##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 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
(Class)
    
    78,933,389 shares
(Outstanding at October 27, 2006)




---



##### 



MGI PHARMA, INC.
 FORM 10-Q INDEX
 PageNumberPART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets  September 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations  Three and Nine Months Ended September 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    26PART II. OTHER INFORMATIONItem 1A: Risk Factors
    
    
    27Item 6. Exhibits
    
    
    27SIGNATURES
    
    
    28
 2




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##### 



PART IFINANCIAL INFORMATION
 Item 1. Financial Statements
 MGI PHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,2006
    
    
    December 31,(Unaudited)
    
    
    
 2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    50,050
    
    
    $
    51,136Short-term marketable investments
    
    
    76,951
    
    
    
    53,067Restricted cash, current
    
    
    
    
    
    
    750Restricted marketable investments, current
    
    
    2,935
    
    
    
    5,822Investments held by SNDC
    
    
    
    
    
    
    18,580Receivables, less contractual allowances and allowance for bad debts of $48,654 and $37,118, respectively
    
    
    134,978
    
    
    
    105,959Inventories
    
    
    31,392
    
    
    
    49,392Other current assets
    
    
    1,957
    
    
    
    1,558Total current assets
    
    
    298,263
    
    
    
    286,264Restricted cash, less current portion
    
    
    1,608
    
    
    
    1,101Long-term marketable investments
    
    
    26,152
    
    
    
    23,952Restricted marketable investments, less current portion
    
    
    
    
    
    
    2,859Equipment, furniture and leasehold improvements, at cost less accumulated depreciation of $6,405 and
$4,810, respectively
    
    
    9,235
    
    
    
    5,647Debt issuance costs, less accumulated amortization of $3,003 and $2,131, respectively
    
    
    5,187
    
    
    
    6,005Intangible assets, at cost less accumulated amortization of $14,216 and $8,779, respectively
    
    
    86,318
    
    
    
    73,505Goodwill
    
    
    53,594
    
    
    
    70,203Other assets
    
    
    1,374
    
    
    
    2,049Total assets
    
    $
    481,731
    
    
    $
    471,585LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    14,453
    
    
    $
    19,463Accrued expenses
    
    
    62,556
    
    
    
    54,050Current portion of long-term debt
    
    
    261
    
    
    
    1,563Deferred revenue, current
    
    
    3,263
    
    
    
    318Other current liabilities
    
    
    1,765
    
    
    
    1,430Total current liabilities
    
    
    82,298
    
    
    
    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
    
    
    202
    
    
    
    359Deferred revenue, net of current portion
    
    
    16,983
    
    
    
    2,540Other noncurrent liabilities
    
    
    2,850
    
    
    
    6,367Total noncurrent liabilities
    
    
    281,707
    
    
    
    270,938Total liabilities
    
    
    364,005
    
    
    
    347,762Commitments and contingent liabilities
    
    
    
    
    
    
    Minority interest
    
    
    
    
    
    
    14,798Stockholders equity:Preferred stock, 10,000,000 authorized and unissued shares
    
    
    
    
    
    
    Common stock, $.01 par value, 140,000,000 authorized shares, 78,782,886 and 77,583,796 issued and
outstanding shares, respectively
    
    
    788
    
    
    
    776Additional paid-in capital
    
    
    577,113
    
    
    
    557,841Unearned compensation
    
    
    (8,160
    )
    
    
    (6,013
    )Accumulated other comprehensive income (loss)
    
    
    7,985
    
    
    
    (4,098
    )Accumulated deficit
    
    
    (460,000
    )
    
    
    (439,481
    )Total stockholders equity
    
    
    117,726
    
    
    
    109,025Total liabilities and stockholders equity
    
    $
    481,731
    
    
    $
    471,585
  3




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##### 



MGI PHARMA, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Product sales
    
    $
    95,540
    
    
    $
    66,448
    
    
    $
    259,256
    
    
    $
    194,152Licensing and other
    
    
    1,459
    
    
    
    1,410
    
    
    
    3,100
    
    
    
    4,10396,999
    
    
    
    67,858
    
    
    
    262,356
    
    
    
    198,255Costs and expenses:Cost of sales
    
    
    34,882
    
    
    
    23,432
    
    
    
    97,037
    
    
    
    68,268Selling, general and administrative
    
    
    38,390
    
    
    
    16,725
    
    
    
    105,375
    
    
    
    52,316Research and development
    
    
    21,173
    
    
    
    14,755
    
    
    
    72,331
    
    
    
    39,45794,445
    
    
    
    54,912
    
    
    
    274,743
    
    
    
    160,041Income (loss) from operations
    
    
    2,554
    
    
    
    12,946
    
    
    
    (12,387
    )
    
    
    38,214Interest income
    
    
    1,364
    
    
    
    1,963
    
    
    
    3,881
    
    
    
    5,067Interest expense
    
    
    (1,891
    )
    
    
    (1,754
    )
    
    
    (5,813
    )
    
