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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2005

OR

For the transition period from              to             

Commission File Number: 0-10736

MGI PHARMA, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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MGI PHARMA, INC.

FORM 10-Q INDEX

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

MGI PHARMA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

See accompanying Notes to Consolidated Financial Statements.

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MGI PHARMA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(in thousands, except per share data)

See accompanying Notes to Consolidated Financial Statements.

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MGI PHARMA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands, except per share data)

See accompanying Notes to Consolidated Financial Statements.

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MGI PHARMA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(1) Basis of Presentation

In the opinion of management, the accompanying Unaudited Consolidated Financial Statements (“consolidated financial statements”) of MGI PHARMA, INC. (“MGI” or “Company”) have been prepared on a consistent basis with the December 31, 2004 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly present the information set forth therein. The consolidated financial statements have been prepared in accordance with the regulations of the SEC, and, therefore, omit certain information and footnote disclosure necessary to present the statements in accordance with generally accepted accounting principles. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, which was filed with the SEC on March 10, 2005. Certain amounts reported in previous periods have been reclassified to conform to the current period presentation. The results of operations for the first three months of 2005 are not necessarily indicative of the results to be expected for the entire fiscal year.

Accounting Policies:

In preparing the consolidated financial statements in conformity with U.S. generally accepted accounting principles, management must make decisions that impact the reported amounts and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, management applies judgments based on its understanding and analysis of the relevant circumstances, historical experience, and actuarial valuations. Actual amounts could differ from those estimated at the time the consolidated financial statements are prepared. Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K provides a summary of the significant accounting policies followed in the preparation of the consolidated financial statements. Other footnotes in the Company’s Annual Report on Form 10-K describe various elements of the consolidated financial statements and the assumptions made in determining specific amounts.

Recent Accounting Pronouncements:

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (Revised 2004), “Share-Based Payment.” SFAS No. 123R is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services through share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost will be recognized over the period during which an employee is required to provide services in exchange for the award. In April 2005, the SEC issued a new rule that allows companies to implement SFAS No. 123R at the beginning of the next fiscal year, instead of the next reporting period, that begins after June 15, 2005. As a result, we will implement SFAS No. 123R in the reporting period beginning January 1, 2006. While the Company cannot precisely determine the impact on net earnings as a result of the adoption of SFAS No. 123R, estimated compensation expense related to prior periods can be found under the heading “Stock-Based Compensation” in note 2. The ultimate amount of increased compensation expense will be dependent on whether the Company adopts SFAS No.123R using the modified prospective or retrospective method, the number of option shares granted during the year, their timing and vesting period, and the method used to calculate the fair value of the awards, among other factors.

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At its October 2004 meeting, the Emerging Issues Task Force of the FASB reached a consensus on Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.” The consensus requires contingently convertible instruments to be included in diluted earnings per share (if dilutive) regardless of whether the market price trigger has been met. The consensus is to be applied to contingently convertible instruments in reporting periods beginning after December 15, 2004. The adoption of this consensus had no effect on the Company’s consolidated financial statements as presented. The potential dilutive shares related to our senior subordinated convertible notes issued in March 2004 are excluded from our diluted loss per share for the three months ended March 31, 2005 and 2004 because their inclusion in a calculation of net income (loss) per share would be antidilutive. When dilutive, our diluted shares outstanding will be increased by up to 8.3 million shares and the net earnings used for earnings per share calculations would be adjusted, using the if-converted method. The Company estimates it would need to record annual net income of approximately $64 million, or quarterly net income of approximately $16 million in order for the effect of this pronouncement to be dilutive to earnings per share.

