MOGN Mgi Pharma (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

(Mark One)

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

 For the quarterly period ended September 30, 2007 

OR

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

  For the transition period from                      to                       

Commission File Number: 0-10736
 

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. þ      No  o  

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ      Accelerated filer o      Non-accelerated filer o               

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes. o      No þ

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

Common Stock, $.01 par value (Class)		80,612,879 shares (Outstanding at October 22, 2007)

 

 

MGI PHARMA, INC.

FORM 10-Q INDEX

		Page
		Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets — September 30, 2007 and December 31, 2006			3
Condensed Consolidated Statements of Operations — Three and Nine months Ended September 30, 2007 and 2006			4
Condensed Consolidated Statements of Cash Flows — Nine months Ended September 30, 2007 and 2006			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures About Market Risk			21
Item 4. Controls and Procedures			22
PART II. OTHER INFORMATION
Item 1A. Risk Factors			23
Item 6. Exhibits			23
SIGNATURES			24

PART I—FINANCIAL INFORMATION

See accompanying Notes to Condensed Consolidated Financial Statements.

MGI PHARMA, INC. AND SUBSIDIARIES

Recent Accounting Pronouncements:

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “ Fair Value Measurements ” which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. We are currently evaluating the potential impact of this statement on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “ The Fair Value Option for Financial Assets and Financial Liabilities” which provides companies with an option to report selected financial assets and liabilities at fair value. The standard’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for Fiscal Years Beginning after November 15, 2007. We are currently evaluating the potential impact of this statement on our consolidated financial statements.

In June 2007, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” (“Issue 07-3”), which addresses the accounting for nonrefundable advance payments. The EITF concluded that nonrefundable advance payments for goods or services to be received in the future for use in research and development activities should be deferred and capitalized. The capitalized amounts should be expensed as the related goods are delivered or the services performed. If an entity’s expectations change such that it does not expect it will need the goods to be delivered or the services to be rendered, capitalized nonrefundable advance payments should be charged to expense. Issue 07-3 is effective for new contracts entered into during fiscal years beginning after December 15, 2007, including interim periods within those fiscal years. We are currently evaluating the potential impact of this issue on our consolidated financial statements.

In August 2007, the FASB proposed FASB Staff Position (FSP) APB 14-a , “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” . The proposed FSP would require the proceeds from the issuance of such convertible debt instruments to be allocated between a liability component (issued at a discount) and an equity component. The resulting debt discount would be amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. The proposed change in accounting treatment would be effective for fiscal years beginning after December 15, 2007, and applied retrospectively to prior periods. If adopted, this FSP would change the accounting treatment for our senior subordinated convertible notes. This new accounting treatment could impact our results of operations and result in an increase to non-cash interest expense beginning in 2008 for financial statements covering past and future periods. We are currently evaluating the potential impact of this issue on our consolidated financial statements in the event that this pronouncement is adopted by the FASB.

2. Stock Incentive Plans

Under the Company’s stock incentive plans, designated persons (including officers, directors, employees, licensors and consultants) have been or may be granted rights to acquire our common stock. These rights include stock options, restricted stock, restricted stock units and other equity rights. Restricted stock and restricted stock units become exercisable over varying periods, generally two to four years. Stock options become exercisable over varying periods, generally four years, and generally expire up to seven years from the date of grant. Options may be granted in the form of incentive stock options or nonqualified stock options. When options are exercised, shares are issued from our authorized shares. At September 30, 2007, shares issued and shares available under stock incentive plans are as follows:

On January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share Based-Payment” using the modified prospective method. As a result, for the three and nine months ended September 30, 2007 and 2006, our results of operations reflect compensation expense for new stock options and awards granted and vested under our stock incentive plans, and the unvested portion of previous stock option and award grants which vested during the three and nine months ended September 30, 2007 and 2006.

Stock-based compensation expense before income tax benefits was reflected in the statement of operations as follows:

The following assumptions were used to estimate the fair value of options granted during the three and nine months ended September 30, 2007 and 2006 using the Black-Scholes option-pricing model:

As of September 30, 2007, there was $27.4 million of total unrecognized compensation expense. That cost is expected to be recognized over a weighted-average period of 1.5 years.

3. Net Income (Loss) Per Common Share  

Net income (loss) per common share is based on weighted average shares outstanding as summarized in the following table:

Weighted-average shares issuable upon the exercise of stock options, which were not included in the diluted earnings per share calculation because they were not dilutive, were 4.0 million and 9.0 million for the three month periods ended September 30, 2007 and 2006, respectively, and 4.9 million and 11.1 million for the nine month periods ended September 30, 2007 and 2006, respectively. The potential dilutive shares related to our senior subordinated convertible notes issued in March 2004 are excluded from our diluted net income (loss) per share for the three and nine months ended September 30, 2007 and 2006 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 (loss) 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 $70.6 million, or quarterly net income of approximately $17.8 million, in order for the inclusion of the convertible debt to be dilutive to earnings per share.