    
    (5,263
    )Other-than-temporary impairment of investment
    
    
    
    
    
    
    
    
    
    
    (9,880
    )
    
    
    Other income
    
    
    202
    
    
    
    
    
    
    
    257
    
    
    
    Income (loss) before minority interest and income taxes
    
    
    2,229
    
    
    
    13,155
    
    
    
    (23,942
    )
    
    
    38,018Minority interest
    
    
    
    
    
    
    
    
    
    
    3,881
    
    
    
    Income (loss) before income taxes
    
    
    2,229
    
    
    
    13,155
    
    
    
    (20,061
    )
    
    
    38,018Provision for income taxes
    
    
    505
    
    
    
    297
    
    
    
    458
    
    
    
    852Net income (loss)
    
    $
    1,724
    
    
    $
    12,858
    
    
    $
    (20,519
    )
    
    $
    37,166Net income (loss) per common share:Basic
    
    $
    0.02
    
    
    $
    0.18
    
    
    $
    (0.26
    )
    
    $
    0.52Diluted
    
    $
    0.02
    
    
    $
    0.17
    
    
    $
    (0.26
    )
    
    $
    0.49Weighted average number of common shares outstanding:Basic
    
    
    78,583
    
    
    
    72,007
    
    
    
    78,196
    
    
    
    71,709Diluted
    
    
    80,689
    
    
    
    76,030
    
    
    
    78,196
    
    
    
    75,818
  4




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##### 



MGI PHARMA, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 Nine Months Ended September 30,2006
    
    
    2005OPERATING ACTIVITIES:Net income (loss)
    
    $
    (20,519
    )
    
    $
    37,166Adjustments for non-cash items:Depreciation and intangible amortization
    
    
    8,567
    
    
    
    2,520Benefit plan contribution
    
    
    1,144
    
    
    
    810Employee stock compensation expense
    
    
    6,337
    
    
    
    2,781Excess tax benefits from stock-based compensation
    
    
    (191
    )
    
    
    Other-than-temporary impairment of investment
    
    
    9,880
    
    
    
    Amortization of non-cash financing charges
    
    
    872
    
    
    
    872Loss on sale of Aggrastat
    
    
    546
    
    
    
    Other
    
    
    429
    
    
    
    (9
    )Change in assets and liabilities (net of acquisitions and divestiture):Receivables
    
    
    (28,609
    )
    
    
    (24,216
    )Inventories
    
    
    18,133
    
    
    
    (32,027
    )Other assets
    
    
    (480
    )
    
    
    (391
    )Accounts payable and accrued expenses
    
    
    9,586
    
    
    
    (14,749
    )Deferred revenue
    
    
    17,387
    
    
    
    (87
    )Other liabilities
    
    
    17
    
    
    
    467Net cash provided by (used in) operating activities
    
    
    23,099
    
    
    
    (26,863
    )INVESTING ACTIVITIES:Purchase of available for sale investments
    
    
    (697,290
    )
    
    
    (1,551,918
    )Maturity of available for sale investments
    
    
    636,059
    
    
    
    1,673,306Purchase of held-to-maturity investments
    
    
    
    
    
    
    (38,399
    )Maturity of held-to-maturity investments
    
    
    37,347
    
    
    
    67,536Purchase of equipment, furniture and leasehold improvements
    
    
    (5,207
    )
    
    
    (1,714
    )Dacogen
license agreement milestone payments
    
    
    (25,000
    )
    
    
    Net proceeds from the sale of Aggrastat
    
    
    17,213
    
    
    
    Prepaid acquisition costs
    
    
    
    
    
    
    (61,106
    )Other
    
    
    842
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (36,036
    )
    
    
    87,705FINANCING ACTIVITIES:Maturity of restricted marketable securities held by trustee for debt service
    
    
    5,746
    
    
    
    5,710Cash consideration from issuance of shares under stock plans
    
    
    7,424
    
    
    
    6,556Excess tax benefits from stock-based compensation
    
    
    191
    
    
    
    Payments on long-term debt
    
    
    (1,456
    )
    
    
    Other
    
    
    (54
    )
    
    
    Net cash provided by financing activities
    
    
    11,851
    
    
    
    12,266Increase (decrease) in cash and cash equivalents
    
    
    (1,086
    )
    
    
    73,108Cash and cash equivalents at beginning of period
    
    
    51,136
    
    
    
    10,098Cash and cash equivalents at end of period
    
    $
    50,050
    
    
    $
    83,206Supplemental disclosure of cash and non-cash information:Cash paid for interest
    
    $
    6,044
    
    
    $
    5,754Cash paid for taxes
    
    $
    116
    
    
    $
    502Activities of SNDC are non-cash activities (See Note 1 in the Notes to Condensed
Consolidated Financial Statements for additional information on SNDC)
  5




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##### 



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




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##### 



2. Stock Incentive Plans
  7




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##### 



Shareholder
    
    
    
    
    
