gs: MLNM (IL/N): On track for profitability in
2006 but sustainable growth unclear
52-Week Range US$11-8
YTD Price Change 5.26%
Market Cap US$3.2bn
MLNM reported a Q4 loss of $0.07, $0.01 better than our est. and in line with consensus
largely due to lower than expected SG&A spending offset by higher R&D. Velcade sales
of $52.4M were essentially in line with expectations. Two early programs in cancer and
inflammation were discontinued. We continue to expect MLNM to turn profitable in 2006
but not consistently on a quarterly basis. The driver of profitability is a $20-25M
milestone payment on Velcade. Our full year revenue and EPS estimates for 2006-2007
are essentially unchanged, and we introduce our 2008 estimates. 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.
WHAT WAS NEW IN Q4 REPORT? (a) MLNM discontinued two early stage programs:
MLN1202 in rheumatoid arthritis and MLN2704 in prostate cancer. (b) Velcade sales of
$52.4M were essentially in line with our estimate of $54.8M (c) Guidance is unchanged
from 1/05/06.
RELATIVELY ATTRACTIVE VALUATION: 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 $10, the implied value of the new indications of Velcade and 6 other products
in Phase 1 or 2 trials is about $2.50/share, which we view as relatively attractive.
WHAT TO WATCH FOR IN 2006: (a) Growth of Velcade in multiple myeloma, particularly for
first and second-line therapies (b) Compendia listing for Velcade in 1st line MM (c) Launch of
competitor Revlimid for myelodysplastic syndrome in Q1/06 (5-10mg dose), and multiple myeloma
in 2H/06 (assuming approval of 20-25mg dose) (d) sNDA filing for Velcade in relapsed mantle cell
lymphoma (e) Phase 2 data on Velcade in follicular NHL (f) Interim data from Velcade trials in 1st
line MM
2. EXPECT PROFITABILITY IN Q1/06 ON VELCADE MILESTONE PAYMENT
For Q1/06, we have raised our estimate for strategic alliance revenue by $20MM to $44MM to
reflect an expected $20-25M milestone payment on Velcade. Our full-year estimate of $135M is
unchanged. Our 2006 estimates for Velcade sales and total royalties are unchanged at $242M and
$124M, respectively. We adjusted our SG&A estimates down by $20M to $128M and increased
R&D expenses by $19M to $295M to better reflect current spending trends. Management expects
further SG&A savings throughout 2006 as a result of the restructuring announced in Q3/05. The net
impact is a revision of our Q1 EPS estimate (excluding stock option expense) to $0.01 from ($0.05)
and our Q4 EPS estimate to $0.04 from $0.10. Our Q2, Q3, and 2006 EPS estimates are unchanged
at ($0.04), $0.00, and $0.01, respectively. Including stock option expense, our 2006 EPS estimates
are ($0.03), ($0.07), ($0.04), and ($0.00) for Q1-Q4, and ($0.14) for the year.
In 2007 we look for revenue of $516M, up 3% year over year. We expect EPS ex-ESO of $0.07.
Our estimate including ESO was revised to ($0.07) from ($0.08) mostly due to rounding.
We are introducing our 2008 estimates of total revenue of $557M (+8%) and EPS of $0.09 (+27%),
excluding ESO expense. Including ESO expense, we look for a loss of $0.05/share in 2008.
2. COMPETITION FOR VELCADE IN 2006, BUT IMPACT SHOULD BE LIMITED
Celgene's Revlimid was approved in December 2005 for the treatment of myelodysplastic
syndrome. In Q1/06 we expect Celgene to file an sNDA for multiple myeloma. While the launch of
Revlimid in Q1/06 may negatively impact Velcade sales, the cannibalization should be offset by 1)
off label use of Velcade in 1st-line therapy, with possible Compendium listing in 2006/7; 2)
potentially positive data from the retreatment study (EVEREST), and interim data on 1st line
treatment in H2/06; 3) increased sales effort, with 50% more salespeople from 2005 and a refined
message focused on survival benefit and treatment duration (only 25% of physicians use Velcade
for >6 cycles, whereas in P3 trials pts saw greatest benefit at 8 cycles); 4) a trend toward
combination therapy, including Velcade + Revlimid; and 5) high price (~3x MDS price) of off-label
Revlimid for multiple myeloma.
3) VELCADE TRIALS IN MULTIPLE MYELOMA ON TRACK IN 2006
MLNM's 3 Phase 3 studies to expand the indication of Velcade to first-line treatment of multiple
myeloma are on-track. Management expects to provide interim data from at least one trial by
year-end. MLNM initiated the VISTA trial in January 2005 in first-line multiple myeloma patients
who are not transplant candidates. Patients receive standard-of-care chemotherapy (melphalan +
prednisone) with or without Velcade. Prior Phase 1/2 data on MP + Velcade has shown complete
response rates similar to those achieved with autologous stem cell transplant. 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 initiated two other first-line Phase 3 multiple myeloma 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 first-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 3 study (HOVON) includes 800 patients
receiving Velcade plus AD (adriamycin/dexamethasone) or VAD as induction treatment prior to
autologous stem cell transplantation.