4. Marketable Investments  

Marketable investments consist of available-for-sale debt investments and available-for-sale, publicly traded, equity securities (reported at fair value). Unrealized gains or losses are included in “Accumulated Other Comprehensive Income” as a separate component of stockholders’ equity. Marketable investments are summarized in the following table:

Our marketable investments include AA and AAA rated auction rate securities that mature at various dates through 2052. Auction rate securities provide investors with liquidity through an auction process that allows the investors to sell their holdings at par at predetermined calendar intervals, usually every 7, 28, 35, or 90 days. During September 2007, auctions for certain of our auction rate securities with an aggregate cost basis of $26.9 million were unsuccessful and we were unable to sell the investments. The estimated fair value of the investments was $23.1 million at September 30, 2007. As a result, we recorded a $3.8 million unrealized loss on the investments in accumulated other comprehensive income. All but one of the failed auction rate securities have an estimated fair value greater than 90% of their cost basis, and recovery of the cost of these investments is expected within one year. The estimated fair value of one auction rate security was less than 90% of the cost basis and recovery of the cost is expected to take longer than one year. Accordingly, the fair value of this auction rate security was classified as noncurrent at September 30, 2007. As of September 30, 2007, the investments’ credit ratings have not been downgraded and recovery of the cost of these investments is probable. However, until successful auctions resume, we may not be able to liquidate the investments at par. Based on our ability to access our cash and other investments, our expected operating cash flows and other sources of cash, we do not anticipate the lack of liquidity on these investments to affect our ability to execute our current business plan.

Restricted marketable investments of $3.0 million at December 31, 2006, consist of United States government investments and certificates of deposit, and relate to the issuance of convertible debt in March 2004. As of September 30, 2007, MGI had no restricted marketable investments.

In September 2004, we acquired four million shares of SuperGen, Inc. (“SuperGen”) as part of a transaction that included obtaining the worldwide licensing rights for Dacogen. The investment is accounted for as long-term available for sale marketable securities. As such, unrealized gains and losses have been reported in accumulated other comprehensive income (loss). As of June 30, 2006, the fair value of MGI’s investment in SuperGen was $14.5 million and had been below our cost basis of $24.4 million for over nine months. As a result, we determined that an other-than-temporary impairment had occurred and in accordance with SFAS 115 “ Accounting for Certain Investments in Debt and Equity Securities ”, the Company recorded an other-than-temporary impairment charge of $9.9 million in the second quarter of 2006. As of September 30, 2007, the fair value of our SuperGen investment was $17.4 million.

We also own 2,181,398 shares of MethylGene Inc. (“MethylGene”), a Canada-based biopharmaceutical company. MethylGene completed its initial public offering and began trading publicly on the Toronto Stock Exchange on June 29, 2004. MGI’s carrying value of the MethylGene investment prior to MethylGene’s initial public offering was $3.6 million. As of September 30, 2007, the fair value of our MethylGene investment was $6.5 million.

The unrealized gains (losses) for marketable investments reported in accumulated other comprehensive income (loss) are summarized as follows: 

5. Inventories

  Inventories are summarized as follows:

Inventories are stated at the lower of cost or market, with costs approximating the first-in, first-out method.

6. Accrued Expenses

  Accrued expenses are summarized as follows:

7. Stockholders’ Equity

  Changes in selected Stockholders’ equity accounts for the nine months ended September 30, 2007 were as follows:

8. Research and Development Expense

Research and development expense consists of the following:

In July 2007, the U.S. Food and Drug Administration (FDA) accepted the filing of the Supplemental New Drug Application (“sNDA”) for Aloxi for prevention of PONV and established a Prescription Drug User Fee Act (“PDUFA”) date of March 4, 2008. In connection with the FDA acceptance of the sNDA, MGI recognized a $5.0 million milestone payment to Helsinn Healthcare SA as a part of research and development expense in the third quarter of 2007.

9. Comprehensive Income (Loss)

Total comprehensive income consists of net income (loss) and other comprehensive income (loss), which consists of unrealized gains and losses on available-for-sale investments and foreign currency translation adjustments. Other comprehensive income (loss) 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:

10. Restructuring

The following tables summarize the activity related to the restructuring charge and liability for restructuring costs:

During the nine month period ended September 30, 2007, adjustments were made to the restructuring accrual for associates previously eligible for severance payments that either terminated employment early or accepted other positions within MGI and therefore, forfeited their severance payments. As a result of activities related to consolidation of MGI’s Baltimore facilities, we expect to incur restructuring costs totaling approximately $18 million. We recognized a charge of $1 million in the third quarter of 2007 due to the abandonment and sublease of a portion of the facility. We estimate that we will recognize a charge of approximately $10 million in the fourth quarter of 2007 when we abandon the remainder of the facility. The balance of approximately $7 million will be recognized over the remaining 148 months of our lease obligation as we accrete our liability, which we have discounted using a credit-adjusted risk-free interest rate of 9.1%. The 2007 restructuring charges primarily reflect the fair value, on a net present value basis, of the total liability as of the cease-use date. The liability is estimated based on the difference between the remaining lease rental payments on one of our Baltimore buildings and the sublease rental income we anticipate receiving through 2019. Actual restructuring costs and cash expenditures will differ based on actual exit costs and sublease income in future periods. The associated cash outlays totaling approximately $18 million will generally be recognized ratably through December 2019.