    
    TotalApproved
    
    
    Other
    
    
    For All(in thousands, except exercise price)
    
    Plans
    
    
    Plans
    
    
    PlansShares issuable under outstanding awards
    
    
    11,777
    
    
    
    41
    
    
    
    11,818Shares available for future issuance
    
    
    6,362
    
    
    
    
    
    
    
    6,362Total
    
    
    18,139
    
    
    
    41
    
    
    
    18,180Average exercise price for outstanding options
    
    $
    16.73
    
    
    $
    5.24
    
    
    $
    16.69
  Stock OptionsWeighted
    
    
    Weighted
    
    
    Aggregate IntrinsicNumber of
    
    
    Average Exercise
    
    
    Average Remaining
    
    
    Value as of(in thousands, except share price)
    
    Shares
    
    
    Price
    
    
    Contractual Term
    
    
    September 30, 2006Outstanding at December 31, 2005
    
    
    10,350
    
    
    $
    16.38Granted
    
    
    2,223
    
    
    
    15.45Exercised
    
    
    (897
    )
    
    
    6.73Expired
    
    
    (170
    )
    
    
    12.48Forfeited
    
    
    (385
    )
    
    
    26.06Outstanding at September 30, 2006
    
    
    11,121
    
    
    
    16.69
    
    
    
    5.69
    
    
    $
    45,007Ending vested and expected to vest
    
    
    10,886
    
    
    
    16.72
    
    
    
    5.66
    
    
    $
    44,472Ending exercisable
    
    
    8,215
    
    
    $
    17.41
    
    
    
    5.32
    
    
    $
    36,397
 Restricted Stock UnitsWeighted
    
    
    Aggregate IntrinsicNumber of
    
    
    Weighted Average Grant
    
    
    Average Remaining
    
    
    Value as of(in thousands, except share price)
    
    Shares
    
    
    Date Fair Value
    
    
    Contractual Term
    
    
    September 30, 2006Outstanding at December 31, 2005
    
    
    264
    
    
    $
    24.83Granted
    
    
    484
    
    
    
    15.42Exercised
    
    
    (23
    )
    
    
    26.97Forfeited
    
    
    (28
    )
    
    
    21.76Outstanding at September 30, 2006
    
    
    697
    
    
    
    18.34
    
    
    
    1.85
    
    
    $
    11,168Ending vested and expected to vest
    
    
    643
    
    
    $
    18.34
    
    
    
    1.78
    
    
    $
    10,285
    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-$5.03
    
    
    1,123
    
    
    
    5.33
    
    
    $
    3.61
    
    
    
    998
    
    
    $
    3.60$5.07-$8.22
    
    
    1,268
    
    
    
    4.53
    
    
    
    6.70
    
    
    
    1,185
    
    
    
    6.62$8.38-$12.75
    
    
    811
    
    
    
    4.67
    
    
    
    8.83
    
    
    
    756
    
    
    
    8.81$12.79-$13.31
    
    
    1,153
    
    
    
    6.75
    
    
    
    13.30
    
    
    
    842
    
    
    
    13.30$13.45-$14.61
    
    
    1,298
    
    
    
    6.69
    
    
    
    14.52
    
    
    
    157
    
    
    
    14.10$14.68-$19.67
    
    
    1,207
    
    
    
    6.41
    
    
    
    16.25
    
    
    
    180
    
    
    
    17.14$19.70-$23.60
    
    
    1,118
    
    
    
    5.67
    
    
    
    22.42
    
    
    
    954
    
    
    
    22.42$23.81-$26.91
    
    
    1,201
    
    
    
    5.61
    
    
    
    26.26
    
    
    
    1,201
    
    
    
    26.26$26.99-$27.86
    
    
    1,186
    
    
    
    4.88
    
    
    
    27.76
    
    
    
    1,186
    
    
    
    27.76$28.00-$33.22
    
    
    756
    
    
    
    6.14
    
    
    
    29.87
    
    
    
    756
    
    
    
    29.87Total
    
    
    11,121
    
    
    
    5.69
    
    
    $
    16.69
    
    
    
    8,215
    
    
    $
    17.41
 8




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##### 



For the three months endedSeptember 30,(in thousands, except per share data)
    
    2006
    
    
    2005Amounts charged against earnings, before income tax benefits
    
    $
    2,451
    
    
    $
    841Impact on net earnings per common share:Basic
    
    $
    0.03
    
    
    $
    0.01Diluted
    
    $
    0.03
    
    
    $
    0.01
 For the nine months endedSeptember 30,(in thousands, except per share data)
    
    2006
    
    
    2005Amounts charged against earnings (loss), before income tax benefits
    
    $
    6,337
    
    
    $
    2,781Impact on net earnings (loss) per common share:Basic
    
    $
    0.08
    
    
    $
    0.04Diluted
    
    $
    0.08
    
    
    $
    0.04
  Three months endedSeptember 30, 2006Selling, general, and administrative
    
    $
    1,751Research and development
    
    
    700Total
    
    $
    2,451
 Nine months endedSeptember 30, 2006Selling, general, and administrative
    
