to the small molecule inhibitor program have reverted back to MethylGene. If we resume development of MG98, our financial responsibilities related to MG98 under the License Agreement would also resume.

Aloxi Products

In April 2001, we obtained from Helsinn Healthcare SA (“Helsinn”) the exclusive oncology license and distribution rights for Aloxi injection in the United States and Canada. Aloxi injection is a differentiated 5-HT₃ receptor antagonist for the prevention of chemotherapy-induced nausea and vomiting. Under the terms of the agreement, we have made an aggregate of $38 million in license initiation and milestone payments as of December 31, 2004. We have also agreed to pay royalties and supply fees based on net sales revenues.

We expanded our agreement with Helsinn in November 2003 to include rights for the post operative nausea and vomiting (PONV) application of Aloxi injection and an oral Aloxi formulation and extended the term through December 31, 2015. Under the terms of the expanded agreement, we have made an aggregate of $25.0 million in initial and milestone payments as of December 31, 2004. We expect to make additional payments totaling $22.5 million over the course of the next several years upon achievement of certain development milestones including the approvals of Aloxi injection for prevention of PONV and an oral Aloxi formulation in the United States. We will also pay royalties and product supply fees based upon net sales. Helsinn will continue to fund and conduct all development of Aloxi products for the new applications and will supply finished product for commercialization.

Mylocel Tablets

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

Hexalen Product Purchase Agreement

In November 2000, we purchased certain assets and assumed certain liabilities related to the Hexalen (altretamine) capsules business from MedImmune (Oncology), Inc. Hexalen capsules are an orally administered anticancer drug that is approved for treatment of ovarian cancer in patients with persistent or recurrent disease following first-line therapy with a cisplatin and/or alkylating agent-based combination chemotherapy in the United States and a number of other countries. We purchased worldwide rights subject to existing distribution agreements for territories outside the United States. The purchase price of $7.2 million has been fully paid and royalties are due on net sales or distribution margins.

Distribution Agreements

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

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

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

Manufacturing

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

Aloxi Injection

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

Salagen Tablets

Pilocarpine hydrochloride, the active pharmaceutical ingredient for the manufacture of Salagen Tablets, is obtained under an exclusive supply and license agreement with Merck KgaA. The exclusive term of this agreement ends on December 31, 2007, and may be extended for additional five-year terms unless earlier terminated by the parties. Upon termination of the exclusive term, the agreement may continue for an indefinite period on a non-exclusive basis. The refined raw material is a semi-synthetic salt of an extract from plants grown and processed exclusively on carefully managed plantations in South America. We believe that the supply of pilocarpine hydrochloride is adequate for the foreseeable future. Salagen Tablets are currently manufactured for us by Patheon Inc. The initial term of the Patheon agreement was four years, with automatic renewal periods of three years. While this agreement may be terminated by either party upon three years’ written notice, neither party has provided notice.

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Hexalen Capsules

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

Development-Stage Pharmaceuticals

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

Dacogen injection

Decitabine, the active pharmaceutical ingredient in Dacogen injection, is currently produced by Ferro Pfanstiehl Laboratories, Inc., a wholly owned subsidiary of Ferro Corporation, under a contract with SuperGen Inc. We are in the process of negotiating a supply agreement with Ferro Pfanstiehl. Ferro Pfanstiehl has the capacity to manufacture the worldwide requirements of decitabine. Dacogen injection is a sterile lyophilized drug product in a single-dose vial, and is manufactured by Pharmachemie B.V. under a contract with SuperGen. MGI is in the process of negotiating a supply agreement with Pharmachemie.

ZYC101a

ZYC101a is composed of plasmid DNA that is currently manufactured by Cobra Biomanufacturing plc. The DNA is encapsulated in biodegradable poly (lactide-co-glycolide) microparticles. ZYC101a for injection is a sterile lyophilized drug product in a single-use vial, and the final formulation is currently manufactured by Hollister Stier Laboratories, LLC.

Saforis oral suspension

L-glutamine, the active pharmaceutical ingredient in Saforis oral powder for suspension is produced by Ajinomoto Co., Inc. Ajinomoto has the capacity to manufacture the worldwide requirements of L-glutamine. Saforis oral powder for suspension is manufactured by Mova Pharmaceutical Corporation. MGI has a supply agreement with Mova, a wholly owned subsidiary of Patheon Inc.

