Citi: MLNM: Velcade Growing, But Competition Is Here
HOLD (2)
Speculative (S)
Mkt Cap: $2,964 mil.
July 27, 2006 SUMMARY
* MLNM reported Q1 pro-forma EPS of $0.01 vs our est. of ($0.00) and consensus of ($0.02). Total revs of $120M were higher than our est. of $116M and consensus of $118M.
* Velcade sales were $59M vs. our $61M est. While Velcade continues to grow moderately, likely due to sales force expansion, push to keep pts on Velcade longer, and off-label use in mantle cell lymphoma, we remain concerned about sales for remainder of '06 due to competition from recently approved Revlimid.
* MLNM is conducting several key trials in an effort to expand Velcade's label (NSCLC, NHL) including the IFM trial in front-line MM pts; we expect an interim look before year-end.
* We reiterate our Hold rating and $11 target price due to few positive catalysts in 2006 and an increasingly competitive environment for mutlippe myeloma.
FUNDAMENTALS
P/E (12/06E) 281.1x
P/E (12/07E) 79.7x
TEV/EBITDA (12/06E) 94.1x
TEV/EBITDA (12/07E) 54.0x
Book Value/Share (12/06E) $6.62
Price/Book Value 1.5x
Revenue (12/06E) $453.5 mil.
Proj. Long-Term EPS Growth NA
ROE (12/06E) 0.5%
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 (7/26/06) $9.73
Rating (Cur/Prev) 2S/2S
52-Week Range $11.15-$8.04
Target Price (Cur/Prev) $11.00/$11.00
Shares Outstanding(a) 304.7 mil.
Expected Share Price Return 13.1%
Div(E) (Cur/Prev) $0.00/$0.00
Expected Dividend Yield 0.0%
Expected Total Return 13.1%
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
12/05A Actual ($0.09)A ($0.11)A ($0.02)A ($0.07)A ($0.28)A
12/06E Current $0.00A $0.01A ($0.01)E $0.03E $0.03E
Previous $0.00A $0.00E ($0.01)E $0.02E $0.01E
12/07E Current NA NA NA NA $0.12E
Previous NA NA NA NA $0.12E
12/08E Current NA NA NA NA $0.37E
Previous NA NA NA NA $0.37E
First Call Consensus EPS: 12/06E ($0.02); 12/07E $0.11; 12/08E $0.24
OPINION
Millennium provided Q2 results this morning; pro-forma EPS was $0.01 versus our
estimate of ($0.00) and consensus of ($0.02). Velcade sales were $59 million
versus our $61 million estimate, royalty revenues were $34 million versus our
$30 million estimate, and strategic alliance revenues were $27 million versus
our $25 million estimate. Total revenues of $120 million were ahead of our $116
million estimate.
On the expense side, R&D expenses of $73 million (excluding $6 million of
stock-based compensation) were higher than our $70 million estimate; SG&A
expenses of $32 million (excluding $5 million of stock-based compensation) were
in-line with our $33 million estimate.
Management reiterated its financial guidance for 2006 to post Velcade sales
between $225 and $250 million and to achieve profitability on a non-GAAP basis
with net income up to $5 million.
WHAT WE LIKED ON THE CALL
Millennium stated on its conference call that Velcade's market share in the
second-line setting increased to 50%-55% (up from approximately 45% during
1Q06), including use as induction therapy prior to stem cell transplant.
Velcade is used in approximately 40%-50% of third-line patients (flat versus
1Q06), and approximately 10% in the front-line setting (flat versus 1Q06).
Fourteen states now provide reimbursement for Velcade in the front-line
setting, up from 12 in 1Q.
The number of administered Velcade cycles continues to average around 6, flat
versus 1Q05 but up from an average of 5.5 cycles in 2005. Millennium also
stated that Velcade is being used off-label to treat mantle cell lymphoma, but
that recent growth in sales has been driven primarily by increasing share and
longer treatment durations. Recall that in June, the company filed an sNDA for
Velcade relapsed/refractory mantle cell lymphoma based on the results of the
PINNACLE trial.
