##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 0-10736
 
 MGI PHARMA, INC.
 (Exact name of registrant as specified in its charter)
 Minnesota
(State or other jurisdiction of
incorporation or organization)
    
    41-1364647
(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)
 
 þ o
  þ o o
 o þ
  Common Stock, $.01 par value
    
    78,106,779 shares(Class)
    
    (Outstanding at May 1, 2006)




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##### 



MGI PHARMA, INC.
 FORM 10-Q INDEX
 PageNumberPART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets  March 31, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations  Three Months Ended March 31, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows  Three Months Ended March 31, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22PART II. OTHER INFORMATIONItem 6. Exhibits
    
    
    23SIGNATURES
    
    
    24Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




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##### Table of Contents



PART IFINANCIAL INFORMATION
 
 tem 1. Financial Statements
 MGI PHARMA, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
  March 31,
    
    
    December 31,2006
    
    
    2005 (*)unauditedASSETSCurrent assets:Cash and cash equivalents
    
    $
    33,035
    
    
    $
    51,136Short-term marketable investments
    
    
    76,429
    
    
    
    53,067Restricted cash
    
    
    750
    
    
    
    750Restricted marketable investments
    
    
    5,788
    
    
    
    5,822Investments held by SNDC
    
    
    14,561
    
    
    
    18,580Receivables, less contractual allowances and allowance for bad debts of $46,672 and $37,118
    
    
    98,401
    
    
    
    105,959Inventories
    
    
    41,435
    
    
    
    49,392Other current assets
    
    
    1,765
    
    
    
    1,558Total current assets
    
    
    272,164
    
    
    
    286,264Restricted cash, less current portion
    
    
    1,094
    
    
    
    1,101Long-term marketable investments
    
    
    29,860
    
    
    
    23,952Restricted marketable investments, less current portion
    
    
    
    
    
    
    2,859Equipment, furniture and leasehold improvements, at cost less accumulated depreciation of $5,258 and $4,810
    
    
    7,709
    
    
    
    5,647Debt issuance costs, less accumulated amortization of $2,422 and $2,131
    
    
    5,714
    
    
    
    6,005Intangible assets, at cost less accumulated amortization of $10,571 and $8,779
    
    
    70,189
    
    
    
    73,505Goodwill
    
    
    71,307
    
    
    
    70,203Other assets
    
    
    2,037
    
    
    
    2,049Total assets
    
    $
    460,074
    
    
    $
    471,585LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    12,157
    
    
    $
    19,463Accrued expenses
    
    
    43,257
    
    
    
    54,050Current portion of long-term debt
    
    
    1,216
    
    
    
    1,563Deferred revenue
    
    
    338
    
    
    
    318Other current liabilities
    
    
    1,663
    
    
    
    1,430Total current liabilities
    
    
    58,631
    
    
    
    76,824Noncurrent liabilities:Senior subordinated convertible notes, face value of $349,500 net of unamortized discount of $87,828
    
    
    261,672
    
    
    
    261,672Other long-term debt, net of current portion
    
    
    336
    
    
    
    359Deferred revenue, net of current portion
    
    
    2,831
    
    
    
    2,540Other noncurrent liabilities
    
    
    5,405
    
    
    
    6,367Total noncurrent liabilities
    
    
    270,244
    
    
    
    270,938Total liabilities
    
    
    328,875
    
    
    
    347,762Commitments and contingent liabilities
    
    
    
    
    
    
    Minority interest
    
    
    12,073
    
    
    
    14,798Stockholders equity:Preferred stock, 10,000,000 authorized and unissued shares
    
    
    
    
    
    
    Common stock, $.01 par value, 140,000,000 authorized shares, 78,068,630 and 77,583,796 issued and
outstanding shares
    
    
    781
    
    
    
    776Additional paid-in capital
    
    
    564,797
    
    
    
    557,841Unearned compensation
    
    
    (5,974
    )
    
    
    (6,013
    )Accumulated other comprehensive income (loss)
    
    
    1,810
    
    
    
    (4,098
    )Accumulated deficit
    
    
    (442,288
    )
    
    
    (439,481
    )Total stockholders equity
    
    
    119,126
    
    
    
    109,025Total liabilities and stockholders equity
    
    $
    460,074
    
    
    $
    471,585
 
 (*)
    
    The Balance Sheet at December 31, 2005 has been derived from the audited
consolidated financial statements at that date but does not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete financial
statements.  3




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MGI PHARMA, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 Three Months EndedMarch 31,2006
    