    $
    4,574Research and development
    
    
    1,763Total
    
    $
    6,337
  Three months ended
    
    Nine months endedSeptember 30, 2006
    
    September 30, 2006Expected dividend yield
    
    
    0
    %
    
    
    0
    %Risk-free interest rate
    
    
    4.82
    %
    
    
    4.69  5.08
    %Expected volatility
    
    
    0.44
    
    
    
    0.41  0.44Expected life, in years
    
    
    5.40  6.65
    
    
    
    5.38  6.65
  9




---



##### 



Three months ended
    
    
    Nine months ended(in thousands, except per share data)
    
    September 30, 2005
    
    
    September 30, 2005Net income, as reported
    
    $
    12,858
    
    
    $
    37,166Add: Total stock-based employee compensation expense included in reported net income
    
    
    841
    
    
    
    2,781Deduct: Total stock-based employee compensation expense determined under fair value
based method for all awards
    
    
    (43,154
    )
    
    
    (60,795
    )Pro forma net (loss)
    
    $
    (29,455
    )
    
    $
    (20,848
    )Net income (loss) per common share:As reported basic
    
    $
    0.18
    
    
    $
    0.52Pro forma basic
    
    $
    (0.41
    )
    
    $
    (0.29
    )As reported diluted
    
    $
    0.17
    
    
    $
    0.49Pro forma diluted
    
    $
    (0.41
    )
    
    $
    (0.29
    )
  Three months ended
    
    Nine months endedSeptember 30, 2005
    
    September 30, 2005Expected dividend yield
    
    
    0
    %
    
    
    0
    %Risk-free interest rate
    
    
    4.03
    %
    
    
    3.93
    %Expected volatility
    
    
    0.64
    
    
    
    0.69Expected life, in years
    
    
    4.79
    
    
    
    4.99
 3. Net Income (Loss) Per Common Share
  Three MonthsEnded September 30,(in thousands)
    
    2006
    
    
    2005Weighted-average shares  basic
    
    
    78,583
    
    
    
    72,007Effect of dilutive stock options
    
    
    2,106
    
    
    
    4,023Effect of convertible debt
    
    
    
    
    
    
    Weighted-average shares  assuming dilution
    
    
    80,689
    
    
    
    76,030
 Nine MonthsEnded September 30,2006
    
    
    2005(in thousands)Weighted-average shares  basic
    
    
    78,196
    
    
    
    71,709Effect of dilutive stock options
    
    
    
    
    
    
    4,109Effect of convertible debt
    
    
    
    
    
    
    Weighted-average shares  assuming dilution
    
    
    78,196
    
    
    
    75,818
  10




---



##### 



4. Marketable Investments
   September 30,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Corporate notes (classified as held-to-maturity)
    
    $
    
    
    
    $
    4,000Government agencies (classified as held-to-maturity)
    
    
    
    
    
    
    33,347Auction rate securities (classified as available-for-sale)
    
    
    76,951
    
    
    
    15,720Total
    
    $
    76,951
    
    
    $
    53,067
  September 30,
    
    December 31,(in thousands)
    
    2006
    
    2005Equity securities (classified as available-for-sale)
    
    $
    26,152

    
    $
    23,952
     September 30, 2006Gross
    
    GrossUnrealized
    
    Unrealized
    
    Fair(in thousands)
    
    Cost Basis
    
    Gains
    
    Losses
    
    ValueEquity Securities (classified as available for sale)
    
    $
    18,166
    
    
    $
    7,986
    
    
    $
    
    $
    26,152
 December 31, 2005Gross
    
    GrossUnrealized
    
    Unrealized
    
    Fair(in thousands)
    
    Cost Basis
    
    Gains
    
    Losses
    
    ValueEquity Securities (classified as available for sale)
    
    $
    28,046
    
    
    $
    106
    
    
    $
    (4,200
    )
    
    $
    23,952
 11




---



##### 



5. Inventories
  September 30,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Raw materials and supplies
    
    $
    658
    
    
    $
    472Work in process
    
    
    953
    
    
    
    1,274Finished products
    
    
    29,601
    
    
    
    47,450Inventory on consignment
    
    
    180
    
    
    
    196Total
    
    $
    31,392
    
    
    $
    49,392
  6. Accrued Expenses
  September 30,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Product rebate, administrative, and other fees
    
    $
    23,974
    
    
    $
    11,886Product development
    
    
    9,707
    
    
    
    9,152License fees
    
    
    8,490
    
    
    
    5,847Other bonuses
    
    
    4,000
    
    
    
    6,007Field sales bonuses
    
    
    3,542
    
    
    
    1,306Vacation
    
    
    3,141
    
    
    
    2,295Retirement plan
    
    
    1,824
    
    
    
    3,088Payroll benefits
    
    
    1,214
    
    
    
    1,497Marketing
    
    
    770
    
    
    
    648Product return
    
    
    618
    
    
    
