UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

Registrant’s telephone number, including area code: 952/346-4700

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value

     Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Exchange Act). Yes þ       No ¨

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨       No þ

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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

     Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨       No þ

     The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2005, the last business day of the registrant’s most recent second quarter, was approximately $1,555,408,490 (based on the closing price of the registrant’s common stock as reported by the Nasdaq National Market on such date).

     The number of shares outstanding of each of the registrant’s classes of common stock, as of March 10, 2006, was: Common Stock, $.01 par value; 78,012,213 shares.

     Pursuant to General Instruction G the responses to Items 10, 11, 12, 13 and 14 of Part III of this report incorporate herein by reference certain information to be contained in the registrant’s definitive Proxy Statement for its 2006 Annual Meeting of Stockholders to be held on May 9, 2006.

 

From time to time in this annual report we may 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 contained in this annual report 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) the clinical development of Dacogen™ Injection, Saforis™ Powder for Oral Suspension, amolimogene (HPV E6 E7 plasmid) (formerly known as ZYC101a), Aloxi^® Injection for PONV, Aquavan^® Injection, and other clinical compounds; (4) efforts to secure adequate supply of the active pharmaceutical ingredients for clinical development and commercialization; (5) efforts to manufacture drug candidates for clinical development and eventual commercial supply; (6) strategic plans; (7) anticipated expenditures and the potential need for additional funds; and (8) 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 annual 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 this annual report. 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™,” “Dopascan^®,” “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. “Kadian^®” is a registered trademark of Alpharma. “Zofran^®” is a registered trademark of GlaxoSmithKline. “Anzemet^®” is a registered trademark of Aventis Pharmaceuticals, Inc. “Vidaza^®” is a registered trademark of Pharmion Corporation. “Kytril^®” is a registered trademark of Roche Pharmaceuticals. “INTERGRILIN^®” and “TEMODAR^®” are registered trademarks of Schering-Plough Corporation. “ReoPro^®” is a registered trademark of Eli Lilly and Company. “Angiomax^®” is a registered trademark of The Medicines Company. “Kepivance™” is a trademark of Amgen Inc. “Disoprivan^®” is a registered trademark of AstraZeneca PLC.

Item 1. Business

Overview

MGI PHARMA, INC. (“we,” “MGI,” “MGI PHARMA”, or the “Company”) is an oncology- and acute care- focused biopharmaceutical company that discovers, acquires, develops and commercializes proprietary pharmaceutical products that address the unmet needs of patients. It is our goal to become a leading biopharmaceutical company through application of our core competencies of product discovery, acquisition, development and commercialization, which we apply toward our portfolio of oncology and acute care products and product candidates. We also 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. Recent acquisitions have now brought us capabilities in biologic and small molecule research. This combined platform allows us to concentrate our resources on focused research, product development and commercialization.

We currently market several cancer-related pharmaceutical products in the United States using our 92-person oncology and 76-person acute care sales organizations (see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Revenues for a breakdown of sales by product over the last three years). We focus our sales efforts solely within the United States where we have retained product rights to our currently marketed products and product candidates under development. We have created alliances with other pharmaceutical or biotechnology companies for the sale and marketing of our products in other countries (see Note 14 to the consolidated financial statements for further information on revenues attributable to U.S. and foreign customers).

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

We believe we have a strong portfolio of oncology and acute care related product candidates. Our current product candidates are a mixture of late stage and earlier stage opportunities. The late stage product candidates include oncology (Dacogen injection) and supportive care (Saforis Powder for Oral Suspension) products, as well as a biologics candidate amolimogene (HPV E6 E7 plasmid) (formerly known as ZYC101a), and two product candidates from our acute care franchise (Aloxi for PONV and Aquavan injection, a minimal to moderate sedative agent for patients undergoing diagnostic or short surgical procedures acquired in our acquisition of Guilford Pharmaceuticals Inc.).

Developments During 2005

Acquisition of Guilford Pharmaceuticals Inc.: On October 3, 2005, we completed the acquisition of Guilford Pharmaceuticals Inc., which is now known as MGI GP, INC. (“Guilford” or “MGI GP”) (see Note 6 of the Company’s Notes to Consolidated Financial Statements).

Aloxi Injection (“Aloxi”): The former Guilford acute care sales team was trained and is now actively promoting Aloxi to hospital-based oncologists. A scale-up of this team is expected to be completed in the first quarter of 2006. The Company anticipates a three-fold increase in hospital-focused sales force activity in support of Aloxi and an impact on sales growth beginning in the second quarter

of 2006. Preparations are also underway for a targeted direct-to-consumer advertising campaign, which is planned to roll out during the second quarter of 2006.

Dacogen Injection (“Dacogen”): We received an approvable letter from the Food and Drug Administration (“FDA”) for Dacogen during September 2005. We responded to that approvable letter during the fourth quarter of 2005, and the FDA accepted this response with a Prescription Drug User Fee Act (“PDUFA”) goal date of May 15, 2006. We expect to be prepared to commercialize this product within several weeks of FDA approval. Dacogen is being evaluated in a broad clinical development program consisting of more than 20 clinical trials, including phase 2 and 3 studies in elderly patients with acute myeloid leukemia (“AML”), an alternate dosing regimen in patients with myelodysplastic syndromes (“MDS”), and a phase 3 European Organization for Research and Treatment of Cancer (“EORTC”)-sponsored trial in patients with MDS.

Saforis Powder for Oral Suspension (“Saforis”): A guidance meeting was held with the FDA in the fourth quarter of 2005 to discuss the Saforis New Drug Application (“NDA”). Following this meeting, we remain on track to submit this NDA in the second quarter of 2006.

Aquavan Injection (“Aquavan”): Following analysis of data from a phase 2 dose-ranging study of Aquavan, a dose was selected to advance into a pivotal program. This program, which will consist of two pivotal phase 3 trials and one safety study, began during the first quarter of 2006.

Business Strategy

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

Marketable Products

Aloxi Injection for the Prevention of Chemotherapy-Induced Nausea and Vomiting

Aloxi (palonosetron hydrochloride) Injection (“Aloxi”) is a potent, highly selective serotonin subtype 3, or 5-HT₃, receptor antagonist differentiated by its strong receptor binding affinity and extended half life for the prevention of CINV. We obtained exclusive U.S. and Canada Aloxi license and distribution rights from Helsinn Healthcare SA in April 2001. On July 25, 2003, approval was received from the FDA to market Aloxi for the prevention of acute and delayed CINV. We began promoting Aloxi through our oncology-focused sales organization in September 2003, and through our acute care sales organization in January 2006. We estimate that the market for the use of 5-HT₃ receptor antagonists for CINV is approximately $1 billion. Product sales of Aloxi in 2005, 2004, and 2003 were $248.5 million, $159.3 million, and $9.7 million, respectively.

Chemotherapy-Induced Nausea and Vomiting Overview

Depending on the type of cancer and treatment goals determined by physicians, patients may receive chemotherapy as part of their treatment regimen. CINV is one of the side-effects of chemotherapy treatments that patients fear most. Supportive care products to treat the side effects of chemotherapy, such as CINV, have emerged to improve patient comfort and compliance with treatment regimens.

Efforts to treat tumors such as those found in breast and lung cancer have led physicians to administer more aggressive chemotherapy regimens. These cytotoxic agents often cause CINV by triggering release of serotonin from cells in the gastrointestinal tract. The released serotonin stimulates nerve receptors that activate the vomiting center via the chemoreceptor trigger zone. When, and if, serotonin stimulates serotonin subtype 3, or 5-HT_3, receptors to initiate nerve impulses to the central nervous system through the 5-HT₃ receptors, vomiting, or emesis, may ensue. Serotonin subtype 3, or 5-HT₃ receptor antagonists, such as Aloxi, act by binding to serotonin receptors in the peripheral and possibly central nervous system, thereby blocking serotonin stimulation of the associated nerves and reducing or eliminating CINV. CINV can be characterized as acute nausea and vomiting, occurring within 24 hours following administration of chemotherapy, or delayed nausea and vomiting, occurring 24 to 120 hours following administration of chemotherapy.

Although CINV has been managed to a greater degree in recent years, it is estimated that up to 85 percent of cancer patients receiving chemotherapy will experience some degree of emesis if not prevented with an antiemetic. The severity of emesis is dependent upon the type of chemotherapy administered, the dosing schedule of the chemotherapy, and the patient’s age and gender, among other predisposing factors. If emesis is not properly managed, it can cause dehydration and poor quality of life, eventually leading to interruption or discontinuation of chemotherapy. Although the vast majority of patients receiving emetogenic chemotherapy are administered a 5-HT₃ receptor antagonist, there remains a need to improve upon the prevention of acute CINV and, especially delayed CINV. Despite the availability of preventive treatments, including first generation 5-HT₃ receptor antagonists, nearly fifty percent of all patients receiving chemotherapy experience nausea and vomiting.

Aloxi Clinical Data for CINV

The results of phase 3 clinical trials demonstrate that Aloxi is more effective than Zofran (ondansetron), marketed by GlaxoSmithKline, and Anzemet (dolasetron), marketed by Aventis Pharmaceuticals, injections. The most frequently prescribed chemotherapies, including those used to treat the most common cancers such as breast, lung and colon, are considered moderately emetogenic, or have a moderate to moderately high potential to cause nausea and vomiting. Based on the phase 3 trials conducted, Aloxi is differentiated by its strong receptor binding affinity and extended half-life and has already been approved for the prevention of CINV. Overall, the incidence, pattern, duration, and intensity of adverse reactions were similar among patients treated with Aloxi and other 5-HT₃ receptor antagonists. In 633 patients treated with Aloxi during phase 3 trials, the most common adverse reactions related to the study drug were headache (9 percent), and constipation (5 percent). The table below provides a summary of the efficacy results from these pivotal phase 3 clinical trials, where complete response rate is defined as the proportion of treated patients who had no vomiting and no rescue medication.

We believe that Aloxi is competitive in the U.S. CINV market for 5-HT₃ receptor antagonists because Aloxi:

The potency and extended half-life of Aloxi may enable patients and their healthcare providers to control both acute and delayed CINV for several days following chemotherapy with a single intravenous dose. We believe this single, fixed dose treatment is more convenient compared to other marketed 5-HT₃ receptor antagonists, which usually demand that patients adhere to an oral follow-up therapy regimen for several days.

Gliadel Wafer for Malignant Glioma as an Adjunct to Surgery and Radiation and for Recurrent Glioblastoma Multiforme

Gliadel (polifeprosan 20 with carmustine implant) Wafer (“Gliadel”) is a proprietary, targeted, site-specific cancer chemotherapy product approved in the United States for the treatment of malignant glioma, a form of primary brain cancer, and for the treatment of recurrent glioblastoma multiforme (“GBM”), a rapidly fatal form of malignant brain cancer. Gliadel, a biodegradable polymer wafer, is implanted into the cavity in the brain after a brain tumor is removed and gradually dissolves, delivering high concentrations of BCNU (or carmustine, the active chemotherapeutic ingredient) directly to the tumor site for an extended period of time. This product minimizes exposure to BCNU throughout the body and reduces or alleviates many of the side effects associated with intravenous chemotherapy. We estimate that there are approximately 11,000 cases of malignant glioma in the United States each year.

We acquired rights to Gliadel when we acquired Guilford in October 2005. Product sales of Gliadel for 2005 were $33.7 million (representing $25.2 million from January through September 2005, and $8.5 from October through December 2005). Product sales of Gliadel for 2004 and 2003 were $27.7 million and $19.2 million, respectively.

In addition to the U.S., we have regulatory approval to market Gliadel for use in patients with recurrent GBM in over 21 countries. During September 2004, Gliadel was granted expanded marketing authorization for use in newly-diagnosed patients with high-grade malignant glioma as an adjunct to surgery and radiation in France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain and the United Kingdom. We market, sell and distribute Gliadel in these countries either directly, on a named patient basis under applicable law, or through distribution agreements with various European companies.

We have a right to the underlying technology for Gliadel pursuant to a license agreement with the Massachusetts Institute of Technology (“MIT”) that requires us to pay annual royalties based on our net revenue from Gliadel, as defined per the license agreement. From January through September 2005, Guilford recognized approximately $1.0 million in royalty expense pursuant to that agreement, and from October through December 2005, we recognized $0.3 million in royalty expense pursuant to that agreement. Our domestic patent protection for Gliadel ends in August 2006; however, during September 2004, the FDA notified Guilford that Gliadel is entitled to market exclusivity for the treatment of patients with malignant glioma undergoing primary surgical resection until February 2010 under applicable orphan drug laws.

Salagen Tablets

We conceived, developed and market Salagen Tablets (pilocarpine hydrochloride) (“Salagen”) in the United States. The FDA granted us orphan drug status for Salagen in 1994 as a treatment for the symptoms of xerostomia induced by radiation therapy in head and neck cancer patients and in 1998 for the symptoms of dry mouth associated with Sjögren’s syndrome. Our orphan drug protection for Salagen for the treatment of symptoms of radiation-induced xerostomia in head and neck cancer patients expired in March 2001 and our orphan drug protection for Sjögren’s syndrome expired in February 2005. In December 2004, the FDA approved a competitor’s Abbreviated New Drug Application (“ANDA”) for a generic 5 milligram pilocarpine hydrochloride tablet. Two additional ANDAs were approved by the FDA in 2005. The introduction of these competing, generic products has resulted in a significant decline of Salagen sales from 2003 and 2004 sales of $26.5 million and $29.3 million, respectively, in the United States to 2005 sales of $9.9 million. We expect this decline to continue in 2006. As a result, we suspended promotion of Salagen.

In December 2004, we entered into a five-year manufacturing, supply and distribution agreement for 5 milligram pilocarpine hydrochloride tablets, with Purepac Pharmaceutical Co. (“Purepac”), a subsidiary of Alpharma, Inc. Under the terms of this manufacturing, supply and distribution agreement, we will manufacture and supply 5 milligram pilocarpine hydrochloride tablets to Purepac for exclusive distribution in the United States and we will receive the supply price and a portion of gross margin of sales by Purepac. For the year ended December 31, 2005, we received $1.4 million in revenues related to this agreement.

Hexalen Capsules for Ovarian Cancer

In November 2000, we purchased worldwide rights to Hexalen (altretamine) capsules (“Hexalen”) from MedImmune Oncology, Inc. Hexalen is an orally administered chemotherapy that is approved as a second-line treatment of ovarian cancer. Hexalen is approved for the treatment of ovarian cancer in 21 countries including the United States. Sales of Hexalen in the United States were $2.8 million, $2.4 million, and $2.8 million in 2005, 2004, and 2003, respectively.

Aggrastat Injection

Guilford acquired the rights to Aggrastat (tirofiban hydrochloride) Injection (“Aggrastat”) in the United States and its territories from Merck in October 2003. Aggrastat is a glycoprotein GP IIb/ IIIa receptor antagonist that is indicated for the treatment of acute coronary syndrome (“ACS”), including patients who are to be medically managed and those who are to undergo percutaneous transluminal coronary angioplasty or atherectomy. ACS includes unstable angina, which is characterized by chest pain when one is at rest, and non-ST elevation myocardial infarction. Aggrastat blocks the ability of platelets to aggregate, thereby inhibiting the formation of blood clots and reducing the potential for cardiac ischemia. Sales of Aggrastat in the United States were $10.9 million in 2005 (representing $9 million from January through September 2005, and $1.9 million from October through December 2005). Product sales for Aggrastat for 2004 and 2003 were $12.5 million and $2.5 million, respectively.

Kadian Capsules for Cancer Pain

In July 2004, we entered into a three-year promotion agreement for Kadian capsules (“Kadian”), a sustained release formulation of morphine, with Alpharma, Inc. Under the terms of this promotion agreement, we promoted Kadian in the United States to oncology health care professionals for moderate to severe pain associated with cancer. Effective December 31, 2005, we and Alpharma, Inc. mutually agreed to end our co-promotion agreement related to Alpharma’s Kadian, a sustained release formulation of morphine sulfate. Alpharma retains all commercial rights to Kadian. Revenues from this agreement, which was originally announced on September 23, 2004, were not material to our financial results during the period that this agreement was in effect. No financial payments were associated with the termination of this agreement.

Products Under Development

Dacogen Injection Overview

In September 2004, we obtained exclusive worldwide rights to the development, commercialization, manufacturing and distribution of Dacogen (decitabine) injection (“Dacogen”) for all indications from SuperGen, Inc. Dacogen is an investigational anti-cancer therapeutic which is currently in development for the treatment of patients with MDS and AML. A Dacogen regulatory application for the treatment of MDS is being reviewed for marketing approval by the FDA in the United States.

A pivotal phase 3 trial and two supporting phase 2 trials for the MDS indication forms the clinical basis of this application. The FDA has established May 15, 2006 as the PDUFA action goal date for the NDA.

An application before the European Medicines Agency (“EMEA”) in Europe was withdrawn in November 2005. We are working with European regulatory authorities and intend a resubmission of the European application with confirmatory data from an ongoing EORTC phase 3 trial.

