Citigroup:MLNM: Restructuring Underway, But Growth Concerns Remain
November 2, 2005
HOLD (2)
Speculative (S)
Mkt Cap: $2,772 mil.
SUMMARY
* MLNM today hosted an analyst day in NY presenting its key initiatives to boost Velcade sales by inc. the sales force by 50% and focusing on need to dose >8 cycles to achieve a survival benefit (current avg is 5 cycles). MLNM has also focused on ongoing dev. efforts of Velcade in NSCLC and front-line MM as a way to unlock key future markets. However, since the NSCLC data is from an open-label study, the data is hard to interpret. More so, we don't expect that Velcade will be a high seller in front line MM since interim data from ph I/II study of Velcade/Revlimid in this setting are on par with Revlimid/dex, a cheaper oral regimen that is highly potent.
* On the positive side, since Street expectations for the pipeline are low, LT upside is possible from MLN1202 and MLN02 of all pipeline projects.
* Nevertheless, while MLNM will become profitable in '06, we remain concerned about Velcade's LT outlook given overhang from CELG's Revlimid.
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 1.4x
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 (11/1/05) $9.10
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 (1.1%)
Div(E) (Cur/Prev) $0.00/$0.00
Expected Dividend Yield 0.0%
Expected Total Return (1.1%)
OPINION
Millennium Pharmaceuticals today hosted an analyst day in New York City led by
the company's CEO Deborah Dunsire and senior management, including President of
R&D Robert Tepper, and CFO Marsha Fanucci. The focal points of the meeting
centered on 3 key issues -- 1) expanding the growth in Velcade sales, 2)
advancing the company's pipeline, and 3) executing on continued restructuring
to achieve goals of profitability.
Thus far, we believe that Dr. Dunsire is leading the company in the right
direction and we are encouraged by the focus on oncology and decision to
increase the sales force to counteract the potential threat posed by Celgene's
Revlimid.
More so, we believe that the strategy to continue developing Velcade in front-
line therapy is sound albeit the drug will be facing an uphill battle given its
need for intravenous dosing. Given that early results from an ongoing phase
I/II study of Velcade/Revlimid show a low 90s% response rate that is
approximately similar to that seen from the ongoing Revlimid/dexamethasone
study, we do not view the Velcade/Revlimid combination to be advantageous since
it is more costly and less convenient than an oral regimen.
While Velcade posted +16% q/q in Q3 (aided by 3.7% price increase on July 1st),
we are also concerned about the impact on sales of the Revlimid Access Program
in multiple myeloma that is now open. However, we are comfortable with our 13%
y/y growth in 2006 since we expect that Revlimid will be used initially in
patients who have failed Velcade or in the 50% of patients who do not receive
Velcade as a second-line agent currently (i.e. Revlimid will take share away
from older chemotherapies).
The company is also clearly on the right path to prioritizing the pipeline
although we would have preferred a more focused approach then continuing
development of 7 compounds.
We also concur that management has sufficiently resized the business to allow
them to reach profitability in 2006, providing that Velcade sales show modest
growth in 2006. Nevertheless, while these developments continue to take shape,
we remained concerned about Velcade's long-term growth prospects (since
Revlimid could eventually dominate first- and second-line MM) and expect that
the stock will trade horizontally since it is appropriately valued at these
levels.
Finally, we believe that Millennium must enter into several strategic
partnerships to defray R&D development costs as further compounds advance into
phase II studies. As such, we argue that the pipeline will be the single most
important factor for the stock's success over the next 18 months since we
already assume that Velcade will ultimately see usage in MCL and NHL in our
model.
UPCOMING MILESTONES
Source: Company reports and Citigroup Investment Research
GROWING VELCADE
The first driver of meeting the goal of non-GAAP profitability in 2006 is
growing Velcade sales. Along these lines, Millennium's efforts include:
* A 50% expansion of the Velcade sales force and medical affairs group to
broaden the voice in the myeloma market;
* Focusing on increasing the number of cycles used to >8 (vs. current 5)
to maximize overall survival as seen in the APEX study; and
* A focus on patient re-treatment and combination use of Velcade with
other drugs to counteract upcoming competition from Celgene's Revlimid.
Along these lines, Millennium has a number of ongoing trials slated to
release data in the next 6-12 months. Notably, results from the Phase
IV EVEREST study evaluating use of Velcade in combination with
dexamethasone, Doxil, or Thalomid in patients who have previously
received Velcade therapy will be released in H2:06. Results from the
phase I/II study of Velcade in combination with Revlimid will be
released at the American Society of Hematology (ASH) meeting in
December.
Further to these efforts, Millennium's growth plans for Velcade include
expansion into the front-line setting as well as new indications (most notably,
mantle cell lymphoma, non-hodgkins lymphoma, and non-small cell lung cancer).
