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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended March 31, 2005



OR



| ̈ | 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



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MGI PHARMA, INC.

(Exact name of registrant as specified in its charter)



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|                                                                   |  |                                                     
|------------------------------------------------------------------ |  | ----------------------------------------------------
|Minnesota                                                          |  | 41-1364647                                          
|(State or other jurisdiction of incorporation or organization)     |  | (I.R.S. employer identification number)             
|                                                                   | 
|5775 West Old Shakopee Road Suite 100 Bloomington, Minnesota 55437 |  | (952) 346-4700                                      
|(Address of principal executive offices and zip code)              |  | (Registrants telephone number, including area code)



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



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



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



|                             |  |                             
|---------------------------- |  | ----------------------------
|Common Stock, $.01 par value |  | 71,755,813 shares           
|(Class)                      |  | (Outstanding at May 2, 2005)



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##### Table of Contents

MGI PHARMA, INC.



FORM 10-Q INDEX



|                                                                                              |  |           
|--------------------------------------------------------------------------------------------- |  | ----------
|                                                                                              |  | PageNumber
|PART I. FINANCIAL INFORMATION                                                                 |  |           
|                                                                                              | 
|Item 1.
Financial Statements (Unaudited)                                                      |  |           
|                                                                                              | 
|Consolidated Balance Sheets  March 31, 2005 and December 31, 2004                            |  | 3         
|                                                                                              | 
|Consolidated Statements of Operations  Three Months Ended March 31, 2005 and 2004            |  | 4         
|                                                                                              | 
|Consolidated Statements of Cash Flows  Three Months Ended March 31, 2005 and 2004            |  | 5         
|                                                                                              | 
|Notes to 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                            |  | 37        
|                                                                                              | 
|Item 4.
Controls and Procedures                                                               |  | 37        
|                                                                                              | 
|PART II. OTHER INFORMATION                                                                    |  |           
|                                                                                              | 
|Item 6.
Exhibits                                                                              |  | 38        
|                                                                                              | 
|SIGNATURES                                                                                    |  | 40        



2



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##### Table of Contents

PART IFINANCIAL INFORMATION



Item 1. Financial Statements



MGI PHARMA, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



|                                                                                                                                                |  |                          |          |   |                  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                |  | March 31,2005(Unaudited) |          |   | December 31,2004 |  
|ASSETS                                                                                                                                          |  |                          |          |   |                  |   |          |  
|                                                                                                                                                |  |                         
|Current assets:                                                                                                                                 |  |                          |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                       |  | $                        | 24,666   |   |                  | $ | 10,098   |  
|Short-term marketable investments                                                                                                               |  |                          | 177,853  |   |                  |   | 195,384  |  
|Restricted marketable investments                                                                                                               |  |                          | 5,805    |   |                  |   | 5,832    |  
|Receivables, less contractual allowances and allowance for bad debts of $13,941 and $12,227                                                     |  |                          | 132,074  |   |                  |   | 122,275  |  
|Inventories                                                                                                                                     |  |                          | 29,350   |   |                  |   | 8,408    |  
|Other current assets                                                                                                                            |  |                          | 2,715    |   |                  |   | 481      |  
|                                                                                                                                                |  |                          |          |   |                  |   |          |  
|Total current assets                                                                                                                            |  |                          | 372,463  |   |                  |   | 342,478  |  
|                                                                                                                                                |  |                         
|Restricted cash                                                                                                                                 |  |                          | 600      |   |                  |   | 600      |  
|Equipment, furniture and leasehold improvements, at cost less accumulated depreciation of $3,775 and $3,505                                     |  |                          | 2,963    |   |                  |   | 2,666    |  
|Long-term marketable investments                                                                                                                |  |                          | 35,130   |   |                  |   | 66,848   |  
|Restricted marketable investments, less current portion                                                                                         |  |                          | 5,671    |   |                  |   | 8,519    |  
|Debt issuance costs, less accumulated amortization of $1,259 and $969                                                                           |  |                          | 6,876    |   |                  |   | 7,167    |  
|Intangible assets, at cost less accumulated amortization of $5,780 and $5,239                                                                   |  |                          | 7,454    |   |                  |   | 7,995    |  
|Other assets                                                                                                                                    |  |                          | 62       |   |                  |   | 62       |  
|                                                                                                                                                |  |                          |          |   |                  |   |          |  
|Total assets                                                                                                                                    |  | $                        | 431,219  |   |                  | $ | 436,335  |  
|                                                                                                                                                |  |                          |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                            |  |                          |          |   |                  |   |          |  
|                                                                                                                                                |  |                         
|Current liabilities:                                                                                                                            |  |                          |          |   |                  |   |          |  
|Accounts payable                                                                                                                                |  | $                        | 13,450   |   |                  | $ | 14,831   |  
|Accrued expenses                                                                                                                                |  |                          | 29,742   |   |                  |   | 43,244   |  
|Deferred revenue                                                                                                                                |  |                          | 245      |   |                  |   | 624      |  
|Other current liabilities                                                                                                                       |  |                          | 1,287    |   |                  |   | 124      |  
|                                                                                                                                                |  |                          |          |   |                  |   |          |  
|Total current liabilities                                                                                                                       |  |                          | 44,724   |   |                  |   | 58,823   |  
|                                                                                                                                                |  |                          |          |   |                  |   |          |  
|Noncurrent liabilities:                                                                                                                         |  |                          |          |   |                  |   |          |  
|Senior subordinated convertible notes, face value of $348,000 net of unamortized discount of $87,828 as of March 31, 2005 and December 31,
2004 |  |                          | 260,172  |   |                  |   | 260,172  |  
|Deferred revenue                                                                                                                                |  |                          | 1,890    |   |                  |   | 1,951    |  
|Other noncurrent liabilities                                                                                                                    |  |                          | 881      |   |                  |   | 879      |  
|                                                                                                                                                |  |                          |          |   |                  |   |          |  
|Total noncurrent liabilities                                                                                                                    |  |                          | 262,943  |   |                  |   | 263,002  |  
|                                                                                                                                                |  |                          |          |   |                  |   |          |  
|Total liabilities                                                                                                                               |  |                          | 307,667  |   |                  |   | 321,825  |  
|                                                                                                                                                |  |                          |          |   |                  |   |          |  
|Stockholders equity:                                                                                                                           |  |                          |          |   |                  |   |          |  
|Preferred stock, 10,000,000 authorized and unissued shares                                                                                      |  |                          |         |   |                  |   |         |  
|Common stock, $.01 par value, 140,000,000 authorized shares, 71,706,266 and 71,041,179 issued and outstanding shares                            |  |                          | 717      |   |                  |   | 710      |  
|Additional paid-in capital                                                                                                                      |  |                          | 423,834  |   |                  |   | 418,659  |  
|Unearned compensation - restricted stock                                                                                                        |  |                          | (2,513   | ) |                  |   | (3,216   | )
|Accumulated other comprehensive (loss) income                                                                                                   |  |                          | (3,015   | ) |                  |   | 5,428    |  
|Accumulated deficit                                                                                                                             |  |                          | (295,471 | ) |                  |   | (307,071 | )
|                                                                                                                                                |  |                          |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                      |  |                          | 123,552  |   |                  |   | 114,510  |  
|                                                                                                                                                |  |                          |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                      |  | $                        | 431,219  |   |                  | $ | 436,335  |  
|                                                                                                                                                |  |                          |          |   |                  |   |          |  