    
    2005Revenues:Product sales
    
    $
    77,525
    
    
    $
    62,385Licensing and other
    
    
    678
    
    
    
    85078,203
    
    
    
    63,235Costs and expenses:Cost of sales
    
    
    28,342
    
    
    
    21,915Selling, general and administrative
    
    
    31,519
    
    
    
    18,755Research and development
    
    
    22,967
    
    
    
    10,31782,828
    
    
    
    50,987Income (loss) from operations
    
    
    (4,625
    )
    
    
    12,248Interest income
    
    
    1,156
    
    
    
    1,357Interest expense
    
    
    (1,997
    )
    
    
    (1,755
    )Other income
    
    
    181
    
    
    
    Income (loss) before minority interest and income taxes
    
    
    (5,285
    )
    
    
    11,850Minority interest
    
    
    2,431
    
    
    
    Income (loss) before income taxes
    
    
    (2,854
    )
    
    
    11,850Provision (benefit) for income taxes
    
    
    (47
    )
    
    
    250Net income (loss)
    
    $
    (2,807
    )
    
    $
    11,600Net income (loss) per common share:Basic
    
    $
    (0.04
    )
    
    $
    0.16Diluted
    
    $
    (0.04
    )
    
    $
    0.15Weighted average number of common shares outstanding:Basic
    
    
    77,788
    
    
    
    71,345Diluted
    
    
    77,788
    
    
    
    75,615
  4




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MGI PHARMA, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 Three Months Ended March 31,2006
    
    
    2005OPERATING ACTIVITIES:Net income (loss)
    
    $
    (2,807
    )
    
    $
    11,600Adjustments for non-cash items:Depreciation and intangible amortization
    
    
    2,251
    
    
    
    830Benefit plan contribution
    
    
    507
    
    
    
    382Employee stock compensation expense
    
    
    2,058
    
    
    
    1,223Excess tax benefits from stock-based compensation
    
    
    (107
    )
    
    
    Minority interest
    
    
    (2,725
    )
    
    
    Amortization of non-cash financing charges
    
    
    291
    
    
    
    291Other
    
    
    151
    
    
    
    13Change in assets and liabilities (net of acquisitions):Receivables
    
    
    7,558
    
    
    
    (9,799
    )Inventories
    
    
    7,957
    
    
    
    (20,942
    )Other assets
    
    
    (195
    )
    
    
    (2,234
    )Accounts payable and accrued expenses
    
    
    (16,510
    )
    
    
    (13,851
    )Deferred revenue
    
    
    311
    
    
    
    (440
    )Other liabilities
    
    
    (309
    )
    
    
    1,163Net cash used in operating activities
    
    
    (1,569
    )
    
    
    (31,764
    )INVESTING ACTIVITIES:Purchase of available for sale investments
    
    
    (197,647
    )
    
    
    (490,392
    )Maturity of available for sale investments
    
    
    151,059
    
    
    
    502,078Purchase of held-to-maturity investments
    
    
    
    
    
    
    (27,813
    )Maturity of held-to-maturity investments
    
    
    27,245
    
    
    
    56,933Purchase of equipment, furniture and leasehold improvements
    
    
    (2,535
    )
    
    
    (587
    )Other
    
    
    7
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (21,871
    )
    
    
    40,219FINANCING ACTIVITIES:Maturity of restricted marketable securities held by trustee for debt service
    
    
    2,893
    
    
    
    2,875Cash consideration from issuance of shares under stock plans
    
    
    2,709
    
    
    
    3,238Excess tax benefits from stock-based compensation
    
    
    107
    
    
    
    Payments on long-term debt
    
    
    (370
    )
    
    
    Net cash provided by financing activities
    
    
    5,339
    
    
    
    6,113Increase (decrease) in cash and cash equivalents
    
    
    (18,101
    )
    
    
    14,568Cash and cash equivalents at beginning of period
    
    
    51,136
    
    
    
    10,098Cash and cash equivalents at end of period
    
    $
    33,035
    
    
    $
    24,666Supplemental disclosure of cash information:Cash paid for interest
    
    $
    3,043
    
    
    $
    2,927Cash paid for taxes
    
    $
    
    
    
    $
    
  5




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MGI PHARMA, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 1. Basis of Presentation
  Accounting Policies:
   Recent Accounting Pronouncements:
   6




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2. Stock Incentive Plans
  Shareholder
    
    
    
    
    
    
    TotalApproved
    
    
    Other
    
    
    For All(in thousands, except exercise price)
    