(2) Stock Incentive Plans

Under stock incentive plans, designated persons (including officers, directors, employees and consultants) have been or may be granted rights to acquire our common stock. These rights include stock options and other equity rights. At March 31, 2005, shares issued and shares available under stock incentive plans are as follows:

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We account for stock-based compensation arrangements in accordance with the provisions of APB No. 25, “Accounting for Stock Issued to Employees,” and comply with the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation”. Under APB No. 25, compensation cost is recognized when the market value of the Company’s stock exceeds the amount an employee must pay to acquire the stock at the date of grant. During the second quarter of 2004, a stock option grant was made below market value and the aggregate amount of $284,800 is being expensed in accordance with APB No. 25 over a four-year vesting period. All other stock incentive awards were made at market value so no compensation expense has been recognized for these awards. Had we determined compensation cost based on fair value at the grant date for our stock options and the fair value of the discount related to the employee stock purchase plan under SFAS 123, our net income (loss) would have been reported as follows:

(3) Net Income (Loss) Per Common Share

Net income (loss) per common share for the three-month periods ended March 31, 2005 and 2004 is based on weighted average shares outstanding as summarized in the following table:

Potentially dilutive securities, which are excluded from the calculation because their inclusion in a calculation of net income (loss) per share would have been antidilutive, include common shares issuable upon exercise of stock options of 2.2 million for 2005 and 8.0 million for 2004 and common shares issuable on conversion of our convertible debt of 8.3 million for both 2005 and 2004 (see Note 7).

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(4) Marketable Investments

Marketable investments consisted of held-to-maturity and available-for-sale debt investments that are reported at amortized cost, which approximates fair market value and available-for-sale, publicly traded, equity securities that are reported at fair market value. Unrealized gains or losses from the available-for-sale, marketable securities are included in “Accumulated other comprehensive (loss) income,” as a separate component of “Stockholders’ equity.” Short-term marketable investments at March 31, 2005 and December 31, 2004 are summarized in the following table:

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

Restricted marketable investments of $11.5 million and $14.4 million at March 31, 2005 and December 31, 2004, respectively, consist of United States government agency investments (see note 7).

(5) Inventories

Inventories at March 31, 2005 and December 31, 2004 are summarized as follows:

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

(6) Accrued Expenses

Accrued expenses at March 31, 2005 and December 31, 2004 are summarized as follows:

(7) Stockholders’ Equity

Changes in selected stockholders’ equity accounts for the three months ended March 31, 2005 were as follows:

(8) Acquisitions

Zycos: On September 3, 2004, Zycos Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of MGI PHARMA merged with and into Zycos Inc. (“Zycos”), a Delaware corporation, with Zycos surviving as our wholly owned subsidiary. Through the merger, we acquired all of the ownership interests in Zycos from its security holders. Zycos was a privately held, development stage company that focused on the creation and

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development of oncology and antiviral products. The transaction has been accounted for as a purchase of a development stage enterprise. Commencing September 3, 2004, the results of Zycos operations have been included in our consolidated financial statements.

As consideration for the acquisition of all ownership interests in Zycos, Inc., we paid $50 million in cash. In addition, we incurred $2.3 million in transaction fees, including legal, valuation, investment banking and accounting fees.

Aesgen: On September 28, 2004, MGIP Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of MGI PHARMA, merged with and into Aesgen, Inc., a Delaware corporation (“Aesgen”), with Aesgen surviving as our wholly owned subsidiary. Aesgen, Inc. was a privately held company focused on developing therapies for treating side effects associated with cancer treatments. Aesgen’s lead product, Saforis^TM oral suspension, is a phase 3 product candidate in development for treatment of oral mucositis. The transaction has been accounted for as a purchase business combination per SFAS 141, “Business Combinations”. Commencing September 28, 2004, the results of Aesgen’s operations have been included in our consolidated financial statements.

As consideration for all of the ownership interests in Aesgen, we paid $32 million in cash at the closing. In addition, we assumed $1.1 million in liabilities and incurred $1.9 million in transaction fees, including legal, valuation and accounting fees.

The following is a summary of potential contingent consideration to Aesgen’s former security holders:

If earned, contingent consideration would be considered goodwill. Goodwill represents the excess of the purchase price paid over the fair value of tangible and identifiable intangible net assets acquired in business combinations. In accordance with SFAS No. 142, the Company has not amortized goodwill for business acquisitions consummated after June 30, 2001, and ceased amortization of goodwill effective April 1, 2002 for business combinations consummated prior to July 1, 2001. Goodwill is reviewed annually and whenever events or circumstances occur which indicate that goodwill might be impaired.

No contingent consideration was paid or was payable as of March 31, 2005.

