Late Bloomer

MGI Pharma’s long history of promising developments and financial losses does tend to invite skepticism. “MGI Pharma Anticipates a Rebound,” was the headline on Dick Youngblood’s Star Tribune column in 1996, “But the company’s past performance makes some people cautious.”

Bloomington-based MGI Pharma was already 17 years old then, founded in 1979 as Molecular Genetics (Nasdaq: MOGN), an agricultural biotechnology company that went public in 1983. By 1988, it had shifted its focus to human health, and in 1994, it released its first internally developed drug. Salagen had been found effective in treating radiation-induced drymouth suffered by cancer patients. But sales were modest. Combined with the company’s nearly uninterrupted losses—there were brief periods of profit in 1983 and 1989 due to asset sales—it gave a hollow ring to MGI’s claims in 1996 that now, with improved marketing, it would boost Salagen sales and finally reach long-term profitability. As one securities analyst remarked in Youngblood’s column, MGI Pharma had “a real credibility problem to overcome.”

Aloxi has accounted for 80 to 90 percent of sales in the past two years. MGI Pharma plans to have at least two more big sellers in 2006.

That problem hadn’t gone away in 2003, when MGI Pharma’s executives believed again that lasting profitability was just around the corner. The company had cumulative net losses of nearly $195 million, but was “just four quarters from sustained profitability” MGI CEO Lonnie Moulder said in Sven Wehrwein’s “Capital Beat” column in the October 2003 Twin Cities Business Monthly. This time, MGI’s hopes and those of its investors were pinned on Aloxi, which the Food and Drug Administration (FDA) approved in July 2003 for treatment of nausea and vomiting caused by chemotherapy. And this time, sales exceeded expectations. In March 2004, MGI was revising its guidance to analysts upward: Aloxi sales for the year would be higher than expected at $100 million to $110 million. (In fact, Aloxi sales that year totaled $159.3 million.)

Something else was different, too. Aloxi had not come from MGI Pharma’s own research. Rather, the company had licensed the development-stage drug from a Swiss company, Helsinn Healthcare SA, in 2001.

On the strength of Aloxi sales, MGI had a profitable second quarter in 2004 and at least three more in 2005. But a string of expenses related to additional licensing deals and acquisitions means that sustained profitability remains a goal.

Still Moulder, who joined MGI Pharma as executive vice president in 1999, and became its chief executive in 2003, is confident that the company has hit on the right strategy for turning red ink to black over the long haul: acquiring the rights to products that are on the market or close to marketability, and in some cases acquiring the companies that developed those products—to a degree, buying rather than building a pipeline.

Moulder sees this as a strategy that could apply to a whole industry sector, not just to his own company: “To the extent that Governor Pawlenty has committed to seeing Minnesota become a biotech center, clearly, I think we’re at the front end of having a business model in place and demonstrating that it can be done in the Twin Cities.”

Moulder will need that kind of optimism to keep him going. After a rally last summer that took the company’s share price from about $20 to nearly $28 (spurred in part by news of an acquisition), the price has dropped again to around $16 in mid-January. Even with revenues climbing steadily for the past two years to a projected $280 million for 2005, given MGI Pharma’s history, investors seem to be saying, “We’ll see.”