    Plans
    
    
    Plans
    
    
    PlansShares issuable under outstanding awards
    
    
    10,289
    
    
    
    41
    
    
    
    10,330Shares available for future issuance
    
    
    1,015
    
    
    
    
    
    
    
    1,015Total
    
    
    11,304
    
    
    
    41
    
    
    
    11,345Average exercise price for outstanding options
    
    $
    16.62
    
    
    $
    5.24
    
    
    $
    16.58
  Stock OptionsWeighted
    
    
    Weighted
    
    
    Aggregate IntrinsicNumber of
    
    
    Average Exercise
    
    
    Average Remaining
    
    
    Value as of March(in thousands, except share price)
    
    Shares
    
    
    Price
    
    
    Contractual Term
    
    
    31, 2006Outstanding at December 31, 2005
    
    
    10,350
    
    
    $
    16.38Granted
    
    
    141
    
    
    
    17.01Exercised
    
    
    (331
    )
    
    
    6.81Expired
    
    
    (140
    )
    
    
    27.05Forfeited
    
    
    (51
    )
    
    
    10.93Outstanding at March 31, 2006
    
    
    9,969
    
    
    
    16.58
    
    
    
    5.91
    
    
    $
    48,654Ending vested and expected to vest
    
    
    9,948
    
    
    
    16.58
    
    
    
    5.91
    
    
    
    48,559Ending exercisable
    
    
    8,213
    
    
    $
    17.74
    
    
    
    5.69
    
    
    
    36,909
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Restricted Stock UnitsWeighted
    
    
    Aggregate IntrinsicNumber of
    
    
    Weighted Average Grant
    
    
    Average Remaining
    
    
    Value as of March(in thousands, except share price)
    
    Shares
    
    
    Date Fair Value
    
    
    Contractual Term
    
    
    31, 2006Outstanding at December 31, 2005
    
    
    265
    
    
    $
    24.84Granted
    
    
    97
    
    
    
    16.88Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (1
    )
    
    
    25.08Outstanding at March 31, 2006
    
    
    361
    
    
    
    22.70
    
    
    
    1.69
    
    
    $
    5,831Ending vested and expected to vest
    
    
    352
    
    
    $
    22.70
    
    
    
    1.67
    
    
    
    5,693
    Options
    
    
    OptionsOutstanding
    
    
    ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    Average
    
    
    Average
    
    
    Number
    
    
    AverageOutstanding
    
    
    Remaining
    
    
    Exercise
    
    
    Exercisable
    
    
    ExerciseRange of Exercise Price
    
    (in thousands)
    
    
    Life
    
    
    Price
    
    
    (in thousands)
    
    
    Price$1.81-$3.65
    
    
    1,005
    
    
    
    5.54
    
    
    $
    3.44
    
    
    
    691
    
    
    $
    3.37$3.67-$6.00
    
    
    1,079
    
    
    
    5.12
    
    
    
    4.88
    
    
    
    968
    
    
    
    5.01$6.11-$8.38
    
    
    1,289
    
    
    
    5.14
    
    
    
    8.11
    
    
    
    1,124
    
    
    
    8.16$8.56-$12.75
    
    
    305
    
    
    
    6.01
    
    
    
    9.63
    
    
    
    193
    
    
    
    9.90$12.79-$13.31
    
    
    1,280
    
    
    
    7.30
    
    
    
    13.30
    
    
    
    586
    
    
    
    13.30$13.45-$23.01
    
    
    1,556
    
    
    
    6.03
    
    
    
    20.03
    
    
    
    1,281
    
    
    
    20.80$23.10-$26.91
    
    
    1,431
    
    
    
    6.15
    
    
    
    25.95
    
    
    
    1,346
    
    
    
    26.10$26.99-$27.43
    
    
    214
    
    
    
    5.69
    
    
    
    27.27
    
    
    
    214
    
    
    
    27.27$27.86-$27.86
    
    
    1,036
    
    
    
    5.32
    
    
    
    27.86
    
    
    
    1,036
    
    
    
    27.86$28.00-$33.22
    
    
    774
    
    
    
    6.64
    
    
    
    29.89
    
    
    
    774
    
    
    
    29.89Total
    
    
    9,969
    
    
    
    5.91
    
    
    
    16.58
    
    
    
    8,213
    
    
    
    17.74
  For the three months endedMarch 31,(in thousands, except per share data)
    
    2006
    
    
    2005Amounts charged against earnings (loss), before income tax benefits
    
    $
    1,951
    
    
    $
    1,093Amount of income tax benefit recognized in earnings (loss)
    