11. Leases

We lease administrative and laboratory facilities under non-cancelable operating lease agreements in Bloomington, Minnesota; Lexington, Massachusetts; and Baltimore, Maryland. These leases contain renewal options and require us to pay operating costs, including property taxes, insurance and maintenance. In June 2007, we entered into an operating sublease agreement for an additional facility in Lexington, Massachusetts. The terms of this sublease agreement extend through October 2014.   Gross future minimum lease payments under non-cancelable operating leases, including both the current and former office facilities, are as follows:

12. Prior Period Misstatements

In the first quarter of 2007, MGI determined that it had incorrectly accounted for certain severance related restructuring items by applying the provisions of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” rather than SFAS No. 112, “Employers’ Accounting for Postemployment Benefits.”   As a result, we understated restructuring expense and accrued liabilities as of and for the three months and year ended December 31, 2006 by $0.9 million.  MGI has determined this error is immaterial to the 2006 consolidated financial statements.  Under Staff Accounting Bulletin (“SAB”) No. 108, “ Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements ,” (“SAB No. 108”), MGI assessed the materiality of making this correction in the current period and concluded that the correction of this misstatement in the first quarter of 2007 would be material to the consolidated financial statements.  Based on these facts MGI has revised the December 31, 2006 Consolidated Balance Sheet within this filing.  In addition, MGI will revise the 2006 consolidated financial statements in subsequent SEC filings.  The following table shows the impact of the revision:

13. Subsequent Event

We entered into a Development and License Agreement with AkaRx, Inc. on August 28, 2007 that provides us with the rights to develop AKR-501, a novel, orally-available, small molecule thrombopoietin mimetic being developed for the treatment of thrombocytopenia. Under the Development and License Agreement, we received an exclusive, worldwide license under patent rights and know-how of AkaRx, Inc. to research and develop AKR-501 related products for thrombocytopenia or other disease conditions in accordance with the terms of the Development and License Agreement. Pursuant to the terms of the Development and License Agreement, we paid a license fee of $1 million to AkaRx, Inc. on October 9, 2007, which is the date the Development and License Agreement became effective.

In connection with the Development and License Agreement, we also entered into an Agreement and Plan of Merger dated August 28, 2007 with AkaRx, Inc. that provides us with the option to acquire AkaRx, Inc., whereby AkaRx, Inc. would become our wholly-owned subsidiary. The Merger Option may be exercised in our sole discretion at any time before it expires on January 8, 2010.

We have also entered into Stockholder Support and Option Agreements with all of the AkaRx, Inc. stockholders that provides us with the option through January 8, 2010 to acquire the shares of capital stock of AkaRx, Inc. held by those stockholders. Pursuant to the terms of the Stockholder Support and Option Agreement, to obtain this option we paid $44 million on October 9, 2007.

Upon exercise of the options under the Supporting Stockholder Option Agreements, the AkaRx, Inc. stockholders are required to execute and deliver a stock purchase agreement to us, with terms substantially identical to those of the Agreement and Plan of Merger, pursuant to which we would purchase the shares of AkaRx’s capital stock held by the stockholders for the same amount of consideration that such stockholders would receive in the merger. Should we exercise the option, we have agreed to take such actions necessary to acquire the remainder of the capital shares of AkaRx, Inc. that we do not acquire through the option.

Subject to the terms of the Agreement and Plan of Merger and the Stockholder Support and Option Agreement, if we acquire AkaRx, Inc., either through merger or exercise of the option, we will pay approximately $255 million.

If the Supporting Stockholder Option Agreements, the Agreement and Plan of Merger, or the Development and License Agreement expire or are terminated, or we do not execute the merger or exercise the option on or before January 8, 2010, then the license to us under the Development and License Agreement will also terminate.

From the effective date of the Development and License Agreement and through January 8, 2010, unless otherwise terminated, all expenditures incurred in connection with research and development of the licensed products will be our sole responsibility.

