Morningstar Analyst Note 01-31-06
Millennium Pharmaceuticals' 2005 financials were as
expected, but we're reducing our fair value estimate on
the basis of a disappointing lack of overall progress in the
company's pipeline. Velcade sales soared 34% in 2005 as
multiple myeloma patients started to use the drug earlier
in the course of treatment, and we expect additional
clinical data for Velcade in lung cancer and various forms
of lymphoma throughout 2006. However, the company
discontinued trials for prostate cancer drug MLN2704 as
well as rheumatoid arthritis trials for MLN1202, and we
are hesitant to place much faith in its current pipeline
favorites. MLN02 is an ulcerative colitis drug that is being
reformulated and won't re-enter the clinic until 2007, and
MLN518 is in early-stage trials to treat a niche of relapsed
leukemia.
Millennium is maintaining its previous guidance for a
small (less than $5 million) non-GAAP net profit in 2006, a
goal that we think could actually be damaging to the
company's long-term pipeline strength. As a result of the
restructuring associated with the transfer of Integrilin
rights back to Schering-Plough, operating expenses fell in
2005, and management expects to cut operating expenses
an additional 19% in 2006. With its expensive and
substantially larger oncology salesforce deployed at the
start of this year, we are concerned that cost-cutting will
primarily hit research and development. We also frown on
the company's decision to exclude stock-based
compensation expenses (expected to hit $40-$50 million in
2006) from operating expenses in its non-GAAP
calculation.
Thesis 01-31-06
Millennium Pharmaceuticals markets its sole drug,
Velcade, as the leading treatment for relapsed multiple
myeloma and has many trials in progress to expand its
market. However, multiple myeloma has turned into a
highly competitive cancer niche, and Millennium's
pipeline, which regularly falters before hitting late-stage
trials, doesn't provide any relief from the company's
high-risk, one-drug profile.
Millennium discovers and develops drugs using a
genomics-based research platform. Historically, the bulk
of Millennium's revenue came from alliances with large
pharmaceutical partners and sales of its acquired
cardiovascular disease drug Integrilin. Shortly after
Deborah Dunsire's arrival as CEO, Millennium smartly
returned Integrilin rights to its marketing partner
Schering-Plough. This removed a slow-growth product
from the company's revenue stream but also provides
significant royalties to contribute to pipeline development.
Millennium's first internally developed product, Velcade,
reached the market in 2003 as a novel drug to treat
relapsed multiple myeloma. Velcade enjoys a sizable
market share approaching 50% in second- and third-line
treatment and almost $200 million in annual U.S. sales.
With several Phase III trials planned or in progress, the
company hopes to add first-line multiple myeloma, lung
cancer, and certain forms of lymphoma to Velcade's list of
approved indications.
However, even if Millennium is able to achieve positive
results in these trials, strong competition could limit
Velcade's growth. Millennium's multiple myeloma market
share should stay well below 50% even in the most
optimistic scenario--Celgene's Thalomid is already used
off-label to treat multiple myeloma, and Celgene's new
drug Revlimid, approved at the end of 2005, is an
improved version of Thalomid with fewer side effects and
better efficacy. The multiple myeloma market should
remain split between Celgene and Millennium, and
early-stage trial results indicate that their competing
drugs could even be safe and effective used in
combination. Velcade is already used off-label in follicular
lymphoma, but unless response rates in combination with
Genentech's blockbuster Rituxan surpass those seen with
Rituxan alone, market penetration could be limited.
The following report was produced by an independent research provider selected by an Independent Consultant as required under the Global Research Analyst Settlement. Citigroup Global Markets Inc.
(a NYSE/NASD regulated entity), or any of its affiliates, is not the author of this report and does not guarantee the accuracy, completeness, or timeliness of the following report.
Millennium has several cancer and inflammation-related
drugs in early-stage clinical trials. However, success
outside multiple myeloma is still a gamble. Given this risk,
we'd require a large margin of safety to our fair value
estimate before becoming too enthusiastic about
Millennium stock.