ZYC300

ZYC300 composed of plasmid DNA that is currently manufactured by Cobra Biomanufacturing plc. The DNA is encapsulated in biodegradable poly(lactide-co-glycolide) microparticles. ZYC300 for injection is a sterile lyophilized drug product in a single-use vial, and the final formulation is manufactured by Hollister-Stier Laboratories, LLC.

Irofulven

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

MG98

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

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Patents and Proprietary Rights

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

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The term of a U.S. patent issued from an application filed before June 8, 1995 is the longer of 17 years from its issue date or 20 years from its effective filing date. The term of a U.S. patent issuing from an application filed on or after June 8, 1995 is 20 years from its effective filing date. The Drug Price and Competition and Patent Term Restoration Act of 1984, the Generic Animal Drug Act, and the Patent Term Restoration Act generally provide that a patent relating to, among other items, a human drug product, may be extended for a period of up to five years by the U.S. Commissioner of Patents and Trademarks if the patented item was subject to regulatory review by the FDA before the item was marketed. Under these acts, a product’s regulatory review period (which consists generally of the period from the time when the exemption to permit clinical investigations becomes effective until the FDA grants marketing approval for the product) forms the basis for determining the length of the extension an applicant may receive. In addition, a patent term can be extended for an additional six months in the U.S. if the applicant performs additional testing in the pediatric population, as requested by the FDA. There can be no assurance that any issued patents will be extended in term. In addition, no grant of patent term extension will prevent a challenge to the underlying patent’s validity or a judicial finding that the underlying patent infringes on the rights of any third party.

We have licensed or obtained patent protection for palonosetron hydrochloride, irofulven and the other acylfulvene analogs, decitabine, certain formulations of l-glutamine, ZYC101a and ZYC300. Patent positions of pharmaceutical companies are generally uncertain and involve complex legal and factual issues. Therefore, although we believe our patents are valid, we cannot predict with any precision the scope or enforceability of the claims. In addition, there can be no assurance that our patent applications will result in issued patents, that issued patents will provide an adequate measure of protection against competitive technology which could circumvent such patents, or that issued patents would withstand review and be held valid by a court of competent jurisdiction. Furthermore, there can be no assurance that infringement of any issued patents cannot be circumvented by others.

Orphan drugs are currently provided seven years of marketing exclusivity for an approved indication following approval to market by the FDA, and are provided ten years of marketing exclusivity for an approved indication following approval to market by the EMEA.

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Orphan drug designation for our products does not, however, insulate us from other manufacturers attempting to develop an alternate drug for the designated indication, or the designated drug for another, separate indication.

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

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

Trademarks

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

Competition

The pharmaceutical industry is intensely competitive, based mostly on product performance and pricing. Many members of the industry have resources far greater than we do, providing them with potentially greater flexibility in developing and marketing their products. While we will seek to protect our products from direct competition through filing patents, seeking marketing exclusivity under the Orphan Drug Act, and maintaining technical information as trade secrets, there is no way to protect us from competition from products with different chemical composition or products made using different technology. There can be no assurance that we will be successful in our plan to gain product specific protection for each of our pharmaceuticals or that developments by others will not render our products noncompetitive or obsolete.

Competition in the markets for Salagen^® (pilocarpine hydrochloride) Tablets is expected to intensify during 2005 because beginning in December 2004 generic 5 milligram pilocarpine hydrochloride tablets entered the United States markets where Salagen Tablets (pilocarpine hydrochloride) compete. If the introduction of these competing products adheres to the classic pattern of initial generic competition in a pharmaceutical product class, we would expect Salagen Tablets sales to decline significantly from our 2004 sales of $29.3 million in the United States. As a result, we suspended direct promotion of Salagen Tablets. Further, Cevimeline hydrochloride is owned by Snow Brand Pharmaceuticals, Inc. and marketed by Daiichi Pharmaceuticals in the United States, as a treatment for dry mouth symptoms associated with Sjögren’s syndrome. We cannot estimate what ultimate effect this competing compound will have on the overall size of the Sjögren’s syndrome market and future demand for Salagen Tablets. A product marketed by MedImmune, Inc., amifostine, was approved in June 1999 by the FDA for reducing the incidence of radiation-induced dry mouth in post-operative head and neck cancer patients. Salagen Tablets are approved in part for the treatment of dry mouth symptoms resulting from radiation used to treat head and neck cancer patients. Due to the more restricted patient population for amifostine, as well as other factors such as price and invasive administration, we currently believe that amifostine will not have a significant impact on sales of Salagen Tablets. We believe other products are currently under development that may compete with Salagen Tablets.