MILLENIUM WILL NO LONGER MANAGE INTEGRILIN SUPPLY CHAIN; NET INCOME UNAFFECTED
Beginning in 3Q06, partner Schering Plough will begin to purchase the raw
material for Integrilin directly from the supplier. Previously, Millennium
purchased the raw material for Schering-Plough, recorded these costs under Cost
of Sales, and recorded offsetting Strategic Alliance revenues. Going forward,
Millennium will no longer record these revenues; however, Cost of Sales will
decrease by a corresponding amount, so net income will be unaffected.
WHAT WE ARE WATCHING
While Velcade continues to grow moderately, likely due to the recent sales
force expansion, a push to keep patients on Velcade longer, and off-label use
in mantle cell lymphoma, we remain concerned about sales for remainder of 2006
due to competition from recently approved Revlimid. Consequently, we believe
company guidance of $225-$250 million in Velcade sales is at risk. We estimate
2006 Velcade sales of $221 million.
VELCADE'S GROWTH IN EUROPE MAY BE HINDERED BY UK'S RECOMMENDATION NOT TO
REIMBURSE
Earlier this week, the National Institute of Health and Clinical Evidence
(NICE), United Kingdom's cost-effectiveness watchdog, recommended that Velcade
should not be covered by the National Healthcare Service (NHS), citing that the
value of the medicine was unclear. However, we note that this recommendation
does not represent a final decision, and Johnson and Johnson will have the
opportunity to respond before a final ruling occurs.
If NICE's initial decision is upheld, it could impact Velcade's growth in
Europe, since the UK is one of the top five markets for oncology therapies.
With about 4,000 English multiple myeloma patients per year who would be
eligible for Velcade according to the International Myeloma Foundation, the
total market opportunity for Velcade is $190M-$250 million, assuming Velcade
costs of $7,900 per month and 6-8 months of treatment per year.
Assuming approximately 50% of the patients are relapsed and/or refractory
patients per year, the market opportunity for Velcade as a second- or third-
line treatment is approximately $95M-$125 million. Recall that Millennium
collects approximately 24% in royalties from J&J, which would translate into
$7-$9 million in loss of potential revenues in the United Kingdom, assuming 30%
Velcade penetration in both second- and third-line treatments.
NUMEROUS TRIALS ARE ONGOING IN AN EFFORT TO EXPAND VELCADE'S LABEL
Millennium is currently conducting numerous clinical trials in an effort to
expand Velcade's label. Of note are two randomized Phase II trials in NSCLC
and three Phase III trials for Velcade in front-line multiple myeloma. We
believe these studies carry the potential to expand the label for Velcade as
well as drive penetration into the front-line setting. However, we caution
that Velcade's data in NSCLC has not been exciting to date. Furthermore,
Velcade's studies in multiple myeloma are behind Revlimid's and Velcade's
higher toxicity profile and less convenience dosing schedule will likely
detract from its appeal.
Current clinical trials of Velcade include:
FRONT-LINE MULTIPLE MYELOMA
* The IFM trial is an open-label, randomized Phase III trial that is enrolling
approximately 480 patients with newly diagnosed multiple myeloma (who have
not previously treated). Patients will receive Vincristine +Adriamycin +
Dexamethasone (VAD) or Velcade + dexamethasone as induction treatment +/-
dexamethasone + cyclophosphamide + etoposide/cisplatin (DCEP) as first-line
therapy in the transplant setting. The primary endpoint is to complete
remission rate. The trial began enrollment in June 2005, and we expect an
interim look at the data during the second half of the year.
* The VISTA trial is a Phase III trial of Velcade + melphalan + prednisone vs.
prednisone alone in patients with newly diagnosed disease who are not
transplant candidates. The trial will enroll approximately 680 patients and
will assess the efficacy and safety and tolerability of the two regimens. The
trial began enrollment in January 2005.
* The HOVON trial is a randomized phase III trial in newly diagnosed multiple
myeloma patients. The trial will enroll approximately 800 patients and will
compare pre-stem cell transplant induction with Velcade + doxorubicin +
dexamethasone and maintenance therapy with Velcade vs. VAD as induction
therapy prior to transplant and thalidomide maintenance. The primary
endpoint is to compare progression free survival, response rate, survival and
the safety and tolerability of the two regimens.
