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MGI's Quiet Gains

Shares of specialty-drug maker MGI Pharma (Nasdaq: MOGN  ) have quietly increased in price by more than 66% in 2007. The company and its drugs don't get a lot of investor attention, but for those who do hold a stake, the third-quarter results released yesterday should have made them feel pretty good. And potential future results should have them even more excited.

Overall revenue rose 16% in the quarter because of the continued growth of Dacogen, which treats myelodysplastic syndromes. Thanks to good expenditure control, operating margins gained more than 700 basis points year over year to 10%. As a result, GAAP diluted earnings per share came in at $0.13 for the quarter, compared with just $0.02 last year.

MGI is best known for its oncology-related focus. In Q3, sales of Aloxi, a drug that combats chemotherapy-induced nausea, rose 37% versus last quarter. That performance continued a rebound from the sales drop Aloxi took earlier this year, after generic versions of GlaxoSmithKline's (NYSE: GSK  ) Zofran hit the market.

Based on its forecasts, MGI is expecting at least $109 million in product sales next quarter for Aloxi, Dacogen, and a minor chemotherapy drug. If gross margins improve slightly to 68% and expenses excluding options hit the midpoint of guidance, then MGI should have another $12 million in operating Q4. Depending on how Dacogen sales go around the holidays, management is suggesting, the upside might even be a little bit better than that.

Now that MGI's top line is finally growing again, 2008 could become a banner year. The company has the potential for multiple label expansions and a new product launch next year, not to mention that margins should improve over time.

Specifically, MGI predicts at least $750 million in peak annual sales for Aloxi if it gets the label expansions it seeks next year, and at least another $400 million in peak sales of sedative Aquavan if it can gain regulatory approval in the third quarter of 2008.

Add in revenue from Dacogen and a product portfolio that won't start taking major U.S. patent hits until 2013, and investors are likely to be sitting on years of top-line and bottom-line growth if MGI can come through on its sales forecasts.

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