citi: Millennium Pharmaceuticals (MLNM)
Citigroup Investment Research
October 27, 2005
MLNM: Restructuring Under Way, But Concerns Remain
Due to Revlimid
HOLD (2)
Speculative (S)
Mkt Cap: $2,593 mil.
SUMMARY
* Millennium today reported Q3 non-GAAP EPS of ($0.02) compared to our and consensus est of ($0.05) and ($0.07), respectively. While total revenues were in line (Velcade posted $51M vs. our $49M), tight exp control ($10M lower) accounted for the diff. Importantly, Millennium updated its financial guidance, lowering FY non-GAAP net loss by $5-$15M due to additional restructuring efforts. The company will also expand its Velcade sales efforts and focused R&D away from discovery and toward development.
* In our view, these efforts will bring Millennium to meet its goal of posting non-GAAP profitability in '06. However, we remain concerned about Velcade's growth prospects, given potential for competition from Celgene's Revlimid. We believe that Millennium must enter into several strategic partnerships to defray R&D development costs from its income statement. We maintain our neutral outlook until the future outlook for Velcade is clearer.
FUNDAMENTALS
P/E (12/05E) NA
P/E (12/06E) NA
TEV/EBITDA (12/05E) NA
TEV/EBITDA (12/06E) NA
Book Value/Share (12/05E) $6.75
Price/Book Value 1.3x
Revenue (12/05E) $541.8 mil.
Proj. Long-Term EPS Growth NA
ROE (12/05E) (4.1%)
Long-Term Debt to Capital(a) 4.8%
MLNM is in the S&P 400(R) Index.
(a) Data as of most recent quarter
SHARE DATA . RECOMMENDATION
Price (10/26/05) $8.51
Rating (Cur/Prev) 2S/2S
52-Week Range $13.39-$7.79
Target Price (Cur/Prev) $9.00/$9.00
Shares Outstanding(a) 304.7 mil.
Expected Share Price Return 5.8%
Div(E) (Cur/Prev) $0.00/$0.00
Expected Dividend Yield 0.0%
Expected Total Return 5.8%
OPINION
Millennium today reported better-than-expected second quarter non-GAAP
financial results, posting non-GAAP EPS of ($0.02) compared to our and the
consensus estimate of ($0.05) and ($0.07), respectively. This performance was
predominantly as a result of lower-than-expected operating expenses ($210
million vs. our $220 million). Specifically, SG&A of $41 million was lower
than our estimate by $8 million, while COGS of $89 million fell below our
estimate by approximately $5 million.
Total revenues of $202 million were mostly in line with our projections of $201
million. Specifically, Velcade generated revenues of $51 million during the
quarter, compared to our and consensus estimate of $49 million. Recall that
during the quarter, Millennium sold rights to Integrilin to its partner,
Schering-Plough. As such, Millennium no longer book sales of the drug, but
instead now records a royalty line on sales.
In our view, the Integrilin transaction was a step in the right direction to
focusing the company on oncology and inflammation. The company continues to
make headway in these regards, benefiting from reduced operating expenditures
as a result of this transaction. Due to increasing cost controls, the company
raised its non-GAAP financial guidance.
Millennium now expects to report a non-GAAP net loss of $85-$95 million
(improved from less than $100 million) with GAAP net loss of $200-$215 million
(an increase from less than $155 million previously). Velcade sales are
expected to range from $190-$195 million from $185-$195 million, previously.
In our view, Velcade is tracking to meet this year-end guidance and will
benefit from expansion of the sales force. This is timely since the Expanded
Access Program of Celgene's Revlimid has opened in September. Looking ahead to
2006, Millennium might sign additional strategic transactions to defray
development costs of its pipeline projects.
Nonetheless, we remain concerned regarding the longer-term outlook for Velcade
due to encroaching competition from Celgene's Revlimid. While Millennium is
undoubtedly in a turn-around situation, we maintain our Hold rating due to the
potential competitive threats facing Velcade and valuation restraints.
MAKING FOLLOWING CHANGES TO OUR MODEL
We are making changes to our model to account for the results of the quarter,
updated financial guidance, and outlook for additional cost control going
forward. Overall, our EPS estimates have changed by $0.04, $0.05, $0.01,
($0.01), and ($0.01) in 2005-09, respectively.
CHANGES TO MILLENNIUM MODEL
Source: Citigroup Investment Research estimates
INVESTMENT THESIS
We rate the shares of Millennium Pharmaceuticals Hold/Speculative Risk (2S).
Millennium is a genomics-based drug development company focused on oncology,
inflammation, and cardiovascular diseases. The company has had a checkered
history of drug development that is compensated for by successful acquisitions.
