gs: Millennium Pharmaceuticals, Inc. (MLNM)
MLNM(IL/N): Strategies set to achieve
profitability in 2006 and to progress pipeline
52-Week Range US$13-8
YTD Price Change -20.76%
Market Cap US$2.9bn
At its analyst day yesterday, MLNM discussed a turnaround strategy based on (1) multiple
initiatives to stimulate Velcade growth, (2) narrow the focus of R&D and accelerate
development of selected clinical candidates, (3) expense management and workforce
reduction and (4) strategic partnerships for the pipeline. The initiatives should increase the
likelihood of achieving profitability in 2006 as well as boost the pipeline. We believe
sustainable growth beyond 2006 will depend on fiscal discipline, solid execution and
some successes in development. With an intrinsic value of $7.50/sh, there should be
limited downside to the shares. We maintain our In-Line rating while awaiting
improvement on the pipeline. Risks are slower sales, development failures & higher exp.
Our coverage view is neutral.
We calculated our intrinsic value of $2.3B or $7.50/share by summing the following 3
components: (1) Velcade ? assuming peak sales of $300MM and 5X sales, the value is
$1.5B. (2) Integrilin ? assuming peak sales of $350MM and 30% royalties, the value at 5X
sales is $0.5B. (3) Net cash of about $0.3B at the end of 2006. At the current share price
of about $9.60, the implied value of the new indications of Velcade and 6 other products
in Phase 1 or 2 trials is $2.10/share, which we view as attractive.
1. RESTRUCTURING TO IMPROVE PROFITABILITY AND PIPELINE
In October 2005, MLNM announced a restructuring and strategic initiative. Key highlights are
- Headcount reduction: MLNM plans to reduce its workforce from 1,500 in 2004 to 1,100 by
yearend. Of the 400 headcount reduction, 200 positions relate to the Integrilin sales and marketing
infrastructure, about 70 positions are from the R&D organization and 30 are overhead related. Some
of the sales/marketing people on Integrilin will be moved to Schering-Plough (SGP). MLNM
expects the headcount to stabilize at around 1,100 in 2006. Despite the restructuring, MLNM plans
to expand the oncology sales force by about 50% to about 100 people.
- Refocus R&D resources: The company plans to expand its discovery efforts in oncology and
downsize inflammation. Specifically, the company plans to add personnel in medicinal chemistry
and pharmacology. Historically discovery has represented about 30-35% of R&D expenditures.
MLNM expects discovery to represent 25% of R&D efforts in 2006 and beyond. MLNM will
continue to develop its 7 inflammation and oncology molecules in clinical trials.
- Expense management: As part of the restructuring, operating expenses in 2006 are expected to be
30% below 2004 levels.
- The facilities in Cambridge, MA will be consolidated.
On July 22, 2005, MLNM agreed to divest U.S. development & marketing rights on Integrilin to its
partner, Schering-Plough. The new agreement should allow MLNM to focus its resources and
efforts on Velcade and the pipeline. The lower expenses and minimum royalty in 2006/07 should
increase the certainty of achieving MLNM's 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. 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. (Please see our note from 7/24/05 for the terms of the
agreement).
2. SEVERAL OPPORTUNITIES TO EXPAND SALES POTENTIAL OF VELCADE TO
$500MM FROM $300MM
a. Multiple myeloma (MM):
* Increasing use in earlier stage multiple myeloma: In Q3/05, market share of Velcade was stable in
third-or-greater line use (40%-50%). Second-line market penetration increased to 45% from 30-40%
in Q2/05. Front line use increased to 9% from 5% in Q2/05. We expect FDA approval of the 2nd
line indication in March 2005 to drive further use of Velcade in relapsed multiple myeloma patients
through enhanced reimbursement and marketing support. Of the 52,000 multiple myeloma patients
in the US, approximately 50%, 25%, and 25% receive first, second, and third line therapies,
respectively.
* Three 1st line multiple myeloma trials ongoing: MLNM is conducting three Phase III trials in 1st
line multiple myeloma with over 2,000 patients. MLNM initiated the VISTA trial in January 2005 in
1st line MM patients who are not transplant candidates. Patients will receive standard-of-care
chemotherapy (melphalan + prednisone) with or without Velcade. The primary endpoints are time
to disease progression and survival. If successful, the VISTA trial could support approval of
Velcade in the first line setting.