    1,684Interest
    
    
    515
    
    
    
    2,189Other
    
    
    4,761
    
    
    
    8,451Total
    
    $
    62,556
    
    
    $
    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
   12




---



##### 



(In thousands)Cash and cash equivalents
    
    $
    19,500Short-term marketable investments
    
    
    2,978Restricted marketable investments
    
    
    15,930Investments held by SNDC
    
    
    21,262Receivables, net
    
    
    4,328Inventories
    
    
    7,957Other current assets
    
    
    1,394Goodwill
    
    
    53,594In-process research and development
    
    
    156,900Acquired identifiable intangible assets
    
    
    83,199Equipment, furniture, and leasehold improvements, net
    
    
    1,768Other assets
    
    
    2,810Accounts payable
    
    
    (7,072
    )Accrued expenses
    
    
    (15,548
    )Long-term debt
    
    
    (3,757
    )Other liabilities
    
    
    (6,366
    )Minority interest
    
    
    (18,034
    )Total purchase price
    
    $
    320,843
  (in thousands)Gliadel Wafer
    
    $
    62,300Aggrastat Injection
    
    
    20,899Total acquired identifiable intangible assets
    
    $
    83,199
  Pro forma results of operations:
 Three months ended
    
    
    Nine months ended(in thousands)
    
    September 30, 2005
    
    
    September 30, 2005Total revenues
    
    $
    80,623
    
    
    $
    233,407Net loss
    
    
    (5,396
    )
    
    
    (33,418
    )Pro forma loss per common share:Basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.43
    )
 8. Divestiture
  (in thousands)Total cash received from Medicure
    
    $
    19,759Baxter liability assumed by Medicure
    
    
    2,476Total sales price
    
    
    22,235Book value of Aggrastat intangible
    
    
    (19,376
    )Book value of inventory purchased by Medicure
    
    
    (859
    )Payment to Merck to relieve obligation
    
    
    (2,000
    )Transaction costs
    
    
    (546
    )Loss on sale of Aggrastat
    
    $
    (546
    )
 13




---



##### 



Three months ended
    
    Nine months ended(in thousands)
    
    September 30, 2006
    
    September 30, 2006Product sales
    
    $
    883

    
    $
    5,760
 9. Goodwill
  (in thousands)Balance at December 31, 2005
    
    $
    70,203Valuation of Baxter loss contract
    
    
    (723
    )Valuation of inventory
    
    
    (991
    )Adjustments of other miscellaneous liabilities and receivables
    
    
    (746
    )Valuation of Aggrastat Injection intangible asset
    
    
    (14,149
    )Balance at September 30, 2006
    
    $
    53,594
 10. Stockholders Equity
  Additional
    
    
    
    
    
    
    Accumulated otherCommon Stock

    
    
    paid-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 $191
    
    
    897
    
    
    
    9
    
    
    
    6,218
    
    
    
    
    
    
    
    Employee retirement plan contribution
    
    
    155
    
    
    
    2
    
    
    
    2,673
    
    
    
    
    
    
    
    Shares issued pursuant to employee stock purchase plan
    
    
    88
    
    
    
    1
    
    
    
    1,387
    
    
    
    
    
    
    
    Restricted stock, net of shares withheld for tax
    
    
    55
    
    
    
    
    
    
    
    5,054
    
    
    
    (5,054
    )
    
    
    Employee stock option compensation expense
    
    
    
    
    
    
    
    
    
    
    3,430
    
    
    
    2,907
    
    
    
    Unrealized gain and recognition of
other-than-temporary impairment on available for sale
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,083Other issuances
    
    
    4
    
    
    
    
    
    
    
    510
    
    
    
    
    
    
    
    Balance at September 30, 2006
    
    
    78,783
    
    
    $
    788
    
    
    $
    577,113
    
    
    $
    (8,160
    )
    
    $
    7,985
 11. Research and Development Expense
  Three Months Ended September 30,(in thousands)
    
    2006
    
    
    2005License fees
    
    $
    26
    
    
    $
    50Other research and development
    
    
    21,147
    
    
    
    14,705Total
    
    $
    21,173
    
    
    $
    14,755
 Nine Months Ended September 30,(in thousands)
    
    2006
    
    
    2005License fees
    
    $
    76
    
    
    $
    50Other research and development
    
    
    72,255
    
    
    
    39,407Total
    
    $
    72,331
    
    
    $
    39,457
 12. Comprehensive Income (Loss)
  14




---



##### 



Three Months Ended September 30,(in thousands)
    
    2006
    
    
    2005Net income, as reported
    
    $
    1,724
    
    
    $
    12,858Unrealized gain
    
    
    5,821
    
    
    
    5,117Foreign currency translation adjustment
    
    
    
    
    
    
    Comprehensive income
    
    $
    7,545
    
    
    $
    17,975
 Nine Months Ended September 30,(in thousands)
    
    2006
    
    
    2005Net income (loss), as reported
    
    $
    (20,519
    )
    