The anticancer activity of Dacogen is due to both inhibition of cell growth, or cytotoxicity, which is observed at higher doses and decreasing methylation of deoxyribonucleic acid, or DNA, which is predominately observed at lower doses. Decreasing DNA methylation, or hypomethylation, is a relatively new approach to cancer treatment. Excess DNA methylation has been implicated as a fundamental factor in the development of cancers. Researchers have determined that an increase in specific methylation of DNA can result in blocking the expression of genes, such as tumor suppressor genes. In clinical trials, researchers have demonstrated that Dacogen can reverse the methylation of DNA, potentially leading to re-expression of tumor suppressor genes. In clinical trials, Dacogen has demonstrated activity in MDS, AML, and chronic myeloid leukemia (“CML”). Preclinical data suggest that Dacogen may be effective in the treatment of solid tumor cancers where DNA methylation status is believed to be important, such as melanoma, colon and ovarian cancer.

Myelodysplastic Syndrome

MDS is a bone marrow disorder characterized by bone marrow production of abnormally functioning, immature blood cells. According to the American Cancer Society and the Aplastic Anemia & MDS International Foundation, approximately 15,000 to 25,000 new cases of MDS are diagnosed each year in the United States, although it is difficult to accurately determine the incidence because MDS is not recorded by the national tumor registry in the United States. In the majority of afflicted patients, MDS results in death from bleeding and infection. In approximately 30 percent of patients, MDS will convert to AML, a disease with a high mortality rate.

The phase 3 trial was designed to support regulatory approval of Dacogen for the treatment of patients with MDS. Dacogen received orphan drug designation for MDS in the United States and Europe, which may provide us with seven years of marketing exclusivity in the United States and ten years of marketing exclusivity in Europe if Dacogen is approved for treatment of MDS by the respective regulatory authorities. In September 2005, we received an Approvable Letter for Dacogen. While an Approvable Letter is a significant step in the drug approval process, approval from the FDA is still required to market the product. In November 2005, we submitted an Approvable

Letter response to the FDA. In December 2005, we received a letter from the FDA stating that our response to the Approvable Letter was complete and a PDUFA date of May 15, 2006 had been established. The PDUFA date is the date by which the FDA aims to render a decision on a new drug application. Also in November 2005, we withdrew our Marketing Authorization Application (“MAA”) with the EMEA. We will continue to work with the European regulatory authorities and intend a resubmission of the MAA with confirmatory data from an ongoing EORTC Phase 3 trial.

In May 2004, Vidaza (azacitidine), marketed by Pharmion Corporation, was approved by the FDA as the first drug to be approved for the treatment of MDS. In December 2005, the FDA approved lenalidomide for treatment of patients categorized as low- or intermediate-1 risk MDS patients. Initial shipments of lenalidomide commenced in early 2006. If Dacogen is also approved for treatment of MDS, it will compete directly with azacitidine and lenalidomide.

Other Potential Indications

Beyond the activity of Dacogen for MDS, we believe phase 1 and 2 trials demonstrate that Dacogen may be active in a variety of other hematological malignancies such as AML and CML. We began a phase 3 trial of Dacogen in AML patients in 2005 and we are currently conducting a multi-center phase 2 trial with Dacogen for the treatment of refractory CML in patients who have failed previous front-line therapy. Phase 1 results also suggest that Dacogen may be useful for treatment of non-malignant diseases such as sickle cell anemia, for which we are supplying Dacogen to investigators for their phase 2 clinical trials in this area of study. Dacogen received orphan drug designation from the FDA for sickle cell anemia in September 2002, which may provide seven years of marketing exclusivity in the United States if Dacogen is approved by the FDA for the treatment of sickle cell anemia. Further, the Dacogen clinical and scientific program is the subject of a Clinical Research and Development Agreement (“CRADA”) with the National Cancer Institute (“NCI”). Pursuant to the CRADA, we will supply Dacogen for pre-clinical and clinical trials that will be managed by the NCI and that will focus primarily on the treatment of solid tumors.

Saforis Powder for Oral Suspension

Saforis Powder for Oral Suspension (“Saforis”) is a late-stage, proprietary formulation of glutamine, an amino acid that is critical to the repair of cellular damage. In multiple clinical trials, Saforis has been shown to reduce the incidence and severity of oral mucositis in patients being treated with mucotoxic cancer therapies for a variety of tumor types. The only treatment currently available for oral mucositis is Kepivance, marketed by Amgen Inc., approved by the FDA in December 2004 for the treatment of severe oral mucositis in patients with hematologic malignancies receiving myelotoxic therapy requiring hematopoietic stem cell support. During the fourth quarter of 2005, a guidance meeting was held with the FDA to discuss the Saforis NDA. We expect to submit the NDA for Saforis in the second quarter of 2006. Saforis was granted Fast Track Designation from the FDA in 2003, a program designed to facilitate the development and expedite the review of specific drug products intended to treat serious or life-threatening conditions for which there is an unmet medical need for such a condition.

Oral Mucositis

Oral mucositis is one of the most common dose-limiting toxicities induced by mucotoxic cancer therapy (both chemotherapy and radiotherapy). Estimates of the incidence of oral mucositis in patients receiving chemotherapy for cancer range from 15% in those receiving standard chemotherapy to 76% in patients having bone marrow transplantation. Oral mucositis presents clinically as erythema and ulceration of the mucosa. Clinical symptoms typically appear 5 to 7 days after the administration of chemotherapy or radiotherapy and persist for 2 to 3 weeks in immunocompetent patients. The underlying damage, however, is sustained many days before clinical symptoms appear. The most common sites for oral mucositis include the lips, the buccal and soft palate mucosa, the floor of the mouth, and the ventral surface of the tongue. Recent research indicates that the underlying pathophysiology of oral mucositis is the same regardless of the precipitating mucotoxic cancer therapy (cytotoxic chemotherapy or radiation). A 5-phase model of mucosal barrier injury has been proposed that characterizes the pathophysiologic progression resulting in oral mucositis: initiation, upregulation and message generation, signaling and amplification, ulceration, and healing.

Clinically significant oral mucositis (World Health Organization (“WHO”) Grade ³ 2) is associated with ulceration, pain, difficulty swallowing, risks for impaired nutrition related to the inability to eat, and significantly higher rates of infection leading to hospitalization and death. Utilization of health care resources is directly linked to the incidence, severity and duration of oral mucositis, involving increased use of opiate analgesics, IV fluids, and antimicrobial agents.

Glutamine

Glutamine is a conditionally essential amino acid that can be synthesized by virtually all tissues in the body. Glutamine is the most abundant amino acid in human plasma and the total amino acid pool and has multiple functions in the human body, including the nitrogen transfer between tissues, energy production, and regulation of nucleic acid and protein synthesis. Glutamine is critical in times of serious illness when tissue repair is necessary or when there are high levels of cell replication. When such increased demands occur, the requirements for glutamine can exceed production, and exogenous (superficial tissue) glutamine is needed to maintain normal plasma and tissue concentrations.

The rapidly dividing cells of the oral mucosa use glutamine not only as the primary fuel but also as the nitrogen source for cellular repair and anabolic functions. Thus, the availability of endogenous (deep tissue) and exogenous glutamine becomes critical when the mucosa has been injured as a result of chemotherapy or radiotherapy.

Glutamine is moderately soluble and highly labile in most physiologic environments. Topical delivery of glutamine to the oral mucosa has previously been limited by these and other factors and by widespread metabolism throughout the body. The most critical of the treatment-limiting factors is the delivery of adequate amounts of glutamine from the oral cavity to the interior of the mucosal cells.

Saforis and Oral Mucositis

Saforis, with its proprietary UpTec delivery system, facilitates mucosal cell uptake of glutamine by more than 100 fold over that of glutamine without the UpTec delivery system. Saforis enhances the uptake of glutamine in epithelial, endothelial, and fibroblast cells. Clinically, Saforis reduces the damaging effects of cancer treatment and facilitates tissue repair in the oral mucosa, thereby preventing or reducing the incidence and/or duration of oral mucositis.

Aquavan Injection

Aquavan (fospropofol disodium) Injection (“Aquavan”) is a novel sedative/hypnotic product candidate that is a water-soluble prodrug of a widely-used anesthetic, propofol. We are currently evaluating Aquavan for use as a minimal to moderate sedative during brief diagnostic and therapeutic medical procedures during which patients are lethargic, but are responsive to stimulation and able to maintain their airways. Moderate sedation is generally used in non-invasive procedures lasting under two hours, including, for example, various endoscopy or bronchoscopy procedures, cardiac procedures, biopsies, insertions or removals of lines, tubes or catheters and other minor surgical procedures.

We concluded a randomized, double-blind, multi-center phase 2 dose ranging trial in the fourth quarter of 2005. A pivotal program will be undertaken in 2006 utilizing an initial dose of 6.5 milligrams per kilogram of body weight that will be designed to serve as the basis for FDA registration. We expect to submit an NDA to the FDA for the approval of Aquavan for use in minimal to moderate sedation for brief diagnostic or therapeutic procedures in the first half of 2007.

Early clinical trials with Aquavan, conducted by Guilford, evaluated its use in connection with elective colonoscopy, bronchoscopy, cardiac catheterization and minor surgical procedures. Guilford conducted four Phase 1 clinical studies in Europe in healthy volunteers, one Phase 1 clinical study in the United States and a Phase 2 clinical trial of Aquavan in patients undergoing coronary artery surgery. In November 2003, Guilford announced the results of a Phase 2 adaptive dose ranging study that evaluated Aquavan when used in combination with fentanyl citrate to provide moderate sedation in patients undergoing elective colonoscopy. The analysis of this trial demonstrated that Aquavan provided rapid onset and rapid recovery from sedation in a convenient dosing regimen and was without serious adverse effects. Subsequently, five Phase 3 trials were initiated using a fixed weight based dose of Aquavan with a weight based pre-treatment dose of fentanyl. One study in colonoscopy was completed while the other four were stopped early. The results of these studies indicated that a fixed weigh-based dosing regimen put patients at too deep a level of sedation. Guilford met with the FDA in April 2005 and received an SPA for a phase 2 does-ranging study that utilized a titration-based dosing regimen.

Guilford originally licensed the rights to Aquavan Injection from ProQuest Pharmaceuticals, Inc., a privately held pharmaceutical company based in Kansas, in 2000. In the fourth quarter of 2004, Guilford acquired ProQuest, thereby obtaining an irrevocable, royalty-free, fully-paid, exclusive, worldwide license to the intellectual property rights for Aquavan from the University of Kansas.

Aloxi Injection for the Prevention of PONV

Aloxi (palonosetron hydrochloride) Injection (“Aloxi”) is a potent, highly selective serotonin subtype 3, or 5-HT₃, receptor antagonist differentiated by its strong receptor binding affinity and extended half-life and has already been approved for the prevention of CINV. Helsinn Healthcare, the licensor of palonosetron hydrochloride, is conducting phase 3 trials with a goal to seek FDA approval of Aloxi for the prevention of PONV. A special protocol assessment (“SPA”) was agreed to with the FDA and phase 3 trials began in 2005. We expect enrollment to be completed in 2006.

PONV is a common consequence of anesthetic and surgical procedures. Patients undergoing abdominal, gynecological, ear, nose and throat, cardiovascular, and eye surgery are at the highest risk for PONV. If not prevented, PONV can delay discharge from the medical facility, cause hospital re-admissions and increase healthcare costs for patients who undergo surgery. We believe that the (United States) market for the use of 5-HT₃ receptor antagonists in PONV is approximately $450-$500 million.

Aloxi Oral Capsule Formulation for the Prevention of CINV

Helsinn Healthcare is evaluating an oral Aloxi capsule (“Aloxi Capsules”) to offer patients and their caregivers a choice of formulations that may provide protection from both acute and delayed CINV. The Aloxi Capsules are currently being evaluated in a phase 3 clinical trial that is expected to complete enrollment by the end of 2006. We estimate that the peak sales potential for all Aloxi formulations in the CINV indication could exceed $500 million in the U.S. depending upon market penetration and acceptance.

Amolimogene (HPV E6 E7 plasmid) (formerly known as ZYC101a)

The goal of treatment with amolimogene (HPV E6 E7 plasmid) is to enhance the natural immune response of a patient infected with human papillomavirus (“HPV”) by allowing the body to produce a substance that is seen as foreign, an HPV antigen, which results in a heightened immune system response to HPV in the patient. The enhanced immune response, in the form of activated cells, is expected to recognize and eliminate the patient’s abnormal growth of cervical tissue, or cervical dysplasia. Amolimogene (HPV E6 E7 plasmid) is a circular form of double-strand DNA, or plasmid DNA, contained within biodegradable poly (lactide-co-glycolide), or PLG, microparticles. This microencapsulation-based formulation of amolimogene (HPV E6 E7 plasmid) facilitates uptake of plasmid DNA by certain antigen-presenting cells (“APCs”). The plasmid DNA is used to produce a protein, fragments of which attach to carrier molecules. This complex migrates to the surface of the APC and is recognized by thymus-derived cells (“T cells”) specific for HPV. These T cells, representing an enhanced immune response, migrate to the cervix and eliminate the HPV positive disease causing cells, thereby enabling the patient to heal.

We are currently developing amolimogene (HPV E6 E7 plasmid) as a treatment for young women with high-grade cervical dysplasia. A phase 2, multicenter, randomized placebo controlled trial of 161 women with high-grade cervical dysplasia was conducted in the United States and Europe. Patients enrolled in this phase 2 trial received an intramuscular injection of amolimogene (HPV E6 E7 plasmid) every three weeks for a total of three doses. Amolimogene (HPV E6 E7 plasmid) was shown to be safe and well tolerated. In a prospectively defined cohort of patients under 25 years of age, the drug promoted resolution of high-grade dysplasia in 70 percent of patients, versus 23 percent in the placebo arm. In all patients, resolution was 43 percent for patients on drug and 27 percent for patients on placebo. In other open label trials, the drug was found to be safe and well-tolerated and disease resolution was observed in a high percentage of young patients. The most frequently observed adverse event in these trials was mild to moderate injection site pain, which was manageable with over the counter analgesics. The first trial in a two-part pivotal program to further assess the safety and efficacy of amolimogene (HPV E6 E7 plasmid) began in 2005 and was designed to become a key part of submissions to regulatory authorities for seeking marketing approval. We expect to complete enrollment in 2006 and a second phase 3 trial is planned to commence at the conclusion of the first trial.

Human Papillomavirus and Cervical Dysplasia Overview

HPV refers to a group of viruses that includes more than 100 different types. More than 30 of these viruses are sexually transmitted and can infect the genital area. The areas include the skin of the penis, vulva, or anus, and the lining of the vagina, cervix, and rectum. Most people who become infected with HPV will not have any symptoms, and the infection will resolve on its own. In the United States, approximately 20 million people are currently infected with HPV. At least 50 percent of sexually active men and women acquire genital HPV infection at some point in their lives. It is estimated that as many as 70 percent of women have had HPV or are currently infected by HPV and that by age 30, at least 80 percent will have acquired genital HPV infection. HPV is the cause of cervical dysplasia.

The three types of cervical dysplasia (also called cervical intraepithelial neoplasia (“CIN”)) are mild, or CIN 1, moderate, or CIN 2, and severe, or CIN 3. Mild dysplasia is by far the most common type. Mild dysplasia is not considered to be a true pre-cancerous disease by many experts, because in about 70 percent of cases the abnormal cervical tissue heals and is replaced by normal tissue over time without any specific medical intervention. However, in a subset of women, mild dysplasia can progress to a more serious disease. Often, moderate and severe types of cervical dysplasia, or CIN 2/3, are grouped together and called high-grade cervical dysplasia.

A diagnosis of CIN 2/3 is based upon cellular changes, or transformation, that leads to sufficiently abnormal cervical cell replication and the generation of a cervical lesion that is deemed a pre-cancerous condition. This diagnosis requires that women be treated to eliminate the lesion and the causative transformed cells, which have the potential to develop into cervical cancer over a long period of time. CIN 2/3 lesions are generally treated by a surgical excision procedure called the loop electrocautery excisional procedure (“LEEP”). This surgical and other CIN 2/3 treatments are associated with efficacy rates of 70 percent to 90 percent. However, these procedures are invasive and can cause a number of short-term and long-term side effects. LEEP places women at risk because it is a surgical procedure and can result in complications such as bleeding, a narrowing of the cervical opening, cervical incompetence, loss of mucous glands, and secondary infertility.

There are two companies developing prophylactic HPV vaccines for the prevention of cervical carcinoma. It is anticipated that the first HPV vaccine will receive regulatory approval by end of 2006. Current data suggests that the efficacy of these vaccines is limited to preventing cervical cancer associated with HPV 16 and 18. These ciral types account for 70% of cervical carcinoma and 55% of CIN2/3. If these vaccines are approved by the FDA, they will not compete directly with amolimogene (HPV E6 E7 plasmid), but over time they may erode the size of the CIN 2/3 market.