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

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

Many companies of all sizes, including large pharmaceutical companies as well as specialized biotechnology companies, are developing cancer therapy drugs that will compete with our product candidates under development, if any of them are approved for sale. There are also a number of products already on the market that will compete directly with our product candidates if any of them are approved. In addition, colleges, universities, governmental agencies and other public and private research institutions will continue to conduct research and may develop new therapies or treatments which would render our drug candidates obsolete or non-

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competitive. Many of our competitors also have substantially greater financial, research and development, human and other resources than we do.

Government Regulation

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

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

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

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

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

Even after initial FDA approval has been obtained, further trials may be required to provide additional data on safety or efficacy for current indications, or to obtain approval for uses other than those for which the product was initially approved. Moreover, such approval may entail limitations on the indicated uses for which a drug may be marketed. Even if FDA approval is obtained, there can be no assurance of commercial success for any product. Post-marketing testing may be required, and surveillance programs such as reporting adverse events are required. The FDA may require withdrawal of an approved product from the market if any significant safety issues arise while a product is being marketed. In addition, before, during and after the process of approval, our prescription drug products must all be manufactured in accordance with current good manufacturing practices as set forth by the FDA. Marketing of products is also regulated by the FDA.

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

The health care industry is changing rapidly as the public, government, medical professionals and the pharmaceutical industry examine ways to broaden medical coverage while controlling health care costs. Potential approaches that may affect us include managed care initiatives, pharmaceutical buying groups, formulary requirements, and efforts to regulate the marketing and pricing of

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pharmaceutical products. 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 effect on our operations or sales, but we cannot predict the impact, if any, of future reimbursement changes.

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

Employees

As of February 21, 2005, we had 282 employees. Of our employees, 162 are engaged in our marketing, selling and manufacturing effort, 85 are involved in pharmaceutical development, including regulatory affairs and product formulation, and 35 are in other management or administrative positions. None of our employees is represented by a labor union or is subject to a collective bargaining agreement. We believe that our relations with our employees are satisfactory.

Available Information

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

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

Our wholly-owned subsidiary, MGI PHARMA Biologics, Inc., leases approximately 27,000 square feet of research lab and office space in Lexington, Massachusetts for approximately $73,000 per month. The initial lease expires May 2010, with an option to renew for an additional five-year period.

Our wholly-owned subsidiary, MGI OM, Inc., leases approximately 2,000 square feet of office space in Princeton, New Jersey for approximately $4,000 per month. The lease expires November 2008.

None.

None.

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PART II

Our common stock trades on the NASDAQ National Market under the symbol “MOGN.” As of March 7, 2005 we had 682 stockholders of record and 71,450,679 shares of common stock outstanding. We have never paid cash dividends on our common stock and have no present intention of paying cash dividends on our common stock.

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

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Overview

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

We promote products directly to physician specialists in the United States using our own sales force. Our products include Aloxi^® (palonosetron hydrochloride) injection, Salagen^® (pilocarpine hydrochloride) Tablets, Hexalen^® (altretamine) capsules and Kadian^® (morphine sulfate) sustained release 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 substantially exceeded 2004 sales of our other 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. Unless we meet certain minimum Aloxi product sales requirements under our license agreement with Helsinn, we would be required to work with Helsinn to develop a remediation plan that if not successfully implemented could result in certain Aloxi product rights reverting to Helsinn. Our 2004 Aloxi product sales of $159.3 million substantially exceeded the minimum requirement for 2004 of $25 million. Our minimum Aloxi product sales requirement for all Aloxi applications is estimated to peak at approximately $155 to $175 million, depending upon the timing of marketing approvals for Aloxi injection for PONV and Aloxi oral for CINV. Our 2004 sales of Aloxi injection for CINV (which does not include any sales of Aloxi injection for PONV or Aloxi oral for CINV) was $159.3 million, so we believe there is minimal risk that we will not achieve our future contractual sales minimums under the Helsinn license agreement.

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. Beginning in December of 2004, generic 5 milligram pilocarpine hydrochloride tablets entered the United States markets where Salagen Tablets compete and we suspended direct promotion of Salagen Tablets. If the introduction of these competing products adheres to the classic pattern of initial generic competition in a pharmaceutical class, we would expect Salagen Tablets sales to decline significantly from our 2004 sales of $29.3 million in the United States. Hexalen capsules are an orally administered chemotherapeutic agent approved in the United States for treatment of refractory ovarian cancer patients.

In March 2004, we issued $348 million of senior subordinated convertible notes. The net proceeds to us were $252.1 million after a discount of $87.8 million and issuance costs of $8.1 million (See Note 10 of the Company’s Notes to Consolidated Financial Statements).