Management expects to achieve Compendium listing for Velcade in 1st line MM in 2006/7. Compendium
listing should help penetration in first line therapy. Management reiterated prior reported
penetration rates for Velcade in the 1st, 2nd, and 3rd line settings of 9-10%, 40-45%, and 40-50%,
respectively.
4. FDA FILING OF MANTLE CELL LYMPHOMA IN H2/06
In H1/06, we expect final data from the Phase 2 trial of Velcade plus Rituxan vs. Rituxan alone in
second-line follicular/marginal zone lymphoma (FML). Positive interim data was presented at
ASCO in May 2005. A Phase 3 pivotal trial of Velcade +/- Rituxan in second-line FML is expected
to begin in H2/06. We expect Compendia listing in 2006. Management indicated that some states
are already reimbursing for Velcade in follicular NHL. We anticipate that MLNM will file an sNDA
for Velcade in mantle cell lymphoma in early 2H/06. In June 2005, MLNM received Compendia
listing for Velcade in MCL which should facilitate reimbursement. Approval of Velcade for these
indications could add $300-500MM to raise the market potential to $0.6-1.0B.
5. DATA ON VELCADE IN NON-SMALL CELL LUNG CANCER (NSCLC) IN 2006
In first-line NSCLC, Millennium is investigating Velcade in a Phase 2 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 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 1/2 trials. The company initiated
the first Phase 1/2 trial with Velcade +/- Tarceva. The 2nd trial, comparing Velcade +/- Alimta, will
begin in H1/06.
In April, 2005, Millennium initiated an open-label Phase 2 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.
6. TWO PHASE 2 CLINICAL PROGRAMS TERMINATED
Management discontinued MLN2704 (Phase 1/2) in prostate cancer and MLN1202 (Phase 2b) in
rheumatoid arthritis.
Development of MLN2704 was terminated after Phase 1/2 trials failed to identify a safe therapeutic
window. MLN2704 is a monoclonal antibody targeting the prostate specific membrane antigen
(PSMA) conjugated to maytansinoid or DM1, a chemotherapeutic agent. Phase 1/2 interim data
presented at the ASCO 2005 showed tumor shrinkage and declines in prostate specific antigen
(PSA) in the serum. According to management, good clinical results are offset by high costs of
manufacturing, significant royalty payments and the side effect of peripheral neuropathy. Toxicity
appears to be related to levels of free toxin rather than antibody. The company may pursue
development of the MAb conjugated to a different toxin.
Development of MLN1202 in rheumatoid arthritis was terminated after Phase 2b trials failed to
demonstrate clinical efficacy. MLN1202 is a humanized monoclonal antibody that binds to the
CCR2 chemokine receptor on monocytes, macrophages and activated memory T- cells. MLNM will
continue to investigate MLN1202 in multiple sclerosis, atherosclerosis, and scleroderma. In 2006,
we expect data from the two Phase 2 trials in relapsing remitting multiple sclerosis (RRMS) and
atherosclerosis. The RRMS trial began in Q2/05. The trial involves 40 patients receiving two dosing
regimens over four months. MRI scans will be performed. The atherosclerosis trial began in Q3/05.
We expect data in H1/06.
7. PIPELINE UPDATE
Oncology pipeline
a. MLN518 is a receptor tyrosine kinase inhibitor targeting FLT3, PDGFR, and c-KIT. Phase 1/2
trials are ongoing in acute myeloid leukemia (AML). During Q3/05, MLNM initiated an additional
Phase 1/2 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. Management has not guided to timing for the initiation of a
registration trial.
b. MLN8054 is an aurora protein kinase inhibitor in Phase 1 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 1 trials.
Inflammation pipeline
a. MLN3897 is an orally active small molecule blocker of the CCR1 chemokine receptor. In Phase 1
studies, there was a dose dependent blockade of the CCR1 pathway based on biomarkers. MLNM
expects to initiate a Phase 2a trial in rheumatoid arthritis in 2006.
b. MLN-3701, another CCR1 inhibitor, entered Phase 1 trials in Q4. 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 2 data in Crohn's disease were mixed while those in ulcerative
colitis were favorable. The manufacturing process is being improved to achieve higher yields.
Management expects to scale up commercial cell lines in 2006 with clinical trials resuming in 2007.
Millennium gained back the rights for MLN02 from Genentech in Q2/04.
d. MLN0415 is an IKK beta inhibitor in preclinical trials. Phase 1 trials are expected to begin in
H2/06.
I, Maykin Ho, Ph.D., hereby certify that all of the views expressed in this report accurately reflect
my personal views about the.. |