ZYC300

Our second immunotherapy compound in clinical development is ZYC300. ZYC300, an encapsulated plasmid encoding a commonly expressed tumor antigen, has completed a phase 1/2a trial in 17 patients with late stage metastatic hematological and solid tumors. The enzyme cytochrome P450 1B1 (“CYP1B1”), is encoded by the ZYC300 plasmid. Data from this trial were selected for oral presentation at the American Society of Clinical Oncology (“ASCO”) 2003 Annual Meeting and demonstrated that ZYC300 was well tolerated and biologically active. During 2006, we plan to begin a clinical trial in patients with solid tumors to further assess the safety and efficacy of ZYC300.

The Immune System and ZYC300

Recent studies, in both human and animal systems, have provided compelling evidence that the immune system can be activated to specifically recognize human tumor cells and kill them. Most attention has focused on T cells as the principal cause of anti-tumor immunity especially in light of findings that tumor-derived proteins function as tumor-associated antigens (“TAA”) and targets for T cells. The demonstration that TAA-specific immune responses can lead to tumor regression has been borne out extensively in animal models and data from clinical trials suggest that this approach is safe, feasible, and potentially effective in humans. Until recently, clinical efforts have been somewhat limited, in part because most tumor antigens are restricted in expression to one or a few tumor types and to a fraction of subjects with these types of tumors. CYP1B1, the enzyme encoded in the ZYC300 plasmid, is widely expressed in human cancer but rarely in normal tissues. Administration of ZYC300 in preclinical studies resulted in anti-tumor T cell responses and results from preclinical toxicity studies warranted clinical development.

A phase 1/2a clinical trial in 17 subjects with advanced malignancies who had failed prior cancer treatments was conducted to test the safety, bioactivity and clinical activity of ZYC300. Each patient was administered ZYC300 intramuscularly every other week for the target number of at least 6 but not more than 12 doses at a fixed dose level. From a safety perspective, ZYC300 was well tolerated. With the exception of a single subject who experienced abscesses at the injection site, no systemic or local toxicity was considered related to treatment with ZYC300, and only mild to moderate localized injection site reactions were observed. From a bioactivity perspective, despite their advanced cancer stage and history of prior chemotherapy treatment, many patients were determined to have an immune response to ZYC300. Increased levels of CYP1B1, or biologic responses, were observed in 46 percent of 13 patients who received more than 6 doses and in 80 percent of the 5 patients receiving 12 doses of ZYC300. From a clinical activity perspective, 3 patients had stable disease following their last dose of ZYC300 and all other patients had progressive disease. Each of the 3 patients who had disease stabilization was an immune responder. Durable clinical response to subsequent chemotherapy was all 6 patients who earlier had demonstrated a biologic response to ZYC300, including 1 complete response that lasted more than twelve months. Only one of the eleven non-biologic responders benefited from subsequent chemotherapy. In summary, the data support proceeding with additional clinical development of ZYC300.

Irofulven for Chemotherapy Treatment of Cancer

Irofulven is a cancer therapy product candidate under development and is part of our family of proprietary cancer therapy compounds called acylfulvenes. Acylfulvenes, including irofulven, are semi-synthetic derivatives of the natural product illudin S obtained from the Omphalotus olearius mushroom. We licensed rights to the entire class of acylfulvene agents, including irofulven, from the Regents of the University of California in 1993.

Mechanism of action studies have indicated that irofulven is rapidly taken up by sensitive tumor cell types where it reacts with tumor cell DNA and protein targets in a novel manner, producing rapid inhibition of DNA synthesis and DNA lesions that are difficult for the tumor cell to repair. The initiation of DNA damage by irofulven begins a tumor selective cascade of cellular events that ultimately causes cell death, or apoptosis. Clinical trials will determine whether the differential effect of irofulven on tumor cells compared to healthy cells translates into important clinical benefit. We further believe that irofulven could be the first of a series of acylfulvene analogs that merit development as cancer therapies.

We believe irofulven has a unique mechanism of action that makes it well suited for study in refractory patient populations and in combination with other cancer therapies. Preclinical data and clinical data demonstrate irofulven’s activity against tumors that are known to be resistant to other therapies. Preclinical studies have also demonstrated the additive or synergistic effect of irofulven with a number of marketed cancer therapies. Therefore, we believe that pursuing development paths in refractory cancers and in combination with other cancer therapies is warranted. Preclinical toxicology studies in rats and dogs and initial clinical data from the dosing of over 1,000 cancer patients with irofulven have demonstrated that irofulven is adequately tolerated as a chemotherapeutic compound and its side effects are reversible. The primary dose-limiting side effect has been bone marrow suppression, usually

observed as decreased blood platelet or white cell counts. Other drug-related side effects have been nausea, vomiting, visual disturbances and fatigue. Bone marrow suppression has been controlled through dose adjustments or treatment delays to allow recovery of platelet or white cell counts. Nausea and vomiting are prophylactically controlled with standard, currently available treatments. Visual disturbances and fatigue are managed by dose adjustments and are generally reversible after discontinuation of treatment.

To obtain marketing approval for irofulven in the United States, pivotal registration trials would need to be successfully completed and submitted to the FDA. Phase 3 trials typically use survival as the primary endpoint, compared to a randomly determined control group and have a higher number of enrolled patients than in earlier phases.

Irofulven Single Agent Trials

We conducted single agent phase 1 dose-ranging trials using daily and intermittent weekly administration of irofulven to determine recommended dose amounts for subsequent trials. Late-stage cancer patients who were refractory to other chemotherapies enrolled in these trials and clinical activity was demonstrated in addition to determining dose amount and schedule for subsequent trials. Based on these results, we tested irofulven in a variety of phase 2 solid tumor trials. We initially chose to investigate prostate, liver, ovary and pancreas cancers because anti-cancer activity of irofulven has been observed in each of these trials, including objective tumor shrinkage.

Irofulven Combination Trials

We believe that an advantage of combination therapy is the potential to achieve enhanced anti-cancer benefit with an acceptable side effect profile compared to either agent used alone. Because irofulven has a unique mechanism of action, retains activity against tumors that are known to be resistant to other cancer therapies and in preclinical trials demonstrated additive or synergistic effects in combination with a number of marketed chemotherapies, we are conducting drug combination trials with irofulven. The first clinical step in exploring combination therapy is to conduct phase 1, dose-ranging trials to determine the maximum tolerated dose of both drugs together. We have completed phase 1 trials of irofulven in combination with each of irinotecan, cisplatin, docetaxel, capecitabine, gemcitabine and oxaliplatin. Phase 2 trials of irofulven in combination with other chemotherapies, such as capecitabine and oxaliplatin are ongoing.

Other Acylfulvene Analogs

In addition to irofulven, we have obtained license rights to acylfulvene analogs. The synthesis and the initial biological testing of over 200 of these analogs has been performed at the University of California, San Diego (“UCSD”). At UCSD, both in vitro and in vivo anti-tumor activity has been demonstrated for a significant number of the acylfulvene analogs. Further in vitro and in vivo testing of some of these analogs by the NCI and by us has confirmed potent, broad spectrum anti-tumor activity. The broad-spectrum anti-tumor activity of the acylfulvene analogs suggests that this class of compounds has the potential to produce additional clinical development candidates. We are currently evaluating selected analogs for further preclinical development.

GCP II Inhibitor Compounds

N-Acetylated-Alpha-Linked-Acid-Dipeptidase (“NAALADase”), also known as glutamate carboxypeptidase II (“GCP II”), is a membrane-bound enzyme found in the central and peripheral nervous system and is believed to play a role in modulating the release of glutamate, one of the brain’s most common chemical messengers. During conditions of acute injury or chronic disease, there may be a large increase in the release of glutamate that incites a cascade of biochemical events, ultimately leading to cell injury or death. Our GCP II inhibitor program is aimed at developing a commercial drug to block excessive glutamate release. Our GCP II inhibitors appear to normalize pain sensitivity, attenuate nerve conduction deficits and prevent histopathological degeneration in several animal models of diabetic and chemotherapy-induced neuropathy and neuropathic pain.

We are currently pursuing the development of GPI 5693, one of our GCP II inhibitor compounds that has completed a single Phase 1 clinical trial, for the treatment of chemotherapy-induced neuropathy.

PARP Inhibitor Compounds

Poly(ADP-ribose) polymerase (“PARP”), is an abundant nuclear enzyme that plays a significant role in facilitating DNA repair and maintaining genomic integrity. In cancer treatment, PARP activity is believed to enable tumor cells to counteract the chemotherapy and radiation therapy by repairing the resulting DNA damage. In animal testing, PARP inhibition enhances the activity of radiotherapy as well as a wide spectrum of chemotherapeutic agents. In ischemia, over-activation of PARP mediates necrosis by depleting nicotinamide adenine dinucleotide and adenosine triphosphate. In animal testing, PARP inhibition provides neuroprotection in stroke and myocardial ischemia models.

We have synthesized several families of potent small molecule PARP inhibitors. Recently, two candidate compounds were selected for clinical development. Both are orally bioavailable, highly brain penetrable and increase the efficacy of various chemotherapies in preclinical cancer models.

GPI 1485

History of GPI 1485

GPI 1485 is an investigational new drug that belongs to a class of small molecule compounds called neuroimmunophilin ligands (“NILs”). Scientists from Johns Hopkins University (“JHU”) discovered that commonly used immunosuppressive drugs can promote nerve growth. Guilford licensed patent rights relating to this research from JHU and as a result of this basic research discovered GPI 1485 and many other proprietary NILs. In pre-clinical experiments, these NILs were shown to repair and regenerate damaged nerves without affecting normal, healthy nerves.

Current Clinical Status

Guilford initiated a Phase 2 clinical study of GPI 1485 in Parkinson’s disease in November 2002, following the termination of a corporate partnership with Amgen that tested GPI 1485 for the same indications but did not meet its primary endpoint. The trial was designed to detect the loss of dopamine transporters. During the first quarter of 2004, Guilford began a second Phase 2 clinical trial studying the use of GPI 1485. This trial was conducted in patients undergoing a nerve sparing prostatectomy, because GPI 1485 showed efficacy in pre-clinical and animal models of post-prostatectomy erectile dysfunction (“PPED”). The Parkinson’s trial was concluded and the PPED trial analysis will be evaluated in July 2006. In March 2006, we were advised by Symphony Neuro Development Company (“SNDC”), the licensee of GPI 1485 and the sponsor of the trials, that the Parkinson’s disease trial failed to meet its primary endpoint.

Symphony Neuro Development Company

In June 2004, Guilford licensed its rights in the United States to GPI 1485 to SNDC in the following four disease states: Parkinson’s disease, traumatic nerve injury, including PPED, HIV-related peripheral neuropathy and HIV-related dementia. SNDC agreed to invest up to $40.0 million to advance GPI 1485 through its current clinical programs in those disease states. In addition, Guilford issued to SNDC’s investors five-year warrants to purchase 1.5 million shares of our common stock at $7.48 per share. When we acquired Guilford, these warrants became warrants to purchase 165,447 shares of our common stock at $57.62 per share. SNDC’s investors granted Guilford an exclusive option to purchase SNDC. Due to our acquisition of Guilford, we may exercise this option at our sole discretion until March 31, 2007, at an exercise price of $85.6 million as of December 31, 2005, and incrementally increasing to $119.8 million by March 2007. If we exercise the option, we will regain the rights that we licensed to SNDC. We have concluded that we will not exercise the option.

While the clinical trials with GPI 1485 were ongoing, we provided certain product development services to RRD International, LLC (“RRD”), the manager of the clinical trials for SNDC. Under this arrangement, we provided SNDC with manufacturing, process development, toxicology, patent and regulatory affairs services. During 2005, we and Guilford were reimbursed $1.3 million for this work by SNDC (representing $1.1 million reimbursed during 2005 prior to our acquisition of Guilford and $0.2 million reimbursed to us subsequent to the acquisition). We expect to provide only minimal services to SNDC under this arrangement during the remainder of 2006, as SNDC completes activities related to the trials.

Dopascan Injection

Dopascan Injection (“Dopascan”) is a product candidate that is intended to measure dopamine transporter binding to diagnose and monitor the degree of Parkinson’s disease, a disease that affects more than one million patients in the United States. Dopascan is administered to patients intravenously and allows an attending physician to obtain images and measure the density of dopamine transporters in the patient’s brain, which are highly concentrated in a specialized area of the brain and which are significantly decreased in patients with Parkinson’s disease. We license exclusive patent rights to Dopascan from the Research Triangle Institute (“RTI”) in Research Triangle Park, North Carolina.

We currently do not have a clinical development program for Dopascan in the United States, and therefore do not expect to be applying to the FDA to market and sell Dopascan. We have international development partners that are currently conducting research.

MG98 and Small Molecule DNA Methyltransferase Inhibitor Programs

In August 2000, as part of our strategy to expand our portfolio of marketed and development stage anti-cancer products, we entered into an exclusive license, research and development agreement with MethylGene Inc. (“MethylGene”) for North America rights to its proprietary anti-cancer product candidate MG98 and MethylGene’s DNA methyltransferase small molecule inhibitor program. Included within our license rights is a United States patent on a method for reversing the tumor-causing state of a cell by administering

an agent that corrects an aberrant methylation pattern in the DNA of the cell. In amendments to the license agreement with MethylGene, they acknowledged full satisfaction of our then current payment obligations and suspended further payment obligations by us pending completion by MethylGene of a planned clinical trial with MG98. Rights to the small molecule inhibitor program have reverted back to MethylGene. If we resume MG98 development, our financial responsibilities related to MG98 under the license agreement with them would also resume.

Sales and Marketing

We believe that for successful commercialization of our products, our commercial management group, including the sales and marketing functions, must be integrated from the moment we identify a product candidate for possible acquisition and development. In this manner, factors that are important throughout the entire life cycle of a product can be appropriately managed. From initial sales forecasting, to market research, to brand strategy, to advocate development, our commercial development function prepares our product candidates for transition to our product marketing group. Our marketing group is responsible for additional market research, brand strategy and tactics, marketing programs, design and production of promotional materials and analysis of market performance. We use a variety of marketing programs to reach our targeted audiences, including distribution of product-specific brochures in face-to-face meetings and direct mailings, exhibits at select medical meetings and journal advertising. In addition, preparations are underway for a targeted direct-to-consumer advertising campaign for Aloxi for CINV. This direct-to-consumer advertising campaign is planned to roll out in the second quarter of 2006.

We currently promote our products in the United States using our 92-person oncology-focused sales organization and our 76-person acute care focused sales organization. Specifically, these promotion activities are directed to physician specialists, plus associated nurses, pharmacists, practice managers and support staff. As is common in the pharmaceutical industry, our domestic product sales are made to pharmaceutical wholesalers, including specialty oncology distributors, for further distribution to the ultimate consumers of our products.

We had three customers, Oncology Supply, McKesson Drug OTN, and US Oncology Specialty, who each individually accounted for more than 10 percent of our revenue in 2005. In total, these three customers accounted for 74 percent of our 2005 revenue.

We use international collaborations to develop and/or commercialize our products outside the United States. We describe those collaborations below in the section entitled “International Research, Development and Commercialization Agreements.”

Research and Development

We maintain active drug development programs for our product candidates and commercialized products. Current drug development efforts are primarily focused on Dacogen, Aquavan, amolimogene (HPV E6 E7 plasmid), Saforis, irofulven and Aloxi products. Earlier stage drug candidates, ZYC300, GPI 5693, and PARP inhibitors, are also being developed internally. We also participate in post-marketing trials to support the continued commercialization of our marketed products and we seek product candidate acquisitions in order to expand our development pipeline. With the MGI Biologics (formerly known as Zycos, Inc.) and MGI GP acquisitions, we have expanded our research and development capabilities to include biologics (the Zycos platform) and small molecule (PARP, GCP II programs) capabilities. This will add the competencies of targeted basic research and traditional drug discovery activities to our research and development organization. It is our intent to focus our research in a disciplined manner to control our expenses and mitigate the risk due to product failure. Currently we employed 201 associates in research and development, which includes 41 associates in research and 160 associates in development activities.

We have incurred significant research and development costs in the past and believe that substantial capital resources will be required to support current and future development programs. We spent approximately $70.9 million in 2005, $62.6 million in 2004, and $50.1 million in 2003 on research and development. For the years ended December 31, 2005, 2004, and 2003, 0.1 percent, 51 percent, and 62 percent, respectively, of our research and development expense was attributable to license/milestone payments. Funding for research and development is expected to come from internally generated funds, joint ventures, strategic alliances or other sources of capital, including equity or debt offerings.

Successful drug development requires a broad spectrum of scientific, clinical and product development expertise. As part of our strategy, we conduct research directed towards the lifecycle management of drugs and drug candidates in our current pipeline, as well as research focused on drug candidates that will address areas of defined medical need in the areas of oncology and acute care. We believe this combined approach will substantially increase our profitability margins in the long term and reduces risk related to early stage drug discovery in the short term.