We completed a two-for-one stock split on June 10, 2004. Stockholders received one additional common share for each common share held on the record date of June 2, 2004. All share and per share data for all periods presented have been restated to reflect this stock split (See Note 12 of the Company’s Notes to Consolidated Financial Statements).

In July 2004, we entered into a three-year promotion agreement for Kadian capsules, a sustained release formulation of morphine, with Alpharma, Inc. Under the terms of this promotion agreement, we promote Kadian capsules in the United States to oncology health care professionals for moderate to severe pain associated with cancer. We began promoting Kadian capsules to oncologists in September 2004. Kadian capsules continue to be marketed by Alpharma to pain specialists in the United States, other than oncology health care professionals.

In September 2004, we completed the acquisition of Zycos, Inc., a privately held, development stage company that focused on the creation and development of oncology and antiviral products. The acquisition of Zycos is expected to further our goal of building a leading oncology franchise. Zycos’ iterative drug formulation process allows for the rapid development of immune response therapeutics and has generated two compounds that are currently in clinical development (See Note 6 of the Company’s Notes to Consolidated Financial Statements).

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In September 2004, we obtained exclusive worldwide rights to the development, commercialization, manufacturing and distribution of Dacogen^TM (decitabine) injection for all indications from SuperGen, Inc. Dacogen injection is an investigational anti-cancer therapeutic which is currently in development for the treatment of patients with myelodysplastic syndrome, (“MDS”). The MDS New Drug Application (NDA) and Marketing Authorization Application, or (“MAA”), for Dacogen^™ injection were submitted and accepted for review by the Food and Drug Administration, (“FDA”) and European Medicines Agency (“EMEA”), respectively. The FDA established a Prescription Drug User Fee Act (“PDUFA”) goal date for the NDA of September 1, 2005. Given the broad activity of Dacogen injection in hematologic cancers, we also intend to initiate during 2005 a pivotal phase 3 program in patients with acute myeloid leukemia, (“AML) (See Note 7 of the Company’s Notes to Consolidated Financial Statements).

In September 2004, we completed the acquisition of Aesgen, Inc., a privately held company focused on treating side effects associated with cancer treatments. Aesgen’s lead product, Saforis oral suspension, is in phase 3 development for prevention and treatment of oral mucositis, which would strengthen our oncology supportive care franchise (See Note 6 of the Company’s Notes to Consolidated Financial Statements).

The following table summarizes the principal indications and commercial rights for our currently marketable products.

The following table summarizes the principal indications, development status and sponsor for our products under development.

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

Critical Accounting Policies

In preparing our financial statements in conformity with U.S generally accepted accounting principles (“GAAP”), our management must make decisions which impact reported amounts and related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, our management applies judgment based on our understanding and analysis of relevant circumstances. Note 1 to the consolidated financial statements provides a summary of the significant accounting policies followed in the preparation of the consolidated financial statements and the remainder of this section describes those that are deemed critical accounting policies.

Our accounting policy on revenue recognition is fully described in Notes 1 and 7 to the consolidated financial statements. The majority of our revenue relates to product sales. We recognize sales revenue when substantially all the risks and rewards of ownership have transferred to our customers. As is common in the pharmaceutical industry, our domestic sales are made to pharmaceutical wholesalers for further distribution 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 will monitor the Aloxi injection product trends in the distribution channel and disclose significant differences between these trends and end-user demand. 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 year-end liabilities associated with these estimates are defined contractually and resolved within several months following year-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 distribution channel inventory levels, underlying demand, historical experience and competitor behavior. Inventory 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 December 31, 2004

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and 2003, we had accrued liability balances of $2.4 million and $1.5 million, respectively, for product returns. The increase in product return provision from 2003 to 2004 is a result of the increased sales of Aloxi injection. The 2004 accrual reduction of $106,000 relates to sales in the prior year and is a result of a decrease of our estimated product returns allowance for Aloxi injection. Actual returns decreased from 2003 to 2004. The 2003 provision related to sales in prior period is a result of a decision to stop marketing Didronel^® I.V. Infusion.