    
    107
    
    
    
    103Amount charged against net loss
    
    $
    2,058
    
    
    $
    1,223Impact on net loss per common share:Basic
    
    $
    0.03
    
    
    $
    0.02Diluted
    
    $
    0.03
    
    
    $
    0.02
  Cost of sales
    
    $
    783Selling, general, and administrative
    
    
    699Research and development
    
    
    469Total
    
    $
    1,951
 8




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Expected dividend yield
    
    
    0
    %Risk-free interest rate
    
    
    4.69
    %Expected volatility
    
    
    0.43Expected life, in years
    
    
    5.63
  Three monthsended(in thousands, except per share data)
    
    March 31, 2005Net income, as reported
    
    $
    11,600Add: Total stock-based employee compensation expense included in reported net income
    
    
    818Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards
    
    
    (9,006
    )Pro forma net income
    
    $
    3,412Net income per common share:As reported basic
    
    $
    0.16Pro forma basic
    
    $
    0.05As reported diluted
    
    $
    0.15Pro forma diluted
    
    $
    0.05Expected dividend yield
    
    
    0
    %Risk-free interest rate
    
    
    3.88
    %Annualized volatility
    
    
    0.76Expected life, in years
    
    
    5.38
  3. Net Income Per Common Share
  Three MonthsEnded March 31,2006
    
    
    2005(in thousands)Weighted-average shares  basic
    
    
    77,788
    
    
    
    71,345Effect of dilutive stock options
    
    
    
    
    
    
    4,270Effect of convertible debt
    
    
    
    
    
    
    Weighted-average shares  assuming dilution
    
    
    77,788
    
    
    
    75,615
  9




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4. Marketable Investments
   March 31,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Corporate notes (classified as held-to-maturity)
    
    $
    
    
    
    $
    4,000Government agencies (classified as held-to-maturity)
    
    
    10,102
    
    
    
    33,347Auction rate securities (classified as available-for-sale)
    
    
    66,327
    
    
    
    15,720Total
    
    $
    76,429
    
    
    $
    53,067
  March 31,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Equity securities (classified as available-for-sale)
    
    
    29,860
    
    
    
    23,952Total
    
    $
    29,860
    
    
    $
    23,952
     March 31, 2006Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    Fair(in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueEquity Securities (classified as available for sale)
    
    $
    28,046
    
    
    $
    3,494
    
    
    $
    (1,680
    )
    
    $
    29,860
 December 31, 2005Gross
    
    GrossUnrealized
    
    Unrealized
    
    Fair(in thousands)
    
    Cost
    
    Gains
    
    Losses
    
    ValueEquity Securities (classified as available for sale)
    
    $
    28,046
    
    
    $
    106
    
    
    $
    (4,200
    )
    
    $
    23,952
 10




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##### Table of Contents



5. Inventories
  March 31,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Raw materials and supplies
    
    $
    702
    
    
    $
    472Work in process
    
    
    354
    
    
    
    1,274Finished products
    
    
    40,379
    
    
    
    47,646Total
    
    $
    41,435
    
    
    $
    49,392
  6. Accrued Expenses
  March 31,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Product rebate, administrative, and other fees
    
    $
    13,336
    
    
    $
    11,886Product development accrual
    
    
    8,522
    
    
    
    9,475License fees
    
    
    5,848
    
    
    
    5,847Field sales bonuses
    
    
    2,918
    
    
    
    1,306Other bonuses
    
    
    2,489
    
    
    
    7,157Vacation
    
    
    2,295
    
    
    
    2,295Product return accrual
    
    
    1,521
    
    
    
    1,684Interest
    
    
    838
    
    
    
    2,189Retirement plan accrual
    
    
    462
    
    
    
    3,088Other accrued expenses
    
    
    5,028
    
    
    
    9,123Total
    
    $
    43,257
    
    
    $
    54,050
 7. Acquisitions
  Purchase Price:
 (In thousands)Purchase of Guilford  cash consideration
    
    $
    53,888Purchase of Guilford  equity consideration
    
    
    122,246Extinguishment of Guilfords revenue interest obligation agreement with Paul Royalty Fund, L.P. and Paul Royalty Fund, II, L.P.
    
