SUMMARY
? Millennium today provide 2006 guidance that is overly bullish on Velcade's
prospects, in our view. The company expects that Velcade will post $225M-
$250M (+17%-30% y/y) including a 5.9% price inc. that was instituted Jan. 1st.
This guidance reflects management's expectations that Velcade will continue to
capture market share. Given that Velcade only grew by 3% q/q in Q4 and given
the expected compeition from Celgene's Revlimid starting in Q3:06, we remain
more cautious and project $223M in '06 sales, up slightly from $216M.
? More so, we are concerned that the 5.9% price inc. will effectively erase any
profit margins to physicians over next 2 Qs and not compensate for the risk of
purchasing the product. This could bias opinions against Velcade by the time
Revlimid is introduced in mid-year.
? Over NT, we do not expect further share price appreciation and foresee
weakness by Revlimid's launch. Inc. TP due to multiple expansion in sector.
United States
? Millennium today provide 2006 guidance that is overly bullish on Velcade's
prospects, in our view. The company expects that Velcade will post $225M-
$250M (+17%-30% y/y) including a 5.9% price inc. that was instituted Jan. 1st.
This guidance reflects management's expectations that Velcade will continue to
capture market share. Given that Velcade only grew by 3% q/q in Q4 and given
the expected compeition from Celgene's Revlimid starting in Q3:06, we remain
more cautious and project $223M in '06 sales, up slightly from $216M.
? More so, we are concerned that the 5.9% price inc. will effectively erase any
profit margins to physicians over next 2 Qs and not compensate for the risk of
purchasing the product. This could bias opinions against Velcade by the time
Revlimid is introduced in mid-year.
? Over NT, we do not expect further share price appreciation and foresee
weakness by Revlimid's launch. Inc. TP due to multiple expansion in sector.
GUIDANCE FOR 2006 IS AGGRESSIVE
Millennium held a conference call this morning to discuss their 2006 guidance. Overall, we
walked away from the call with the impression that Millennium’s guidance to grow Velcade
by 11%-24% organically (17%-30% including the 5.9% price increase instituted on January
1st) could be aggressive given that Velcade only grew by 3% q/q. In addition, the fact that
this guidance calls for Velcade to capture market share coincidently with Revlimid’s launch
also increases our concerns about the achievability of this guidance.
More so, we are concerned that in the current ASP+6% reimbursement environment the
5.9% price increase will effective erase any profit margins for physician practices for a
period of 6 months until the ASP is increased to factor in for this price hike. Given that
physicians practices carry the risks associated with purchasing expensive drugs such as
Velcade and are then mandated to collect the patient co-pay from Medicare beneficiaries of
20%, the lack of premium to compensate for these risks could somewhat detract from the
appeal of this drug and sour physicians’ opinions. If that occurs, Revlimid’s approval by
mid-year could be a welcome respite from this pricing scheme, thereby driving market share
loss to the new agent.
In our view, we can envision that Velcade could post $223 million (up from $216 million
previously), which is slightly below the guidance of $225 million-$250 million.
Millennium is also expecting that royalty revenue will be $115 million-$125 million, lower
than our forecast of $161 million. Of that Millennium is conservatively projecting that $85
million will be due to Integrilin royalties on U.S. sales from partner Schering-Plough. This is
the absolute minimum amount that is due to Millennium and is lower than the $120 million
that we had predicted. We are lowering our royalty revenues projection to $141 million
since we are lowering our expectations for Integrilin royalties on U.S. sales to $100 million.
In our view, it is possible that Millennium is anticipating that royalty revenues will be closer
to the contracted minimum since data from the Medicines Company’s Angiomax from the
ACCUITY study in acute coronary syndromes (ACS) is expected at the American College of
Cardiology (ACC) meeting in March. This 13,800 patient study has been fully enrolled
since December, and tests Angiomax versus heparin and IIb/IIIa inhibitors. If positive, it
could drive market share gains for Angiomax in the early ACS setting where Integrilin
currently holds >30% market share. .
While the rest of the guidance was in line with our expectations, we believe that onus is now
on Millennium to prove that they can deliver on Velcade’s guidance.
In our view, one of the main drivers of success for the stock in the upcoming year will
depend on success or fail of the pipeline. In this regard, we are especially concerned of a
possible disappointment if Millennium terminates development of MLN2704 (anti-PSMA
antibody conjugated to DM1 toxin in prostate cancer) due to its narrow therapeutic window.
On the positive side, we continue to be intrigued about the prospects of MLN1202 (anti-
CCR2 antibody in atherosclerosis, MS and rheumatoid arthritis) since we expect proof of
principle data in atherosclerosis during the first half of the year.
MILESTONES
Event Timing
Phase II SWOG NSCLC data H1:06
Phase II follicular NHL data H1:06
Phase II final relapsed MCL data H1:06
Phase I/II data in MLN2704 prostate study (Go/ No Go decision) H1:06
Initiate Phase I MLN3701 study in RA H1:06
Initiate Phase IIa MLN1202 study in scleroderma H1:06
Initiate Phase I/II 2nd line NSCLC Velcade/pemetrexed study H1:06
Phase II MLN1202 atherosclerosis data H1:06
Phase II MLN1202 RA data H2:06
Phase IV EVEREST data H2:06
Phase III Velcade front line data H2:06
Initiate Phase I MLN0415 study H2:06
Initiate Phase II MLN3897 study in RA H2:06
File sNDA for Velcade in MCL H2:06
Initiate Phase III follicular relapsed NHL study H2:06
Phase II MLN1202 MS data Late '06/Early '07
Source: Company reports
CHANGES TO THE MODEL
2006
Old New
Strategic alliance revenue $90,000 $90,000
Velcade $216,155 223,813
Royalty revenues $161,097 141,096
Total revenues $467,252 454,909
R&D $250,000 242,000
R&D % of sales 54% 53%
SG&A $155,000 158,000
SG&A % of sales 33% 35%
Non-GAAP net income/(loss) $8,268 2,875
Non-GAAP EPS $0.03 $0.01
VALUATION
We are raising our target price to $11 from $9 to account for the recent multiple expansion of
the group, but are still maintaining a relative discount to the average historical multiple of
the group due to our concerns over the competitive outlook for the stock. Our $11 target
price is based on an average of three different valuation metrics: 1) 35x (previously 30x) our
discounted 2008 pro forma, fully-taxed EPS estimate of $0.28; 2) 7x (previously 6x) our
discounted EV-to-projected 2008 revenues estimate of $523 million; and 3) a ten-year DCF
analysis.
A multiple of 35x (as opposed to 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. This implies an $8 target price.
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 7x (6x previously) is a discount to the historical EV-to-revenue multiple for the
mid-cap 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. This implies a $12 target price.
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 fiveyear,
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. This implies a $13 target price. |