We manage the clinical development of product candidates by selectively outsourcing certain activities. We have in-house targeted research, preclinical, clinical, product and formulation development, data management, biostatistics, medical writing, safety, quality and regulatory capabilities, which allows us to manage clinical trials, monitor adverse drug experience reporting, and file new drug applications with regulatory bodies. We outsource other development activities, such as certain laboratory projects, conduct of certain preclinical studies, production of clinical supplies and certain aspects of clinical trial conduct. We expect to continue to contract with third parties until it is necessary and economical to add these capabilities internally.

Technology In-licensing Agreements

Aloxi Products

In April 2001, we obtained from Helsinn Healthcare SA (“Helsinn”) the exclusive oncology license and distribution rights for Aloxi in the United States and Canada. Aloxi is a differentiated 5-HT₃ receptor antagonist for the prevention of CINV. Under the terms of the agreement, we have made an aggregate of $38 million in license initiation and milestone payments as of December 31, 2005. We have also agreed to pay royalties and supply fees based on net sales revenues.

We expanded our agreement with Helsinn in November 2003 to include rights for PONV application of Aloxi and Aloxi Capsules and extended the term through December 31, 2015. Under the terms of the expanded agreement, we have made an aggregate of $25.0 million in initial and milestone payments as of December 31, 2005. We expect to make additional payments totaling $22.5 million over the course of the next several years upon achievement of certain development milestones including the approvals of Aloxi for prevention of PONV and Aloxi Capsules in the United States. We will also pay royalties and product supply fees based upon net sales. Helsinn will continue to fund and conduct all development of Aloxi products for the new applications and will supply finished product for commercialization.

Gliadel Wafer

In March 1994, Guilford entered into an agreement, the Gliadel Agreement, with Scios Inc. (“Scios”) pursuant to which Guilford licensed from Scios exclusive worldwide rights to numerous U.S. patents and patent applications and corresponding international patents and patent applications for polyanhydride biodegradable polymer technology for use in the field of tumors of the central nervous system and cerebral edema. Gliadel is covered under this license by two U.S. patents and certain related international patents and patent applications. The patent rights in the U.S. will expire in 2006. In April 1994, Scios assigned all of its rights and obligations under the Gliadel Agreement to MIT. We have exclusive worldwide rights to the technology for brain cancer therapeutics, subject to certain conditions, including a requirement to perform appropriate pre-clinical tests and file an Investigational New Drug Application (“IND”) with the FDA within 24 months of the identification of a drug-polymer product having greater efficacy than Gliadel.

Under the Gliadel Agreement, we are obligated to pay a royalty of 4% on all net product revenue incorporating the technology covered by the agreement, as well as 25% of all proceeds from sublicensees and 4% of proceeds from corporate partners. For a particular country, our obligation to pay a royalty on net revenue expires upon the later to occur of (i) the expiration of the relevant patent rights in such country or (ii) 15 years after the first sale of a commercial product derived from the licensed technology in such country. For the year ended December 31, 2005, we incurred a total of approximately $0.3 million in royalty expense to MIT under this license agreement. This amount represents royalty expense on account of Gliadel wafer product sales from October 2005 through December 2005 (following our acquisition of Guilford). Prior to our acquisition of Guilford, they incurred $1.0 million of royalty expense from January 2005 through September 2005.

Each party may terminate the agreement if the other party materially breaches the agreement, subject to prior notice to and an opportunity to cure by the offending party. Additionally, we may terminate the agreement at any time with six months prior written notice to MIT. Upon termination of the agreement (other than because of a material breach by MIT) all license rights revert to MIT, subject to our limited right to use the licensed technology for a 90-day transition period following termination of the agreement. Although we believe that we can comply with our obligations, our failure to perform these obligations could result in losing our rights to new polymer-based products.

Hexalen Product Purchase Agreement

In November 2000, we purchased certain assets and assumed certain liabilities related to the Hexalen business from MedImmune (Oncology), Inc. Hexalen is an orally administered anticancer drug that is approved for treatment of ovarian cancer in patients with persistent or recurrent disease following first-line therapy with a cisplatin and/or alkylating agent-based combination chemotherapy in the United States and a number of other countries. We purchased worldwide rights subject to existing distribution agreements for territories outside the United States. The purchase price of $7.2 million has been fully paid and royalties are due on net sales or distribution margins.

Dacogen Injection

In September 2004, we obtained exclusive worldwide rights to the development, commercialization, manufacturing and distribution of Dacogen for all indications from SuperGen, Inc. Dacogen is SuperGen’s investigational anti-cancer therapeutic that is currently in development for the treatment of patients with MDS. In September 2005, the Company received an Approvable Letter from the FDA for Dacogen. While an Approvable Letter is a significant step in the drug approval process,

approval from the FDA is still required to market the product. In November 2005, the Company submitted its Approvable Letter response to the FDA and the FDA accepted this response with a PDUFA date of May 15, 2006. The PDUFA date is the date by which the FDA aims to render a decision on a new drug application. Also in November 2005, the Company withdrew its MAA with the EMEA. The Company will continue to work with the European regulatory authorities to determine the information required to support a resubmission of the MAA. Under the terms of our agreement with SuperGen, we paid $40 million to SuperGen and we incurred $1.1 million of transaction fees, including legal and accounting fees. We received four million shares of SuperGen, Inc. that were valued at $24.4 million on the purchase date and are reported as an available-for-sale equity security. The difference between total consideration ($41.1 million) and the fair value of the equity investment ($24.4 million) of $16.7 million was recorded as research and development expense in the third quarter of 2004. We expensed a total of $12.5 million in milestone obligations during 2004 for: (1) the filing of the NDA for Dacogen with the FDA and (2) a MAA filing with the EMEA. We expect to make additional milestone payments totaling $32.5 million upon achievement of the following milestones: (1) $20 million upon first commercial sale of Dacogen in the United States, and (2) $12.5 million for regulatory and commercialization milestones in Europe and Japan. Subject to certain limitations, we will also pay SuperGen 50 percent of certain revenue payable as a result of our sublicensing rights to market, sell or distribute Dacogen, to the extent such revenues are in excess of the milestone payments. In addition, SuperGen will receive a royalty on annual worldwide net sales of licensed products starting at 20 percent and escalating to a maximum of 30 percent. We also committed to fund at least $15 million of further Dacogen development costs by September 1, 2007, of which all had been incurred by December 2005.

Aquavan Injection

In March 2000, Guilford entered into a license agreement with ProQuest Pharmaceuticals, Inc. (“ProQuest”) that granted Guilford exclusive worldwide development and commercialization rights to Aquavan. In the fourth quarter of 2004, Guilford acquired ProQuest, thereby superseding the license agreement and obtaining an irrevocable, royalty-free, fully-paid, exclusive, worldwide license to the intellectual property rights for Aquavan from the University of Kansas.

Dopascan Injection

We hold exclusive worldwide rights to Dopascan pursuant to a license agreement with RTI (the “RTI Agreement”) that was entered into in 1994 by Guilford. The RTI Agreement grants us rights to various U.S. and international patents and patent applications relating to binding ligands for certain receptors in the brain that are or may be useful as dopamine neuron imaging agents. Dopascan and certain related precursors and analogues are covered by U.S. patents that expire in 2009, as well as certain related international patents and patent applications. Pursuant to the RTI Agreement, Guilford has reimbursed RTI for approximately $0.8 million of certain past, patent-related expenses and as annual payments to support mutually agreed-upon research that was conducted at RTI through March 1999. We are obligated to pay RTI a royalty of 6.5% of gross revenues we receive from products derived from the licensed technology and from sublicensee proceeds and to make minimum royalty payments following the first commercial sale of such products of $15,000, $30,000 and $60,000 during each of the first, second and each successive year thereafter, respectively. We must use commercially reasonable efforts to develop products related to the licensed technology and to meet certain performance milestones. No payments to RTI were required in connection with meeting these performance milestones as of December 31, 2005.

The license agreement expires on the date of expiration of the last patent licensed under the agreement or upon 120 days written notice by either party to the other. The parties also may terminate the license agreement for cause upon a material breach or default by the other party, subject to prior notice to and an opportunity to cure by the offending party. Upon termination of the license agreement by RTI for cause, all licensed rights revert to RTI, subject to our limited right to use the licensed technology for a six-month transition period following termination of the license agreement. Accordingly, our failure to perform our obligations under the RTI Agreement in the future could result in termination of the license, and loss of our right to use this technology.

We do not currently plan to commercialize Dopascan in the United States, but have licensed Dopascan to Molecular Neuroimaging LLC (“MNI”) for use in combination with testing certain experimental treatments.

We have also entered into a sublicense agreement with Daiichi Radioisotope Laboratories (“DRL”) for the development and commercialization of Dopascan in Japan, Korea and Taiwan.

GPI 1485/Neuroimmunophilin Ligand Program

Guilford entered into a series of exclusive worldwide license agreements with John Hopkins University (“JHU”) regarding patents covering the neurotrophic use of NILs. In addition to an up-front payment of $70,000, the agreements require us, among other things, to: (1) reimburse JHU for costs associated with preparing, filing, maintaining and prosecuting their patents, (2) pay an annual maintenance fee of $5,000, (3) make milestone payments of $100,000 upon the first U.S. IND for a licensed product and $200,000 upon the first FDA approval for commercial sale of a licensed product, (4) pay a royalty of 3% on net revenue from licensed products and of 2% on any proceeds we receive from sublicenses of licensed products, and (5) expend at least $100,000 per year to develop the licensed products. No milestone payments have yet been paid by us under the agreements. Amgen, our former corporate partner for the NIL program, paid a milestone payment of $100,000 to JHU upon receipt of the first U.S. IND for a licensed product.

Each agreement partially expires with respect to a particular country on the date of expiration of the last patent licensed in that country, or if no patents have been issued in that country, in 2018. The parties also may terminate each agreement for cause upon a material breach or default by the other party, subject to prior notice to and an opportunity to cure by the offending party. In the event of termination of these agreements, we would lose our rights to use the licensed technology.

In June 2004, Guilford licensed its rights in the United States to GPI 1485 to SNDC in the following four disease states: Parkinson’s disease, peripheral nerve injury, including PPED, HIV-related peripheral neuropathy and HIV-related dementia. SNDC agreed to invest up to $40.0 million to advance GPI 1485 through its current clinical programs in those disease states. SNDC’s investors granted us an exclusive option to purchase SNDC. With the acquisition of MGI GP, we may exercise this option at our sole discretion at any time until March 31, 2007, at an exercise price starting at $85.6 million in December 2005 and incrementally increasing to $119.8 million by March 2007. If we exercise the option, we will regain the rights that we licensed to SNDC. We have concluded that we will not exercise the option. For a more complete description of the clinical trials with GPI 1485, see the section above entitled, “Products Under Development / GPI 1485.”

Acylfulvenes, Including Irofulven

In August 1993, we entered into an exclusive license agreement with the Regents of the University of California. Under the agreement, the university granted to us an exclusive, worldwide, royalty-bearing license for the commercial development, manufacture, use and sale of acylfulvene analogs, methods of synthesizing acylfulvene analogs and methods of treating tumors using acylfulvene analogs. We have been developing irofulven under this license. We paid the university an initial license fee upon execution of the agreement and agreed to pay license maintenance fees on each anniversary of the execution of the agreement until we submit the first NDA relating to the analogs to the FDA. In addition, we make development milestone payments prior to commercialization of the product. We have also agreed to pay royalties on net sales revenues, subject to annual minimum requirements. Through December 31, 2005, we have made approximately $950,000 in cash payments to the university under this agreement. Unless earlier terminated by the parties, the term of the agreement extends until the later of: (a) the expiration of the last-to-expire patent we have licensed; or (b) ten years from the date of the first commercial sale of products developed from the acylfulvene analogs.

International Research, Development and Commercialization Agreements

We have entered into various agreements with international companies to further develop, commercialize, and distribute certain of our products in markets outside of the United States. Distributors are required to obtain local authorizations in connection with the import/export and distribution of product in their designated territory. We receive product supply payments and may receive distribution initiation fees.

Manufacturing

Except for Gliadel, which is manufactured in-house, our marketed and development-stage pharmaceuticals are manufactured under agreements with third-party manufacturers. Our manufacturing and quality assurance personnel authorize, audit and approve virtually all aspects of the manufacturing process. In-process and finished product inventories are analyzed through contract testing laboratories and the results are reviewed and approved by us prior to release for further processing or distribution. We intend to carry an approximate six-month inventory of each of our marketable products.

Aloxi Injection

Palonosetron hydrochloride, the active pharmaceutical ingredient for Aloxi products, is manufactured by Helsinn Healthcare SA. Helsinn is responsible for the worldwide requirements of both the active pharmaceutical ingredient and finished drug product, a sterile formulation in a single-use vial. Helsinn contracts with Cardinal Healthcare, Inc. for filling vials with a solution of the active pharmaceutical ingredient. Helsinn Birex Pharmaceuticals Ltd., a unit of Helsinn, located in Ireland, finishes (labels and packages) the vials for distribution.

Salagen Tablets

Pilocarpine hydrochloride, the active pharmaceutical ingredient for the manufacture of Salagen, is obtained under an exclusive supply and license agreement with Merck KgaA. The exclusive term of this agreement ends on December 31, 2007, and may be extended for additional five-year terms unless earlier terminated by the parties. Upon termination of the exclusive term, the agreement may continue for an indefinite period on a non-exclusive basis. The refined raw material is a semi-synthetic salt of an extract from plants grown and processed exclusively on carefully managed plantations in South America. We believe that the supply of pilocarpine hydrochloride is adequate for the foreseeable future. Salagen is currently manufactured for us by Patheon Inc. The initial term of the Patheon agreement was four years, with automatic renewal periods of three years. While this agreement may be terminated by either party upon three years’ written notice, neither party has provided notice.

Gliadel Wafer

We manufacture Gliadel using a proprietary process at our facility in Baltimore, Maryland, which includes areas designated for packaging, quality assurance, laboratory and warehousing. This facility enables us to produce up to 12,000 Gliadel treatments (each consisting of eight wafers) annually. We have a second clean room at this facility that we estimate would potentially allow us to increase our annual manufacturing capacity to 20,000 treatments or provide backup manufacturing capability if the first clean room facility is unable to be utilized. We are currently manufacturing Gliadel at 28% of capacity of the primary facility per year, and therefore believe that our capacity to manufacture Gliadel will satisfy patient demand for the product.

We believe that the various materials used in Gliadel are readily available and will continue to be available at reasonable prices. We have an adequate supply of BCNU to meet the demand we expect for the product. Nevertheless, failure of any of our suppliers to provide sufficient quantities of raw material for Gliadel in accordance with the FDA’s current Good Manufacturing Practice (“cGMP”) regulations could cause delays in our ability to sell Gliadel.

Hexalen Capsules

Pharmaceutical grade altretamine for the manufacture of Hexalen is obtained from Heumann Pharma GmbH, a wholly owned subsidiary of Pfizer. Heumann Pharma supplies the bulk active drug substance pursuant to an agreement that we assumed. Hexalen is currently manufactured pursuant to an agreement with AAIPharma Inc. that expires October 1, 2009 (five-year initial term). Absent written notice of termination by either party at least one year in advance of a renewal date, the term of the agreement is automatically renewed for two-year periods on the renewal date.

Aggrastat Injection

We have entered into an exclusive supply agreement with Merck for the manufacture and supply of the active pharmaceutical ingredient for Aggrastat. Aggrastat is sold in 100 ml and 250 ml pre-mixed bags and 50 ml vials. We have an agreement with Baxter Healthcare Corp. (“Baxter”) to supply us with the pre-mixed bags of Aggrastat until July 2009. Under this agreement, we are required to make minimum annual purchases from Baxter. We have also identified a supplier to provide vials of Aggrastat. We expect to have an adequate supply of pre-mixed bags and vials of Aggrastat to meet existing demand for at least the next 12 months.

Development-Stage Pharmaceuticals

Dacogen injection

We entered into a contract with Ferro Pfanstiehl Laboratories, Inc., a wholly owned subsidiary of Ferro Corporation, to produce decitabine, the active pharmaceutical ingredient in Dacogen. We renegotiated assignment of the Ferro Pfanstiehl Drug Substance Validation and Supply Agreement from SuperGen to us effective May 11, 2005. The initial term of the supply agreement will be seven years following each of the initial marketing authorizations in the United States and the European Union. The supply agreement will automatically extend for two-year periods in successive years following the initial term unless otherwise terminated under mutually acceptable terms and conditions. Ferro Pfanstiehl has the capacity to manufacture the worldwide requirements of decitabine. Dacogen is a sterile lyophilized drug product in a single-dose vial, and is manufactured by Pharmachemie B.V. We have negotiated a supply agreement with Pharmachemie effective July 6, 2005 (five-year initial term). The terms of the agreement shall automatically extend for successive one-year periods, unless either party provides to the other party written notice of termination. Such notice shall be given in writing at least 90 days prior to the end of the five- or one-year period.

As a regular part of our business, we establish contract manufacturing arrangements for our development-stage pharmaceuticals. These arrangements include purchase orders, supply agreements, and development-scale manufacturing contracts.