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)



|                                                      |  |                             |        |   |      |   |        |  
|----------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                      |  | Three Months EndedMarch 31, |       
|                                                      |  | 2005                        |        |   | 2004 |  
|Revenues:                                             |  |                             |        |   |      |   |        |  
|Sales                                                 |  | $                           | 62,385 |   |      | $ | 25,834 |  
|Licensing and other                                   |  |                             | 850    |   |      |   | 1,035  |  
|                                                      |  |                             |        |   |      |   |        |  
|                                                      |  |                             | 63,235 |   |      |   | 26,869 |  
|                                                      |  |                             |        |   |      |   |        |  
|Costs and expenses:                                   |  |                             |        |   |      |   |        |  
|Cost of sales                                         |  |                             | 21,915 |   |      |   | 7,624  |  
|Selling, general and administrative                   |  |                             | 18,755 |   |      |   | 17,465 |  
|Research and development                              |  |                             | 10,317 |   |      |   | 5,016  |  
|                                                      |  |                             |        |   |      |   |        |  
|                                                      |  |                             | 50,987 |   |      |   | 30,105 |  
|                                                      |  |                             |        |   |      |   |        |  
|Operating income (loss)                               |  |                             | 12,248 |   |      |   | (3,236 | )
|                                                      |  |                            
|Interest income                                       |  |                             | 1,357  |   |      |   | 815    |  
|Interest expense                                      |  |                             | (1,755 | ) |      |   | (725   | )
|                                                      |  |                             |        |   |      |   |        |  
|Income (loss) before income taxes                     |  |                             | 11,850 |   |      |   | (3,146 | )
|Provision for income taxes                            |  |                             | (250   | ) |      |   |       |  
|                                                      |  |                             |        |   |      |   |        |  
|Net income (loss)                                     |  | $                           | 11,600 |   |      | $ | (3,146 | )
|                                                      |  |                             |        |   |      |   |        |  
|Net income (loss) per common share:                   |  |                             |        |   |      |   |        |  
|Basic                                                 |  | $                           | 0.16   |   |      | $ | (0.05  | )
|Diluted                                               |  | $                           | 0.15   |   |      | $ | (0.05  | )
|                                                      |  |                            
|Weighted average number of common shares outstanding: |  |                             |        |   |      |   |        |  
|Basic                                                 |  |                             | 71,345 |   |      |   | 68,545 |  
|Diluted                                               |  |                             | 75,615 |   |      |   | 68,545 |  



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)



|                                                                              |  |                             |          |   |      |   |          |  
|----------------------------------------------------------------------------- |  | --------------------------- | -------- | - | ---- | - | -------- | -
|                                                                              |  | Three Months EndedMarch 31, |         
|                                                                              |  | 2005                        |          |   | 2004 |  
|OPERATING ACTIVITIES:                                                         |  |                             |          |   |      |   |          |  
|Net income (loss)                                                             |  | $                           | 11,600   |   |      | $ | (3,146   | )
|Adjustments for non-cash items:                                               |  |                             |          |   |      |   |          |  
|Depreciation and intangible amortization                                      |  |                             | 830      |   |      |   | 637      |  
|Benefit plan contribution                                                     |  |                             | 382      |   |      |   | 209      |  
|Employee stock compensation expense                                           |  |                             | 1,223    |   |      |   | 12       |  
|Amortization of non-cash financing charges                                    |  |                             | 291      |   |      |   | 209      |  
|Other                                                                         |  |                             | 13       |   |      |   | 16       |  
|Change in operating assets and liabilities:                                   |  |                             |          |   |      |   |          |  
|Receivables                                                                   |  |                             | (9,799   | ) |      |   | (17,885  | )
|Inventories                                                                   |  |                             | (20,942  | ) |      |   | 1,439    |  
|Other current assets                                                          |  |                             | (2,234   | ) |      |   | (19      | )
|Accounts payable                                                              |  |                             | (1,381   | ) |      |   | 1,082    |  
|Accrued expenses                                                              |  |                             | (12,470  | ) |      |   | (4,596   | )
|Deferred revenue                                                              |  |                             | (440     | ) |      |   | (61      | )
|Other current liabilities                                                     |  |                             | 1,163    |   |      |   | 604      |  
|                                                                              |  |                             |          |   |      |   |          |  
|Net cash used in operating activities                                         |  |                             | (31,764  | ) |      |   | (21,499  | )
|                                                                              |  |                             |          |   |      |   |          |  
|INVESTING ACTIVITIES:                                                         |  |                             |          |   |      |   |          |  
|Purchase of investments                                                       |  |                             | (518,205 | ) |      |   | (735,668 | )
|Maturity of investments                                                       |  |                             | 559,011  |   |      |   | 515,069  |  
|Purchase of equipment, furniture and leasehold improvements                   |  |                             | (587     | ) |      |   | (270     | )
|                                                                              |  |                             |          |   |      |   |          |  
|Net cash provided by (used in) investing activities                           |  |                             | 40,219   |   |      |   | (220,869 | )
|                                                                              |  |                             |          |   |      |   |          |  
|FINANCING ACTIVITIES:                                                         |  |                             |          |   |      |   |          |  
|Purchase of restricted marketable securities held by trustee for debt service |  |                             |         |   |      |   | (17,081  | )
|Maturity of restricted marketable securities held by trustee for debt service |  |                             | 2,875    |   |      |   |         |  
|Issuance of shares under stock plans                                          |  |                             | 3,238    |   |      |   | 5,890    |  
|Proceeds of debt offering                                                     |  |                             |         |   |      |   | 260,172  |  
|Issuance costs of debt offering                                               |  |                             |         |   |      |   | (8,078   | )
|Issuance of shares through stock purchase warrant exercise                    |  |                             |         |   |      |   | 3,850    |  
|                                                                              |  |                             |          |   |      |   |          |  
|Net cash provided by financing activities                                     |  |                             | 6,113    |   |      |   | 244,753  |  
|                                                                              |  |                             |          |   |      |   |          |  
|Increase (decrease) in cash and cash equivalents                              |  |                             | 14,568   |   |      |   | 2,385    |  
|                                                                              |  |                            
|Cash and cash equivalents at beginning of period                              |  |                             | 10,098   |   |      |   | 5,491    |  
|                                                                              |  |                             |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                    |  | $                           | 24,666   |   |      | $ | 7,876    |  
|                                                                              |  |                             |          |   |      |   |          |  
|Supplemental disclosure of cash information:                                  |  |                             |          |   |      |   |          |  
|Cash paid for interest                                                        |  | $                           | 2,927    |   |      | $ |         |  



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:



|                                               |  |                          |        |            |   |                   |  |   |       
|---------------------------------------------- |  | ------------------------ | ------ | ---------- | - | ----------------- |  | - | ------
|(in thousands, except exercise price)          |  | ShareholderApprovedPlans |        | OtherPlans |   | TotalFor AllPlans
|Shares issuable under outstanding options      |  |                          | 9,045  |            |   | 40                |  |   | 9,085 
|Shares available for future issuance           |  |                          | 2,175  |            |   |                  |  |   | 2,175 
|                                               |  |                          |        |            |   |                   |  |   |       
|Total                                          |  |                          | 11,220 |            |   | 40                |  |   | 11,260
|                                               |  |                          |        |            |   |                   |  |   |       
|Average exercise price for outstanding options |  | $                        | 14.36  |            | $ | 5.24              |  | $ | 14.32 