In terms of front line therapy, Millennium has three registration trials
ongoing (VISTA, HOVON, and IFM).
VELCADE FRONT LINE REGISTRATION STUDIES
Source: Company reports
While Velcade has received a Compendia listing for MCL by virtue of an interim
results from a phase II study showing a 42% overall response and 8% complete
response, sales are slow since this disease is rare (<5000 patients) and
awareness of the data is modest. Final data is expected at the American
Society of Clinical Oncology (ASCO) meeting in June 2-6, 2006. Millennium
expects to file an sNDA for this indication in the second half of 2006.
In relapsed/refractory follicular relapsed NHL, Millennium is currently
planning phase III studies in combination with Rituxan slated to begin in the
second half of 2006. Interim results from a Phase II study of similar design
are expected at this year's annual American Society of Hematology (ASH)
meeting.
For NSCLC, final data from the open-label SWOG phase II study (Velcade in
combination with gemcitabine and carboplatin) are also expected at ASCO. While
the preliminary results showed a 5 months PFS and 11 months overall survival,
since there is no comparator arm, the impact of Velcade on the background
regimen cannot be determined.
ADVANCING PIPELINE
Outside of efforts to expand Velcade's current label, management also
highlighted 3 key compounds in the company's pipeline for which development is
ongoing and 4 early stage compounds. Key compounds included:
MLN02 has shown encouraging phase II results in ulcerative colitis (34%
remission with 2.0 mg/kg dose at 43 days compared to placebo of 15%). The
company is scaling up production and bridging studies are expected in the first
half of 2007. We believe that pivotal studies could begin by mid-2007.
MLN518 has shown modest single agent activity in AML. This compound has been
stalled in early stage clinical development for >2 years, making us skeptical
of its clinical potential. Currently, combination therapy studies are ongoing
and front-line phase I/II studies are planned.
MLN2704, an anti-PSMA antibody conjugated to DM1 toxin, has also been stalled
in phase I/II studies for >2 years. Further data is expected at ASCO. Based
on experience from this drug and several other compounds that were conjugated
to the DM1 toxin, the therapeutic window is fairly narrow, increasing the
challenge of finding an appropriate dose. As a result, we are not optimistic
about this compound either.
EARLY STAGE COMPOUNDS
Source: Company reports
BUILDING A PROFITABLE COMPANY
Millennium management reiterated its guidance for full-year 2005 of non-GAAP
net loss of $85-$95 million, GAAP net loss of $200-$215 million, and Velcade
sales of $190-$195 million. The company also maintained its outlook for non-
GAAP profitability in 2006 based on its continued restructuring and expense
management. We have fine-tuned our estimates following today's meeting. Our
2007 EPS has changed by $0.01 to $0.18. Our other estimates remain unchanged.
In our view, Velcade is on track to meet this guidance and we share
management's sentiment that Velcade sales will benefit from an expansion of the
sales force. However, we expect that the stock will largely trade sideways
until the potential impact of the September opening of Revlimid's Expanded
Access Program is better defined.
Looking ahead to 2006, we are comfortable with our 13% y/y growth estimate for
Velcade and model that Revlimid will largely capture market share in the third-
line settings while Velcade is increasingly used in second-line patients.
These estimates could be at risk if physicians opt to use Revlimid ahead of
Velcade immediately after its potential launch in the second quarter of 2006.
Finally, we believe that the 7 clinical candidates must show success early in
their development in order to attract a partner to defray development costs,
thereby allowing the business to achieve a consistent level of profitability.
INVESTMENT THESIS
Millennium is a drug development company focused on oncology and inflammation.
The company has had a checkered history of drug development that was
compensated for by successful acquisitions. In 1999, Millennium acquired
LeukoSite, thereby gaining rights to Velcade. In 2003, Velcade became
Millennium's main growth driver after receiving approval for use in
relapsed/refractory multiple myeloma. Velcade has recently faced growth
constraints due to high market penetration and is bound to face competition
from Celgene's Revlimid over the next few months. While the company has
restructured to closely assimilate revenues with expenses and should become
profitably in 2006, we remain cautious due to these competitive overhangs. In
our view, future success of the stock pivots on success of several pipeline
projects. However, we believe that that these projects are too early in
development to materially impact the stock over the next 12 months.
COMPANY DESCRIPTION
Millennium Pharmaceuticals (MLNM) is a biopharmaceutical company focused on
development of novel therapeutics for oncology, 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 has seven
other projects in clinical development focusing on inflammation and oncology.
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 low 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 project a
5% terminal growth rate, which we view as conservative.
Near-term market volatility and short-term trading patterns may cause the
Expected Total Return to become temporarily misaligned relative to the hurdle
for this stock's fundamental rating, as defined under our current system.
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.
I, Yaron Werber, M.D., research |