ONGOING FRONT LINE VELCADE STUDIES IN MULTIPLE MYELOMA
Source: Company reports
NON-HODGKIN'S LYMPHOMA
* Millennium and JJRD have also initiated a two-arm, randomized, open-label
phase III trial of Velcade + Rituxan vs. Rituxan alone. The trial is being
conducted under a Special Protocol Assessment and will enroll up to 670
relapsed patients with relapsed or refractory follicular B-cell non-Hodgkin's
lymphoma. The primary endpoint is progression free survival; secondary
endpoints include overall response rate, duration of response, time to
progression, and overall survival. Velcade will be administered for five
cycles for a total of 25 weeks.
NON-SMALL CELL LUNG CANCER
* Millennium and partner Johnson and Johnson Research and Development (JJRD)
are conducting a three-arm, randomized Phase II study of Velcade + Alimta vs.
Alimta alone vs. Velcade alone in patients with locally advanced or
metastatic NSCLC who have failed prior chemotherapy. The primary endpoint of
the trial is overall response rate as assessed by RECIST criteria; secondary
endpoints include time to progression, progression-free survival, and safety.
Target enrollment for the trial is 135 patients.
* Millennium is also conducting a randomized, open-label, phase II study of
Velcade + Tarceva vs. Tarceva alone in patients with relapsed or refractory,
locally advanced or metastatic NSCLC. The trial began enrollment at the end
of 2005 and is expected to enroll approximately 135 patients.
MILESTONES
Source: Company reports
CHANGES TO OUR MODEL
Source: CIR
VALUATION
Our $11 target price is based on an average of three different valuation
metrics: 1) 35x our discounted 2008 pro forma EPS estimate of $0.32; 2) 7x our
discounted EV-to-projected 2008 revenue estimate of $536 million ($570 million
previously); and 3) a ten-year DCF analysis.
A multiple of 35x our discounted 2008 EPS estimate is below the multiple of the
large-cap, profitable biotech group's next-12-months' multiple of 44x, which
has historically (over the last ten years) been in a range from a high-20s to
low-40s multiple excluding historical bubble years within the sector. We
believe the growth challenges and encroaching competition to Velcade from
Celgene's Revlimid merit this discount to the peer multiple. This implies an
$11 target price.
We used a 20% discount rate in this calculation to account for the risk
associated with this projected revenue stream. The higher discount rate is
applicable due to encroaching competition from Revlimid. We apply a 20%
discount rate to mature commercial products whose revenue stream is facing
stable but facing increasing risks as outlined in our note "Visiting Valuation"
published on May 26, 2004.
A multiple of 7x represents a discount to the 14x historical EV-to-revenue
multiple for the mid-cap biotech group, (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 20% discount rate in
this analysis. This implies a $12 target price.
In our ten-year DCF analysis, we use a 10% discount rate. This discount rate
reflects a 10% cost of equity, 10% weighted average cost of capital (WACC), and
1.46 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 3% terminal growth
rate. This implies an $11 target price.
RISKS
We rate Millennium Pharmaceuticals Speculative risk due to the company's
reliance on Velcade, a product that is facing significant competition from
Celgene's Revlimid.
On the revenue side, Velcade is the main growth driver of the company. The
drug has contended with a deceleration in growth and has yielded lackluster
results in most solid tumors. While Velcade is in Phase III development in
multiple myeloma, it is behind Revlimid in the race to yield data in the
lucrative front-line setting. Data from ongoing studies in non-Hodgkin's
lymphoma are not expected until late 2007/early 2008. If sales fail to
reaccelerate or impact of Revlimid is greater than we forecast, our financial
forecasts would not be met. Conversely, if Velcade has a greater penetration
in the use as a second- or a third-line treatment, our forecasts could be
surpassed.
In our view, the company's goal to reach profitability on a non-GAAP basis in
2006 creates execution risk. This is because a substantial increase in
revenues must be achieved with a concomitant tight control of expenses to reach
this goal. If the company fails to achieve this goal, than the stock could
perform under our expectations.
If the impact of these risk factors turns out to be greater than we anticipate,
the shares may have difficulty achieving our target price. Conversely, if the
impact from the risk factors has less of an impact than we envision, the stock
may exceed our target price.
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
profitable 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 the
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.
MILLENIUM QUARTERLY P&L ($MMS)
Source: CIR
MILLENIUM ANNUAL P&L ($MMS)
Source: CIR
ANALYST CERTIFICATION APPENDIX A-1
I, Yaron Werber, research analyst and the author of this report, hereby certify
that all of the views expressed in this research report accurately reflect my.. |