    $
    37,166Unrealized gain (loss) and recognition
of other-than-temporary impairment
from securities classified as
available for sale
    
    
    12,080
    
    
    
    (4,144
    )Foreign currency translation adjustment
    
    
    3
    
    
    
    Comprehensive income (loss)
    
    $
    (8,436
    )
    
    $
    33,022
 13. Licensing Arrangements
 Technology Out-License Arrangements
 Dacogen Injection
  Technology In-License Arrangements
 Dacogen Injection
  15




---



##### 



14. Subsequent Events
 Saforis approvable letter
  Revolving
Credit Facility
     Restructuring
    16




---



##### 



Item 2.
 From time to time in this quarterly report we make statements that reflect our current expectations
regarding our future results of operations, economic performance, and financial condition, as well
as other matters that may affect our business. In general, we try to identify these forward-looking
statements by using words such as anticipate, believe, expect, estimate and similar
expressions.
 The forward-looking statements may cover, but are not necessarily limited to, the following topics:
(1) efforts to market, sell and distribute Aloxi ® Injection in the United
States and Canada; (2) efforts to market, sell and distribute Gliadel ® Wafer;
(3) efforts to develop, market, sell, and distribute Dacogen for Injection (4) the clinical
development of Dacogen for Injection, Saforis Powder for Oral Suspension, amolimogene bepiplasmid
(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 these forward-looking
statements.
 We discuss some factors that could cause or contribute to such differences in the Risk Factors
section of our Annual Report on Form 10-K for the year ended December 31, 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®, and Gliadel® as trademarks with the U.S.
Patent and Trademark Office, and own pending trademark applications for the marks Saforis and
UpTec. All other trademarks used in this report are the property of their respective owners.
Aloxi® is a registered trademark of Helsinn Healthcare SA. Dacogen is a trademark of SuperGen,
Inc. Aggrastat® is a registered trademark of Medicure Inc.
 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 PHARMADacogen for Injection
    
    MDS
    
    Currently marketed
    
    North America: MGI PHARMA
Rest of World: Cilag GmbHGliadel Wafer
    
    Malignant glioma at time of initial surgery
    
    Currently marketed
    
    U.S.: MGI PHARMA
Outside U.S.: Various collaboratorsGlioblastoma multiforme (GBM)
    
    Currently marketed
    
    U.S.: MGI PHARMA

Outside U.S.: Various collaboratorsSalagen 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 PHARMA

Europe: Novartis

Canada: Pfizer

Rest of World: Various other
collaboratorsHexalen capsules
    
    Ovarian Cancer
    
    Currently marketed
    
    U.S.: MGI PHARMA

Outside U.S.: Various collaborators
 17




---



##### 



PRODUCT CANDIDATES AND RESEARCH PIPELINE
 Products
    
    Principal Indications
    
    Status
    
    SponsorAloxi Injection
    
    PONV
    
    Phase 3
    
    Helsinn HealthcareAloxi Capsules
    
    CINV
    
    Phase 3
    
    Helsinn HealthcareDacogen for Injection
    
    AML
    
    Phase 2 & 3
    
    MGI PHARMAAquavan Injection
    
    Minimal to moderate sedation of
patients undergoing brief
diagnostic or surgical procedures
    
    Phase 3
    
    MGI PHARMASaforis Powder for 
Oral Suspension
    
    Oral mucositis
    
    FDA approvable letter
received October 12,
2006
    
    MGI PHARMAamolimogene 
bepiplasmid
(formerly known as 
ZYC101a)
    
    Cervical dysplasia
    
    Pivotal program ongoing
    
    MGI PHARMAirofulven
    
    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 PHARMAPARP Inhibitors
    
    Cancer chemosensitization and
radiosensitization
    
    Preclinical
    
    MGI PHARMAGCP II Inhibitors
    
    Chemotherapy induced neuropathy
    
    Preclinical
    
    MGI PHARMAMG98
    
    Renal cell cancer
    
    Phase 2
    
    MethylGene
    18




---



##### 



Results of Operations
  Revenues
  Three Months Ended September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    % ChangeProduct sales:Aloxi Injection
    
    $
    70,357
    
    
    $
    63,605
    
    
    $
    6,752
    
    
    
    11
    %Gliadel Wafer
    
    
    9,538
    
    
    
    
    
    
    
    9,538
    
    
    
    Dacogen
    
    
    11,917
    
    
    
    
    
    
    
    11,917
    
    
    
    Salagen Tablets
    
    
    1,605
    
    
    
    1,765
    
    
    
    (160
    )
    
    
    (9
    )Hexalen Capsules
    
    
    787
    
    
    
    752
    
    
    
    35
    
    
    
    5Aggrastat Injection
    
    
    883
    
    
    
    
    
    
    
    883
    
    
    
    Other
    
    
    453
    
    
    
    326
    
    
    
    127
    
    
    
    39Total product sales
    
    
    95,540
    
    
    
    66,448
    
    
    