    
    59,891Repurchase of Guilfords convertible debt
    
    
    69,249Transaction costs and fees
    
    
    15,569Purchase price
    
    $
    320,843
   11




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(In thousands)Cash and cash equivalents
    
    $
    19,500Short-term marketable investments
    
    
    2,978Restricted marketable investments
    
    
    15,930Investments held by SNDC
    
    
    21,262Receivables, net
    
    
    3,918Inventories
    
    
    6,966Other current assets
    
    
    1,394Goodwill
    
    
    71,307In-process research and development
    
    
    156,900Acquired identifiable intangible assets
    
    
    67,526Equipment, furniture, and leasehold improvements, net
    
    
    1,768Other assets
    
    
    2,810Accounts payable
    
    
    (7,409
    )Accrued expenses
    
    
    (15,548
    )Long-term debt
    
    
    (3,757
    )Other liabilities
    
    
    (6,668
    )Minority interest
    
    
    (18,034
    )Total purchase price
    
    $
    320,843
  (in thousands)Gliadel Wafer
    
    $
    62,300Aggrastat Injection
    
    
    5,226Total acquired identifiable intangible assets
    
    $
    67,526
  Pro forma results of operations:
 (in thousands)Total revenues
    
    $
    73,971Net loss
    
    
    (9,138
    )Pro forma loss per common shareBasic and diluted
    
    $
    (0.12
    )
 12




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##### Table of Contents



8. Stockholders Equity
  Common StockAdditional
    
    
    
    
    
    
    Accumulated otherpaid-in
    
    
    Unearned
    
    
    comprehensive(in thousands)
    
    Shares
    
    
    Par value
    
    
    capital
    
    
    compensation
    
    
    income (loss)Balance at December 31, 2005
    
    
    77,584
    
    
    $
    776
    
    
    $
    557,841
    
    
    $
    (6,013
    )
    
    $
    (4,098
    )Exercise of stock options, including income tax
benefit of $107
    
    
    331
    
    
    
    3
    
    
    
    2,357
    
    
    
    
    
    
    
    Employee retirement plan contribution
    
    
    119
    
    
    
    1
    
    
    
    2,035
    
    
    
    
    
    
    
    Shares issued pursuant to employee stock purchase plan
    
    
    31
    
    
    
    1
    
    
    
    455
    
    
    
    
    
    
    
    Restricted stock, net of shares withheld for tax
    
    
    1
    
    
    
    
    
    
    
    1,131
    
    
    
    39
    
    
    
    Employee stock compensation expense
    
    
    
    
    
    
    
    
    
    
    792
    
    
    
    
    
    
    
    Unrealized gain on available for sale investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,908Other issuances
    
    
    3
    
    
    
    
    
    
    
    186
    
    
    
    
    
    
    
    Balance at March 31, 2006
    
    
    78,069
    
    
    $
    781
    
    
    $
    564,797
    
    
    $
    (5,974
    )
    
    $
    1,810
 9. Research and Development Expense
  Three Months Ended March 31,(in thousands)
    
    2006
    
    
    2005License fees
    
    $
    
    
    
    $
    Other research and development
    
    
    22,967
    
    
    
    10,317Total
    
    $
    22,967
    
    
    $
    10,317
 10. Comprehensive Income (Loss)
  Three Months Ended March 31,(in thousands)
    
    2006
    
    
    2005Net income (loss), as reported
    
    $
    (2,807
    )
    
    $
    11,600Unrealized gain (loss) from securities classified as available for sale
    
    
    5,908
    
    
    