In Q2/05, the company also initiated two additional 1st line Phase III MM trials in the transplant
setting with the cooperative groups. One of the trials is conducted by the Intergroupe Francophone
du Myelome (IFM) in France. The study includes 480 patients receiving Velcade plus
dexamethasone or standard 1st-line therapy, VAD (vincristine, adriamycin, dexamethasone), as
induction treatment prior to autologous stem cell transplantation. The primary endpoint is complete
response rates post-induction therapy. The third Phase III study (HOVON) includes 800 patients
receiving Velcade plus AD (adriamycin/dexamethasone) or VAD as induction treatment prior to
autologous stem cell transplantation. We expect interim data from the Phase III trials in H2/06.
We believe lack of reimbursement and Phase III data are hurdles to wide adoption of Velcade in
front-line patients. Management noted though that 9 states have begun reimbursement for Velcade
in the 1st line based on recent Compendium listing, with 39 additional states in the reviewing
process. The company also expects national compendium listing on Velcade by H1/07.
* Retreatment trial for MM ongoing: In addition to earlier use, the Velcade market opportunity
could be expanded through repeat use in patients undergoing multiple courses of Velcade therapy.
Millennium is enrolling patients into a Phase IV study (EVEREST trial) investigating retreatment of
Velcade responders. The target is 78 patients. The primary endpoint will be best confirmed
M-protein response. The potential for Velcade retreatment regimens is supported by: (1) lack of an
identified mechanism of Velcade resistance; and (2) absence of cumulative toxicity associated with
extended therapy of Velcade. We expect data in H2/06.
* Increase # of cycles of Velcade therapy: Management noted that only 25% of physicians ("early
adopters") were using Velcade for more than 6 cycles. Management plans to leverage the increased
oncology salesforce to target the remaining 75% of physicians ("late adopters") who are using less
than 6 cycles of therapy. In Phase III trials, patients received Velcade for up to 8 cycles.
* Combination studies: The company expects to study Velcade in combination with various existing
standards of care as well as new agents. Preliminary results from a Phase I/II trial combining
Velcade with Revlimid showed encouraging data. We expect additional data at the American
Society of Hematology (December 10-13, 2005).
b. Hematological cancers:
* Mantle Cell Lymphoma (MCL): In June 2005, MLNM received compendia listing for Velcade in
MCL which should facilitate reimbursement. The company is conducting a Phase II trial of Velcade
monotherapy in 2nd line MCL (Rituxan plus chemotherapy is the standard of care for 1st line
therapy). Positive interim data were presented at ASCO in 5/05. We expect final data in H1/06 and
FDA filing in H2/06. Management indicated that there is some off-label use for MCL.
* Follicular/marginal zone lymphoma (FML): A Phase II trial of Velcade plus Rituxan in 2nd line
FML is also ongoing. Positive interim data was presented at ASCO in May 2005. We expect final
data in H1/06. A Phase III trial of Velcade +/- Rituxan in 2nd line FML is expected to begin in
H2/06. We expect potential listing in compendia in 2006.
c. Solid tumors:
* Non-small cell lung cancer (NSCLC): In 1st line NSCLC, Millennium is investigating Velcade in
a Phase II trial sponsored by the South Western Oncology Group (SWOG). The trial involves 121
patients treated with Velcade in combination with gemcitabine and carboplatin. Preliminary data
presented at the analyst meeting showed an overall survival of 11 months and progression free
survival of 5 months. Final data are expected at the American Society of Clinical Oncology in June
2006.
For relapsed NSCLC, Millennium expects to conduct two Phase I/II trials. The company initiated
the first Phase I/II trial with Velcade +/- Tarceva. The 2nd trial, comparing Velcade +/- Alimta, will
begin in H1/06.