Intellectual Property Rights

Patents

     We rely on patent rights, orphan drug designation, trade secrets, trademarks, and nondisclosure agreements to establish and protect our proprietary rights in our products and product candidates in both the United States and selected foreign jurisdictions. As of December 31, 2005, we owned or had licensed rights to more than 315 U.S. patents and more than 350 foreign patents. In addition, we owned or had licensed more than 1,000 pending applications worldwide. The following charts identify the number of patents and patent applications that protect or relate to our marketed products, product candidates and significant research programs, and whether those patents or patent applications are issued (or filed) in the United States or internationally, whether they are owned by us, licensed to us, or both owned and licensed, the earliest date on which those patents begin to expire, and if the technology is protected by orphan drug designation or other regulatory provisions providing marketing exclusivity.

The term of a U.S. patent issued from an application filed before June 8, 1995 is the longer of 17 years from its issue date or 20 years from its effective filing date. The term of a U.S. patent issuing from an application filed on or after June 8, 1995 is 20 years from its effective filing date. The Drug Price and Competition and Patent Term Restoration Act of 1984, the Generic Animal Drug Act, and the Patent Term Restoration Act generally provide that a patent relating to, among other items, a human drug product, may be extended for a period of up to five years by the U.S. Commissioner of Patents and Trademarks if the patented item was subject to regulatory review by the FDA before the item was marketed (commonly referred to as a Hatch-Waxman extension). Under these acts, a product’s regulatory review period (which consists generally of the period from the time when the exemption to permit clinical investigations becomes effective until the FDA grants marketing approval for the product) forms the basis for determining the length of the extension an applicant may receive. In addition, a patent term can be extended for an additional six months in the U.S. if the applicant performs additional testing in the pediatric population, as requested by the FDA. There can be no assurance that the term of any issued patents will be extended. In addition, no grant of patent term extension will prevent a challenge to the underlying patent’s validity or a judicial finding that the underlying patent infringes on the rights of any third party.

Patent positions of pharmaceutical companies are generally uncertain and involve complex legal and factual issues. Therefore, although we believe our patents are valid, we cannot predict with any precision the scope or enforceability of the claims. In addition, there can be no assurance that our patent applications will result in issued patents, that issued patents will provide an adequate measure of protection against competitive technology which could circumvent such patents, or that issued patents would withstand review and be held valid by a court of competent jurisdiction. Furthermore, there can be no assurance that infringement of any issued patents cannot be circumvented by others.

Orphan drugs are currently provided seven years of marketing exclusivity for an approved indication following approval to market by the FDA, and are provided ten years of marketing exclusivity for an approved indication following approval to market by the EMEA. Orphan drug designation for our products does not, however, insulate us from other manufacturers attempting to develop an alternate drug for the designated indication, or the designated drug for another, separate indication.

We also rely on trade secrets and continuing innovation that we seek to protect with reasonable business procedures for maintaining trade secrets, including confidentiality agreements with our collaborators, employees and consultants. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach or that our trade secrets and proprietary know-how will not otherwise be known or be independently discovered by competitors.

In addition to the patents which form the basis of the pharmaceutical focus of this company, we also own four U.S. patents which claim maize plants that are resistant to certain herbicides and that also claim methods for producing such resistant plants. These patents were issued between 1988 and 1998. While these patents have been licensed to BASF (originally licensed to American Cyanamid), we may still incur expenses associated with any litigation, interference or other administrative proceedings related to these patents.

Trademarks

The following chart summarizes the rights that we have to use various trademarks both in the United States and in selected foreign jurisdictions:

Rights in the United States

Rights in Selected Foreign Jurisdictions

Competition

The pharmaceutical industry is highly competitive, and participants compete primarily on product performance and pricing. Many members of the industry have greater resources than we do, providing them with potentially greater flexibility in developing and marketing their products. While we will seek to protect our products from direct competition through filing patents, seeking marketing exclusivity under the Orphan Drug Act, and maintaining technical information as trade secrets, there is no way to protect us from competition from products with different chemical composition or products made using different technology. There can be no assurance that we will be successful in our plan to gain product specific protection for each of our pharmaceuticals or that developments by others will not render our products noncompetitive or obsolete.

Aloxi is the fourth 5-HT₃ antagonist approved for marketing in the United States. Further, there is no certainty that the patent protection afforded palonosetron hydrochloride will be effective in keeping generic equivalents from entering the market. Patent protection for Zofran (ondansetron), a major competing product, will expire in 2006. This will allow for the introduction of a generic 5-HT₃ inhibitor, which could affect sales of all branded 5-HT₃ inhibitors including Aloxi. At the end of 2007, it is anticipated that generic Kytril (granisetron) may be available.

With respect to Gliadel, we are aware of several competing approaches for the treatment of malignant glioma, including traditional systemic chemotherapy, radioactive seeds, radiation catheters, TEMODAR Capsules, which is a chemotherapy product manufactured by Schering Corporation and other experimental protocols. Furthermore, our patent protection for Gliadel ends in August 2006. The FDA has granted us market exclusivity for marketing Gliadel for malignant glioma at the time of initial surgery until February 2010. Regardless, after August 2006 when our patent protection expires, others may try to copy the wafer and enter the market as a generic drug through applicable FDA procedures.

In May 2004, Vidaza (azacitidine) was approved by the FDA as the first drug to be approved for the treatment of MDS. In December 2005, the FDA also approved lenalidomide for treatment of patients categorized as low- or intermediate-1 risk MDS patients. Initial shipments of lenalidomide commenced in early 2006. If Dacogen is also approved for treatment of MDS, it will compete directly with azacitidine and lenalidomide.

Competition in the markets for Salagen intensified during 2005 because, beginning in December 2004, generic 5 milligram pilocarpine hydrochloride tablets entered the United States markets where Salagen competes. The introduction of these competing, generic products has resulted in a significant decline of Salagen sales from 2004 sales of $29.3 million in the United States to 2005 sales of $9.9 million. We expect a continued decline in the sales of Salagen in 2006. As a result of competing, generic products, we suspended direct promotion of Salagen.

With respect to Aggrastat, there are two other competing GP IIb/ IIIa inhibitors: Integrilin Injection (“integrilin”) and ReoPro (abciximab). ReoPro, marketed by Eli Lilly, was the first GP IIb/ IIIa inhibitor to come to market and is used predominantly at the time of percutaneous coronary intervention (“PCI”). Currently, Integrilin, marketed in the U.S. through Schering-Plough Corporation, has a broader indication than ReoPro, allowing Integrilin to be used both at the time of PCI as well as prior to PCI. In some medical institutions, Angiomax, an antithrombin, is being used as a replacement for IIb/ IIIa inhibitors in PCI but that use is generally limited to low-risk and elective PCI patients.

Hexalen is approved in the United States for the treatment of ovarian cancer in patients with persistent or recurrent disease following first-line therapy with certain other chemotherapies. Other chemotherapies are also used for second-line treatment of ovarian cancer and are marketed by pharmaceutical companies with greater resources than we have. Further, competitors could develop and introduce generic drugs that are comparable to Hexalen.

Many companies of all sizes, including large pharmaceutical companies as well as specialized biotechnology companies, are developing cancer therapy drugs that will compete with our product candidates under development, if any of them are approved for sale. There are also a number of products already on the market that will compete directly with our product candidates if any of them are approved. In addition, colleges, universities, governmental agencies and other public and private research institutions will continue to conduct research and may develop new therapies or treatments which would render our drug candidates obsolete or non-competitive. Many of our competitors also have substantially greater financial, research and development, human and other resources than we do.

Government Regulation

Our research and marketing activities are subject to significant regulation by numerous governmental authorities in the United States and other countries. Pharmaceutical products intended for therapeutic use in humans are governed by FDA regulations in the United States and by comparable regulations in foreign countries. The process of completing clinical testing and obtaining FDA approval for a new drug product requires a number of years and the expenditure of substantial resources without any assurance that approval for marketing will be granted.

The FDA has established mandatory procedures to regulate the manufacturing and testing process regarding the identity, strength, quality and purity of a product. Following initial formulation, the steps required before any new prescription pharmaceutical product may be marketed in the United States include (1) preclinical laboratory and animal tests; (2) submission to the FDA of an IND; (3) adequate and well-controlled clinical trials to establish the safety and efficacy of the drug; (4) submission of an NDA and (5) FDA review and approval of the NDA prior to any commercial sale.

Preclinical studies are conducted in the laboratory and in animal model systems to gain information on the drug’s efficacy, mode of action, and to identify any significant safety problems. The results of these studies are submitted to the FDA as part of the IND. Testing in humans may commence 30 days after the IND has been filed unless the FDA issues a clinical hold. Additional animal studies may be performed throughout the development process.

A three-phase clinical program is usually required for FDA approval of a pharmaceutical product, unless accelerated approval is granted. Phase 1 clinical trials are conducted to determine the safety profile, including the safe dosage range, metabolism and pharmacologic action of the product, and, if possible, to gain early evidence on efficacy. Although most phase 1 trials are conducted with healthy volunteers, phase 1 cancer trials are conducted with cancer patients. Following establishment of a safe dose from phase 1 trials, a phase 2 clinical program is conducted for dose-ranging and to assess the safety and efficacy of the product in patients with the disease being studied. Phase 3 confirmatory clinical trials are conducted on patients more representative of the intended patient population in terms of medical treatment, age groups, gender and ethnicity. Data from the larger phase 3 program is to provide adequate statistical evidence of safety and efficacy necessary to evaluate the overall benefit and risk relationship in the target patient population. Phase 2 and phase 3 trials are usually multi-center trials in order to achieve greater statistical validity and to have data from a broader patient population that is more representative of the intended patient group. Phase 4, or post-approval trials, may be required under accelerated approval or to provide additional data on safety or efficacy of the product.

Upon completion of clinical testing, and with data successfully demonstrating that the product is safe and effective for a specific indication, an NDA or Biologics License Application (“BLA”) for Biologics products may be filed with the FDA. The NDA or BLA contains all the scientific evidence including product formulation, manufacturing, control information, preclinical and clinical data. FDA approval of the NDA or BLA is required before the applicant may market the new product.

Even after initial FDA approval has been obtained, further trials may be required to provide additional data on safety or efficacy for current indications, or to obtain approval for uses other than those for which the product was initially approved. Moreover, such approval may entail limitations on the indicated uses for which a drug may be marketed. Even if FDA approval is obtained, there can be no assurance of commercial success for any product. Post-marketing testing may be required, and surveillance programs such as reporting adverse events are required. The FDA may require withdrawal of an approved product from the market if any significant safety issues arise while a product is being marketed. In addition, before, during and after the process of approval, our prescription drug products must all be manufactured in accordance with current good manufacturing practices as set forth by the FDA. Marketing of products is also regulated by the FDA.

The orphan drug provisions of the Federal Food, Drug, and Cosmetic Act provide incentives to drug and biologics manufacturers to develop and manufacture drugs for the treatment of rare diseases or conditions, currently defined as a disease or condition that affects fewer than 200,000 individuals in the U.S. or, for a disease or condition that affects more than 200,000 individuals in the U.S., where the sponsor does not realistically anticipate that revenue generated from sales of the product will exceed the cost of its development. Under these provisions, a manufacturer of a designated orphan product can seek tax benefits, and the holder of the first FDA approval of a designated orphan product will be granted a seven-year period of marketing exclusivity for that product for the orphan indication. While the marketing exclusivity of an orphan drug would deter other sponsors from obtaining approval of the same compound for the same indication, it would not prevent other types of drugs from being approved for the same indication.

The health care industry is changing rapidly as the public, government, medical professionals and the pharmaceutical industry examine ways to broaden medical coverage while controlling health care costs. Potential approaches that may affect us include managed care initiatives, pharmaceutical buying groups, formulary requirements, and efforts to regulate the marketing and pricing of pharmaceutical products. 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 effect on our operations or sales, but we cannot predict the impact, if any, of future reimbursement changes.

Federal, state and local environmental laws and regulations do not materially effect our operations and we believe that we are currently in material compliance with such applicable laws and regulations.

Executive Officers of the Registrant

Employees

As of March 1, 2006, we had 575 employees, which included 238 in commercial operations, 51 in manufacturing, 160 in pharmaceutical research and development, 41 in research activities and 85 in general and administrative functions. None of our employees is represented by a labor union or is subject to a collective bargaining agreement. We believe that our relations with our employees are satisfactory.

Available Information

Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to those reports and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website (http://www.mgipharma.com) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the Securities and Exchange Commission (“SEC”). The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that website is http://www.sec.gov. Additionally, you may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

We were incorporated under the name Molecular Genetics, Inc. in Minnesota in November 1979. Our principal executive offices are located at 5775 West Old Shakopee Road, Suite 100, Bloomington, Minnesota 55437. Our telephone number is (952) 346-4700, and our website address is http://www.mgipharma.com. Financial information prepared in accordance with United States generally accepted accounting principles, including information about revenues from customers and geographical areas, measures of profit and losses, and total assets, can be found in our Consolidated Financial Statements included in Item 8 of Part II of this annual report.

Item 1A. Risk Factors

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

The success of our business is dependent on the continued successful commercialization of Aloxi. Aloxi sales represented 91 percent and 83 percent of our total product sales and 89 and 81 percent of our total revenue for the years ended December 31, 2005 and December 31, 2004, respectively. Any factor adversely affecting sales of Aloxi could cause our product revenues to decrease and our stock price to decline significantly.

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

Patent protection for injectable Zofran (ondansetron), a major competing product, will expire in 2006. This will allow for the generic 5-HT₃ inhibitors, which could negatively affect sales of all branded 5-HT₃ inhibitors including Aloxi.

The Food and Drug Administration (“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 or cause sales of Aloxi to decline. In those circumstances, our stock price would decline and we would 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 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, such as Aloxi for post-operative nausea and vomiting (“PONV”) and Aloxi oral for CINV (“Aloxi Capsules”), 2) the continued development of other product candidates, including Aquavan Injection (“Aquavan”), amolimogene (HPV E6 E7 plasmid) (formerly known as ZYC101a), Saforis Powder for Oral Suspension (“Saforis”), Dacogen Injection (“Dacogen”) and irofulven, 3) continued commercialization of Aloxi, Gliadel Wafer (“Gliadel”), and our other marketed products and 4) acquire additional product candidates or companies. Therefore, we may not generate net income on a consistent basis, or at all, unless we are able to significantly increase sales of Aloxi, Gliadel, or other products compared to our current sales, and/or significantly reduce the funding for our research and development programs or commercial operations.

In addition to Aloxi, to a more limited extent we will also depend on maintaining or increasing revenues from Gliadel, the failure of which would have an adverse effect on our ability to accomplish our business objectives.

Prior to February 2003, the FDA had only approved the marketing of Gliadel in the United States for patients who had a brain tumor surgically removed and had recurrent forms of a type of brain cancer called glioblastoma multiforme (“GBM”), affecting approximately 3,000 to 4,000 patients annually. In February 2003, the FDA granted approval to also market Gliadel for patients undergoing initial surgery, also known as first line therapy, in the United States for malignant glioma in conjunction with surgery and radiation. Our ability to increase sales of Gliadel will depend upon achieving greater market penetration among GBM patients and successful marketing of Gliadel for first line therapy. Even if we increase our sales and marketing efforts, such increases may not result in increased sales of Gliadel. If Gliadel fails to gain broader market acceptance for GBM patients or as first line therapy, the revenues we receive from sales of Gliadel would be unlikely to increase.

Sales of our Salagen Tablets (“Salagen”) in the United States are likely to continue to decline significantly for subsequent periods because generic pilocarpine hydrochloride tablets were introduced into the United States in December 2004.

Beginning in December 2004, generic 5 milligram pilocarpine hydrochloride tablets entered the United States markets where Salagen competes. Sales of Salagen declined significantly in 2005 to $9.9 million from our 2004 sales of $29.3 million in the United States. Due to competition from these generics, and as a result of the cessation of our marketing efforts of Salagen, we expect revenues from Salagen to continue to decrease.

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

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

For the year ended December 31, 2005, we reported net loss of $132.4 million, including an estimated $156.9 million of acquired in-process research and development expense related to the Guilford acquisition. For the year ended December 31, 2004, we reported 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 a net loss of $61.9 million for the year ended December 31, 2003. 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. Because of these fluctuations, it is possible that our operating results for a particular quarter or quarters will not meet the expectations of public market analysts and investors, causing the market price of our common stock to decrease. For example, the trading price of our common stock during the period of January 1, 2003 to December 31, 2005 ranged from $3.43 to $34.49.

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 income 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, 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. These deferred tax assets include the net operating loss carryforwards and research and development credit carryforwards acquired in the Guilford, Aesgen and Zycos transactions all of which are subject to ownership change limitations and may also be subject to various other limitations on the amounts utilized. For subsequent periods, our financial statement tax provision will 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 net income per share beginning with the quarter we are required to expense approximate statutory tax rates.