    29,092
    
    
    
    44Licensing and other
    
    
    1,459
    
    
    
    1,410
    
    
    
    49
    
    
    
    3Total revenues
    
    $
    96,999
    
    
    $
    67,858
    
    
    $
    29,141
    
    
    
    43
 19




---



##### 



Nine Months Ended September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    % ChangeProduct sales:Aloxi Injection
    
    $
    201,095
    
    
    $
    181,514
    
    
    $
    19,581
    
    
    
    11
    %Gliadel Wafer
    
    
    27,630
    
    
    
    
    
    
    
    27,630
    
    
    
    Dacogen
    
    
    17,134
    
    
    
    
    
    
    
    17,134
    
    
    
    Salagen Tablets
    
    
    4,627
    
    
    
    8,736
    
    
    
    (4,109
    )
    
    
    (47
    )Hexalen Capsules
    
    
    2,227
    
    
    
    1,958
    
    
    
    269
    
    
    
    14Aggrastat Injection
    
    
    5,760
    
    
    
    
    
    
    
    5,760
    
    
    
    Other
    
    
    783
    
    
    
    1,944
    
    
    
    (1,161
    )
    
    
    (60
    )Total product sales
    
    
    259,256
    
    
    
    194,152
    
    
    
    65,104
    
    
    
    34Licensing and other
    
    
    3,100
    
    
    
    4,103
    
    
    
    (1,003
    )
    
    
    (24
    )Total revenues
    
    $
    262,356
    
    
    $
    198,255
    
    
    $
    64,101
    
    
    
    32
 Product Sales:
 
    
    Aloxi net sales revenue was $70.4 million, or 74 percent, and $201.1 million, or 78
percent of our product sales revenue for the three and nine months ended September 30,
2006, respectively. This compares with Aloxi net sales revenue of $63.6 million, or 96
percent, and $181.5 million, or 93 percent, of our product sales revenue for the three and
nine months ended September 30, 2005.
    
    Gliadel net sales revenue was $9.5 million, or 10 percent, and $27.6 million, or 11
percent of our product sales revenue for the three and nine months ended September 30, 2006
respectively. Because Gliadel was a product we acquired in our purchase of Guilford during
the fourth quarter of 2005, we had no comparable sales for the three and nine months ended
September 30, 2005.
    
    Dacogen net sales revenue was $11.9 million, or 12 percent, and $17.1 million, or 7
percent of our product sales revenue for the three and nine months ended September 30,
2006, respectively. We began our commercial launch of Dacogen during the second quarter of
2006.
    
    Salagen net sales continued to decline from historical levels. Salagen net sales
revenue was $1.6 million, or 2 percent, and $4.6 million, or 2 percent of our product sales
revenue for the three and nine months ended September 30, 2006. This compares with Salagen
net sales revenue of $1.8 million, or 3 percent, and $8.7 million, or 4 percent of our
product sales revenue for the three and nine months ended September 30, 2005. This decline
began as a result of the FDA approval of a competitors Abbreviated New Drug Application
(ANDA) for a generic 5 milligram pilocarpine hydrochloride tablet in December 2004.
Since then, three additional ANDAs have been approved by the FDA, two of which were
approved in 2005 and an additional ANDA was approved in 2006 that included the approval of
the first generic 7.5 milligram pilocarpine hydrochloride tablet. We suspended promotion
of Salagen in 2005.
  Licensing and other:
 20




---



##### 



Costs and Expenses
 Three Months Ended September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    % ChangeCosts and expenses:Cost of sales
    
    $
    34,882
    
    
    $
    23,432
    
    
    $
    11,450
    
    
    
    49
    %Selling, general and administrative
    
    
    38,390
    
    
    
    16,725
    
    
    
    21,665
    
    
    
    130Research and development
    
    
    21,173
    
    
    
    14,755
    
    
    
    6,418
    
    
    
    43Total
    
    $
    94,445
    
    
    $
    54,912
    
    
    $
    39,533
    
    
    
    72
 Nine Months Ended September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    % ChangeCosts and expenses:Cost of sales
    
    $
    97,037
    
    
    $
    68,268
    
    
    $
    28,769
    
    
    
    42
    %Selling, general and administrative
    
    
    105,375
    
    
    
    52,316
    
    
    
    53,059
    
    
    
    101Research and development
    
    
    72,331
    
    
    
    39,457
    
    
    
    32,874
    
    
    
    83Total
    
    $
    274,743
    
    
    $
    160,041
    
    
    $
    114,702
    
    
    
    72
 Cost of sales:
 Selling, general and administrative:
 Research and development:
 Interest Income and Expense and Other Income
 Three Months Ended September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    % ChangeInterest income
    
    $
    1,364
    
    
    $
    1,963
    
    
    $
    (599
    )
    
    
    (31
    )%Interest expense
    
    
    (1,891
    )
    
    
    (1,754
    )
    
    
    (137
    )
    
    
    (8
    )Other income
    
    
    202
    
    
    
    
    