    (8,443
    )Comprehensive income
    
    $
    3,101
    
    
    $
    3,157
 11. Goodwill
  (in thousands)Balance at December 31, 2005
    
    $
    70,203Valuation of Baxter loss contract
    
    
    (420
    )Valuation of Aggrastat Injection
    
    
    1,524Balance at
March 31, 2006
    
    $
    71,307
 12. Subsequent Events
  13




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##### Table of Contents



Item 2.
 From time to time in this quarterly report we make statements that reflect our current expectations
regarding our future results of operations, economic performance, and financial condition, as well
as other matters that may affect our business. In general, we try to identify these forward-looking
statements by using words such as anticipate, believe, expect, estimate and similar
expressions.
 The forward-looking statements may cover, but are not necessarily limited to, the following topics:
(1) efforts to market, sell and distribute
Aloxi ® Injection in the United
States and Canada; (2) efforts to market, sell and distribute
Gliadel Wafer; (3) efforts to develop, market, sell and
distribute DacogenTM for Injection; (4) the clinical
development of Saforis Powder for Oral Suspension, amolimogene (HPV E6 E7
plasmid) (formerly known as ZYC101a), Aloxi ® Injection for PONV,
Aquavan ® Injection, and
other clinical compounds; (5) efforts to secure
adequate supply of the active pharmaceutical ingredients for clinical development and
commercialization; (6) efforts to manufacture drug candidates for clinical development and eventual
commercial supply; (7) strategic plans; (8) anticipated expenditures and the potential need for
additional funds; and (9) specific guidance we give regarding our current expectations of our
future operating results.
 All of these items involve significant risks and uncertainties. These and any of the other
statements we make in this quarterly report that are forward-looking are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution you that our
actual results may differ significantly from the results we discuss in the forward-looking
statements.
 We discuss some factors that could cause or contribute to such differences in the Risk Factors
section of our Annual Report on Form 10-K for the year ended December 31, 2005, that we have
previously filed with the Securities and Exchange Commission. In addition, any forward-looking
statements we make in this document speak only as of the date of this document, and we do not
intend to update any such forward-looking statements to reflect events or circumstances that occur
after that date.
 We have registered Hexalen®, Salagen®, Aquavan®, Gliadel®, Aggrastat®, Saforis,
UpTec,as trademarks with the U.S. Patent and Trademark Office. All other trademarks used in this
report are the property of their respective owners. Aloxi® is a registered trademark of Helsinn
Healthcare SA. Dacogen is a trademark of SuperGen, Inc.
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Business
Overview 
    MARKETABLE PRODUCTS
 Products
    
    Principal Indications
    
    Status
    
    Commercial RightsAloxi Injection
    
    CINV
    
    Currently marketed
    
    U.S. & Canada: MGI PHARMAGliadel Wafer
    
    Malignant glioma at time of initial surgery
    
    Currently marketed
    
    U.S.: MGI PHARMAOutside U.S.: Various collaboratorsGBM
    
    Currently marketed
    
    U.S.: MGI PHARMAOutside U.S.: Various collaborators
 14




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##### Table of Contents



Products
    
    Principal Indications
    
    Status
    
    Commercial RightsSalagen Tablets
    
    Symptoms of radiation-induced dry mouth
    
    Currently marketed
    
    U.S.: MGI PHARMAin head and neck cancer patients
    
    
    
    Europe: NovartisDry mouth, plus dry eyes outside the U.S.,
    
    
    
    Canada: Pfizerin Sjögren's syndrome patients
    
    
    
    Rest of World: Various othercollaboratorsHexalen capsules
    
    Ovarian Cancer
    
    Currently marketed
    
    U.S.: MGI PHARMAOutside U.S.: Various collaboratorsAggrastat Injection
    
    Acute coronary syndrome
    
    Currently marketed
    
    U.S.:  MGI PHARMADacogen for Injection
    
    MDS
    
    FDA approval on
    
    U.S.:  MGI PHARMAMay 3, 2006 Not yet marketed
  PRODUCT CANDIDATES AND RESEARCH PIPELINE
 Products
    
    Principal Indications
    
    Status
    
    SponsorDacogen for Injection
    
    AML
    
    Phase 2 & 3
    
    MGI PHARMASaforis Powder for Oral
Suspension
    
    Oral mucositis
    
    NDA submitted in April 2006
    
    MGI PHARMAamolimogene (HPV E6 E7
plasmid) (formerly known
as ZYC101a)
    
    Cervical dysplasia
    
    Pivotal program ongoing
    
    MGI PHARMAAloxi Injection
    
    PONV
    
    Phase 3
    
    Helsinn HealthcareAquavan Injection
    
    Minimal to moderate sedation of
    
    Phase 3
    
    MGI PHARMApatients  undergoing brief diagnosticor surgical proceduresAloxi Capsules
    
    CINV
    
    Phase 3
    
    Helsinn Healthcareirofulven
    
    Hormone refractory prostate cancer
    
    Phase 2
    
    MGI PHARMALiver cancer, inoperable
    
    Phase 2
    
    MGI PHARMACombination with oxaliplatin
    
    Phase 2
    
    MGI PHARMAZYC300
    
    Solid tumors
    
    Phase 1/2
    
    MGI PHARMAGCP II Inhibitors
    
    Chemotherapy induced neuropathy
    
    Preclinical
    
    MGI PHARMAHIV neuropathy and drug addiction
    
    Preclinical
    
    NIHPARP Inhibitors
    
    Cancer chemosensitization and
    
    Preclinical
    
    MGI PHARMAradiosensitizationMG98
    
    Renal cell cancer
    
    Phase 2
    
    MethylGeneOther acylfulvene analogs
    
    Various Cancers
    
    Preclinical
    
    MGI PHARMA
   15




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##### Table of Contents



Results of Operations
  Revenues
  Three Months Ended March 31,(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    % ChangeProduct sales:Aloxi Injection
    
