MGI Pharma Swings to Profit

The company affirms its full-year forecast.
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MGI Pharma

(MOGN)

pleasantly surprised investors by reporting a third-quarter pro forma profit Wednesday.

Excluding items, the company earned 6 cents a share, easily exceeding the Thomson First Call consensus estimate for a loss of 3 cents. Revenue of $97 million also surpassed expectations of $91.4 million. Calculated using generally accepted accounting principles, MGI earned 2 cents a share.

Sales of the antinausea medication Aloxi grew 11% year over year to $70.4 million. Dacogen, a treatment for myelodysplastic syndromes, racked up $11.9 million in its first full quarter on the market. Gliadel, for brain cancer, saw flat year-over-year sales of $9.5 million.

Net margins slid to 1.8% from 18.9% a year ago, while selling, general and administrative expenses rose to 39.6% of revenue from 24.5%. The increased SG&A costs were related to a direct-to-consumer campaign for Aloxi, the deployment of a hospital sales force and the costs associated with Gliadel, which it acquired when it bought Guilford Pharmaceuticals last October.

Research and development costs rose 43.2% to $21.2 million primarily because of expenses related to Aquavan, a sedative that can be used during medical procedures such as colonoscopies. Aquavan is in phase III trials. MGI expects to submit a new drug application to the Food and Drug Administraion in the first half of 2007.

CEO Lonnie Moulder says "overall expenses in 2007 will come down a bit." He declined to break down the expenses by category.

During the quarter, MGI closed on a $75 million line of credit with an option to increase it to $100 million. Moulder doesn't expect to need to raise money in the near future considering the increasing earnings and $127 million in cash on the balance sheet.

One of the biggest challenges facing MGI is looming competition for Aloxi from a generic version of

GlaxoSmithKline's

(GSK) - Get Report

Zofran. Even the bulls expect Aloxi to take a hit in the first two quarters of 2007 as a result of the generic option. Doctors who prescribe the generic will be reimbursed by Medicare at the branded price until the second half of the year.

MGI's CEO isn't especially worried. "It's just two quarters," he declares. "We'll just do what we've always done, which is to emphasize the clinical superiority of our drug."

The company also reiterated the full-year guidance that it gave last quarter. Minneapolis-based MGI projects sales of $330 million to $350 million for the full year with a pro forma operating loss of $15 million to $30 million.

In 2007, MGI is expected to be profitable and have positive cash flow. Consensus estimates forecast sales growth of 17.5% over 2006. Moulder expects Dacogen to ramp up and Aloxi to continue to grab marketshare, which he says is in the mid-40s in the office and clinic segment and growing one to two share points each quarter.

After hours, shares of MGI Pharma jumped 3.3% to $18.76 on the positive earnings report.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;

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