Pro forma results of operations: The following unaudited pro forma information for the three months ended March 31, 2004, presents a summary of the combined results of MGI PHARMA, Aesgen and Zycos as if the acquisitions had occurred on January 1, 2004. The pro forma net income (loss) and income (loss) per share include the acquired IPR&D charge noted above as if recognized in 2003. The pro forma information is not necessarily indicative of results that would have occurred had the acquisitions been consummated for the periods presented or indicative of results that may be achieved in the future.

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(9) Research and Development Expense

Research and development expense for the three-month periods ended March 31, 2005 and 2004 consists of the following:

(10) Comprehensive Income

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

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Item 2.

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

Business 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 address cancer patient needs. It is our goal to become a leading oncology-focused biopharmaceutical company through the 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 sales of Aloxi injection for CINV (which does not include any sales of Aloxi injection for PONV or Aloxi oral for CINV) for the quarter ended March 31, 2005 and for the year ended December 31, 2004 were $57.2 million and $159.3 million, respectively, 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 November 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. Sales of Salagen Tablets were $3.6 million and $6.7 million for the quarters ended March 31, 2005 and 2004, respectively.

Hexalen capsules are an orally administered chemotherapeutic agent approved in the United States for treatment of refractory ovarian cancer patients.

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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.

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

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Results of Operations

Quarter ended March 31, 2005 compared to quarter ended March 31, 2004

Revenues

Total revenues in the first quarter of 2005 increased 135 percent over total revenues in the first quarter of 2004.

Sales: Sales revenue increased 141 percent in the first quarter of 2005 from the first quarter of 2004.

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Licensing: Licensing revenue decreased 18 percent to $0.9 million in the first quarter of 2005 from $1 million in the first quarter of 2004. Licensing revenue is a combination of deferred revenue amortization that is recognized over the term of the underlying arrangement and royalties that are recognized when the related sales occur. Future licensing revenue will fluctuate from quarter to quarter depending on the level of recurring royalty generating activities and changes in amortization of deferred revenue, including the initiation or termination of licensing arrangements.

We expect revenue for 2005 to be approximately $285 million, including estimated Aloxi injection sales of $260 million.

Costs and Expenses

Cost of sales: Cost of sales as a percentage of sales was 35.1 percent for the first quarter of 2005 and 29.5 percent for the first quarter of 2004. The increase in cost of sales as a percentage of sales is a result of sales of Aloxi injection, which has a lower gross margin than our other marketed products. If Aloxi injection sales continue to represent an increasing percentage of our sales revenue, cost of sales will increase as a percentage of sales. Cost of sales may vary from quarter to quarter, depending on the product mix and production costs. We believe that cost of sales for 2005 will be approximately $97 million.

Selling, general and administrative: Selling, general and administrative expenses increased $18.8 million in the

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first quarter of 2005 from $17.5 million in the first quarter of 2004. The increase is primarily a result of the company’s year over year growth. We expect selling, general and administrative expense of approximately $80 million for 2005.

Research and development: Research and development expense increased 106 percent to $10.3 million in the first quarter of 2005 from $5.0 million in the first quarter of 2004. The increase primarily represents increased spending on development programs for the late-stage product candidates in our pipeline, including those acquired in 2004. We expect net research and development expense for 2005 to be approximately $46 million.

NM – Not Meaningful

Interest Income

Interest income increased 67 percent to $1.4 million in the first quarter of 2005 from $0.8 million in the first quarter of 2004. The increase is due to an increase in the average amount of funds available for investment, resulting from the $252.1 million of net proceeds from the March 2004 convertible debt issuance. Interest income for 2005 will fluctuate depending on the timing of cash flows and changes in interest rates for marketable investments.

Interest Expense

Interest expense increased 142 percent to $1.8 million in the first quarter of 2005 from $0.7 million in the first quarter of 2004. The increase is due to our issuance of convertible debt in March 2004. We expect interest expense for 2005 to be approximately $7 million, of which $5.9 million will be paid using cash. The non-cash portion of interest expense is primarily related to the amortization of issuance costs incurred and capitalized in conjunction with the issuance of convertible debt in March 2004.