We have determined that AkaRx, Inc. is a variable interest entity (VIE) under FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN 46R”). FIN 46R requires an entity deemed to be the primary beneficiary of a VIE to include the VIE’s assets, liabilities, noncontrolling interests and operating results in its consolidated financial statements. As of October 9, 2007, the effective date the Development and License Agreement, we became the primary beneficiary of AkaRx, Inc., and therefore must consolidate AkaRx, Inc. We expect to record a net charge of approximately $45 million in the fourth quarter of 2007 in connection with this transaction.

Item 2.  

From time to time in this quarterly report we make statements that reflect our current expectations regarding our future results of operations, economic performance, and financial condition, as well as other matters that may affect our business. In general, we try to identify these forward-looking statements by using words such as “anticipate,” “believe,” “expect,” “estimate” and similar expressions.

The forward-looking statements may cover, but are not necessarily limited to, the following topics: (1) efforts to market, sell and distribute Aloxi ^® Injection in the United States and Canada; (2) efforts to market, sell and distribute Gliadel ^® Wafer; (3) efforts to develop, market, sell, and distribute Dacogen ^® for Injection (4) the clinical development of Dacogen ^® for Injection, Saforis™ Powder for Oral Suspension, amolimogene bepiplasmid, Aloxi ^® Injection for PONV, Aquavan ^® Injection, and other clinical compounds; (5) efforts to secure adequate supply of the active pharmaceutical ingredients for clinical development and commercialization; (6) efforts to manufacture drug candidates for clinical development and eventual commercial supply; (7) strategic plans; (8) anticipated expenditures and the potential need for additional funds; and (9) specific guidance we give regarding our current expectations of our future operating results.

All of these items involve significant risks and uncertainties. These and any of the other statements we make in this quarterly report that are forward-looking are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution you that our actual results may differ significantly from the results we discuss in these forward-looking statements.

We discuss some factors that could cause or contribute to such differences in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2006, that we have previously filed with the Securities and Exchange Commission. In addition, any forward-looking statements we make in this document speak only as of the date of this document, and we do not intend to update any such forward-looking statements to reflect events or circumstances that occur after that date.

We have registered “Hexalen ^® ,” Salagen ^® ,” “Aquavan ^® ,” “Gliadel ^® ,” and “Saforis™” as trademarks with the U.S. Patent and Trademark Office. All other trademarks used in this report are the property of their respective owners. “Aloxi ^® ” is a registered trademark of Helsinn Healthcare SA. “Dacogen ^® ” is a trademark of SuperGen, Inc. “Aggrastat ^® ” is a registered trademark of Medicure Inc. in the United States.

Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Business Overview –

MGI PHARMA, INC. (including its subsidiaries, “MGI,” “MGI PHARMA,” “we,” “our,” or the “Company”) is a biopharmaceutical company focused in oncology and acute care that acquires, researches, develops and commercializes proprietary pharmaceutical products that address the unmet needs of patients. It is our goal to become a leading biopharmaceutical company through application of our core competencies of product research, acquisition, development and commercialization, which we apply toward our portfolio of oncology and acute care 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 marketable products. This allows us to concentrate our skills on focused research, product development and commercialization. We have facilities in Bloomington, Minnesota; Lexington, Massachusetts; and Baltimore, Maryland.

We promote products directly to physician specialists and hospitals in the United States using our own sales force. Our promoted products include Aloxi (palonosetron hydrochloride) Injection (“Aloxi”), Dacogen (decitabine) for Injection (“Dacogen”), and Gliadel (polifeprosan 20 with carmustine implant) Wafer (“Gliadel”).

The following tables set forth summary information about our marketable products and our product candidates and research pipeline:

We believe we have a strong portfolio focused in oncology and acute care related product candidates. Our current product candidates include a mixture of late stage and earlier stage opportunities. Our late stage product candidates include two product candidates from our acute care franchise (Aloxi for post operative nausea and vomiting (“PONV”) and Aquavan, a minimal to moderate sedative agent for patients undergoing brief diagnostic or surgical procedures), oncology (Dacogen for acute myeloid leukemia (“AML”)) and supportive care (Saforis Powder for Oral Suspension (“Saforis”)) products, as well as a biologics candidate, amolimogene bepiplasmid.

In July 2007, the FDA accepted the filing of the Supplemental New Drug Application (“sNDA”) for Aloxi for prevention of PONV and established a Prescription Drug User Fee Act (“PDUFA”) date of March 4, 2008. This submission is based on the successful completion of two randomized, multi-center phase 3 clinical trials of Aloxi for prevention of PONV involving 1,219 patients. Both clinical trials successfully met the primary efficacy endpoint of complete response for the 0-24 hour time period following surgery. In addition, both trials achieved the secondary endpoints of complete response for the 0-48 and 0-72 hour time periods.