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 net 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 Aloxi PONV, Aloxi Capsules, Dacogen, Saforis, Aquavan, amolimogene (HPV E6 E7 plasmid), irofulven and ZYC300, 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 for Aloxi, and for our other products other collaborators, 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 are often not 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, side effects or other adverse results during clinical trials could interrupt, limit, delay or stop the development of a product candidate. 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:

Other factors, such as lack of efficacy, unacceptable toxicities, or other adverse events, 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.

Because our product candidates such as Dacogen, Aquavan, Saforis, amolimogene (HPV E6 E7 plasmid), ZYC300 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 indications. 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. Similar examples of resource trade offs also exist for our other product candidates.

In addition, the uncertainty of the development path for a particular product candidate makes it difficult to ascertain the capital resources that will be required.

Our ability to achieve strong revenue growth for Gliadel, Aquavan, Dacogen, and Saforis may depend to a large extent on the results of additional clinical trials.

We may conduct additional clinical trials with Gliadel to provide physicians with added clinical data and/or to expand Gliadel’s labeled indications. There is no assurance that such clinical trials, if any, will be successful, or if successful, will convince the FDA that an additional indication is warranted. Also, if one or more additional clinical trials are not successful, sales of the product in its current markets could be adversely affected and could significantly adversely affect our ability to increase sales of Gliadel.

Additionally, our ability to increase the size of the potential market for Aquavan will depend upon our success in obtaining approval for the product in a variety of procedural sedation settings. We will likely need to conduct additional clinical trials beyond those we already have announced to do so, and such trials may not be successful or may not, in the determination of the FDA, warrant an indication for Aquavan larger than the one we are currently attempting to obtain. In such cases, sales of Aquavan may not meet our expectations.

We have initiated enrollment in a 480 patient acute myeloid leukemia (“AML”) trial to expand on Dacogen’s expected labeled indications. There is no assurance that such clinical trials, if any, will be successful, or if successful, will convince the FDA that an additional indication is warranted. Additionally, Dacogen has other clinical trials that seek to optimize the schedule in which the product is delivered to patients, which may or may not be enough data to assure an additional label change to the dosing section.

Our ability to achieve strong revenue growth for Saforis may depend to a large extent on the results of additional clinical trials that will adequately characterize the efficacy of Saforis in patients receiving different types of cancer therapies. Additional trials may be undertaken with Saforis to expand the market size in oral mucositis. The outcome of these potential additional trials may or not warrant expansion of the label in the view of the FDA. In such a case where the FDA views that these additional trials do not warrant an expanded label, Saforis may under perform in meeting our expectations.

European regulatory agencies have imposed restrictions on our ability to import Gliadel to the European Union.

We have been informed by the European regulatory agency responsible for overseeing the testing and release of Gliadel in the European Union that we must test each sublot of Gliadel that we ship to the European Union. Each time a lot is tested it results in the destruction of a portion of the lot and the testing is costly. This requirement may make it commercially unfeasible to ship small sublots of Gliadel labeled for smaller European markets. If we are not able to agree with the regulatory agency to an alternative method of testing and releasing sublots of Gliadel, we may not be able to continue to ship Gliadel to our distributors for smaller European markets. As a result, growth in our Gliadel revenue would be negatively affected.

We depend on a single supplier to provide us with the finished drug product for Aloxi and Dacogen and single suppliers to provide us with the active ingredients for other product candidates. If the suppliers terminate their relationships with us, or are unable to fill our demand for the ingredients or products, we may be unable to sell Aloxi, and 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 Helsinn Birex Pharmaceuticals Ltd. as our sole and exclusive supplier of Aloxi finished drug product. Helsinn Birex Pharmaceuticals Ltd. may make regulatory provision for alternate sites for the manufacture of Aloxi. However, if our relationship with Helsinn Birex Pharmaceuticals Ltd. terminates, we will be unable to continue to offer Aloxi for commercial sale.

We rely on Pharmachemie BV as our sole supplier of the Dacogen finished drug product. In addition, we rely on other sole or exclusive suppliers for other product candidates’ finished drug products. If our relationship with Pharmachemie BV 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.

Our customer base is highly concentrated. Bankruptcy or financial distress 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 pharmaceutical 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 become insolvent or dispute payment of the amount it owes us, this 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.

The timing of customer purchases and the resulting product shipments have a significant impact on the amount of revenue from product sales that the Company recognizes in a particular period.

The majority of our sales are made to independent pharmaceutical wholesalers, including specialty oncology distributors, which, in turn, resell the product to an end user (normally a clinic, hospital, alternative healthcare facility or an independent pharmacy). Inventory in the distribution channel consists of inventory held by independent pharmaceutical wholesalers, who are our principal customers. Our revenue from product sales in a particular period is impacted by increases or decreases in the distribution channel inventory levels. If distribution channel inventory levels increase materially, we could experience reduced sales revenue in subsequent periods due to low patient demand.

We cannot significantly control or influence the purchasing patterns of independent pharmaceutical wholesalers or end users. These are highly sophisticated customers that purchase our products in a manner consistent with their industry practices and, presumably based upon their projected demand levels. From time to time, we offer sales incentives in the ordinary course of business. These incentives may impact the level of inventory held by wholesalers. Additionally, the buying practices of the wholesalers include occasional speculative purchases of product in excess of the current market demand, at their discretion, in anticipation of future price increases. Purchases by any given customer, during any given period, may be above or below actual patient demand of any of our products during the same period, resulting in fluctuations in product inventory in the distribution channel. If distribution channel inventory levels substantially exceed end user demand, we could experience reduced revenue from sales in subsequent periods due to a reduction in end-user demand.

If the third-party manufacturer of Aloxi, Salagen, or Aggrastat 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, Patheon Inc. for the production of Salagen, Baxter Pharmaceuticals for the production of Aggrastat, and other third-party manufacturers for our other products, other than Gliadel, which we manufacture ourselves. We expect to continue to rely on others to manufacture future products, including products currently in development. 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, Salagen, and Aggrastat, will not comply with all applicable regulatory standards, and may not be able to manufacture Aloxi, Salagen, Aggrastat, 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:

Our business strategy depends on our ability to discover, acquire, license and develop product candidates and discover, acquire or license approved products. If we are not able to undertake these activities successfully, we will not be able to achieve our corporate goals.

As part of our business strategy we plan to discover, acquire, license and develop product candidates and discover, acquire and license approved products for markets that we can reach through our marketing and distribution channels. If we are unsuccessful in our drug discovery and acquisition strategy, our stock price could decline. If we fail to discover, obtain, develop and successfully commercialize additional products, we may not meet expectations for our future performance and our stock price could decline. Other companies, including some with substantially greater financial, marketing and sales resources, are competing with us to acquire or license 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.

Any acquisition strategy is subject to inherent risk and we cannot guarantee that we will be able to complete any acquisition, including the ability to identify potential partners, successfully negotiate economically beneficial terms, successfully integrate such business, retain its key employees and achieve the anticipated revenue, cost benefits or synergies.

We review the records of companies we plan to acquire, however, even an in-depth review of records may not reveal existing or potential problems or permit us to become familiar enough with a business to assess fully its capabilities and deficiencies. As a result, we may assume unanticipated liabilities, or an acquisition may not perform as well as expected. We also face the risk that the returns on acquisitions will not support the expenditures or indebtedness incurred to acquire such businesses, or the capital expenditures needed to develop such businesses.

On October 3, 2005, we closed the acquisition of Guilford Pharmaceuticals Inc. During the third quarter of 2004, we acquired Zycos, Inc. and Aesgen, Inc. We may acquire other companies in the future as a part of our business strategy.

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:

In addition, even if we are able to successfully integrate the companies we acquire, 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. In an acquisition, some customers may seek alternative sources of product after the announcement of the merger or after the merger due to, among other reasons, a desire not to do business with the combined company or perceived concerns that the combined company may not continue to support and develop certain products. After an acquisition, a combined company could also experience some customer attrition or disputes by reason of the acquisition. Our failure to achieve expected benefits from an acquisition or to minimize the impact of any negative effect 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:

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:

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 Helsinn Healthcare SA. 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 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:

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 competes with three other products from the 5-HT₃ receptor 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, Sanofi-Aventis, Merck and other large multinational competitors. If Aloxi does not compete successfully with existing products on the market, our stock price could decline significantly. Gliadel currently competes as a treatment of malignant glioma with traditional systemic chemotherapy, radioactive seeds, radiation catheters, TEMODAR Capsules, a chemotherapy product manufactured by Schering Corporation, and other experimental protocols. Additionally, MedImmune, Inc., Daichi Pharmaceutical, and three U.S. generic manufacturers have drugs that are approved for sale and compete in the same markets as Salagen.

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 combination of 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, 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.

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.

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 (“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, Saforis, amolimogene (HPV E6 E7 plasmid), ZYC300, Aquavan 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.

Once we receive regulatory approval to market a product, our promotional activities are subject to extensive regulation from the FDA, the Federal Trade Commission (“FTC”), the Office of the Inspector General of the U.S. Department of Health and Human Services (“OIG”), or State Attorney General. If we violate any such regulations it could be damaging to our reputation and restrict our ability to sell or market our products, and our business condition could be adversely affected.

In their regulation of advertising, the FDA from time to time issues correspondence alleging that some advertising or promotional practices are false, misleading or deceptive. The FDA has the power to impose a wide array of sanctions on companies for such advertising or promotional practices, and the receipt of correspondence from the FDA alleging these practices could result in any or all of the following:

If we were to become subject to any of the above requirements, it could be damaging to our reputation, and our business condition could be adversely affected.

Physicians may prescribe pharmaceutical products for uses that are not described in a product’s labeling or differ from those tested by us and approved by the FDA. While such “off-label” uses are common and the FDA does not regulate physicians’ choice of treatments, the FDA does restrict a manufacturer’s communications on the subject of off-label use. Companies cannot actively promote FDA-approved pharmaceutical products for off-label uses, but under certain limited circumstances they may disseminate articles to physicians published in peer-reviewed journals. If our promotional activities of this type fail to comply with the FDA’s regulations or guidelines, we may be subject to warnings from, or enforcement action by, the FDA.

Additionally, if we fail to comply with the FDA regulations prohibiting promotion of off-label uses and the promotion of our products, the FDA, FTC, Department of Justice, OIG or State Attorney General could bring enforcement actions against us that would inhibit our marketing capabilities as well as result in significant penalties.

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

We hold an exclusive license in the United States and Canada on patents covering Aloxi. 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.

In our acquisition of Guilford, we obtained an exclusive license to intellectual property, including patents, patent applications and know-how, related to Gliadel, which requires us to pay a royalty to the Massachusetts Institute of Technology on revenue from Gliadel. Our U.S. patent protection for Gliadel expires in August 2006. In addition, in February 2003, the FDA awarded orphan drug status for Gliadel for seven years for the treatment of patients with malignant glioma undergoing primary surgical resection. Accordingly, following the expiration of U.S. patent protection, we now have approximately four additional years of market exclusivity for Gliadel for initial surgical resection. However, there can be no assurance that others will not enter the market with a generic copy of Gliadel for recurrent surgical resection. The availability of such a generic copy could negatively impact our revenues from Gliadel for initial surgical resection after August 2006.

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:

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.

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 for products, product candidates and clinical trials. 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, net income, cash balances and price of our stock could decline.

Our ability to commercialize our products successfully will depend in part on the extent to which private health insurers, organizations such as HMOs and governmental authorities reimburse the cost of our products and related treatments. Third-party payors are increasingly challenging the prices charged for medical products and services. Also, the trend toward managed health care in the United States and the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may all result in lower prices for or rejection of our products. The cost containment measures that health care payors and providers are instituting and the effect of any health care reform could materially and adversely affect our ability to operate profitably.

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.

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.

Aloxi, Salagen, and Gliadel 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. 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 research, development and manufacturing 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. If we do not comply with environmental regulations, we may face significant fines or penalties. In the event of an accident or environmental discharge, third parties or governmental entities may hold us liable for any resulting damages, which, along with fines and penalties, may exceed our financial resources and may have a material adverse effect on our ability to fund our operations.

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:

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 $3.43 to $34.49 per share during the three-year period ended December 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, convertible notes and warrants 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 December 31, 2005, we had options outstanding at option prices ranging from $1.81 to $33.22 for 10.4 million shares of our common stock that have been registered for resale. Additionally, in our acquisition of Guilford, we assumed warrants to purchase 319,206 of our shares at a weighted average exercise price (net of cash we would be required to pay on exercise) of $61.21. 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 of our convertible debt is contingent on a number of factors that have not yet been satisfied. Consequently, we are not able to estimate when, if ever, our convertible debt will be converted into common stock, but any such conversion would almost certainly dilute stockholder value.

The Guilford Merger resulted in an obligation for us to make an offer to repurchase all the Guilford convertible subordinatd notes (“Guilford Notes”) due July 1, 2008 in accordance with the terms of the related indenture at a repurchase price in cash equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest and liquidated damages, if any, up to but excluding the payment date. Each $1,000 principal amount of the Guilford Notes was convertible, at the option of the holder, into (i) 17.6772 shares of MGI PHARMA common stock, and (ii) $180.28 in cash through November 28, 2005. At the expiration of the offer to repurchase, $1.5 million of the Guilford Notes were outstanding.

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 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:

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 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.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We currently lease approximately 75,000 square feet of office space for our headquarters in Bloomington, Minnesota for approximately $121,000 per month. The initial term of this lease expires in May 2008, with two options for renewal, each for an additional three-year period.

Our wholly-owned subsidiary, MGI PHARMA Biologics, Inc., leases approximately 27,000 square feet of research lab and office space in Lexington, Massachusetts for approximately $88,000 per month. The initial lease expires May 2010, with an option to renew for an additional five-year period.

Our wholly-owned subsidiary, MGI GP, occupies two facilities in Baltimore, Maryland: an office, research and manufacturing facility that contains approximately 90,000 square feet for approximately $93,000 per month, and a research and development facility that contains approximately 77,000 square feet, for approximately $139,000 per month. The office, research and manufacturing facility consists of approximately 23,000 square feet of office space, 18,000 square feet of manufacturing space, and 49,000 square feet of research and development laboratories. The research and development facility consists of approximately 29,000 square feet of office space and 48,000 square feet of research and development laboratories. Each facility is occupied pursuant to a 15-year absolute net lease, commencing December 2004. We also have options to extend the lease terms for each facility for two additional ten-year periods.

Item 3. Legal Proceedings

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock trades on the NASDAQ National Market under the symbol “MOGN.” As of March 10, 2006 we had 733 stockholders of record and 78,012,213 shares of common stock outstanding. We have never paid cash dividends on our common stock and have no present intention of paying cash dividends on our common stock.

The following table lists the high and low trading prices for our common stock as reported by the NASDAQ National Market during the quarters listed.

Item 6. Selected Financial Data

In the table below we have presented certain selected financial data as of and for each of the five years in the period ended December 31, 2005. The historical consolidated financial data has been derived from our audited consolidated financial statements. This data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

MGI PHARMA, INC. (including its subsidiaries, “MGI,” “we,” or the “Company”) is an oncology- and acute care- focused biopharmaceutical company that discovers, acquires, develops and commercializes proprietary pharmaceutical products that address the unmet needs of patients. It is our goal to become a leading biopharmaceutical company through application of our core competencies of product discovery, acquisition, development and commercialization, which we apply toward our portfolio of oncology and acute care products and product candidates. We acquire intellectual property or product rights from others after they have completed the basic research to discover the compounds that will become our product candidates or marketed products. This allows us to focus our skills on focused research, product development and commercialization. On October 3, 2005, we acquired Guilford Pharmaceuticals Inc., now known as MGI GP, Inc. (“Guilford” or “MGI GP”), located in Baltimore, Maryland. With the acquisition of Guilford, we added the additional drug discovery capabilites. We now expect to be able to focus on our relevant markets as a fully integrated pharmaceutical company performing focused drug discovery, product acquisition, product development and commercialization. We have facilities in Bloomington, Minnesota; Lexington, Massachusetts; and Baltimore, Maryland.

We promote products directly to physician specialists in the United States using our own sales force. Our promoted products include Aloxi (palonosetron hydrochloride) Injection (“Aloxi”), Gliadel (carmustine) Wafer (“Gliadel”), Salagen (pilocarpine hydrochloride) Tablets (“Salagen”), Hexalen (altretamine) Capsules (“Hexalen”), and Aggrastat (tirofiban hydrochloride) Injection (“Aggrastat”). In the third quarter of 2003, Aloxi 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 competes and its favorable clinical profile, sales of Aloxi substantially exceeded 2005 sales of our other products, and the results of our operations are highly correlated to the success of this product. We obtained exclusive U.S. and Canadian license and distribution rights to Aloxi 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 and an oral Aloxi formulation (“Aloxi Capsules”). 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 2005 Aloxi product sales of $248.5 million substantially exceeded the minimum requirement for 2005 of $56 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 for PONV and Aloxi Capsules for CINV. Our 2005 sales of Aloxi for CINV (which does not include any sales of Aloxi for PONV or Aloxi Capsules for CINV) was $248.5 million, so we believe there is minimal risk that we will not achieve our future contractual sales minimums under the Helsinn license agreement.