Tax Expense

Tax expense of $250,000 represents federal alternative minimum taxes. Our ability to achieve profitable operations is dependent upon our successful commercialization of Aloxi injection, among other things, and therefore, we continue to maintain a valuation allowance against our deferred tax assets. If and when it is judged to be more-likely-than-not that we will be able to utilize some or all of our deferred tax assets, the related valuation allowance will be reduced and a tax benefit will be recorded, and the portion of the allowance pertaining to the exercise of stock options will increase additional paid-in capital. The benefits realized from the use of acquired net operating losses and credits will first reduce to zero the intangible assets related to the acquisitions and then reduce tax expense. Then for subsequent tax periods, our tax provision would likely reflect normal statutory tax rates, and utilization of our deferred tax attributes would reduce our deferred tax asset balance. The timing of this valuation allowance adjustment is primarily dependent upon continued growth in sales of Aloxi injection and the demonstration of consecutive quarters of profitability.

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Net Income (Loss)

We had a net income of $11.6 million for the first quarter of 2005 and a net loss of $3.1 million for the first quarter of 2004. The change to net income in the first quarter of 2005 from net loss in the first quarter of 2004 reflects a 135 percent increase in revenues from 2004 to 2005, and a 69 percent increase in costs and expenses from 2004 to 2005. We expect operating income for 2005 to be approximately $62 million.

Liquidity and Capital Resources

At March 31, 2005, we had cash, cash equivalents and unrestricted marketable debt investments of $213 million and working capital of $328 million, compared with $238 million and $284 million, respectively, at December 31, 2004. A majority of the decrease in cash and cash equivalents was to fund working capital requirements for accounts receivable and inventory in the quarter.

Net Cash Used in Operating Activities

Net cash used in operations was $31.8 million and $21.5 million for the three months ended March 31, 2005 and 2004, respectively. The increase in cash use was primarily due to an increase in accounts receivable and inventories and decreases in accounts payable and accrued expenses, offset by an increase in net income. The $20.9 million increase in inventories reflects inventory build to support Aloxi injection sales. Our terms for Aloxi injection sales to specialty distributors are 150 days, a change from 180 days in the fourth quarter of 2004; as a result, the $9.8 million increase in accounts receivable is a result of increased Aloxi injection sales from the fourth quarter of 2004 and the first quarter of 2005 compared to sales in the second half of 2004. The primary reason for the decrease in accrued expenses is the decrease in bonus accruals of $6 million.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by investing was $40.2 million for the three months ended March 31, 2005 and $220.9 million was used in investing for the three months ended March 31, 2004. The 2005 amount provided by investing was the result of maturing investments. The 2004 amount used in investing activities was a result of investing proceeds from the issuance of convertible debt in March 2004. Cash provided by or used in investing activities will fluctuate due to the timing of purchase and maturity of investments.

Net Cash Provided by Financing Activities

Net cash provided by financing was $6.1 million and $244.8 million for the three months ended March 31, 2005 and 2004, respectively. The 2005 amount provided by financing activities was the result of the maturing of restricted investments and issuance of shares under stock plans. The 2004 amount was due to net proceeds of $252.1 million received from the issuance of convertible debt in March 2004, $5.9 million from issuance of shares under stock award plans and $3.9 million upon the exercise of warrants and issuance of shares. This total was reduced by the purchase of $17.1 million of restricted marketable securities, which were pledged as security for the first six scheduled interest payments related to the issuance of convertible debt.

Cash Management and Requirements

Our cash use in 2005 will depend in part upon the pattern of Aloxi injection sales. We expect the Aloxi injection sales to increase for 2005, which will result in increased working capital deployed for Aloxi injection finished product inventory and receivables. However, as sales increase we expect our operations to generate positive cash flow. We expect cash provided by operations in 2005 to be approximately $60 million. Our overall change in cash position will be positive or negative depending on our investing and financing activities.

Substantial amounts of capital are required for our pharmaceutical development and commercialization efforts.

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For continued development and commercialization of our product candidates and marketed products, and the acquisition and development of additional product candidates, we plan to utilize cash provided from product sales, collaborative arrangements and existing liquid assets: we may seek other sources of funding, including additional equity or debt issuances as appropriate. We have no arrangements or operating covenants that would trigger acceleration of our lease obligations or long-term liabilities.