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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:



|                                                                                                                |      |                             |        |      |      |   |        |  
|--------------------------------------------------------------------------------------------------------------- | ---- | --------------------------- | ------ | ---- | ---- | - | ------ | -
|(in thousands, except per share data)                                                                           |      | Three Months EndedMarch 31, |       
|                                                                                                                | 2005 |                             |        | 2004 |     
|Net income (loss), as reported                                                                                  |      | $                           | 11,600 |      |      | $ | (3,146 | )
|Add: Stock-based employee compensation expense, included in reported net income (loss)                          |      |                             | 37     |      |      |   |       |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards |      |                             | (8,225 | )    |      |   | (3,097 | )
|                                                                                                                |      |                             |        |      |      |   |        |  
|Pro forma net income (loss)                                                                                     |      | $                           | 3,412  |      |      | $ | (6,243 | )
|                                                                                                                |      |                             |        |      |      |   |        |  
|Net income (loss) per common share:                                                                             |      |                             |        |      |      |   |        |  
|As reported basic                                                                                               |      | $                           | 0.16   |      |      | $ | (0.05  | )
|Pro forma basic                                                                                                 |      | $                           | 0.05   |      |      | $ | (0.09  | )
|                                                                                                                |      |                            
|As reported diluted                                                                                             |      | $                           | 0.15   |      |      | $ | (0.05  | )
|Pro forma diluted                                                                                               |      | $                           | 0.05   |      |      | $ | (0.09  | )
|                                                                                                                |      |                            
|                                                                                                                |      | 2005                        |        |      | 2004 |  
|Expected dividend yield                                                                                         |      |                             | 0      | %    |      |   | 0      | %
|Risk-free interest rate                                                                                         |      |                             | 3.88   | %    |      |   | 3.43   | %
|Annualized volatility                                                                                           |      |                             | 0.76   |      |      |   | 0.80   |  
|Expected life, in years                                                                                         |      |                             | 5.375  |      |      |   | 5.25   |  



(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:



|                                            |  |        |  |       
|------------------------------------------- |  | ------ |  | ------
|Three months ended March 31,                |  | 2005   |  | 2004  
|(in thousands)                              |  |        |  |       
|Weighted-average shares - basic             |  | 71,345 |  | 68,545
|Effect of dilutive stock options            |  | 4,270  |  |      
|Effect of convertible debt                  |  |       |  |      
|                                            |  |        |  |       
|Weighted-average shares - assuming dilution |  | 75,615 |  | 68,545
|                                            |  |        |  |       



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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##### Table of Contents

(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:



|                                                           |  |               |         |                  |   |        
|---------------------------------------------------------- |  | ------------- | ------- | ---------------- | - | -------
|(in thousands)                                             |  | March 31,2005 |         | December 31,2004
|Corporate notes (classified as held-to-maturity)           |  | $             | 7,190   |                  | $ | 33,071 
|Government agencies (classified as held-to-maturity)       |  |               | 20,036  |                  |   |       
|Auction rate securities (classified as available-for-sale) |  |               | 150,627 |                  |   | 162,313
|                                                           |  |               |         |                  |   |        
|                                                           |  | $             | 177,853 |                  | $ | 195,384
|                                                           |  |               |         |                  |   |        



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:



|                                                     |  |               |        |                  |   |       
|---------------------------------------------------- |  | ------------- | ------ | ---------------- | - | ------
|(in thousands)                                       |  | March 31,2005 |        | December 31,2004
|Corporate notes (classified as held-to-maturity)     |  | $             |       |                  | $ | 3,184 
|Equity securities (classified as available-for-sale) |  |               | 25,031 |                  |   | 33,474
|Government agencies (classified as held-to-maturity) |  |               | 10,099 |                  |   | 30,190
|                                                     |  |               |        |                  |   |       
|                                                     |  | $             | 35,130 |                  | $ | 66,848
|                                                     |  |               |        |                  |   |       



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:



|                                |  |      |        |      |   |      
|------------------------------- |  | ---- | ------ | ---- | - | -----
|(in thousands)                  |  | 2005 |        | 2004
|Raw materials and supplies      |  | $    | 15     |      | $ | 328  
|Work in process                 |  |      | 262    |      |   | 397  
|Finished products               |  |      | 29,073 |      |   | 7,473
|Inventories consigned to others |  |      |       |      |   | 210  
|                                |  |      |        |      |   |      
|Total                           |  | $    | 29,350 |      | $ | 8,408
|                                |  |      |        |      |   |      



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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:



|                                |  |      |        |      |   |       
|------------------------------- |  | ---- | ------ | ---- | - | ------
|(in thousands)                  |  | 2005 |        | 2004
|Product rebate and other fees   |  | $    | 11,962 |      | $ | 14,229
|License fees                    |  |      | 4,662  |      |   | 4,576 
|Product return accrual          |  |      | 2,328  |      |   | 2,448 
|Product development commitments |  |      | 1,466  |      |   | 3,314 
|Field sales bonuses             |  |      | 789    |      |   | 3,800 
|Other bonuses                   |  |      | 658    |      |   | 3,512 
|Retirement plan accruals        |  |      | 839    |      |   | 2,624 
|Interest                        |  |      | 488    |      |   | 1,951 
|Other accrued expenses          |  |      | 6,550  |      |   | 6,790 
|                                |  |      |        |      |   |       
|Total                           |  | $    | 29,742 |      | $ | 43,244
|                                |  |      |        |      |   |       



(7) Stockholders Equity



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



|                                                    |  |              |  |                          |     |                      |   |         |                                     |   |        |   |  |   |        |  
|--------------------------------------------------- |  | ------------ |  | ------------------------ | --- | -------------------- | - | ------- | ----------------------------------- | - | ------ | - |  | - | ------ | -
|                                                    |  | Common Stock |  | Additionalpaid-incapital |     | Unearnedcompensation |   |         | Accumulatedothercomprehensiveincome |  
|(in thousands)                                      |  | Shares       |  | Par value                |     |                      |  
|Balance at December 31, 2004                        |  | 71,041       |  | $                        | 710 |                      | $ | 418,659 |                                     | $ | (3,216 | ) |  | $ | 5,428  |  
|Conversion of debt                                  |  |              |  |                          |     |                      |   |         |                                     |   |        |   |  |   |        |  
|Exercise of stock purchase warrants                 |  |              |  |                          |     |                      |   |         |                                     |   |        |   |  |   |        |  
|Exercise of stock options                           |  | 618          |  |                          | 6   |                      |   | 3,232   |                                     |   |        |   |  |   |        |  
|Employee retirement plan contribution               |  | 46           |  |                          |     |                      |   | 1,413   |                                     |   |        |   |  |   |        |  
|Stock option term modification                      |  |              |  |                          |     |                      |   | 275     |                                     |   |        |   |  |   |        |  
|Restricted stock expense                            |  |              |  |                          |     |                      |   | 115     |                                     |   | 703    |   |  |   |        |  
|Unrealized loss on available for sale investments   |  |              |  |                          |     |                      |   |         |                                     |   |        |   |  |   | (8,443 | )
|Income tax expense related to employee stock awards |  |              |  |                          |     |                      |   | 130     |                                     |   |        |   |  |   |        |  
|Other issuances                                     |  | 1            |  |                          | 1   |                      |   | 10      |                                     |   |        |   |  |   |        |  
|                                                    |  |              |  |                          |     |                      |   |         |                                     |   |        |   |  |   |        |  
|Balance at March 31, 2005                           |  | 71,706       |  | $                        | 717 |                      | $ | 423,834 |                                     | $ | (2,513 | ) |  | $ | (3,015 | )
|                                                    |  |              |  |                          |     |                      |   |         |                                     |   |        |   |  |   |        |  