    $
    63,300
    
    
    $
    57,154
    
    
    $
    6,146
    
    
    
    11
    %Gliadel Wafer
    
    
    9,664
    
    
    
    
    
    
    
    9,664
    
    
    
    Salagen Tablets
    
    
    1,461
    
    
    
    3,633
    
    
    
    (2,172
    )
    
    
    (60
    )Hexalen Capsules
    
    
    720
    
    
    
    566
    
    
    
    154
    
    
    
    27Aggrastat Injection
    
    
    2,380
    
    
    
    
    
    
    
    2,380
    
    
    
    Other
    
    
    
    
    
    
    1,032
    
    
    
    (1,032
    )
    
    
    Total product sales
    
    
    77,525
    
    
    
    62,385
    
    
    
    15,140
    
    
    
    24Licensing and other
    
    
    678
    
    
    
    850
    
    
    
    (172
    )
    
    
    (20
    )Total revenues
    
    $
    78,203
    
    
    $
    63,235
    
    
    $
    14,968
    
    
    
    24
 
 16




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##### Table of Contents



Product Sales:
 
    
    The primary reasons for the increase in product sales revenue are the increased sales of
Aloxi and the sales of Gliadel and Aggrastat, products acquired in the acquisition of
Guilford. Aloxi net sales revenue was $63.3 million or 82 percent of our product sales
revenue in the three months ended March 31, 2006 and $57.2 million or 92 percent of our
product sales revenue in the three months ended March 31, 2005. Gliadel net sales revenue
was $9.7 million or 12 percent of our product sales revenue for the three month ended March
31, 2006.
    
    In the three months ended March 31, 2006 and 2005, we recognized $1.5 million of Salagen
sales or 2 percent of our product sales revenue and $3.6 million of Salagen sales or 6
percent of our product sales revenue, respectively. In December 2004, the FDA approved a
competitors Abbreviated New Drug Application (ANDA) for a generic 5 milligram
pilocarpine hydrochloride tablet. Three additional ANDAs have been approved by the FDA, two
in 2005 and one in 2006. The introduction of these competing, generic products has resulted
in a significant decline of Salagen sales from 2004 to 2005. We expect this decline to
continue in 2006. As a result, we suspended promotion of Salagen.
    
    At March 31, 2006, we estimate there was approximately 30 days worth of sales in
inventory in the wholesale distribution channel utilized by the Company. This represented
an increase from an estimate of one to three weeks of inventory, varying by distributor, as
of March 31, 2005, but is consistent with inventory levels at December 31, 2005. These
estimates are based on inventory levels provided by our wholesalers and historical and
current product sales trends.
 Licensing and other:
 Costs and Expenses
 Three Months Ended March 31,2006
    
    
    2005
    
    
    Change
    
    
    % Change(in thousands)Costs and expenses:Cost of sales
    
    $
    28,342
    
    
    $
    21,915
    
    
    $
    6,427
    
    
    
    29
    %Selling, general and administrative
    
    
    31,519
    
    
    
    18,755
    
    
    
    12,764
    
    
    
    68Research and development
    
    
    22,967
    
    
    
    10,317
    
    
    
    12,650
    
    
    
    123Total
    
    $
    82,828
    
    
    $
    50,987
    
    
    $
    31,841
    
    
    
    62
 Cost of sales:
 Selling, general and administrative:
 Research and development:
 Interest Income and Expense and Other Income
 Three Months Ended March 31,2006
    
    
    2005
    
    
    Change
    
    
    % Change(in thousands)Interest income
    
    $
    1,156
    
    
    $
    1,357
    
    
    $
    (201
    )
    
    
    (15
    )%Interest expense
    
    
    (1,997
    )
    
    
    (1,755
    )
    
    
    (242
    )
    
    
    (14
    )Other income
    
    
    181
    
    
    
    
    
    
    
    181
    
    
    
    Total
    
    $
    (660
    )
    
    $
    (398
    )
    
    $
    (262
    )
    
    
    NM
    *
 
 *
    
    Not Meaningful 17




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##### Table of Contents



Interest Income
 Interest Expense
 Other income:
 Provision for Income Taxes
  Net (Loss) Income
  Liquidity and Capital Resources
   Net Cash Used in Operating Activities
  Net Cash Provided by (Used in) Investing Activities
  18