Salagen is 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 December 2004, generic 5 milligram pilocarpine hydrochloride tablets entered the United States markets where Salagen competes and we suspended direct promotion of Salagen. The introduction of these competing, generic products has resulted in a significant decline of Salagen sales from 2004 sales of $29.3 million in the United States to 2005 sales of $9.9 million. We expect a continued decline in the sales of Salagen in 2006. Hexalen is an orally administered chemotherapeutic agent approved in the United States for treatment of refractory ovarian cancer patients.

In July 2004, we entered into a three-year promotion agreement for Kadian capsules (“Kadian”), a sustained release formulation of morphine, with Alpharma, Inc. Under the terms of this promotion agreement, we promoted Kadian in the United States to oncology health care professionals for moderate to severe pain associated with cancer. This arrangement was terminated effective December 31, 2005.

In September 2004, we completed the acquisition of Zycos, Inc., a privately held, development stage company that focused on the creation and development of oncology and antiviral products. Zycos’ iterative drug formulation process allows for the rapid development of immune response therapeutics and has generated two compounds, amolimogene (HPV E6 E7 plasmid) (formerly known as ZYC101a) and ZYC300, that are currently in clinical development (See Note 6 of the Company’s Notes to Consolidated Financial Statements).

In September 2004, we obtained exclusive worldwide rights to the development, commercialization, manufacturing and distribution of Dacogen (decitabine) Injection (“Dacogen”) for all indications from SuperGen, Inc. Dacogen is an investigational anti-cancer therapeutic which is currently in development for the treatment of patients with myelodysplastic syndrome (“MDS”). A new drug application (“NDA”) for Dacogen for the treatment of MDS is being reviewed for marketing approval by the FDA in the United States. A regulatory application before the European Medicines Agency (”EMEA”) in Europe was withdrawn in November 2005. A pivotal phase 3 trial and two supporting phase 2 trials for the MDS indication form the clinical basis of these applications. The FDA has established May 15, 2006 as the Prescription Drug User Fee Act (“PDUFA”) action goal date for the NDA. We are working with

European regulatory authorities to determine additional clinical information needed to support a resubmission of the European application. We have assumed responsibility for development of all other indications for Dacogen.

Given the broad activity of Dacogen in hematologic cancers, a pivotal phase 3 program in patients with acute myeloid leukemia (“AML”) was initiated in 2005 (see Note 7 of the Company’s Notes to Consolidated Financial Statements).

In September 2004, we completed the acquisition of Aesgen, Inc., a privately held company focused on treating side effects associated with cancer treatments. Aesgen’s lead product, Saforis, is in phase 3 development for prevention and treatment of oral mucositis. During the fourth quarter of 2005, a meeting was held with the FDA to discuss the Saforis NDA submission (see Note 6 of the Company’s Notes to Consolidated Financial Statements).

In October 2005, we completed the acquisition of Guilford Pharmaceuticals, Inc. As part of the Guilford acquisition, we acquired the marketed product Gliadel, a biodegradable wafer containing the chemotherapy agent carmustine, (“BCNU”), approved for the treatment of high-grade malignant gliomas as an adjunct to surgery and radiation, and the product candidate Aquavan (fospropofol disodium) Injection (“Aquavan”), a novel sedative/hypnotic that is an IV formulation of a water-soluble prodrug of a widely-used anesthetic, propofol (see Note 6 in the Notes to Consolidated Financial Statements).

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

We completed a two-for-one stock split on June 10, 2004. Stockholders received one additional common share for each common share held on the record date of June 2, 2004. All share and per share data for all periods presented have been restated to reflect this stock split (see Note 12 of the Company’s Notes to Consolidated Financial Statements).

Critical Accounting Policies

In preparing our financial statements in conformity with U.S generally accepted accounting principles (“GAAP”), our management must make decisions that impact reported amounts and related disclosures. These decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching these decisions, our management applies judgment based on our understanding and analysis of relevant circumstances. Note 1 to the consolidated financial statements provides a summary of the significant accounting policies followed in the preparation of the consolidated financial statements and the remainder of this section describes those that are deemed critical accounting policies.

Revenue Recognition for Product Sale: Our accounting policy on revenue recognition is fully described in Notes 1 and 7 to the consolidated financial statements. The majority of our revenue relates to product sales. We recognize sales revenue when substantially all the risks and rewards of ownership have transferred to our customers.

As is common in the pharmaceutical industry, our domestic sales are primarily made to pharmaceutical wholesalers for further distribution to the ultimate consumers of our products. As such, our product sales revenue may be less than or greater than the underlying demand for our products. We monitor inventory levels and product trends in the distribution channel to identify significant differences between these trends and end-user demand. At December 31, 2005, we estimate there was approximately 30 days worth of sales in inventory in the wholesale distribution channels utilized by the Company. These estimates are based on historical sales trends of our products.

We report sales revenue net of wholesaler chargebacks, allowances for product returns, cash discounts, administrative fees and other rebates. We estimate wholesaler chargebacks, cash discounts, administrative fees and other rebates by considering the following factors: current contract prices and terms with both direct and indirect customers, estimated customer and wholesaler inventory levels and current average chargeback rates by product and by indirect customer. The majority of the expense and year-end liabilities associated with these estimates are defined contractually and resolved within several months following year-end and therefore it is unlikely the actual results will differ significantly from the estimates. We update these estimates for changes in facts and circumstances as appropriate.

Revenue Recognition for Product Returns: Our process to estimate product returns is tailored to the specific facts and circumstances of each product, including its product life cycle stage. For new products, a product returns allowance is estimated based on historical information for similar or competing products in the same distribution channel. We obtain and evaluate product return data from distributors and, based on this evaluation, estimate return rates. For established products, a product returns allowance is estimated by considering the following factors: current marketing efforts, estimated distribution channel inventory levels, underlying demand, historical experience and competitor behavior. Inventory in the distribution channel and underlying demand are estimated on a monthly basis by evaluating data obtained from a company that surveys pharmaceutical inventory movement and prescription data. We also use this data to monitor underlying demand in relation to significant external factors such as price changes from competitors and the introduction of new products by competitors. External and internal factors could have a material adverse effect on the demand for our products and on product returns. As of December 31, 2005 and 2004, we had accrued liability balances of $1.7 million and $2.4 million, respectively, for product returns. The decrease in product return provision from 2004 to 2005 is a result of actual returns to date and the fact that a large majority of Aloxi sold has been administered (therefore no right of return exists). The 2005 accrual reduction of $0.7 million relates to sales in the prior year and is a result of a change in the sales terms for Aloxi that generally do not allow for product returns.

Revenue Recognition for Product Licenses: We also recognize revenue related to licensing agreements. Licensing revenue recognition requires management to estimate effective terms of agreements and identify points at which performance is met under the contracts such that the revenue earnings process is complete. Under this policy for out-licensing arrangements, revenue related to up-front, time-based and performance-based licensing payments is recognized over the entire contract performance period. For our major licensing contracts, this results in the deferral of revenue amounts (approximately $2.4 million at December 31, 2005) where non-refundable cash payments have been received, but the revenue is not immediately recognized due to the long-term nature of the respective agreements. Following our initial estimate of the effective terms of these arrangements, subsequent developments such as contract modifications or terminations could increase or decrease the period over which the deferred revenue is recognized.

Research and Development Expense: Research and development expense includes work performed for us by outside vendors, collaborators and research organizations. At each reporting period, we estimate expenses incurred but not reported or billed to us by these outside vendors. These expense estimates typically cover a period of 1 to 4 weeks of expense. Actual results are recorded on a timely basis and, historically, have not been materially different from our estimates. In addition, costs related to in-licensing arrangements for product candidates are expensed as research and development until FDA approval for marketing is obtained.

Consolidation of Entities: In accordance with FIN 46R, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights, and accordingly should consolidate the entity, SNDC

Holdings LLC, the parent of Symphony Neuro Development Company (“SNDC”), is considered a variable interest entity. Under FIN 46R, we have been deemed the primary beneficiary of the variable interest entity because we are most closely associated with SNDC Holdings LLC. Accordingly, the financial results of SNDC Holdings LLC have been consolidated with our 2005 financial statements.

Results of Operations

Revenues

Total revenues for the years ended December 31, 2005, 2004 and 2003 are summarized in the following table:

Product sales: Product sales revenue increased 43 percent to $274.0 million in 2005 from $192.1 million in 2004. The increase in product sales revenue from 2004 to 2005 reflects increased revenue from Aloxi and the acquisition of Gliadel and Aggrastat in October 2005. Sales of Aloxi in the United States provided $248.5 million, or 91 percent of sales revenue, in 2005 and $159.3 million, or 83 percent of sales revenue, in 2004. Sales of Salagen in the United States provided $9.9 million, or 4 percent of sales revenue, in 2005 and $29.3 million, or 15 percent of sales revenue, in 2004. Sales of Gliadel in the United States provided $8.5 million, or 3 percent of sales revenue, from the date of acquisition.

Product sales revenue increased 382 percent to $192.1 million in 2004 from $39.9 million in 2003. The increase in product sales revenue from 2003 to 2004 reflects increased revenue from Aloxi and Salagen. We began the promotion of Aloxi in September 2003, following the approval by the FDA. Sales of Aloxi in the United States provided $159.3 million, or 83 percent of sales revenue, in 2004 and $9.7 million, or 24 percent of sales revenue, in 2003. Sales of Salagen in the United States provided $29.3 million, or 15 percent of sales revenue, in 2004 and $26.5 million, or 67 percent of sales revenue, in 2003.

In December 2004, the FDA approved a competitor’s Abbreviated New Drug Application (“ANDA”) for a generic 5 milligram pilocarpine hydrochloride tablet, which is a generic version of Salagen, a second ANDA was approved in January 2005, and a third in October 2005. The introduction of these competing, generic products resulted in a significant decline of Salagen sales from 2004 to 2005. We expect this decline to continue in 2006. Therefore, we have suspended direct promotion of Salagen

Licensing and other: Licensing and other revenue increased 50 percent to $5.4 million in 2005 from $3.6 million in 2004. The majority of this increase is a result of revenue from the December 2004 manufacturing supply and distribution agreement for 5mg pilocarpine hydrochloride tablets with Purepac.

Licensing revenue decreased 62 percent to $3.6 million in 2004 from $9.5 million in 2003. We and Dainippon Pharmaceutical Co. Ltd. agreed to terminate our collaborative acylfulvene license agreement in the third quarter of 2003. Because we had no future obligations to Dainippon after termination, all remaining unamortized licensing revenue related to this relationship was amortized into license revenue in 2003. For 2003, we amortized $7.1 million of deferred revenue into licensing revenue related to previously received non-refundable license fees from Dainippon, which included $6.9 million being amortized in the third quarter of 2003.

Licensing revenue is a combination of deferred revenue amortization from licensing arrangements and from royalties that are recognized when the related sales occur. We recognized $0.7 million, $0.2 million and $7.4 million of amortized deferred revenue in 2005, 2004 and 2003, respectively, related to all payments received under these license agreements. We will recognize the December 31, 2005 unamortized balance of $2.4 million from our license agreements into licensing revenue over the expected periods of benefit for the related collaborative arrangements, which is expected to continue into 2015. 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.

Total expected revenue for 2006 is in the range of $370 to $385 million. Expected total revenue includes expected Aloxi sales of $285 to $300 million, expected Gliadel sales of approximately $40 million, expected Dacogen sales of approximately $25 million, if approved by the FDA during the second quarter of 2006, and all other revenues in total are expected to be approximately $20 million.

Costs and Expenses

Costs and expenses for the years ended December 31, 2005, 2004 and 2003 are summarized in the following table:

Cost of sales: Cost of sales as a percentage of sales increased to 36 percent in 2005 from 32 percent in 2004. This increase in cost of sales as a percentage of sales is a result of increased sales of Aloxi, Gliadel, and Aggrastat, which have lower gross margins than our other marketed products, in addition to a decrease in Salagen sales, which has a higher gross margin than our other marketed products. Cost of sales as a percentage of sales, excluding the impact of the acquisition of Guilford, increased to 34 percent in 2005 from 32 percent in 2004.

Cost of sales as a percentage of sales increased to 32 percent in 2004 from 20 percent in 2003. The increase in cost of sales as a percentage of sales is primarily a result of increased sales of Aloxi, which began in September 2003.

We expect cost of sales for 2006 will be in the range of $125 to $140 million, excluding the effect of SFAS No. 123R, depending on total product sales and sales mix.

Selling, general, and administrative: Selling, general and administrative expenses increased 21 percent to $89.0 million in 2005 from $73.8 million in 2004. The increase is primarily a result of the Guilford acquisition, which added $12.0 million in selling, general, and administrative expenses, the continued commercialization of Aloxi, and pre-launch activities for Dacogen.

Selling, general and administrative expenses increased 46 percent to $73.8 million in 2004 from $50.4 million in 2003. The increase in selling, general and administrative expense is primarily a result of increased expenditures for the commercial launch of Aloxi in September 2003 and its continued commercialization.

We expect selling, general, and administrative expenses for 2006 to be approximately $140 million, excluding the effect of SFAS No. 123R.

Research and development: Research and development expense increased 13 percent to $70.9 million in 2005 from $62.6 million in 2004. The increase primarily represents increased spending on development programs for the late-stage product candidates in our pipeline, including those acquired or in-licensed in 2004 and the acquisition of Guilford. Research and development expense increased 25 percent to $62.6 million in 2004 from $50.1 million in 2003.

Research and development expenses include expense related to milestone payments under our license agreement for Aloxi product candidates: $2.5 million in 2004 and $31.3 million in 2003. In addition, 2004 research and development expenses included license and milestone payments of $29.2 million under our agreement for Dacogen product candidates. Other research and development expenses increased 130 percent to $70.8 million in 2005 from $30.9 million in 2004 and increased 64 percent to $30.9 million in 2004 from $18.8 million in 2003.

The following table details our research and development costs incurred for major development projects in the years ended December 31, 2005, 2004, and 2003:

We expect net research and development expenses for 2006 to be approximately $88 million, excluding the effect of SFAS No. 123R, and excluding product candidate development milestone payments of approximately $2 million and expenses incurred for SNDC, a non-majority owned consolidated entity acquired in connection with the Guilford acquisition, a majority of which are reversed as minority interest prior to computing pre-tax income.

Aloxi products and product candidates: In April 2001, we obtained from Helsinn Healthcare SA (“Helsinn”) the exclusive oncology license and distribution rights for Aloxi in the United States and Canada. Under the terms of the agreement, we made all $38 million in initial license and milestone license payments, including upon FDA approval. We expanded our agreement with Helsinn in November 2003 to include rights for PONV application of Aloxi and Aloxi Capsules. Under the terms of the expanded agreement, we made an initial payment of $22.5 million in 2003 and milestone payments of $2.5 million in 2004 and we expect to make additional payments of $22.5 million over the course of the next several years upon achievement of certain development milestones that culminate with the approvals of Aloxi for the prevention of PONV and Aloxi Capsules. Phase 3 trials began during 2005 with a goal to seek FDA approval of Aloxi for prevention of PONV and Aloxi Capsules for prevention of CINV. Helsinn will continue to fund and conduct all registration directed development of Aloxi products for the new applications.

Aquavan Injection: In March 2000, Guilford entered into a license agreement with ProQuest Pharmaceuticals, Inc. (“ProQuest”) that granted Guilford exclusive worldwide development and commercialization rights to Aquavan. Guilford acquired ProQuest, thereby superseding the license agreement and obtaining an irrevocable, royalty-free, fully-paid, exclusive, worldwide license to the intellectual property rights for Aquavan from the University of Kansas. We concluded a randomized, double-blind, multi-center phase 2 dose ranging trial in the fourth quarter of 2005. A pivotal program will be undertaken in 2006 utilizing an initial dose of 6.5 milograms per kilogram of body weight that will be designed to serve as the basis for FDA registration. We expect to submit a new drug application to the FDA for the approval of Aquavan Injection for use in procedural sedation for brief diagnostic or therapeutic procedures in 2007.

Dacogen injection: Under the terms of our agreement with SuperGen, Inc. for the rights to Dacogen, we incurred $29.2 million in license expense in 2004 and we expect to make additional license payments of $32.5 million over the course of the next several years upon achievement of certain development milestones culminating with marketing approvals and commercialization of Dacogen. Dacogen regulatory applications for the treatment of MDS are being reviewed for marketing approval by the FDA in the United States. An application before the EMEA in Europe was withdrawn in November 2005. A pivotal phase 3 trial and two supporting phase 2 trials for the MDS indication form the clinical basis of these applications. The FDA has established May 15, 2006 as the PDUFA action goal date for the NDA. We have assumed financial responsibility for all further development of Dacogen and we committed to fund at least $15 million of Dacogen development costs by September 1, 2007, all of which was incurred by December 31, 2005. Given the broad activity of Dacogen in hematologic cancers, a pivotal phase 3 program in patients with acute myeloid leukemia, or AML was initiated in 2005 and we are currently conducting a multi-center phase 2 trial with Dacogen for the treatment of refractory chronic myeloid leukemia (“CML”) in patients who have failed previous front line therapy.