In April, 2005, Millennium initiated an open-label Phase II monotherapy trial (PEAK) of Velcade in
NSCLC patients with either advanced bronchioalveolar carcinoma (BAC) or adenocarcinoma with
BAC features. Of the 160,000 patients with NSCLC in the U.S., 6% have BAC and 14% have
BAC-like adenocarcinoma. Patients will have failed one or two previous lines of therapy, of which
one must have been an EGF receptor inhibitor, such as Tarceva (DNA) or Iressa (AZN). The
primary endpoint will be response rate, as determine by RECIST criteria (Response Evaluation
Criteria in Solid Tumors). We expect data in H1/07.
* Other solid tumors: The company
is conducting Phase I/II trials in prostate and ovarian cancers. Previous trials of Velcade in
colorectal and breast cancers have not resulted in improved response rates. The company is also
hoping to find applications for the drug outside of oncology, with a Phase I trial in stroke planned
by yearend.
3. PIPELINE UPDATE
Oncology pipeline
a. MLN2704 is a monoclonal antibody targeting the prostate specific membrane antigen (PSMA)
conjugated to maytansinoid or DM1, a chemotherapeutic agent. A Phase I/II trial with multiple
ascending doses (MAD) is ongoing in prostate cancer. There were also some hepatic transaminitis
(liver toxicities) and peripheral neuropathy. MLN2704 is infused every week and also every 2
weeks. Positive Phase I/II interim data presented at the ASCO 2005 showed tumor shrinkage and
declines in prostate specific antigen (PSA) in the serum. We expect final PI/II data in H1/06.
MLN2704 was also granted fast track review in December 2003.
b. MLN-518 is a receptor tyrosine kinase inhibitor targeting FLT3, PDGFR, and c-KIT. Phase I/II
trials are ongoing in acute myeloid leukemia (AML). During Q3/05, MLNM initiated an additional
Phase I/II trial in combination with Cytarabine and Daunorubicin (standard chemotherapy) for
AML. During Q2/05, the company also entered into an agreement with the Cancer Therapy
Evaluation Program (CTEP) to study MLN-518 in various tumor types such as glioblastoma,
prostate cancer and renal cell carcinoma. Millennium obtained MLN518 through its acquisition of
COR Therapeutics in February 2002.
c. MLN8054 is an aurora protein kinase inhibitor in Phase I studies. Potential indications include
colorectal cancer, solid and hematological tumors. We expect data in H1/07. Merck and Vertex are
also developing an Aurora kinase inhibitor, VX-680, which is in Phase I trials.
Inflammation pipeline
a. MLN1202 is a humanized monoclonal antibody that binds to the CCR2 chemokine receptor on
monocytes, macrophages and activated memory T- cells. Phase II trials for rheumatoid arthritis are
ongoing. Biomarkers and ACR 20 scores will be evaluated. Data is expected in 2006. During
Q2/05, Millennium initiated a Phase II study in relapsing-remitting multiple sclerosis (RRMS). The
trial will involve 40 patients receiving two dosing regimens over four months. MRI scans will be
performed. Data are expected in 2006. In Q3/05, the company initiated a Phase II study in
secondary atherosclerosis, with data expected in H1/06. The company also expects to initiate a
Phase IIa trial for scleroderma in H1/06.
b. MLN3897 is an orally active small molecule blocker of the CCR1 chemokine receptor. In Phase I
studies, there was a dose dependent blockade of the CCR1 receptor and pathway based on
biomarkers. MLNM expects to initiate a Phase IIa trial in rheumatoid arthritis in 2006. The
company also expects to initiate Phase I trials on MLN-3701, its backup CCR1 inhibitor, in H1/06.
Millennium is developing MLN3897 and MLN-3701 in collaboration with Sanofi-Aventis.
c. MLN02 is a monoclonal antibody to alpha-4 beta-7 integrin. It has potential as a treatment for
inflammatory bowel disease. Phase II data in Crohn's disease were mixed while those in ulcerative
colitis were favorable. The manufacturing process is being improved to achieve higher yields.
Millennium plans to reinitiate a Phase I bridging study on MLN02 in H1/06 with data expected in
H1/07. The following step would be initiation of Phase III trials. Millennium gained back the rights
for MLN02 from Genentech in Q2/04.
d. MLN0415 is an IKK beta inhibitor in preclinical trials. Phase I trials are expected to begin in
H2/06.
I, Maykin Ho, PhD, hereby certify that all of the views expressed in this report accurately reflect
my personal views about the subject company |