    
    
    202
    
 
    
    NM
 *Total
    
    $
    (325
    )
    
    $
    209
    
    
    $
    (534
    )
    
 

     NM
    *
 
 *
    
    Not Meaningful Nine Months Ended September 30,(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    % ChangeInterest income
    
    $
    3,881
    
    
    $
    5,067
    
    
    $
    (1,186
    )
    
    
    (23
    )%Interest expense
    
    
    (5,813
    )
    
    
    (5,263
    )
    
    
    (550
    )
    
    
    (10
    )Other-than-temporary impairment of investment
    
    
    (9,880
    )
    
    
    
    
    
    
    (9,880
    )
    
    
    NM
 *Other income
    
    
    257
    
    
    
    
    
    
    
    257
    
    
    
    NM
 *Total
    
    $
    (11,555
    )
    
    $
    (196
    )
    
    $
    (11,359
    )
    
    
    NM
 *
 
 *
    
    Not Meaningful Interest Income
 21




---



##### 



Interest Expense
 Other-than-temporary Impairment of Investment :
 Other income:
 Provision for Income Taxes
  Net Income (Loss)
  Liquidity and Capital Resources
  22




---



##### 



Net Cash Provided by (Used in) Operating Activities
  Net Cash Provided by (Used in) Investing Activities
  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, Dacogen, and our other products;
    
    the future expenditures we may make to increase revenue from our products;
 23




---



##### 




    
    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.
  Payment Obligations
  Remainder of(in thousands)
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    TotalOperating lease payments
    
    $
    1,376
    
    
    $
    5,606
    
    
    $
    4,810
    
    
    $
    4,307
    
    
    $
    3,832
    
    
    $
    29,661
    
    
    $
    49,592Capital lease payments
    
    
    102
    
    
    
    115
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    254Baxter loss contract (a)
    
    
    
    
    
    
    1,419
    
    
    
    400
    
    
    
    400
    
    
    
    250
    
    
    
    
    
    
    
    2,469Other long term debt
    
    
    21
    
    
    
    63
    
    
    
    65
    
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    209Convertible debt
    
    
    
    
    
    
    5,929
    
    
    
    7,429
    
    
    
    5,854
    
    
    
    5,854
    
    
    
    350,927
    
    
    
    375,993Helsinn minimum sales obligation (b)
    
    
    
    
    
    
    6,123
    
    
    
    5,559
    
    
    
    4,801
    
    
    
    4,052
    
    
    
    6,241
    
    
    
    26,776Total
    
    $
    1,499
    
    
    $
    19,255
    
    
    $
    18,300
    
    
    $
    15,422
    
    
    $
    13,988
    
    
    $
    386,829
    
    
    $
    455,293
 
 (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 August 9, 2006, we sold our
rights to Aggrastat to Medicure. Under the terms of that sale,
Medicure assumed the obligations of the Baxter Agreement and we agreed
to reimburse Medicure for a portion of those obligations. MGIs
remaining obligation for 2006 is $1.4 million. In 2007, 2008, and 2009
the obligation is 50 percent of the purchasing shortfall up to a
maximum of $0.4 million, $0.4 million, and $0.3 million, respectively.
These obligations will be paid in the first quarter of the following
fiscal year.(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
 24




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##### 



Application of Critical Accounting Policies and Estimates
 Stock-based Compensation:
  25




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##### 



Item 3.
 Quantitative and Qualitative Disclosures About Market Risk
  Equity Price Risk
  Hypothetical PercentageEstimated Fair Value at
    
    Hypothetical Price
    
    Estimated Fair Value after
    
    Increase(Decrease) inSeptember 30, 2006
    
    Change
    
    Hypothetical Price Change
    

Stockholders EquityEquity Securities
    
    $
    26,152
    
    
    
    10
    %
    
    $
    28,767
    
    
    
    2.2
    %(10
    )%
    
    
    23,537
    
    
    
    (2.2
    )%20
    %
    
    
    31,382
    
    
    
    4.4
    %(20
    )%
    
    
    20,922
    
    
    
    (4.4
    )%30
    %
    
    
    33,998
    
    
    
    6.7
    %(30
    )%
    
    
    18,306
    
    
    
    (6.7
    )%
 Item 4.
 Controls and Procedures
     26




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##### 



PART
II  OTHER INFORMATION
 Item 1A. Risk Factors
  Item 6. Exhibits
 ExhibitNo.
    
    Description10.1*
    
    License Agreement, dated July 3, 2006, by and between MGI PHARMA, INC. and Cilag GmbH International.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 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.
 
 *
    
    Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions
of Exhibit 10.1 have been deleted and filed separately with the Securities and Exchange Commission
pursuant to a request for confidential treatment. 27




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##### 



SIGNATURES
  MGI PHARMA, INC.Date: November 3, 2006
    By:
    /s/ William F. SpenglerWilliam F. SpenglerExecutive Vice President and Chief Financial Officer
(principal financial officer, and duly authorized officer) 28