Our liquidity is affected by a variety of factors, including sales of our products, the pace of our research and development programs, the out-licensing of our products, the in-licensing of new products and our ability to raise additional debt or equity capital. As identified in our risk factors, adverse changes that affect our future demand for our marketed products, continued access to the capital markets, and continued development and expansion of our product candidates would affect our longer-term liquidity. We believe we have sufficient liquidity and capital resources to fund operations to positive cash flow. The following table summarizes our contractual obligations at March 31, 2005 and the effect these obligations are expected to have on our liquidity and cash flow in future periods:

We expect to make additional payments to Helsinn related to Aloxi product candidates totaling $22.5 million, to SuperGen related to Dacogen injection totaling $32.5 million and to Aesgen former security holders related to Saforis oral suspension totaling $58 million over the course of the next several years upon achievement of certain development milestones.

Off Balance Sheet Arrangements

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

Application of Critical Accounting Policies and Estimates

There were no significant changes to our critical accounting policies during the three months ended March 31, 2005. See our most recent Annual Report filed on Form 10-K for the year ended December 31, 2004 for a discussion of our critical accounting policies.

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

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

RISKS RELATED TO OUR BUSINESS

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

Aloxi injection sales represented 92 percent and 83 percent of our total product sales and 90 and 81 percent of our total revenue for the three months ended March 31, 2005 and year ended December 31, 2004, respectively. Any factor adversely affecting sales of Aloxi injection could cause our product revenues to decrease and our stock price to decline significantly.

The success of our business is dependent on the continued successful commercialization of Aloxi injection. Aloxi injection is relatively new to the market and its long-term acceptance by the oncology community will depend largely on our ability to demonstrate the efficacy and safety of Aloxi injection as an alternative to other therapies. We cannot be certain that Aloxi injection will provide benefits considered adequate by providers of oncology services or that enough providers will use the product to ensure its continued commercial success.

The FDA subjects an approved product and its manufacturer to continual regulatory review. After approval and use in an increasing number of patients, the discovery of previously unknown problems with a product, such as unacceptable toxicities or side effects, may result in restrictions or sanctions on the product or manufacturer that could affect the commercial viability of the product or could require withdrawal of the product from the market. Further, we must continually submit any labeling, advertising and promotional material to the FDA for review. There is risk that the FDA will prohibit use of the marketing material in the form we desire.

Unfavorable outcomes resulting from factors such as those identified above could limit sales of Aloxi injection or cause sales of Aloxi injection to decline. In those circumstances, our stock price would decline and we may have to find additional sources of funding or scale back or cease operations.

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

We have a very limited history of profitability. We expect to incur significant expenses over the next several years as we devote substantial resources to 1) support of the development efforts of Aloxi products through milestone payments to Helsinn, 2) the continued development of other product candidates, including ZYC101a,

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Saforis oral suspension, Dacogen injection and irofulven, 3) continued commercialization of Aloxi injection and our other marketed products and 4) acquire additional product candidates or companies. Therefore, we may not reliably generate net income unless we are able to increase sales of Aloxi injection or other products compared to our current sales, and we may be unable to fund development of our product candidates or to continue our business operations as planned.

Generic pilocarpine hydrochloride tablets were introduced into the United States in November 2004. Our sales of Salagen Tablets (pilocarpine hydrochloride) in the United States are likely to decline significantly for subsequent periods.

Beginning in November 2004 generic 5 milligram pilocarpine hydrochloride tablets entered the United States markets where Salagen Tablets (pilocarpine hydrochloride) competes. We expect our annual sales of Salagen Tablets beginning in 2005 to decline significantly from our first quarter 2005 sales of $3.6 million and our 2004 sales of $29.3 million in the United States.

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

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

For the first three months of 2005, we had net income of $11.6 million. For the year ended December 31, 2004, we had a net loss of $85.7 million inclusive of $83.1 million of acquired in-process research and development expense related to acquisitions, compared to net losses of $61.9 and $36.1 million for each of the years ended December 31, 2003, and December 31, 2002, respectively. Variations in the timing of our future revenues and expenses could cause significant fluctuations in our operating results from period to period and may result in unanticipated earnings shortfalls or losses.