(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, SaforisTMoral 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:



| |  |  | $33 million upon FDA approval of Saforis oral suspension;
| | - |  | ----------------------------------------------------------



| |  |  | $25 million in the event that net sales of Aesgen products containing L-Glutamine, including Saforis oral suspension, exceed $50 million in the second year after commercial launch
of Saforis oral suspension; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For the ten-year period after commercialization begins, a 5 percent royalty on net sales of Saforis oral suspension after cumulative net sales exceed $50 million; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A payment equal to three times net sales in the tenth year after commercialization begins.
| | - |  | ------------------------------------------------------------------------------------------



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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##### Table of Contents

|                                 |  |                                   |        |  
|-------------------------------- |  | --------------------------------- | ------ | -
|(in thousands)                   |  | Three Months Ended March 31, 2004 |       
|Total revenues                   |  | $                                 | 27,768 |  
|Net income (loss)                |  |                                   | (4,623 | )
|Pro forma loss per common share: |  |                                   |        |  
|Basic                            |  | $                                 | (0.07  | )
|Diluted                          |  | $                                 | (0.07  | )



(9) Research and Development
Expense



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



|                               |  |      |        |      |   |      
|------------------------------ |  | ---- | ------ | ---- | - | -----
|Three months ended March 31,   |  | 2005 |        | 2004
|(in thousands)                 |  |      |        |     
|License fees                   |  | $    |       |      | $ | 500  
|Other research and development |  |      | 10,317 |      |   | 4,516
|                               |  |      |        |      |   |      
|Total                          |  | $    | 10,317 |      | $ | 5,016
|                               |  |      |        |      |   |      



(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:



|                                                                        |      |                             |        |      |  |   |        |  
|----------------------------------------------------------------------- | ---- | --------------------------- | ------ | ---- |  | - | ------ | -
|(in thousands)                                                          |      | Three Months EndedMarch 31, |       
|                                                                        | 2005 |                             |        | 2004 | 
|Net income (loss), as reported                                          |      | $                           | 11,600 |      |  | $ | (3,146 | )
|Unrealized gain (loss) from securities classified as available for sale |      |                             | (8,443 | )    |  |   |       |  
|                                                                        |      |                             |        |      |  |   |        |  
|Comprehensive income (loss)                                             |      | $                           | 3,157  |      |  | $ | (3,146 | )
|                                                                        |      |                             |        |      |  |   |        |  



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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.



|                 |  |                                                                                                                                                    |  |                    |  |                                                                                     
|---------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ |  | ------------------------------------------------------------------------------------
|Products         |  | Principal Indications                                                                                                                              |  | Status             |  | Commercial Rights                                                                   
|Aloxi injection  |  | Chemotherapy-induced nausea and vomiting                                                                                                           |  | Currently marketed |  | U.S. & Canada: MGI                                                                  
|                 |  |                                                                                                                                                    | 
|Salagen Tablets  |  | Symptoms of radiation-induced dry mouth in head and neck cancer patients Dry mouth, plus dry eyes outside the U.S., in Sjögrens syndrome patients |  | Currently marketed |  | U.S.: MGI Europe: Novartis Canada: Pfizer Rest of World: Various other
collaborators
|                 |  |                                                                                                                                                    | 
|Hexalen capsules |  | Ovarian Cancer                                                                                                                                     |  | Currently marketed |  | U.S.: MGI Outside U.S.: Various
collaborators                                       
|                 |  |                                                                                                                                                    | 
|Kadian capsules  |  | Cancer related pain                                                                                                                                |  | Currently promoted |  | U.S.: MGI - Cancer Alpharma  all
other                                             



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



|                          |  |                                 |  |                                      
|------------------------- |  | ------------------------------- |  | -------------------------------------
|Products                  |  | Principal Indications           |  | Status                               
|Dacogen injection         |  | MDS AML                         |  | FDA & EMEA review To begin Phase
3   
|                          |  |                                
|Saforis oral suspension   |  | Oral mucositis                  |  | To submit NDA To begin second Phase
3
|                          |  |                                
|ZYC101a                   |  | Cervical dysplasia              |  | To begin pivotal program             
|                          |  |                                
|Aloxi injection           |  | PONV                            |  | To begin Phase 3                     
|                          |  |                                
|Aloxi capsules            |  | CINV                            |  | To begin Phase 3                     
|                          |  |                                
|Irofulven *               |  | Monotherapy Combination Therapy |  | Phase 2 Phase 2                      
|                          |  |                                
|MG98                      |  | Renal cell cancer               |  | Phase 2                              
|                          |  |                                
|ZYC300                    |  | Solid tumors                    |  | Phase 1/2                            
|                          |  |                                
|Other acylfulvene analogs |  | Various Cancers                 |  | Preclinical                          

---

|* | includes National Cancer Institute trials
|- | -----------------------------------------



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



| |  |  | Continue to successfully commercialize Aloxi injection for prevention of chemotherapy-induced nausea and vomiting, or CINV, by marketing Aloxi injection as an enhanced alternative
to currently-marketed 5-HT3receptor antagonists;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | In collaboration with SuperGen, Inc. pursue approval of the New Drug Application, or NDA, and Marketing Authorization Application, or MAA, for Dacogen injection at the U.S. Food and
Drug Administration, or FDA, and the European Medicines Agency, or EMEA, while completing United States commercial product launch activities in conjunction with the September 1, 2005 Prescription Drug User Fee Act, or PDUFA, goal date established by
the FDA;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Complete the NDA submission for Saforis oral suspension during the third quarter of 2005 and initiate a phase 3 trial of Saforis oral suspension in patients with oral mucositis
after the NDA submission is completed.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Advance our predominately late-stage product candidate pipeline, including initiation in 2005 of the following pivotal programs or phase 3 trials:
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Dacogen injection for the treatment of acute myeloid leukemia, or AML,
| | - |  | ----------------------------------------------------------------------



| |  |  | Aloxi injection for the prevention of post operative nausea and vomiting, or PONV, and Aloxi capsules for prevention of CINV, and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | ZYC101a for the treatment of cervical dysplasia;
| | - |  | ------------------------------------------------



| |  |  | Establish commercialization paths for our product candidates in territories outside of North America; and
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | Selectively add to our product portfolio through various means, including product acquisition, in-licensing, co-promotion or business combinations, including:
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Oncology and oncology-related products, and
| | - |  | -------------------------------------------



| |  |  | Acute care, hospital promoted products.
| | - |  | ---------------------------------------



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.