Saforis Powder for Oral Suspension: Saforis is a late-stage, novel, proprietary oral formulation of glutamine, an amino acid that is critical to the repair of cellular damage. In multiple clinical trials, Saforis decreased the duration and/or severity of chemotherapy-induced inflammation of the tissues lining the mouth, or oral mucositis. Additionally, Saforis reduced the healing time of oral mucositis, reduced patients’ requirements for analgesics to treat pain due to oral mucositis, improved patients’ ability to swallow, thereby improving nutrition and improved patients’ overall quality of life. In 2004, a randomized, placebo controlled phase 3 trial of Saforis was completed in 326 patients and it met its primary clinical objective of a statistically significant reduction of oral mucositis in patients receiving Saforis compared to those patients receiving the placebo. During the fourth quarter of 2005, a meeting was held with the FDA to discuss the Saforis NDA submission. We expect to submit an NDA for Saforis in the second quarter of 2006. Saforis received Fast Track Designation from the FDA in 2002, which is designed to facilitate the development and expedite the review of applications of drugs that are intended to treat serious or life-threatening conditions and demonstrate the potential to address an unmet medical need for such a condition.

Amolimogene (HPV E6 E7 plasmid): The goal of treatment with amolimogene (HPV E6 E7 plasmid) is to enhance the natural immune response of a patient infected with human papillomavirus (“HPV”) by allowing the immune process to produce a substance that is seen as foreign, an HPV antigen, which results in a heightened immune system response to HPV in the patient. We are currently developing amolimogene (HPV E6 E7 plasmid) as a treatment for young women with high-grade cervical dysplasia. A phase 2, multicenter, randomized placebo controlled trial of 161 women with high-grade cervical dysplasia was conducted in the United States and Europe. Patients enrolled in this phase 2 trial received an intramuscular injection of amolimogene (HPV E6 E7 plasmid) every three weeks for a total of three doses. Amolimogene (HPV E6 E7 plasmid) was shown to be safe and well tolerated. In a prospectively defined cohort of patients under 25 years of age, the drug promoted resolution of high-grade dysplasia in 70 percent of patients, versus 23 percent in the placebo arm. In all patients, resolution was 43 percent for patients on drug and 27 percent for patients on placebo. In other open label trials, the drug was found to be safe and well-tolerated and disease resolution was observed in a high percentage of young patients. The most frequently observed adverse event in these trials was mild to moderate injection site pain, which was manageable with over the counter analgesics. A pivotal trial to further assess the safety and efficacy of amolimogene (HPV E6 E7 plasmid) began in 2005 and was designed to become a key part of submissions to regulatory authorities for seeking marketing approval. We expect to complete enrollment in 2006. This is the first part of a two-part pivotal program. A second phase 3 trial is planned to commence at the conclusion of the first trial.

Irofulven: In 1993, we obtained exclusive worldwide rights to the acylfulvene family of compounds from the Regents of the University of California. Irofulven, the lead product candidate is a novel, broadly active cytotoxic agent, which is currently in clinical trials, including trials for hormone refractory prostate cancer, inoperable liver cancer, and in combination with capecitabine or oxaliplatin.

GPI 1485: In June 2004, MGI GP licensed to SNDC, a newly formed, privately held Delaware corporation, its rights in the United States to GPI 1485 in the following four indications: Parkinson’s disease, peripheral nerve injury, including PPED, HIV-related peripheral neuropathy, and HIV-related dementia. SNDC agreed to invest up to approximately $40.0 million to advance GPI 1485 through current clinical programs in those disease states. In March 2006, we were advised by SNDC that the Parkinson’s disease trial failed to meet its primary endpoint. The HIV-related indications were placed on hold in the second quarter of 2005 until the results of the phase 2 trials are released.

MG98 and DNA MT: In a December 2003 amendment to the license agreement with MethylGene, they acknowledged full satisfaction of our then current payment obligations and suspended further payment obligations by us until after completion by MethylGene of a planned clinical trial with MG98. If we resume development, our financial responsibilities under the license agreement would also resume. We agreed with MethylGene to terminate the small molecule inhibitor of DNA methyltransferase portion of our license relationship and those rights reverted back to MethylGene without any additional payments by either party.

For information about the commercial status, target diseases and the development of our drug compounds, refer to the product overview table contained in Part I, Item I of this Form 10-K. In general, the estimated times to completion within the various stages of clinical development are as follows:

Due to the significant risks and uncertainties inherent in preclinical tests and clinical trials associated with each of our research and development projects, the cost to complete such projects as well as the timing of product marketing and sales is not reasonably estimable. The data obtained from these tests and trials may be susceptible to varying interpretation that could delay, limit or prevent a project’s advancement through the various stages of clinical development. The actual probability of success for each drug candidate and clinical program will be impacted by a variety of factors, including the biologic activity of the molecule, the validity of the target and disease indication, early clinical data, patient accrual, investment in the program, competition and commercial viability.

Acquired in-process research and development: In 2005, in connection with our acquisition of Guilford, we recorded acquired in-process research and development expense of $156.9 million related to the fair value of certain projects that, as of the acquisition date, had not yet achieved regulatory approval for marketing and have no alternative future use. In 2004, in connection with our acquisitions of Zycos, Inc. and Aesgen, Inc., we recorded acquired in-process research and development expense of $83.1 million related to the fair value of certain projects that, as of the acquisition date, had not yet achieved regulatory approval for marketing and have no alternative future use.

Interest Income, Interest Expense, and Other Income

Interest income, interest expense, and other income for the years ended December 31, 2005, 2004 and 2003 are summarized in the following table:

Interest Income: Interest income increased 14 percent to $6.1 million in 2005 from $5.3 million in 2004. The increase was due to an increase in the effective interest rates received on our cash and marketable investments from 1.67 percent in 2004 to 2.96 percent in 2005. This increase is offset by the decrease in the average amount of funds available for investment from $332.2 million in 2004 to $173.7 million in 2005, which is primarily a result of the acquisition of Guilford.

Interest income increased 243 percent to $5.3 million in 2004 from $1.6 million in 2003. The increase was due to increased funds available for investment in 2004 as a result of the issuance of senior subordinated convertible notes in the first quarter of 2004.

Interest expense: Interest expense increased 21 percent to $7.3 million in 2005 from $6.0 million in 2004. The increase is due to our issuance of senior subordinated convertible notes in the first quarter of 2004. In 2005, interest expense paid using cash was $6.1 million. The non-cash portion of interest expense is primarily related to the amortization of issuance cost incurred and capitalized in conjunction with the issuance of senior subordinated convertible notes in the first quarter of 2004.

Interest expense increased 500 percent to $6.0 million in 2004 from $1.0 million in 2003. The increase is due to our issuance of senior subordinated convertible notes in the first quarter of 2004.

Other income: In the acquisition of Guilford, we acquired warrants held by SNDC and a Private Investment in Public Equity (“PIPE”). The SNDC and PIPE warrants are classified as liabilities and will be measured at fair value, with changes in fair value reported in earnings. The increase in fair value from October 3, 2005 to December 31, 2005 was $0.6 million. We also acquired investments previously held by Guilford, a portion of these investments matured in the fourth quarter of 2005, which resulted in a realized gain of $0.5 million.

Impairment of Investment

We own an approximate ten percent, investment in MethylGene Inc., a Canada-based biopharmaceutical company. MethylGene completed its initial public offering and began trading publicly on the Toronto Stock Exchange on June 29, 2004. Prior to MethylGene becoming a publicly traded company, our minority investment in MethylGene was reported as a “Long-term equity investment” at the lower of its cost, or if its value was other than temporarily impaired, at its estimated fair value. We reviewed its fair value on a periodic basis. Until MethylGene became publicly traded, the value of this investment was inherently more difficult to estimate than an investment in a public company. In November 2003, MethylGene, Inc. management negotiated a financing term sheet at arms length that indicated the value of our investment had declined from its original cost of $6.8 million to $3.6 million as of December 31, 2003 and an impairment of this investment had occurred which was considered to be other than temporary. Although, MethylGene’s Board of Directors ultimately rejected the financing terms, these terms provided the best available estimate of fair value for our investment in MethylGene and accordingly, we recorded an impairment charge of $3.2 million in the year ended December 31, 2003.

Tax Expense

Tax expense of $423,000 in 2005 and $340,000 in 2004 represents alternative minimum tax. There is no provision for tax expense in 2003 due to net losses of $61.9 million. Our ability to achieve profitable operations is dependent upon our continued successful commercialization of Aloxi, 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 utilize 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. 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 and the demonstration of a number of consecutive quarters of profitability.

Net Loss

We had net losses of $132.4 million, $85.7 million and $61.9 million in 2005, 2004 and 2003, respectively. The increased net loss from 2004 to 2005 reflects a 43 percent increase in revenues and a 48 percent increase in costs and expenses from 2004 to 2005. Cost and expenses in 2005 include $156.9 million of acquired in-process research and development expense related to the Guilford acquisition. The increased net loss from 2003 to 2004 reflects a 296 percent increase in revenues and a 158 percent increase in costs and expenses from 2003 to 2004. Costs and expenses in 2004 included $83.1 million of acquired in-process research and development expense related to acquisitions. During the next several years, we expect to direct our efforts towards activities intended to grow long-term revenues, including the continued development and commercialization of Aloxi products and continued development of our other product candidates. The level of profitability attained will be a result of revenue levels attained and investments made in products and technologies.

Liquidity and Capital Resources

As of December 31, 2005, we had cash, cash equivalents and unrestricted marketable debt investments of $104 million compared with $239 million and $178 million at December 31, 2004 and 2003, respectively. We had working capital of $209 million and $284 million as of December 31, 2005 and 2004, respectively. The decline in 2005 is primarily related to the acquisition of Guilford.

Historically, we have primarily funded our operations through the issuance of equity securities, senior subordinated convertible notes, revenues from the sales of Aloxi, Salagen, and other products, and since October 2005, revenues from the sale of Gliadel and Aggrastat. We have also funded operations through collaborative and partnering agreements and through proceeds from loans or other borrowings. Any, or all, of these financing vehicles or others may be utilized to fund our future capital requirements.

Net Cash Provided by (Used in) Operating Activities

Net cash provided by operations was $14 million for the year ended December 31, 2005, and net cash used in operations was $81 million and $57 million for the years ended December 31, 2004 and 2003, respectively. The increase in cash provided by operating activities from 2004 to 2005 was primarily due to an increase in earnings prior to the effects of non-cash acquired IPR&D and a decrease in accounts receivable, offset by an increase in inventories. The decrease in accounts receivable is a result of shorter payment terms being offered on sales of Aloxi. Future trends in our accounts receivable balances will largely depend upon the competing effects of continued growth in sales of Aloxi. The increase in inventories is primarily due to our increasing quantities of Aloxi to support sales expectations.

The increase in cash used in operating activities from 2003 to 2004 was primarily due to an increase in net loss and accounts receivable, offset by increases in accounts payable and accrued expenses. The $115 million increase in accounts receivable was a result of growing sales of Aloxi and longer payment terms being offered on sales of Aloxi in 2004.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities was $14 million for the year ended December 31, 2005 and net cash used in investing activities was $168 million and $116 million for the years ended December 31, 2004 and 2003, respectively. The increase in cash provided from 2004 to 2005 was primarily due to the net maturities of $195 million from investment activity offset by the $179 million purchase of certain net assets in connection with the Guilford acquisition (see Note 6 of the Company’s Notes to Consolidated Financial Statements).

The increase in cash used from 2003 to 2004 was primarily due to purchases of certain net assets of $86 million in connection with the Aesgen and Zycos business acquisitions (see Note 6 of the Company’s Notes to Consolidated Financial Statements) and the purchase of an equity investment of $24 million in SuperGen in connection with the Dacogen license agreement (see Note 7 of the Company’s Notes to Consolidated Financial Statements).

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $13 million, $253 million and $176 million for the years ended December 31, 2005, 2004 and 2003, respectively. In 2005, we received $8 million in cash from the issuance of shares under stock award plans and $6 million from the maturity of restricted marketable securities. In 2004, we received $252 million in cash from the issuance of senior subordinated convertible notes, and $12 million in cash from issuance of shares under stock award plans offset by the net purchase of $14.4 million of restricted marketable securities related to the convertible debt issuance. In 2003, we received $169 million in cash from the issuance of 10,120,000 shares of common stock in a follow-on public offering, and $12 million in cash from issuance of shares under stock award plans.

Our cash use in 2006 will depend in part upon the pattern and growth of Aloxi sales. We expect Aloxi sales to increase for 2006, which will result in increased working capital deployed for Aloxi finished product inventory and receivables. However, as sales increase we expect positive cash flow from operations. Our overall change in cash will depend upon our investing and financing activities and the change may be an increase or decrease.

Cash Uses and Capital Raising Activities

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

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

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

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

As identified in our risk factors, adverse changes that affect 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.

Payment Obligations

Our future, noncancellable, contractual commitments, are summarized in the following table:

We expect to make additional payments to Helsinn related to Aloxi product candidates totaling $22.5 million, to SuperGen related to Dacogen totaling $32.5 million over the course of the next several years upon achievement of certain development milestones, and to Aesgen’s former security holders of $33 million upon the FDA approval of Saforis.

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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Our operations are not subject to risks of material foreign currency fluctuations, nor do we use derivative financial instruments in our investment 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 loss as a result of a one percentage point change in short-term interest rates would be approximately $1.0 million based on our cash, cash equivalents and unrestricted short-term marketable investment balances at December 31, 2005.

Equity Price Risk

We invest in equity securities that are subject to fluctuations in market value. We hold our equity securities available for sale. Any changes in the fair value in these securities would be reflected in our accumulated other comprehensive income as a component of stockholders’ equity. The table below summarizes our equity price risk and shows the effect of a hypothetical increase or decrease in market prices as of December 31, 2005 on the estimated fair value of our consolidated equity portfolio. The selected hypothetical changes do not indicate what could be the potential best or worst case scenarios (dollars in thousands):

Item 8. Financial Statements and supplementary Data

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.

The management of MGI PHARMA is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).

Management of MGI PHARMA conducted an evaluation of the effectiveness of MGI PHARMA’s internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control — Integrated Framework, management concluded that MGI PHARMA’s internal control over financial reporting was effective as of December 31, 2005.

Management’s assessment of the effectiveness of MGI PHARMA’s internal control over financial reporting as of December 31, 2005, excluded MGI GP, INC. (formerly known as Guilford Pharmaceuticals Inc.), which was acquired by MGI PHARMA in October 2005 in a purchase business combination. MGI GP, INC. is a wholly-owned subsidiary of MGI PHARMA whose total assets and total net sales represented 37% of consolidated total assets and, taking into account sales since the date of acquisition of products that were previously sold by Guilford Pharmaceuticals Inc., 4% of consolidated net sales of MGI PHARMA as of and for the year ended December 31, 2005. Companies are allowed to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition under guidelines established by the Securities and Exchange Commission.

Management’s assessment of the effectiveness of MGI PHARMA’s internal control over financial reporting as of December 31, 2005, has been audited by KPMG LLP, the independent registered public accounting firm that audited the consolidated financial statements in this Form10-K, as stated in their report, which is included herein.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
MGI PHARMA, INC.:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that MGI PHARMA, INC. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). MGI PHARMA, INC.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of MGI PHARMA, INC.’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that MGI PHARMA, INC. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, MGI PHARMA, INC. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Management’s assessment of the effectiveness of MGI PHARMA, INC.’s internal control over financial reporting as of December 31, 2005, excluded Guilford Pharmaceuticals Inc. which was acquired by MGI PHARMA, INC. in October 2005 in a purchase business combination. Guilford Pharmaceuticals Inc. is a wholly-owned subsidiary of MGI PHARMA, INC. whose total assets and total net sales represented 37% of consolidated total assets and 4% of consolidated net sales of MGI PHARMA, INC. as of and for the year ended December 31, 2005. Our audit of internal control over financial reporting of MGI PHARMA, INC. also excluded an evaluation of the internal control over financial reporting of Guilford Pharmaceuticals Inc.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of MGI PHARMA, INC. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, cash flows and stockholders’ equity for each of the years in the three-year period ended December 31, 2005, and our report dated March 14, 2006 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Minneapolis, Minnesota
March 14, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
MGI PHARMA, INC.:

     We have audited the accompanying consolidated balance sheets of MGI PHARMA, INC. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, cash flows and stockholders’ equity for each of the years in the three-year period ended December 31, 2005. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II. These consolidated financial statements and financial statement schedule are the responsibility of the MGI PHARMA, INC.’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MGI PHARMA, INC. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the accompanying financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of MGI PHARMA, INC.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Minneapolis, Minnesota
March 14, 2006

CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)