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Our effective tax rate, if any, may vary significantly from period to period, especially within the first few years of becoming profitable. Increases in our effective tax rate would have a negative effect on our results of operations.

We have had no or minimal provision for tax expense for a number of years due to a history of incurring significant losses. Our ability to achieve profitable operations is dependent upon our continued successful commercialization of Aloxi injection, and therefore we continue to maintain a valuation allowance against our deferred tax assets. If and when it is judged to be more-likely-than-not that we will be able to utilize our deferred tax assets, the valuation allowance will be reduced and a tax benefit will be recorded. For subsequent tax periods, our tax provision would likely approximate normal statutory tax rates. A transition to an effective tax rate that approximates statutory tax rates could result in an increase in effective tax rate from less than 5 percent to approximately 35 percent. An increase of this magnitude would result in a significant reduction in our net income and income per share beginning with the quarter of implementation.

Even if we begin reporting an effective tax rate that approximates statutory tax rates, various factors may continue to have favorable or unfavorable effects on our effective tax rate. These factors include, but are not limited to, changes in overall levels of income before taxes, interpretations of existing tax laws, changes in tax laws and rates, future levels of research and development spending, future levels of capital expenditures, and changes in the mix of activity in the various tax jurisdictions in which we operate. An increase in our effective tax rate would reduce our net income and income per share.

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

Before obtaining regulatory approvals for the commercial sale of any product under development, including irofulven, Dacogen injection, Saforis oral suspension, ZYC300 and ZYC101a, we, or our strategic collaborators, must demonstrate through preclinical studies and clinical trials that the product is safe and effective for use in each target indication. We depend on collaboration with Helsinn Healthcare SA, SuperGen, Inc., medical institutions and laboratories to conduct our clinical and preclinical testing in compliance with good clinical and laboratory practices as required by the FDA. We, or our strategic collaborators, may depend on contract research organizations to manage a substantial portion of the medical institutions utilized to conduct clinical testing. The results from preclinical animal studies and human clinical trials may not be predictive of the results that will be obtained in large-scale testing. Some of the results reported from clinical trials are interim results and may not be predictive of future results, including final results from such trials, because, among other factors, patient enrollment and the time period for evaluating patient results are not complete. If we, or our strategic collaborators, fail to adequately demonstrate the safety and efficacy of a product candidate, the FDA would not provide regulatory approval of the product. The appearance of unacceptable toxicities or side effects during clinical trials could interrupt, limit, delay or abort the development of a product. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after experiencing promising results in previous animal and human studies.

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

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

Since our product candidates such as Dacogen injection, Saforis oral suspension, ZYC101a and irofulven may have alternative development paths and we have limited resources, our focus on a particular development path for these product candidates may result in our failure to capitalize on more profitable areas and may not result in viable products.

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

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

We depend on a single supplier to provide us with the finished drug product for Dacogen injection and single suppliers to provide us with the active ingredients for other product candidates. If a sole or exclusive supplier of finished drug product for our product candidates terminates its relationship with us, or is unable to meet our demand, the development of our product candidates could be delayed or if a product candidate is approved, the commercial launch could be delayed.

We rely on PCH Pharmachemie as our sole supplier of the Dacogen injection finished drug product. In addition, we rely on other sole or exclusive suppliers for other product candidates’ finished drug products. If our relationship with PCH Pharmachemie or another sole or exclusive supplier terminates or if the supplier is unable to meet our needs for any reason, we will need to find an alternative source of the products supplied by those companies. If we are unable to identify an alternative source, we may have to suspend development of our product candidates or delay commercial launch of an approved product candidate. Even if we were able to procure drug product from an alternative source, any disruption in supply could have a material adverse effect on our ability to meet our development goals or our ability to provide the commercial supply of an approved product candidate, which would cause our future product revenues to decrease and our stock price to decline.

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

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

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

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

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

We rely on Helsinn Birex Pharmaceuticals Ltd. for the production of Aloxi injection, Patheon Inc. for the production of Salagen Tablets, and other third-party manufacturers for our other products. We intend to continue to rely on others to manufacture future products, including any products that we may acquire or license. Our dependence on third parties for the manufacture of our products may adversely affect our ability to develop and deliver such products.

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

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

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