In 1999, Millennium received rights to Velcade through the acquisition of
LeukoSite. In 2003, Velcade received FDA accelerated approval for use in
relapsed/refractory multiple myeloma based on Phase II data. While the market
for several liquid tumors is lucrative, the valuation of the stock already
discounts success of Velcade in these indications. In 2002, Millennium gained
marketing rights to Integrilin, the leading IIb/IIIa inhibitor through the
acquisition of COR Therapeutics. The IIb/IIIa inhibitor market is mature and
Integrilin has been contending with modest growth and elevated wholesaler
inventory. In our view, future success of the stock pivots on success of the
pipeline.
COMPANY DESCRIPTION
Millennium Pharmaceuticals (MLNM) is a biopharmaceutical company focused on
development of novel therapeutics for oncology, cardiovascular disease, and
inflammation. In 2003, Velcade, a first-in-class proteosome inhibitor, received
FDA accelerated approval for relapsed and refractory multiple myeloma. Based on
positive data from the Phase III confirmatory study, we expect that Velcade
will receive full approval for the treatment of multiple myeloma by 2006.
Millennium also co-promotes Integrilin, a market-leading IIb/IIIa inhibitor for
acute coronary syndrome, with Schering-Plough. Millennium has five high
priority projects in clinical development focusing on inflammation and
oncology. However, we believe that that these projects are too early in
development to materially impact the stock over the next 12 months.
VALUATION
Our $9 target price is based on an average of three different valuation
metrics: 1) 30x our discounted 2008 pro forma, fully-taxed EPS estimate of
$0.28 (our published $0.33 estimate is not fully-taxed adjusted due to net
operating losses); 2) 6x our discounted EV-to-projected 2008 revenues estimate
of $523 million; and 3) a ten-year DCF analysis.
A multiple of 30x our discounted 2008 EPS estimate is below the historical
multiple of the large-cap, profitable biotech group's next-12-month (NTM)
multiple of 44x, which has historically (over the last ten years) traded in a
range from a high 20's to 40's multiple excluding historic bubble years within
the sector. We believe the growth challenges and encroaching competition to
Velcade from Celgene's Revlimid merit this discount to the multiple.
We used a 15% discount rate in this calculation to account for the risk
associated with this projected revenue stream. We apply a 15% discount rate to
mature commercial products with good visibility of future revenue stream as
outlined in a first call note titled "Visiting Valuation" published on May 26,
2004.
A multiple of 6x is a discount to the historical EV-to-revenue multiple for the
profitable biotech group of 14x, (which has traded within a range from a high
single digit to teens multiple over the last ten years). We believe this
discount is appropriate given the upcoming competition to Velcade as well as
the lack of acceleration in Velcade sales. We also used a 15% discount rate in
this analysis.
In our ten-year DCF analysis, we use Millennium's 14% discount rate. This
discount rate reflects a 15% cost of equity, 14% weighted average cost of
capital (WACC), and 1.71 five-year, weekly-adjusted beta. We assume a 15% debt
and 85% equity as our target capital structure. The cost of debt is 9%, a
percent higher than cost on non-investment grade debt. Finally, we
conservatively project a 5% terminal growth rate.
RISKS
We rate Millennium Pharmaceuticals Speculative risk due to the company's
reliance on two products and ongoing extensive operating losses.
On the revenue side, Velcade is the main growth driver of the stock. While the
drug is promising, it is still in clinical development in several key
indications. Disappointing clinical results will likely have an impact on
sales. After a strong launch, Velcade's sales have reached a plateau. If
sales fail to reaccelerate, our financial forecasts would not be met.
In addition, the Center for Medicare and Medicaid Services (CMS) has granted
preferential reimbursement for Velcade through 2005. This reimbursement rate
creates an incentive for physicians to use the drug. At present, it is
difficult to quantify how this reimbursement rate might change after 2005. Any
unexpected decrease in reimbursement might have an adverse impact on sales.
Velcade is also facing competition from Celgene's Thalomid in multiple myeloma.
Additionally, Celgene's Revlimid is likely to be approved over the next 12
months leading to significant competition to Velcade in the market. If,
however, the impact of additional competition is not as great as we expect,
MLNM stock could outperform our target price.
In our view, the company's goal to reach profitability on a non-GAAP basis in
2006 creates execution risk. This is due to the fact that a substantial
increase in revenues must be achieved with a concomitant tight control of
expenses to reach this goal. Millennium has failed to reach the goal of
profitability in the past. We believe that failure to meet this goal again
will be detrimental to the stock. If, however, restructuring and expense
reductions proceed more quickly than we estimate, MLNM stock could outperform
our target price.
If the impact of these risk factors is greater than we anticipate, shares may
have difficulty achieving our target price. Conversely, if these risks have
less of an impact than we envision, the stock may exceed our target price.
MILLENNIUM PHARMACEUTICALS QUARTERLY P&L ($000S)
Source: Citigroup Investment Research estimates and company reports
MILLENNIUM PHARMACEUTICALS ANNUAL P&L ($000S)
Source: Citigroup Investment Research estimates and company reports
ANALYST CERTIFICATION APPENDIX A-1
I, Yaron Werber, research .. |