Valuation
We are reducing our fair value estimate to $11 per share
from $15. We still expect Velcade to continue to penetrate
the second- and first-line multiple myeloma markets, and
the drug's label could also be extended to include
lymphoma and lung cancer. However, we expect strategic
alliance revenue to shrink significantly in 2006, and the
discontinuation of prostate cancer drug MLN2704 as well
as rheumatoid arthritis trials for MLN1202 has reduced
our long-term revenue growth estimate from 26% to 16%
through 2009. Given strong competition in multiple
myeloma, we don't expect positive operating cash flow,
free cash flow, or earnings until 2008. Our model assumes
that Velcade's share of the overall multiple myeloma
market peaks at 35%, which incorporates some first-line
use and possible combination use with Revlimid, but also
strong competition from this newly approved drug.
Financial Overview
Growth: As Velcade becomes more established on the
market, sales from that drug and royalty revenue from
Integrilin should make up the majority of total revenue,
rather than the strategic alliance revenue the firm relied
on in the past. This should result in steadier revenue
growth, but 2006 revenue could be erratic because of
various Velcade milestones.
Profitability: Thanks to additional restructuring charges
last fall, Millennium could find a way to wiggle into
non-GAAP profitability in 2006. Despite Velcade sales
growth and a significant reduction in R&D expenses
following the 2003 restructuring, we don't expect
Millennium to be profitable until 2008.
Financial Health: At the end of 2005, Millennium had more
than $600 million in cash and securities on hand. Because
of high conversion prices, we treat the $100 million in
convertible debt as pure debt in our model. Although the
debt is due starting this year, we think product sales
growth should prevent the need for additional financing in
the near term.
Company Overview
Profile: Millennium discovers and develops
biopharmaceuticals to treat cancer, cardiovascular
disease, and inflammatory conditions. The firm markets
one drug, Velcade, for multiple myeloma. Millennium
returned the distribution rights for cardiovascular disease
drug Integrilin to marketing partner Schering-Plough but
will continue to receive substantial royalties. Millennium
partners with Johnson & Johnson to market Velcade
outside the U.S. and currently has a seven-drug pipeline.
Strategy: Millennium seeks to discover and develop a
portfolio of drug candidates for cancer, cardiovascular
disease, and inflammatory disease. With the recent
addition of Deborah Dunsire as CEO, the company has
chosen to focus its drug-discovery efforts on oncology,
reducing inflammation-related research. Millennium sold
the distribution rights to cardiovascular drug Integrilin in
the summer of 2005 and seeks to expand Velcade's label
while continuing to develop drugs in both oncology and
inflammation.
Management: In July 2005, Mark Levin ended his 12-year
career as head of Millennium and was replaced by
Deborah Dunsire, a pharmaceutical veteran who took part
in the launch of cancer drug Gleevec while she was at
Novartis. Her considerable oncology experience should
help the company make the most of Velcade, but we are
disappointed by the price of her arrival; her annual salary
and cash bonus amount to $1.4 million, double that of the
former CEO. Add the 400,000 shares of stock she was
given, $300,000 signing bonus, and 450,000 stock options
by the end of September, and we are even more
disappointed. Christophe Bianchi's employment package is
equally disappointing for a company otherwise
preoccupied with reducing expenses. A Sanofi-Aventis
veteran with 17 years of U.S. pharmaceutical experience,
Bianchi will join Millennium as executive vice president of
commercial operations in February for annual cash
compensation of roughly $600,000, as well as 200,000
options, 30,000 shares of restricted stock, a $100,000
tax-deferred account, and $60,000 in additional bonuses.
This company also consistently points to non-GAAP
earnings that exclude habitual restructuring, amortization,
and stock-option compensation expenses, a habit that
makes us skeptical of the merit behind any management
profitability goals. |