|                |      |                             |        |        |   |        |         |   |        |   |  |     |  
|--------------- | ---- | --------------------------- | ------ | ------ | - | ------ | ------- | - | ------ | - |  | --- | -
|(in thousands)  |      | Three Months EndedMarch 31, |        | Change |   |        | %Change |  
|                | 2005 |                             | 2004   |        |  
|Sales:          |      |                             |        |        |   |        |         |   |        |   |  |     |  
|Aloxi injection |      | $                           | 57,154 |        | $ | 18,561 |         | $ | 38,593 |   |  | 208 | %
|Salagen Tablets |      |                             | 3,633  |        |   | 6,717  |         |   | (3,084 | ) |  | (46 | )
|Other           |      |                             | 1,598  |        |   | 556    |         |   | 1,042  |   |  | 187 |  
|                |      |                             |        |        |   |        |         |   |        |   |  |     |  
|Total sales     |      |                             | 62,385 |        |   | 25,834 |         |   | 36,551 |   |  | 141 |  
|                |      |                             |        |       
|Licensing       |      |                             | 850    |        |   | 1,035  |         |   | (185   | ) |  | (18 | )
|                |      |                             |        |        |   |        |         |   |        |   |  |     |  
|Total revenues  |      | $                           | 63,235 |        | $ | 26,869 |         | $ | 36,366 |   |  | 135 |  
|                |      |                             |        |        |   |        |         |   |        |   |  |     |  



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



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| |  |  | Sales of Aloxi injection, which we began selling in September 2003, are the primary reason for the increase in sales revenue. We recognized $57.2 million in Aloxi injection net
sales revenue in the first quarter of 2005, which represented 91.6 percent of our sales revenue. In the first quarter of 2004, we recognized $18.6 million in Aloxi sales, which represented 72 percent of our sales revenue. Continued commercialization
of Aloxi injection is expected to result in sales of Aloxi injection representing a greater percentage of our sales revenue in future periods.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In the first quarter of 2005, we recognized $3.6 million of Salagen Tablets sales, which represented 5.8 percent of our sales revenue. In the first quarter of 2004, we recognized
$6.7 million in Salagen Tablets sales, which represented 26 percent of our sales revenue. In November 2004, the FDA approved a competitors Abbreviated New Drug Application (ANDA) for a generic 5 milligram pilocarpine hydrochloride
tablet and a second ANDA was approved in December 2004 and we have suspended direct promotion of Salagen Tablets. If the introduction of these competing products adheres to the classic pattern of initial generic competition in a pharmaceutical
product class, we would expect Salagen Tablet sales in 2005 to decline significantly from 2004 levels.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As is common in the pharmaceutical industry, our domestic sales are made to pharmaceutical wholesalers for further distribution through pharmacies to the ultimate consumers of our
products.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|                                    |      |                             |        |        |   |         |  |   |        |  |     |  
|----------------------------------- | ---- | --------------------------- | ------ | ------ | - | ------- |  | - | ------ |  | --- | -
|(in thousands)                      |      | Three Months EndedMarch 31, |        | Change |   | %Change | 
|                                    | 2005 |                             | 2004   |        |  
|Costs and expenses:                 |      |                             |        |        |   |         |  |   |        |  |     |  
|Cost of sales                       |      | $                           | 21,915 |        | $ | 7,624   |  | $ | 14,291 |  | 187 | %
|Selling, general and administrative |      |                             | 18,755 |        |   | 17,465  |  |   | 1,290  |  | 7   |  
|Research and development            |      |                             | 10,317 |        |   | 5,016   |  |   | 5,301  |  | 106 |  
|                                    |      |                             |        |        |   |         |  |   |        |  |     |  
|                                    |      | $                           | 50,987 |        | $ | 30,105  |  | $ | 20,882 |  | 69  |  
|                                    |      |                             |        |        |   |         |  |   |        |  |     |  



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.



|                 |      |                             |        |      |        |   |      |         |  |   |        |   |  |     |  
|---------------- | ---- | --------------------------- | ------ | ---- | ------ | - | ---- | ------- |  | - | ------ | - |  | --- | -
|(in thousands)   |      | Three Months EndedMarch 31, |        |      | Change |   |      | %Change | 
|                 | 2005 |                             |        | 2004 |        |   |     
|Interest income  |      | $                           | 1,357  |      |        | $ | 815  |         |  | $ | 542    |   |  | 67  | %
|Interest expense |      |                             | (1,755 | )    |        |   | (725 | )       |  |   | (1,030 | ) |  | 142 |  
|                 |      |                             |        |      |        |   |      |         |  |   |        |   |  |     |  
|                 |      | $                           | (398   | )    |        | $ | 90   |         |  | $ | (488   | ) |  | NM  |  
|                 |      |                             |        |      |        |   |      |         |  |   |        |   |  |     |  



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:



|                                           |  |                  |       |      |   |       |  |      |        |      |   |            |  |       |       |  |   |         |  |   |        
|------------------------------------------ |  | ---------------- | ----- | ---- | - | ----- |  | ---- | ------ | ---- | - | ---------- |  | ----- | ----- |  | - | ------- |  | - | -------
|(in thousands)                             |  | Remainder of2005 |       | 2006 |   | 2007  |  | 2008 |        | 2009 |   | Thereafter |  | Total
|Operating lease payments                   |  | $                | 2,110 |      | $ | 2,568 |  | $    | 2,605  |      | $ | 1,720      |  | $     | 1,126 |  | $ | 559     |  | $ | 10,688 
|Convertible debt                           |  |                  |      |      |   |      |  |      |       |      |   |           |  |       |      |  |   | 348,000 |  |   | 348,000
|Dacogen minimum development obligation (a) |  |                  |      |      |   |      |  |      | 4,900  |      |   |           |  |       |      |  |   |        |  |   | 4,900  
|Helsinn minimum sales obligation (b)       |  |                  | 2,862 |      |   | 5,181 |  |      | 6,120  |      |   | 5,554      |  |       | 4,795 |  |   | 11,465  |  |   | 35,977 
|                                           |  |                  |       |      |   |       |  |      |        |      |   |            |  |       |       |  |   |         |  |   |        
|Total                                      |  | $                | 4,972 |      | $ | 7,749 |  | $    | 13,625 |      | $ | 7,274      |  | $     | 5,921 |  | $ | 360,024 |  | $ | 399,565

---

|(a) | In connection with the September 2004 in-licensing agreement with SuperGen where we obtained the exclusive worldwide rights for Dacogen (decitabine) injection, we committed to fund
at least $15 million of further Dacogen injection development costs by September 1, 2007, of which $10.1 million was incurred as of March 31, 2005.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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:



| |  |  | the acceptance of, and demand for, Aloxi injection;
| | - |  | ---------------------------------------------------



| |  |  | changing demand for our other products;
| | - |  | ---------------------------------------



| |  |  | third parties introducing competing products;
| | - |  | ---------------------------------------------



| |  |  | the pace and breadth of our development programs;
| | - |  | -------------------------------------------------



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



| |  |  | expenditures we incur and assume in business acquisitions;
| | - |  | ----------------------------------------------------------



| |  |  | availability of product supply from third-party manufacturers;
| | - |  | --------------------------------------------------------------



| |  |  | changes in sales and marketing expenditures; and
| | - |  | ------------------------------------------------



| |  |  | the timing of licensing and royalty revenues.
| | - |  | ---------------------------------------------



