From Goldman Sachs Report July 25th (picked up at Yahoo!).
MLNM (IL/N): Divestiture of Integrilin slight positive. Revised est.
July 25, 2005
MLNM agreed to divest U.S. development & marketing rights on Integrilin to its partner, SGP. We view the divestiture as a slight positive as it allows the company to streamline its resources, raise the likelihood of achieving profitability in 2006 & potentially increase the cash reserve for in-licensing. However, with limited information on the royalties after 2007, it is difficult to predict the earnings growth. We have revised our 2005-07 EPS to $(0.32), $(0.01) & $0.07 from $(0.36), $(0.06) & 0.05, respectively. We maintain our In-Line rating while awaiting for further clarity on the growth strategies. With an intrinsic value of $7.50, there should be limited downside to the shares. Risks are slower sales, development failures & higher expenses. Our coverage view remains Neutral.
Terms of restructured agreement: MLNM and SGP restructured their agreement on Integrilin which we expect to have sales of $300MM, $326MM & $353MM in the U.S. in 2005-07. The two companies have been copromoting Integrilin and sharing profits since 2002. Effective 9/1/05, SGP will have sole responsibilities for marketing and development which should improve efficiencies (no duplication of sales force) and decision making, potentially leading to higher sales. MLNM will receive $35.5MM upfront, $45-50MM for transfer of inventories to SGP, a minimum of $85MM in royalties annually in 2006/07 and additional royalties for the life of the product. MLNM will continue to improve the manufacturing process on Integrilin.
Divestiture is a slight positive: The new agreement should allow MLNM to focus its resources and efforts on Velcade and the pipeline. MLNM will reduce its R&D and SG&A expenses by about 15%, including the elimination of about 200 positions. Some of the sales/marketing people on Integrilin will be integrated into SGP. The lower expenses and minimum royalty in 2006/07 should increase the certainty of achieving MLNMs profitability goal in 2006. Management indicated that the upfront payment, royalties and cost savings should be at least equivalent to the current profit sharing arrangement. However, it is not clear what MLNMs assumptions are for sales & royalties. Clinical development, selling and meeting sales goals of Integrilin have been challenging for management. With the new structure, MLNM may be able to focus more on Velcade and the pipeline, including in-licensing.
Revised estimates: Under the new agreement, we do not expect any profit sharing which was recognized under copromotional revenues, but royalties (estimated 27% of U.S. Integrilin sales) should increase. Strategic alliance revenues which include reimbursement on manufacturing and upfront fees, may decline due to amortization of the payment. R&D and SG&A expenses will also decline. We have modified our model based on the above and revised EPS for the better in 2005-07 to $(0.32), $(0.01) and $0.07, from $(0.36), $(0.06) and $0.05, respectively. There is no change to our domestic Integrilin forecast of $300MM, $326MM & $353MM in 2005-07.
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