On September 27, 2007, MGI submitted a New Drug Application (“NDA”) for Aquavan Injection to the FDA for review. Aquavan is an investigational drug that is being studied as a sedative-hypnotic agent in patients undergoing brief surgical or diagnostic procedures. Data from phase 2 and phase 3 trials in patients undergoing colonoscopy, a phase 3 trial in patients undergoing bronchoscopy, and an open label study in patients undergoing a variety of minor surgical procedures form the foundation of the Aquavan NDA. In total, data from 21 clinical studies, including 1,611 subjects are included in the application. A randomized, double-blind, multi-center phase 3 pivotal trial was conducted to evaluate whether an Aquavan dosing regimen of 6.5 mg/kg would be safe and effective in providing moderate sedation in patients undergoing colonoscopy, compared to a control dose of 2.0 mg/kg. The results showed that 87% of patients who received an initial bolus dose of Aquavan 6.5 mg/kg achieved sedation success, which was defined by three consecutive Modified Observer’s Assessment of Alertness/Sedation (MOAA/S) scores of less than or equal to 4, plus completion of the procedure without the need for alternative sedative medications and manual or mechanical airway assistance. A randomized, double-blind, multi-center, pivotal phase 3 trial of Aquavan Injection for sedation of patients undergoing bronchoscopy successfully met the primary endpoint of sedation success as well as all secondary endpoints.

Effective October 9, 2007, we entered into a Development and Licensing Agreement with AkaRx, Inc. that provides us with the rights to develop AKR-501, a novel, orally-available, small molecule thrombopoietin mimetic being developed for the treatment of thrombocytopenia. Under the Development and License Agreement, we received an exclusive, worldwide license under patent rights and know-how of AkaRx, Inc. to research and develop AKR-501 related products for thrombocytopenia or other disease conditions in accordance with the terms of the Development and License Agreement. AKR-501 is a full agonist that targets the c-Mpl receptor on megakaryocytes to stimulate platelet production.

In connection with the Development and License Agreement, we also entered into an Agreement and Plan of Merger dated August 28, 2007 with AkaRx, Inc. that provides us with the option to acquire AkaRx, Inc., whereby AkaRx, Inc. would become our wholly-owned subsidiary. The Merger Option may be exercised in our sole discretion at any time before it expires on January 8, 2010.

We have also entered into Stockholder Support and Option Agreements with all of the AkaRx, Inc. stockholders that provides us with the option through January 8, 2010 to acquire the shares of capital stock of AkaRx, Inc. held by those stockholders. Pursuant to the terms of the Stockholder Support and Option Agreement, we paid the AkaRx, Inc. stockholders option consideration of $44 million on October 9, 2007.

Upon exercise of the options under the Supporting Stockholder Option Agreements, the AkaRx, Inc. stockholders are required to execute and deliver a stock purchase agreement to us, with terms substantially identical to those of the Agreement and Plan of Merger, pursuant to which we would purchase the shares of AkaRx’s capital stock held by the stockholders for the same amount of consideration that such stockholders would receive in the merger. Should we exercise the option, we have agreed to take such actions necessary to acquire the remainder of the capital shares of AkaRx, Inc. that we do not acquire through the option.

Subject to the terms of the Agreement and Plan of Merger and the Stockholder Support and Option Agreement, if we acquire AkaRx, Inc., either through merger or exercise of the option, we will pay approximately $255 million.

If the Supporting Stockholder Option Agreements, the Agreement and Plan of Merger, or the Development and License Agreement expire or are terminated, or we do not execute the merger or exercise the option on or before January 8, 2010, then the license to us under the Development and License Agreement will also terminate.

Results of Operations

The three and nine months ended September 30, 2007 compared to the three and nine months ended September 30, 2006:

Revenues

Total revenues in the three and nine months ended September 30, 2007 increased 16% and 10%, respectively, over total revenues in the three and nine months ended September 30, 2006.

Product Sales: Product sales revenue in the three and nine months ended September 30, 2007 increased 16% and 9%, respectively, over product sales for the comparable period in 2006. The primary reason for the increase is Dacogen product sales (product launched in May 2006), offset by a decrease in Aloxi product sales as a result of the introduction of generic ondansetron in December 2006 and a decline in other product sales primarily due to the divestiture of Aggrastat Injection (“Aggrastat”) in August 2006. During the three months ended September 30, 2007, we recognized $1.9 million in Dacogen product sales that had previously been deferred.

At September 30, 2007, we estimate the inventory levels in the distribution channel utilized by the Company were materially unchanged when compared to inventory levels at December 31, 2006. These estimates are based on inventory levels provided by our wholesalers, historical and current sales trends and the timing of chargeback claims. 

Licensing and other: Licensing and other revenue increased 17% to $1.7 million in the three months ended September 30, 2007 from $1.5 million in the three months ended September 30, 2006, and increased 75% to $5.4 million in the nine months ended September 30, 2007 from $3.1 million in the nine months ended September 30, 2006. This increase is a result of revenue from the Dacogen license agreement with Cilag, grant related revenue, and other miscellaneous activities. Licensing and other revenue is primarily 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.