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:



| |  |  | the size of the patient population;
| | - |  | -----------------------------------



| |  |  | the nature of clinical protocol requirements;
| | - |  | ---------------------------------------------



| |  |  | the diversion of patients to other trials or marketed therapies;
| | - |  | ----------------------------------------------------------------



| |  |  | our ability to recruit and manage clinical centers and associated trials;
| | - |  | -------------------------------------------------------------------------



| |  |  | the proximity of patients to clinical sites; and
| | - |  | ------------------------------------------------



| |  |  | the patient eligibility criteria for the trial.
| | - |  | -----------------------------------------------



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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:



| |  |  | marketing or manufacturing delays;
| | - |  | ----------------------------------



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| |  |  | warning letters;
| | - |  | ----------------



| |  |  | fines;
| | - |  | ------



| |  |  | product recalls or seizures;
| | - |  | ----------------------------



| |  |  | injunctions;
| | - |  | ------------



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



| |  |  | total or partial suspension of production;
| | - |  | ------------------------------------------



| |  |  | civil penalties;
| | - |  | ----------------



| |  |  | withdrawals of previously approved marketing applications; or
| | - |  | -------------------------------------------------------------



| |  |  | criminal prosecutions.
| | - |  | ----------------------



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



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



We may not realize all of the anticipated benefits of our recent and future acquisitions.



During the third quarter of 2004, we acquired Zycos, Inc. and Aesgen, Inc. and we may acquire other companies in the future as a part of our
business strategy. The success of these mergers will depend, in part, on our ability to realize the anticipated synergies and growth opportunities from integrating the businesses. The integration of independent companies is a complex, costly and
time-consuming process. The difficulties of combining the operations of the companies include, among others:



| |  |  | Retaining key employees;
| | - |  | ------------------------



| |  |  | Coordinating research and development activities;
| | - |  | -------------------------------------------------



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| |  |  | Consolidating corporate and administrative functions;
| | - |  | -----------------------------------------------------



| |  |  | Minimizing the diversion of managements attention from ongoing business concerns; and
| | - |  | --------------------------------------------------------------------------------------



| |  |  | Coordinating geographically separate organizations.
| | - |  | ---------------------------------------------------



In addition, even if we are able to successfully integrate, the integrations may not result in the realization of the full benefits of development and growth
opportunities that we currently expect or that these benefits will be achieved within the anticipated time frame. Our failure to achieve these benefits could have a material adverse effect on our results of operations.



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



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



| |  |  | to expand our portfolio of marketed products and product candidates;
| | - |  | --------------------------------------------------------------------



| |  |  | to develop products we have acquired or licensed;
| | - |  | -------------------------------------------------



| |  |  | to obtain necessary working capital; and
| | - |  | ----------------------------------------



| |  |  | to fund operating losses.
| | - |  | -------------------------



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



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



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



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



| |  |  | any arrangements with third-parties will not be successful;
| | - |  | -----------------------------------------------------------



| |  |  | strategic collaborators will not fulfill their obligations to us under any arrangements entered into with them;
| | - |  | ---------------------------------------------------------------------------------------------------------------



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



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



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



We have licensed the right to promote, sell and distribute Aloxi products in the United States and Canada from a Helsinn Healthcare S/A. We are particularly dependent
on Helsinn for our ability to commercialize Aloxi products.



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



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



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



With respect to products in which we own rights outside the United States, we have entered into alliances with various multinational and foreign pharmaceutical companies related to the development and commercialization of our products and
product candidates in markets outside the United States. Our continued relationships with



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strategic collaborators are dependent in part on the successful achievement of development milestones. If we or our collaborators do not achieve these
milestones, or we are unable to enter into agreements with our collaborators to modify their terms, these agreements could terminate, which could cause a loss of licensing revenue, a loss of future commercial product potential and a decline in our
stock price.



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



| |  |  | the achievement of milestones by us or our collaborators;
| | - |  | ---------------------------------------------------------



| |  |  | the amount of product sales and royalty-generating activities;
| | - |  | --------------------------------------------------------------



| |  |  | the timing of initiating additional licensing relationships; and
| | - |  | ----------------------------------------------------------------



| |  |  | our continuing obligation related to license payments.
| | - |  | ------------------------------------------------------



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



Competition in the pharmaceutical industry is intense. Most of our competitors are large,
multinational pharmaceutical companies that have considerably greater financial, sales, marketing and technical resources than we do. Most of our present and potential competitors also have dedicated research and development capabilities that may
allow them to develop new or improved products that compete with our products. Currently, Aloxi injection competes with three other products from the 5-HT3receptor antagonist class of compounds, as well as products from other chemical classes that are also used for the prevention of chemotherapy-induced nausea and vomiting. These products are marketed
by GlaxoSmithKline, Roche, Aventis and Merck, large multinational competitors. If Aloxi injection does not compete successfully with existing products on the market, our stock price could decline significantly. Additionally, MedImmune, Inc., Daichi
Pharmaceutical, and two U.S. generic manufacturers have drugs that are approved for sale and compete in the same markets as Salagen Tablets.



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



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



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



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



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



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



RISKS RELATED TO OUR INDUSTRY



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



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



There is also risk that regulatory authorities in the United States and elsewhere may not allow us to conduct planned additional clinical testing of any of our product
candidates, including irofulven, Dacogen injection, Saforis oral suspension, ZYC101a, ZYC300 or Aloxi products, or that, if permitted, this additional clinical testing will not prove that these product candidates are safe and effective to the extent
necessary to permit us to obtain marketing approvals from regulatory authorities.



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



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



The FDA awarded us orphan drug status for Salagen Tablets in 1994 as a treatment for the
symptoms of xerostomia, or severe dry mouth, induced by radiation therapy in head and neck cancer patients and in 1998 for the symptoms of dry mouth associated with Sjögrens syndrome. An orphan drug designation entitles us to marketing
exclusivity of the protected drug for the stated condition for a period of seven years. Our orphan drug protection for Salagen Tablets expired in March 2001 for the treatment of symptoms of radiation-induced



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xerostomia in head and neck cancer patients and expired in February 2005 for the Sjögrens syndrome indication.
Beginning in November 2004, generic 5 milligram pilocarpine hydrochloride tablets entered the United States markets where Salagen Tablets compete and we have suspended direct promotion of Salagen Tablets. If the introduction of these competing
products adheres to the classic pattern of initial generic competition in a pharmaceutical product class, we would expect Salagen Tablets sales to decline significantly from our first quarter 2005 sales of $3.6 million and our 2004 sales of $29.3
million in the United States.



We hold an exclusive license in the United
States and Canada on patents covering Aloxi injection. In addition, we hold an exclusive, worldwide license on patents and patent applications covering acylfulvene proprietary rights, including irofulven. The license applicable to these technologies
is subject to certain statutory rights held by the U.S. government. Even though we have licensed these patents, we may not have exclusive rights to all possible acylfulvene analogs, all possible methods of using acylfulvene analogs to treat tumors
or all possible synthetic methods for preparing acylfulvenes. In addition, we licensed rights to patents and patent applications covering MG98. Protection of these rights and creation of additional rights involve joint responsibilities between us
and the respective license party. We have recently acquired rights to patents and patent applications covering technologies that were owned by or licensed to Zycos, Inc., and Aesgen, Inc., and those rights that were licensed from third parties were
assigned to us in those transactions. We have also recently obtained a worldwide, exclusive license of certain rights to patents and patent applications covering technologies that are owned by SuperGen, Inc., or licensed to SuperGen, Inc., from
third parties.