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##### Table of Contents



Net Cash Provided by Financing Activities
  Cash Uses and Capital Raising Activities
  
    
    fund our research and development and drug discovery efforts;
    
    expand our portfolio of marketed products and product candidates, including through
additional product or product candidate acquisitions or business combinations;
    
    develop products we have discovered, acquired, or licensed;
    
    fund our sales and marketing efforts;
    
    fund operating losses; and
    
    support our contractual obligations and debt service requirements.
   
    
    the revenue from Aloxi, Gliadel and our other products;
    
    the future expenditures we may make to increase revenue from our products;
    
    the progress of our research and development programs;
    
    the progress of pre-clinical and clinical testing;
    
    the time and cost involved in obtaining regulatory approval;
    
    the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
    
    the changes in our existing research relationships, competing technological and marketing developments;
    
    our ability to establish collaborative arrangements and to enter into licensing
agreements and contractual arrangements with others;
    
    the conversion of our senior subordinated convertible notes;
    
    the costs of additional product or product candidate acquisitions or business combinations; and
    
    any future change in our business strategy.
  19




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##### Table of Contents



Payment Obligations
  Remainder of((in thousand)
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    TotalOperating lease payments
    
    $
    4,120
    
    
    $
    5,606
    
    
    $
    4,810
    
    
    $
    4,307
    
    
    $
    3,832
    
    
    $
    29,661
    
    
    $
    52,336Capital lease payments
    
    
    404
    
    
    
    115
    
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    562Baxter loss contract (a)
    
    
    1,459
    
    
    
    1,459
    
    
    
    1,459
    
    
    
    1,459
    
    
    
    
    
    
    
    
    
    
    
    5,836Other long term debt
    
    
    812
    
    
    
    63
    
    
    
    64
    
    
    
    51
    
    
    
    
    
    
    
    
    
    
    
    990Convertible debt
    
    
    
    
    
    
    
    
    
    
    1,500
    
    
    
    
    
    
    
    
    
    
    
    348,000
    
    
    
    349,500Helsinn minimum sales obligation (b)
    
    
    5,170
    
    
    
    6,123
    
    
    
    5,559
    
    
    
    4,801
    
    
    
    4,052
    
    
    
    6,241
    
    
    
    31,946Total
    
    $
    11,965
    
    
    $
    13,366
    
    
    $
    13,435
    
    
    $
    10,618
    
    
    $
    7,884
    
    
    $
    383,902
    
    
    $
    441,170
 (a)
    
    In the acquisition of Guilford, MGI assumed obligations under a supply
agreement with Baxter Healthcare Corporation for Aggrastat 250 ml and
100 ml bags through July 2009. As of March 31, 2006, the Company has
committed to purchasing approximately $5.8 million, of which
approximately $1.5 million will be incurred during the remainder of
2006.(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, 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 for prevention of CINV peak at approximately
$90 million in the fourth year of commercialization.
  Off Balance Sheet Arrangements
  Impact of Recently Issued Accounting Standards
  20




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Application of Critical Accounting Policies and Estimates
   21




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##### Table of Contents



Item 3.
 Quantitative and Qualitative Disclosure About Market Risk
  Equity Price Risk
  Hypothetical PercentageEstimated Fair Value at
    
    Hypothetical Price
    
    Estimated Fair Value after
    
    Increase(Decrease) inMarch 31, 2006
    
    Change
    
    Hypothetical Price Change
    

Stockholders EquityEquity Securities
    
    $
    29,860
    
    
    
    10
    %
    
    $
    32,846
    
    
    
    2.5
    %(10
    )%
    
    
    26,874
    
    
    
    (2.5
    )%20
    %
    
    
    35,832
    
    
    
    5.0
    %(20
    )%
    
    
    23,888
    
    
    
    (5.0
    )%30
    %
    
    
    38,818
    
    
    
    7.5
    %(30
    )%
    
    
    20,902
    
    
    
    (7.5
    )%
 
 Item 4.
 Controls and Procedures
     22




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 6. Exhibits
 ExhibitNo.
    
    Description31.1
    
    Certification of Leon O. Moulder, Jr. Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002).31.2
    
    Certification of William F. Spengler Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002).32.1
    
    Certification of Leon O. Moulder, Jr. Pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of William F. Spengler Pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 23




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##### Table of Contents



SIGNATURES
  MGI PHARMA, INC.Date: May 9, 2006
    
    By:
    
    /s/ William F. SpenglerWilliam F. SpenglerSenior Vice President and Chief Financial Officer(principal financial officer, and duly authorized officer)
 24