Cost of sales: Cost of sales as a percentage of revenue was 34% and 33% for the three and nine months ended September 30, 2007, respectively, compared to 36% and 37% for the comparable periods in 2006. The decrease for both periods is primarily a result of a change in sales mix; increased sales of higher gross margin Dacogen and decreased sales of lower gross margin Aloxi. Cost of sales may vary from quarter to quarter depending on the product sales mix, royalties, and production costs.

Selling, general and administrative: Selling, general and administrative expenses increased 1% to $38.7 million in the three months ended September 30, 2007 from $38.4 million in the three months ended September 30, 2006. This increase is primarily a result of additional stock-based compensation and employee related costs of $2.3 million, offset by a decrease in marketing costs of $2.3 million. Selling, general and administrative expenses increased 14% to $120.4 million in the nine months ended September 30, 2007 from $105.4 million in the nine months ended September 30, 2006. This increase is primarily a result of additional stock-based compensation of $9.7 million, and employee related costs of $5.1 million.

Research and development: Research and development expenses increased 8% to $22.8 million in the three months ended September 30, 2007 from $21.2 million in the three months ended September 30, 2006 and decreased 21% to $56.9 million in the nine months ended September 30, 2007 from $72.3 million in the nine months ended September 30, 2006. The increase for the three months ended September 30, 2007 is primarily due to expense recognition of the $5.0 million milestone payment to Helsinn Healthcare SA in connection with the FDA acceptance of the sNDA for Aloxi for prevention of PONV, offset by lower product development expenses of $2.1 million related to amolimogene, Saforis, and irofulven. The decrease for the nine months ended September 30, 2007 primarily represents a reduction of $10.0 million in product development spending, and $2.2 million in employee costs in connection with the 2006 restructuring. Research and development expenses for the nine months ended September 30, 2006 include expenses related to Symphony Neuro Development Company (“SNDC”) of $3.9 million. The impact of these expenses is fully absorbed by the minority interest prior to computing pre-tax net loss. For the three and nine months ended September 30, 2007, there are no SNDC related expenses in research and development expenses.

Acquired in-process research and development : During the three months ended September 30, 2007, we incurred $0.7 million in acquisition costs in connection with the various agreements associated with the AkaRx transaction. We have determined that AkaRx, Inc. is a variable interest entity (VIE) under FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN 46R”). FIN 46R requires an entity deemed to be the primary beneficiary of a VIE to include the VIE’s assets, liabilities, noncontrolling interests and operating results in its consolidated financial statements. As of October 9, 2007, the effective date the Development and License Agreement, we became the primary beneficiary of AkaRx, Inc., and therefore must consolidate AkaRx, Inc. We expect to record a net charge of approximately $45 million in the fourth quarter of 2007 in connection with this transaction.

Restructuring: In October 2006, MGI implemented a plan of organizational restructuring (the “Plan”, approved by management on October 20, 2006) in order to better align our workforce and resources with our operational objectives. Under the Plan, we have lowered our cost structure by (i) reducing total workforce by approximately 13%, or 70 positions, (ii) consolidating drug development functions at one location, and (iii) in connection with that consolidation, relocating approximately five positions. We estimate that, under the Plan, we will incur approximately $3.4 million of costs for severance benefits. We expensed $3.0 million of these costs in the year ended December 31, 2006 and $(0.1) million and $0.1 million in the three and nine months ended September 30, 2007, respectively. Included in these expense amounts are accrual reductions of $0.2 million and $1.1 million, respectively, made for associates previously eligible for severance payments that either terminated employment early or accepted other positions within MGI and therefore, forfeited their severance payments. We expect the remaining approximately $0.1 million to be expensed in 2007.

As a result of activities related to consolidation of MGI’s Baltimore facilities, we expect to incur restructuring costs totaling approximately $18 million. We recognized a charge of $1 million in the third quarter of 2007 due to the abandonment and sublease of a portion of the facility. We estimate that we will recognize a charge of approximately $10 million in the fourth quarter of 2007 when we abandon the remainder of the facility. The balance of approximately $7 million will be recognized over the remaining 148 months of our lease obligation as we accrete our liability, which we have discounted using a credit-adjusted risk-free interest rate of 9.1%. The 2007 restructuring charges primarily reflect the fair value, on a net present value basis, of the total liability as of the cease-use date. The liability is estimated based on the difference between the remaining lease rental payments on one of our Baltimore buildings and the sublease rental income we anticipate receiving through 2019. Actual restructuring costs and cash expenditures will differ based on actual exit costs and sublease income in future periods. The associated cash outlays totaling approximately $18 million will generally be recognized ratably through December 2019.