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



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



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



| |  |  | these confidentiality agreements will be breached;
| | - |  | --------------------------------------------------



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



| |  |  | our trade secrets will otherwise become known; or
| | - |  | -------------------------------------------------



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



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



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



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



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



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



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



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



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



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



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



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The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 together with rulemaking by the Centers for
Medicare and Medicaid Services (CMS) require a number of changes in Medicare practices, including reimbursement. The changes made to date are not expected to have an adverse affect on our operations, sales or the price of our stock, but we cannot
predict the impact, if any, of future provider reimbursement changes.



Salagen
Tablets and Aloxi injection generally have been eligible for reimbursement to providers from third-party payors and we have applied for, or in certain cases already received confirmation of, reimbursement eligibility for providers for Aloxi
injection. Third-party reimbursement is important to the commercialization of our products. If government entities and other third-party payors do not provide adequate reimbursement levels to providers for our products, our product and license
revenues would be materially and adversely affected and our stock price could decline.



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



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



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



RISKS RELATED TO OUR OUTSTANDING SECURITIES



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



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



| |  |  | fluctuations in our operating results;
| | - |  | --------------------------------------



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



| |  |  | published reports by securities analysts;
| | - |  | -----------------------------------------



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| |  |  | positive or negative progress with our clinical trials;
| | - |  | -------------------------------------------------------



| |  |  | governmental regulation, including healthcare reimbursement policies;
| | - |  | ---------------------------------------------------------------------



| |  |  | developments in patent or other proprietary rights;
| | - |  | ---------------------------------------------------



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



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



| |  |  | general market conditions.
| | - |  | --------------------------



The trading price of our common stock has been, and could continue to be, subject to wide fluctuations in response to these factors, including the sale or attempted sale of a large amount of our common stock into the
market. Our stock price ranged from $2.34 to $34.49 per share during the three-year period ended March 31, 2005. Broad market fluctuations may also adversely affect the market price of our common stock.



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



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



We routinely grant stock options to our employees and other individuals. At March 31, 2005, we had options outstanding at option prices ranging from $1.81 to $33.22 for
9.1 million shares of our common stock that have been registered for resale. We have also issued convertible debt that is convertible into 8.3 million shares of common stock at an initial conversion price of $31.46 per share of common stock.
Conversion is contingent on a number of factors that have not yet been satisfied. Consequently, we are not able to estimate when, if ever, the convertible debt will be converted into common stock, but any such conversion would almost certainly
dilute stockholder value.



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



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



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



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



The indenture does not prohibit or limit us and
would not limit any of our subsidiaries from incurring senior indebtedness or incurring other indebtedness and other liabilities. As of March 31, 2005, we do not have senior indebtedness outstanding, and have no senior subordinated indebtedness
other than the notes. We anticipate that from time to time we will incur additional senior indebtedness and other additional liabilities.



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



We cannot provide any assurances that a market will be available for the notes or that
holders of our notes will be able to sell their notes. If there is an available market, future trading prices of the notes will depend on many factors, including prevailing interest rates, the market for similar securities, general economic
conditions and our financial condition, performance and prospects. Historically, the market for convertible debt has been subject to disruptions that have caused substantial fluctuations in the prices of the securities. Accordingly, holders of our
notes may be required to bear the financial risk of an investment in the notes for an indefinite period of time.



Although the notes have been registered for resale under the Securities Act, we have the right, pursuant to the registration rights agreement, to suspend the use of the
shelf registration statement in certain circumstances. In the event of such a suspension, note holders would not be able to sell the notes or associated common stock under the registration statement.



Our convertible notes are not protected by restrictive covenants.



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



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



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



| |  |  | March 2, 2011 - $747.62 per $1,000 of principal amount;
| | - |  | -------------------------------------------------------



| |  |  | March 2, 2014 - $799.52 per $1,000 of principal amount;
| | - |  | -------------------------------------------------------



| |  |  | March 2, 2019 - $894.16 per $1,000 of principal amount.
| | - |  | -------------------------------------------------------



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



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



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



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



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



The Notes are convertible at the option of the holders into shares of our common stock, after June 30, 2004, only under the following
circumstances: (1) if the closing sale price of our common stock was more than 120% of the then current conversion price of the Notes for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the
previous calendar quarter (once the forgoing condition is satisfied for any one quarter, then the notes will thereafter be convertible at any time at the option of the holder, through maturity), (2) if we elect to redeem the Notes, (3) upon the
occurrence of specified corporate transactions or significant distributions to holders of our common stock occur or (4) subject to certain exceptions, for the five consecutive business day period following any five consecutive trading day period in
which, for each day of that period, the trading price of the Notes was less than 98% of the sale price of our common stock multiplied by the Notes then current conversion rate. Subject to the above conditions, the Notes are convertible into an
aggregate of 8,269,942 shares of common stock at an initial conversion price of $31.46 per share of common stock.



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



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



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



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



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



| |  |  | On or after March 2, 2011: 100% of the accreted principal amount of the Notes.
| | - |  | ------------------------------------------------------------------------------



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



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



| |  |  | advance notice requirements for stockholder proposals and nominations; and
| | - |  | --------------------------------------------------------------------------



| |  |  | the authority of the board of directors to issue, without stockholder approval, preferred stock with such terms as the board of directors may determine.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, our board of directors has adopted a stockholder rights plan, or poison pill,
which enables our board of directors to issue preferred stock purchase rights that would be triggered by an acquisition of 15 percent or



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more of the outstanding shares of our common stock. These provisions and specific provisions of Minnesota law relating to
business combinations with interested stockholders may have the effect of delaying, deterring or preventing a merger or change in control. Some of these provisions may discourage a future acquisition of our company even if stockholders would receive
an attractive value for their shares or if a significant number of our stockholders believed such a proposed transaction to be in their best interests. As a result, stockholders who desire to participate in such a transaction may not have the
opportunity to do so.



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Item 3.



Quantitative and Qualitative
Disclosure About Market Risk



Our operations are not subject to risks of
material foreign currency fluctuations, nor do we use derivative financial instruments in our treasury practices. We place our marketable investments in instruments that meet high credit quality standards, as specified in our investment policy
guidelines. We do not expect material losses with respect to our investment portfolio or exposure to market risks associated with interest rates. The impact on our net income as a result of a 25, 50 or 100 basis point (where 100 basis points equals
1%) change in short-term interest rates would be approximately $0.53 million, $1.05 million or $2.1 million annually based on our cash, cash equivalents, marketable investment and restricted marketable investment balances at March 31, 2005.



Item 4.



Controls and Procedures



(a) Evaluation of Disclosure Controls and Procedures



Under the supervision and with the participation of our management, including our President
and Chief Executive Officer, Leon O. Moulder, Jr., and our Senior Vice President and Chief Financial Officer, James C. Hawley, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective.



(b) Changes in Internal
Controls Over Financial Reporting



During the most recent fiscal quarter
covered by this report, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonable likely to materially affect, our internal control
over financial reporting.



