citi: MLNM: In Line Quarter With Further Pipeline
Disappointments
HOLD (2)
Speculative (S)
Mkt Cap: $3,197 mil.
Yaron Werber, MD
yaron.werber@citigroup.com
Raymond Bower, MD
raymond.bower@citigroup.com
Damian Forbes, CFA
damian.forbes@citigroup.com
January 26, 2006 SUMMARY
* Millennium provided Q4 financial results today posting higher total revenues that were partiallyoffset by higher expenses. Earnings of ($0.07) were slightly better than our ($0.08) estimate.
* While the results were uneventful, we expect that Millennium will continue its cost cutting efforts, driving the company to achieve non-GAAP profitability by year-end. We model $0.01 in 2006 increasing to $0.18 in 2007.
* On the call, the company announced that it has discontinued development of MLN2704 due to a narrow therapeutic window and noted that MLN1202 has failed development in rheumatoid arthritis. This further calls into question Millennium drug development capabilities.
* We remain cautious on the stock in the face of upcoming Revlimid's launch in multiple myeloma in mid-year. In addition, we remain concerned that the Velcade guidance of $225M-$250M is optimistic.
FUNDAMENTALS
P/E (12/06E) NA
P/E (12/07E) 56.1x
TEV/EBITDA (12/06E) NA
TEV/EBITDA (12/07E) 44.7x
Book Value/Share (12/06E) $6.38
Price/Book Value 1.6x
Revenue (12/06E) $455.1 mil.
Proj. Long-Term EPS Growth NA
ROE (12/06E) 0.2%
Long-Term Debt to Capital(a) 5.0%
MLNM is in the S&P 400(R) Index.
(a) Data as of most recent quarter
SHARE DATA . RECOMMENDATION
Price (1/25/06) $10.31
Rating (Cur/Prev) 2S/2S
52-Week Range $11.09-$7.79
Target Price (Cur/Prev) $11.00/$11.00
Shares Outstanding(a) 310.1 mil.
Expected Share Price Return 6.7%
Div(E) (Cur/Prev) $0.00/$0.00
Expected Dividend Yield 0.0%
Expected Total Return 6.7%
OPINION
Millennium provided Q4 results this morning after its pre-announcement on
January 19th (see our note, Q4 Biotech Preview- A Week Quarter Setting Stage
for 2006, and our note earlier today Millennium Reports In-Line Q4). For the
quarter, pro-forma EPS was ($0.07) versus our ($0.08) and consensus ($0.07).
While total revenues were robust at $122 million (versus our $106 million) due
to revenues under strategic alliances, higher expenses particularly R&D ($88
million versus our $72 million). While cost savings in R&D began in Q4, these
were not fully implemented during the quarter. Instead, SG&A savings have been
noted thus far.
Company management also gave an update of pipeline progress. In accordance with
commitments to reduce R&D spending, development of MLN2704 has been
discontinued for the treatment of prostate cancer due to a narrow therapeutic
window. We have had low expectations for this program. However, we were more
disappointed that MLN1202 has failed for the treatment of rheumatoid arthritis.
This calls into question the likelihood of success in the remaining
inflammatory indications including atherosclerosis, scleroderma and multiple
sclerosis.
We remain concerned about the outlook in the second half of the year as the
expected approval of Revlimid for the treatment of multiple myeloma (MM)
approaches in June 30th. Due to scarce positive catalysts in 2006, and
increasing Velcade competition, we reiterate our cautious view.
MILESTONES
Source: Company reports
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. Millennium has seven
other projects in clinical development focusing on inflammation and oncology.
VALUATION
Our $11 target price is based on an average of three different valuation
metrics: 1) 35x our discounted 2008 pro forma, fully-taxed EPS estimate of
$0.28; 2) 7x our discounted EV-to-projected 2008 revenues estimate of $523
million; and 3) a ten-year DCF analysis.
A multiple of 35x 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 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 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. This implies a $13 target price.
RISKS
We rate Millennium Pharmaceuticals Speculative risk due to the company's
reliance on only one product, 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) might also
change the reimbursement scheme for Velcade that could reduce payment for
physicians. Velcade is also facing competition from Celgene's Thalomid in
multiple myeloma starting in mid-year.
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.
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
Source: Citigroup Investment Research and Company Reports
MILLENNIUM PHARMACEUTICALS ANNUAL P&L
Source: Citigroup Investment Research and Company Reports
U.S. MULTIPLE MYELOMA MODEL
Source: Citigroup Investment Research and Company reports
EX-U.S. MULTIPLE MYELOMA MODEL
Source: Citigroup Investment Research and Company reports
LYMPHOMA MODEL
Source: Citigroup Investment Research and Company reports
I, Yaron Werber, MD, research analyst and the author of this report, hereby
certify that all of the views expressed in this research report accurately
reflect my personal views about any... |