Interest Income and Expense and Other (Expense) Income

Interest Income : Interest income increased 54% to $2.1 million in the three months ended September 30, 2007 from $1.4 million in the three months ended September 30, 2006 and increase 57% to $6.1 million in the nine months ended September 30, 2007 from $3.9 million in the nine months ended September 30, 2006. The increase was due to an increase in the average amount of funds available for investment, $149.3 million and $109.1 million for the three months ended September 30, 2007 and 2006, respectively, and $149.4 million and $114.4 million for the nine months ended September 30, 2007 and 2006, respectively, as well as an increase in the effective interest rates received on our cash and marketable investments, 5.67% and 5.35% for the three months ended September 30, 2007 and 2006, respectively, and 5.43% and 4.68% for the nine months ended September 30, 2007 and 2006, respectively. Interest income for 2007 will fluctuate depending on the timing of cash flows and changes in interest rates for marketable investments.

Interest Expense : Interest expense was $1.9 million in the three months ended both September 30, 2007 and 2006, and decreased 3% to $5.6 million in the nine months ended September 30, 2007 from $5.8 million in the nine months ended September 30, 2006. Interest expense for the three and nine months ended September 30, 2007 and 2006 primarily relates to the convertible notes issued by MGI in March 2004.

Other income: In the acquisition of Guilford Pharmaceuticals Inc. (“Guilford”), we acquired warrants issued by Guilford to investors in SNDC and warrants that had been issued by Guilford to investors in connection with a Private Investment in Public Equity transaction (“PIPE”). The SNDC and PIPE warrants are classified as liabilities and are measured at fair value, with changes in fair value reported in earnings. The change in fair value of these warrant liabilities was $119,000 and $200,000 for the three months ended September 30, 2007 and 2006, respectively. For the nine months ended September 30, 2007 and 2006, the change was $119,000 and $258,000 respectively. Other income also includes foreign currency gain for the three and nine months ended September 30, 2007.

Provision for Income Taxes  

The tax expense for the three and nine months ended September 30, 2007 was $0.5 million and $1.2 million, respectively, and represents state income tax and federal alternative minimum tax. Our ability to achieve profitable operations is dependent upon our continued successful commercialization of Aloxi, Dacogen, and Gliadel 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 our deferred tax assets, to the extent the valuation allowance does not relate to the deferred tax assets acquired in the Guilford, Zycos and Aesgen transactions, or stock-based compensation, the valuation allowance will be reduced, and a tax benefit will be recorded. The removal of the valuation allowance relating to the deferred tax assets acquired in the Guilford, Zycos and Aesgen acquisitions will first reduce to zero the remaining carrying value of goodwill, identifiable intangible assets, and long-lived assets related to those acquisitions and then reduce income tax expense. The deferred tax assets acquired in the Guilford, Zycos and Aesgen transactions include net operating loss carry forwards and research and development credit carry forwards, all of which are subject to ownership change limitations and may also be subject to various other limitations on the amounts utilized. Tax benefits related to stock-based compensation deductions will be recognized as an increase to additional paid-in capital when the tax deductions reduce future income taxes payable. After recovery of our valuation allowance, 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, Dacogen, and Gliadel, and the demonstration of a number of consecutive quarters of profitability.

Net Income (Loss)  

We reported net income of $10.9 million and $1.7 million for the three months ended September 30, 2007 and 2006, respectively and net income (loss) of $13.7 million and $(20.5) million for the nine months ended September 30, 2007 and 2006, respectively. The primary reason for the increase in net income for the three months ended September 30, 2007 was the addition of $22.7 million of Dacogen product sales offset by reductions of $4.0 million in Aloxi product sales. The primary reason for the increase in net income for the nine months ended September 30, 2007 was the addition of $70.8 million of Dacogen product sales offset by a reduction of $39.1 million in Aloxi product sales.

Liquidity and Capital Resources

The following table shows cash, cash equivalents and short-term marketable investments at September 30, 2007 and December 31, 2006.

Cash, cash equivalents, and short-term marketable investments at September 30, 2007 remained materially unchanged from December 31, 2006. In October 2006, we entered into a 3-year, $75 million revolving line of credit with an option to increase the facility to $100 million. As of September 30, 2007, there were no borrowings under this revolving credit facility.

For the nine months ended September 30, 2007, cash used in operating activities was $5.4 million due to payments on accounts payable and an increase in accounts receivable, offset by a decrease in inventories and collections of cash related to a non-trade receivable. For the nine months ended September 30, 2007, net cash provided by investing and financing activities was $43.3 million primarily due to net maturities of available for sale investments and by cash received from employee exercises of stock options.

We have primarily funded our operations through revenues from the sales of our commercialized products (Aloxi, Dacogen, Gliadel, and other products) and the issuance of equity securities and senior subordinated convertible notes. We have also funded operations through collaborative and partnering agreements and through proceeds from loans or other borrowings. Any, or all, of these financing vehicles or others may be utilized to fund our future capital requirements.

Our marketable investments include AA and AAA rated auction rate securities that mature at various dates through 2052. Auction rate securities provide investors with liquidity through an auction process that allows the investors to sell their holdings at par at predetermined calendar intervals, usually every 7, 28, 35, or 90 days. During September 2007, auctions for certain of our auction rate securities with an aggregate cost basis of $26.9 million were unsuccessful and we were unable to sell the investments. The estimated fair value of the investments was $23.1 million at September 30, 2007. As a result, we recorded a $3.8 million unrealized loss on the investments in accumulated other comprehensive income. All but one of the failed auction rate securities have an estimated fair value greater than 90% of their cost basis, and recovery of the cost of these investments is expected within one year. The estimated fair value of one auction rate security was less than 90% of the cost basis and recovery of the cost is expected to take longer than one year. Accordingly, the fair value of this auction rate security was classified as noncurrent at September 30, 2007. As of September 30, 2007, the investments’ credit ratings have not been downgraded and recovery of the cost of these investments is probable. However, until successful auctions resume, we may not be able to liquidate the investments at par. Based on our ability to access our cash and other investments, our expected operating cash flows and other sources of cash, we do not anticipate the lack of liquidity on these investments to affect our ability to execute our current business plan.

In connection with the Development and License Agreement with AkaRx, Inc., and the Supporting Stockholder Option Agreements with the stockholders of AkaRx, Inc., we made aggregate cash payments of $45 million on October 9, 2007. Through January 8, 2010, we have the option to acquire AkaRx, Inc. for approximately $255 million.

Activities of SNDC

The activities of SNDC are reported in our Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2006 due to our requirement to consolidate the variable interest entity in accordance with FASB Interpretation No. 46R, “ Consolidation of Variable Interest Entities” as we were deemed to be the primary beneficiary of SNDC. In the second quarter of 2006, we terminated the purchase option agreement with SNDC and as a result ceased to be the primary beneficiary of SNDC, therefore we are no longer required to consolidate its financial results with ours. SNDC activities had no impact on our net decrease in cash and cash equivalents during the period. Further, the impact of SNDC on our Condensed Consolidated Statement of Cash Flow classifications is not indicative of our historical or ongoing operations.

The impact to net cash used in operating activities for the nine months ended September 30, 2006 was a $1.0 million decrease from SNDC’s usage of working capital and a $3.9 million decrease in minority interest related to SNDC. The impact to net cash used in investing activities for the nine months ended September 30, 2006 was $14.5 million in maturity of investments held by SNDC offset by a $9.6 million distribution of SNDC funds to SNDC investors.

Cash Uses and Capital Raising Activities

Substantial amounts of capital will be needed to continue growing our business. We will require this capital to:

	•		fund our research and development and drug discovery efforts;
	•		expand our portfolio of marketed products and product candidates, including through additional product or product candidate acquisitions or business combinations;
	•		develop products we have discovered, acquired, or licensed;
	•		fund our sales and marketing efforts;
	•		fund operating losses; and
	•		support our contractual obligations and debt service requirements.

The timing of these events is difficult to predict due to many factors, including the costs and outcomes of our research and development programs and when those outcomes are determined, the timing of product or product candidate acquisitions or business combinations, the timing and expense of obtaining regulatory approvals, the presence and status of competing products, and the protection and freedom to operate for our intellectual property.

Our capital needs may exceed the capital available from our future operations, collaborative arrangements, revolving line of credit and existing liquid assets. Our future capital requirements and liquidity will depend on many factors, including but not limited to:

	•		the revenue from Aloxi, Dacogen, Gliadel, and our other products;
	•		the future expenditures we may make to increase revenue from our products;
	•		the progress of our research and development programs;
	•		the progress of pre-clinical and clinical testing;
	•		the time and cost involved in obtaining regulatory approval;
	•		the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
	•		the changes in our existing research relationships, competing technological and marketing developments;
	•		our ability to establish collaborative arrangements and to enter into licensing agreements and contractual arrangements with others;
	•		the conversion of our senior subordinated convertible notes;
	•		the liquidity of our marketable investments;
	•		the timing and terms of subleases related to the restructuring of one of our Baltimore facilities;
	•		the costs of additional product or product candidate acquisitions or business combinations, including AkaRx, Inc.; and
	•		any future change in our business strategy.

For these needs or in anticipation of these needs, we may decide to seek additional capital. The source, timing and availability of this funding will depend on market conditions, interest rates and other factors. This funding may be sought through various sources, including drawing down the letter of credit, debt and equity offerings, corporate collaborations, divestures, bank borrowings, lease arrangements relating to fixed assets or other financing methods. There can be no assurance that additional capital will be available on favorable terms, if at all.

Payment Obligations