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PART II  OTHER INFORMATION



Item 6. Exhibits



|              |  |                                                                                                                                                                                                                                                                                               
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                   
|3.1           |  | Second Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).                                                                                                          
|              | 
|3.2           |  | Articles of Amendment to the Second Amended and Restated Articles of Incorporation, filed June 2, 2004 (Incorporated by reference to Exhibit 3.2 to the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2004)                                                          
|              | 
|3.3           |  | Restated Bylaws of the Company, as amended to date (Incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30,
1998).                                                                                                             
|              | 
|3.4           |  | Amendment dated May 10, 2004 to Restated Bylaws (Incorporated by reference to Exhibit 3.4 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30,
2004).                                                                                                           
|              | 
|4.1           |  | Specimen certificate for shares of Common Stock of the Company (Incorporated by reference to Exhibit 4.1 to the Companys Annual Report on Form 10-K for the year ended December 31,
2004).                                                                                                   
|              | 
|4.2           |  | Rights Agreement, dated as of July 14, 1998, between the Company and Norwest Bank, Minnesota, N.A. (including the form of Rights Certificate attached as Exhibit B thereto) (Incorporated by
reference to Exhibit 1 to the Companys Registration Statement on Form 8-A, filed July 15, 1998).
|              | 
|4.3           |  | First Amendment to Rights Agreement, dated March 14, 2000, between the Company and Norwest Bank, Minnesota, N.A. (Incorporated by reference to Exhibit 2 to the Companys Registration
Statement on Form 8-A/A-1, filed March 20, 2000).                                                      
|              | 
|4.4           |  | Form of Convertible Subordinated Promissory Notes issued to Deerfield Partners, L.P. and Deerfield International Limited on December 2, 2002 (Incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K filed on December 4, 2002).                                
|              | 
|4.5           |  | Form of Common Stock Purchase Warrants issued to Deerfield Partners, L.P. and Deerfield International Limited on December 2, 2002 (Incorporated by reference to Exhibit 4.2 to the
Companys Current Report on Form 8-K filed on December 4, 2002).                                           
|              | 
|4.6           |  | Senior Subordinated Convertible Notes Purchase Agreement, dated February 25, 2004, by and between MGI PHARMA, INC. and Merrill Lynch, Pierce, Fenner & Smith (Incorporated by reference to
Exhibit 4.1 to the Companys Current Report on Form 8-K filed on March 4, 2004).                   
|              | 
|4.7           |  | Senior Subordinated Convertible Notes Indenture, dated March 2, 2004, by and between MGI PHARMA, INC. and Wells Fargo Bank, National Association, as Trustee (Incorporated by reference to
Exhibit 4.2 to the Companys Current Report on Form 8-K filed March 4, 2004).                      
|              | 
|4.8           |  | Registration Rights Agreement dated March 2, 2004, between MGI PHARMA, INC. and Merrill Lynch & Co. (Incorporated by reference to Exhibit 4.3 to the Companys Current Report on Form
8-K filed March 4, 2004).                                                                               



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##### Table of Contents

|     |  |                                                                                                                                           
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Leon O. Moulder, Jr. Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002)                          
|     | 
|31.2 |  | Certification of James C. Hawley Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002)                               
|     | 
|32.1 |  | Certification of Leon O. Moulder, Jr. Pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|     | 
|32.2 |  | Certification of James C. Hawley Pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     



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##### Table of Contents

SIGNATURES



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



|                  |  |                  |  |                                                           
|----------------- |  | ---------------- |  | ----------------------------------------------------------
|                  |  | MGI PHARMA, INC.
|                  |  |                 
|Date: May 9, 2005 |  | By:              |  | /s/ James C. Hawley                                       
|                  |  |                  |  | James C. Hawley,                                          
|                  |  |                  |  | Senior Vice President and Chief Financial Officer         
|                  |  |                  |  | (principal financial officer, and duly authorized officer)



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##### Table of Contents

MGI PHARMA, INC. AND SUBSIDIARIES



Quarterly Report on Form 10-Q

for the

Quarter Ended March 31, 2005



EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                               
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                   
|              | 
|3.1           |  | Second Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).                                                                                                          
|              | 
|3.2           |  | Articles of Amendment to the Second Amended and Restated Articles of Incorporation, filed June 2, 2004 (Incorporated by reference to Exhibit 3.2 to the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2004)                                                          
|              | 
|3.3           |  | Restated Bylaws of the Company, as amended to date (Incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30,
1998).                                                                                                             
|              | 
|3.4           |  | Amendment dated May 10, 2004 to Restated Bylaws (Incorporated by reference to Exhibit 3.4 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30,
2004).                                                                                                           
|              | 
|4.1           |  | Specimen certificate for shares of Common Stock of the Company (Incorporated by reference to Exhibit 4.1 to the Companys Annual Report on Form 10-K for the year ended December 31,
2004).                                                                                                   
|              | 
|4.2           |  | Rights Agreement, dated as of July 14, 1998, between the Company and Norwest Bank, Minnesota, N.A. (including the form of Rights Certificate attached as Exhibit B thereto) (Incorporated by
reference to Exhibit 1 to the Companys Registration Statement on Form 8-A, filed July 15, 1998).
|              | 
|4.3           |  | First Amendment to Rights Agreement, dated March 14, 2000, between the Company and Norwest Bank, Minnesota, N.A. (Incorporated by reference to Exhibit 2 to the Companys Registration
Statement on Form 8-A/A-1, filed March 20, 2000).                                                      
|              | 
|4.4           |  | Form of Convertible Subordinated Promissory Notes issued to Deerfield Partners, L.P. and Deerfield International Limited on December 2, 2002 (Incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K filed on December 4, 2002).                                
|              | 
|4.5           |  | Form of Common Stock Purchase Warrants issued to Deerfield Partners, L.P. and Deerfield International Limited on December 2, 2002 (Incorporated by reference to Exhibit 4.2 to the
Companys Current Report on Form 8-K filed on December 4, 2002).                                           
|              | 
|4.6           |  | Senior Subordinated Convertible Notes Purchase Agreement, dated February 25, 2004, by and between MGI PHARMA, INC. and Merrill Lynch, Pierce, Fenner & Smith (Incorporated by reference to
Exhibit 4.1 to the Companys Current Report on Form 8-K filed on March 4, 2004).                   
|              | 
|4.7           |  | Senior Subordinated Convertible Notes Indenture, dated March 2, 2004, by and between MGI PHARMA, INC. and Wells Fargo Bank, National Association, as Trustee (Incorporated by reference to
Exhibit 4.2 to the Companys Current Report on Form 8-K filed March 4, 2004).                      



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|     |  |                                                                                                                                                                                                                
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|4.8  |  | Registration Rights Agreement dated March 2, 2004, between MGI PHARMA, INC. and Merrill Lynch & Co. (Incorporated by reference to Exhibit 4.3 to the Companys Current Report on Form
8-K filed March 4, 2004).
|     | 
|31.1 |  | Certification of Leon O. Moulder, Jr. Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002)                                                                                               
|     | 
|31.2 |  | Certification of James C. Hawley Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002)                                                                                                    
|     | 
|32.1 |  | Certification of Leon O. Moulder, Jr. Pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                     
|     | 
|32.2 |  | Certification of James C. Hawley Pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                          



42