We also recognize revenue related to licensing agreements. Licensing revenue recognition requires management to estimate effective terms of agreements and identify points at which performance is met under the contracts such that the revenue earnings process is complete. Under this policy for out-licensing arrangements, revenue related to up-front, time-based and performance-based licensing payments is recognized over the entire contract performance period. For our major licensing contracts, this results in the deferral of revenue amounts (approximately $2.2 million at December 31, 2004) where non-refundable cash payments have been received, but the revenue is not immediately recognized due to the long-term nature of the respective agreements. Following our initial estimate of the effective terms of these arrangements, subsequent developments such as contract modifications or terminations could increase or decrease the period over which the deferred revenue is recognized.

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

Results of Operations

Revenues

Total revenues for the years ended December 31, 2004, 2003 and 2002 are summarized in the following table:

Sales: Sales revenue increased 382 percent to $192.1 million in 2004 and increased 57 percent to $39.9 million in 2003 from $25.4 million in 2002. The increase in sales revenue from 2003 to 2004 reflects increased revenue from Aloxi injection and Salagen Tablets. We began the promotion of Aloxi injection in September 2003, following its approval by the U.S. Food and Drug Administration. Sales of Aloxi injection in the United States provided 83 percent of our sales revenue in 2004, and 24 percent in 2003. Sales of Salagen Tablets in the United States provided 15 percent of our sales revenue in 2004, 67 percent in 2003 and 88 percent in 2002.

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In December 2004, the FDA approved a competitor’s Abbreviated New Drug Application (“ANDA”) for a generic 5 milligram pilocarpine hydrochloride tablet and a second ANDA was approved in January 2005 and we have suspended direct promotion of Salagen Tablets. If the introduction of these competing products adheres to the classic pattern of initial generic competition in a pharmaceutical product class, we would expect Salagen Tablet sales in 2005 to decline significantly.

Licensing: Licensing revenue decreased 62 percent to $3.6 million in 2004 but increased 240 percent to $9.5 million in 2003 from $2.8 million in 2002. We and Dainippon Pharmaceutical Co. Ltd. agreed to terminate our collaborative acylfulvene license agreement in the third quarter of 2003. Since we had no future obligations to Dainippon after termination, all remaining unamortized licensing revenue related to this relationship was amortized into license revenue in 2003. For 2003, we amortized $7.1 million of deferred revenue into licensing revenue related to previously received non-refundable license fees from Dainippon, which included $6.9 million being amortized in the third quarter of 2003.

Licensing revenue is a combination of deferred revenue amortization from licensing arrangements and from royalties that are recognized when the related sales occur. We recognized $0.2 million, $7.4 million and $0.8 million of amortized deferred revenue in 2004, 2003 and 2002, respectively, related to all payments received under these license agreements. We will recognize the December 31, 2004 unamortized balance of $2.2 million from our license agreements into licensing revenue over the expected periods of benefit for the related collaborative arrangements, which is expected to continue into 2015. Future licensing revenue will fluctuate from quarter to quarter depending on the level of recurring royalty generating activities, and changes in amortization of deferred revenue, including the initiation or termination of licensing arrangements.

Annual 2005 sales for Aloxi injection are expected to be approximately $260 million and for all other revenues are expected to be approximately $25 million.

Costs and Expenses

Costs and expenses for the years ended December 31, 2004, 2003 and 2002 are summarized in the following table:

Cost of sales: Cost of sales as a percent of sales was 32 percent for 2004, 20 percent for 2003 and 17 percent for 2002. The increase in cost of sales as a percentage of sales is primarily a result of increased 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 depending on the product mix and production costs. We believe that cost of sales as a percent of product sales for our currently marketed products for 2005 will be approximately $97 million or 34 percent of sales.

Selling, general and administrative: Selling, general and administrative expenses increased 46 percent to $73.8 million in 2004 and increased 75 percent to $50.4 million in 2003 from $28.8 million in 2002. The increase in selling, general and administrative expense is primarily a result of increased expenditures for the commercial launch of Aloxi injection in September 2003 and its continued commercialization. We expect selling, general and administrative expenses for 2005 to be approximately $80 million.

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Research and development: Research and development expense increased 25 percent to $62.6 million in 2004 and increased 56 percent to $50.1 million in 2003 from $32.2 million in 2002. All three periods include expense related to milestone payments under our license agreement for Aloxi product candidates: $2.5 million in 2004, $31.3 million in 2003 and $14.0 million in 2002. In addition, 2004 research and development expenses included license and milestone payments of $29.2 million under our agreement for Dacogen product candidates. Exclusive of license payments, research and development expense increased 61 percent to $30.3 million in 2004 and increased 3 percent to $18.8 million in 2003 from $18.2 million in 2002. The following table details the Company’s research and development costs incurred for major development projects in the years ended December 31, 2004, 2003, and 2002: