citi: MLNM: Millennium Acquires AnorMed-MOZOBIL Complementary
But Not Enough
HOLD (2)
Speculative (S)
Mkt Cap: $3,092 mil.
September 26, 2006 SUMMARY
* MLNM announced the acquisition of AnorMed for $12/share, a 21% premium over the stock's closing price & 40% premium over Genzyme's bid at $8.55/share. The company will commence a cash tender offer valued at $515M.
* Millennium expects that the deal will be dilutive in 2006/07, modestly accretive in 2008, and significantly accretive in 2009. AnorMed's core asset, MOZOBIL, a product for stem cell mobilization for autologous transplants, is currently in ph III studies and expected for launch in 2008.
* The market opportunity for MOZOBIL, a small molecule CXCR4 chemokine antagonist, could be $250M worldwide and $100M in the U.S. alone.
* With $646M in cash, the company will need to undertake financing to fund the deal, in our view. While MOZOBIL is a late stage, complementary product over long-term, we remain concerned that investor expectations for Velcade remain too high near-term. We maintain our cautious view on the stock..
FUNDAMENTALS
P/E (12/06E) 293.2x
P/E (12/07E) 83.1x
TEV/EBITDA (12/06E) 98.9x
TEV/EBITDA (12/07E) 56.7x
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 (9/25/06) $10.15
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 8.4%
Div(E) (Cur/Prev) $0.00/$0.00
Expected Dividend Yield 0.0%
Expected Total Return 8.4%
OPINION
Today, Millennium announced the acquisition of AnorMed for $12/share, a 21%
premium over the stock's closing price and 40% premium over Genzyme's bid at
$8.55/share. The company will commence a cash tender offer within 10 days,
which is expected to be open for at least 35 days, valued at $515 million. In
the event that the transaction between Millennium and AnorMed does not close
successfully, Millennium is required to pay a termination fee of $19.5 million.
In terms of the financial impact on Millennium, the company expects the deal to
be dilutive in 2006/07, modestly accretive in 2008, and significantly accretive
in 2009. However, with $646 milllion in cash and approximately $100 million
cash-burn per quarter, the company will need to undertake financing near-term
to fund the deal, in our view.
AnorMed's core asset, MOZOBIL, a product for stem cell mobilization in stem
cell transplants, is currently in phase III studies and expected for launch in
2008. The market opportunity for MOZOBIL, a small molecule CXCR4 chemokine
antagonist, could be $250 million worldwide and $100 million in the U.S.,
assuming the cost of MOZOBIL at $5,000. Since G-CSF costs $500 per
administration for 5-10 days prior to transplantation, we assume pricing of
MOZOBIL at the upper end of this range.
Although phase II study yielded impressive results, a few questions remain
regarding the use of MOZOBIL for stem cell mobilization, such as whether
MOZOBIL can boost stem cell mobilization vs. higher doses of G-CSF than that
was used in phase II trials. Ultimately, the success of MOZOBIL will depend on
pricing and usage in other indications, such its use as stem cell mobilizer in
allogeneic transplants and as a chemotherapy sensitizers in other hematologic
malignancies, such as acute myelogenous leukemia (AML) and chronic lymphocytic
leukemia (CLL). However, allogeneic transplants are associated with high
mortality, related to fungal infections, interstitial pneumonia and graft-vs-
host disease, and data for use as chemotherapy sensitizers are too early.
While MOZOBIL is a late stage, complementary product over long-term, we remain
concerned that investor expectations for Velcade remain too high near-term.
Furthermore, considering the market opportunity in the U.S., Millennium is
paying approximately 5x U.S. sales for AnorMed, a high price for a late stage
product, in our view. Recall that Genzyme's offer for AnorMed was valued at
$367 million, or 40% less than Millennium's bid.
Despite the addition of a late stage, complentary product to its porfolio, we
remain concerned that investor expectations for Velcade remain too high near-
term. Moreover, the AnorMed acquisition will be a dilutive event for the next
few years and investors will not reap the benefits MOZOBIL until 2008. We
maintain a cautious view on the stock.
MOZOBIL HAS IMPRESSIVE PHASE II DATA
For many non-Hodgkin lymphoma (NHL) and multiple myeloma (MM) patients,
autologous hematopoietic progenitor cell (HPC) transplantation has emerged as a
potential life-saving treatment. The marrow recovery depends largely on HPC
mobilization for collection by apheresis into the circulation from the bone
marrow. Thus, many transplant centers have a established a minimal cell dose,
1 million to 2 million CD34+ (hematopoietic) cells/kg, in order to proceed to
transplantation (note that ideal cell dose target is considered to be ~5
million CD34+ cells/kg). A common approach to mobilize HPC is to administer
granulocyte colony stimulating factor (G-CSF), which produces myeloid
hyperplasia in the marrow and, therefore, leads to more HPCs in circulation.
In a phase II study involving 24 patients who served as their own control,
AMD3100 (MOZOBIL) was evaluated in combination with G-CSF (A + G) vs G-CSF
alone (G). The combination of A + G proved to be superior to G alone in
several ways:
* Higher number of CD34+ cells mobilized into circulation, which
translated into higher daily collections of CD34+ cells from apheresis
in all patients
* A + G was superior mobilizing HPC than G alone, irrespective of which
regimen was administered first.
* Many of the patients were able to collect appreciably more (50% or more
increase) CD34+ cells, despite requiring fewer apheresis procedures to
complete the collections.
* 20 patients receiving A + G achieved the optimal 5 million CD34+
cells/kg vs. 8 receiving G only.
Clinically, the above results would translate into effective mobilization of
patients who failed to mobilize with G alone, reducing the number of apheresis
procedures required to reach the minimal HPC dose and reducing the number of
apheresis procedures required to reach the optimal HPC dose.
The phase II study also demonstrated that HPC mobilization effect achieved by
MOZOBIL was greater in NHL than with MM, although the total number of patients
in the study were too small to draw any conclusions.
PHASE III STUDIES ARE ONGOING TO ASSESS THE EFFICACY OF MOZOBIL
Currently, there are two ongoing phase III studies evaluating A + G vs. G alone
in two cancer populations: non-Hodgkin's lymphoma (NHL) and multiple myeloma
(MM). The NHL study (n=300) is about 92% enrolled (expected to complete
enrollment by year-end) while the MM study (n=300) is fully enrolled, with the
results in both studies expected in 2007. Both studies are randomized, double-
blinded, active control, parallel assignment, safety/efficacy studies.
The primary endpoint in the NHL study is a stem cell collection target of
greater than or equal to 5 million CD34+ cells/kg in four or less days of
apheresis while the primary endpoint in the MM study is a stem cell collection
target of greater than or equal to 6 million CD34+ cells/kg in two or less days
of apheresis. The study endpoints and statistical analysis for the phase III
program are based on results from phase II program on MOZOBIL as well as
historical data from standard stem cell mobilization regimens using G-CSF
alone. Based on this data, each Phase III study is powered to show a minimum of
a 20% difference between the study arms, with an assumption that 20% of
patients in the control arm will meet the primary endpoint.
DESPITE IMPRESSIVE PHASE II RESULTS FEW QUESTIONS REMAIN
Although phase II study yielded impressive results, a few questions remain
regarding future trials. First, although the data did not suggest a
significant delay in platelet recovery, future studies will be required to
define the pace of platelet recovery more precisely, since the phase II study
was less rigorous in requiring daily platelet counts after discharge. White
cell or platelet engraftment, a process in which the transplanted cells start
to grow and make new blood cells, is important when evaluating the outcome of
stem cell transplants.
Secondly, some evidence suggests that higher doses of G-CSF can be used than
that was used in the phase II study. Whether MOZOBIL can boost stem cell
mobilization vs. higher doses of G-CSF will need to be determined. Since
Millennium is most likely to price MOZOBIL at a premium if approved, there is
an economic incentive to use a cheaper alternative if higher doses of G-CSF can
increase HPC mobilization as effective as MOZOBIL.
Finally, in healthy volunteers, administration of a single dose of MOZOBIL
resulted in a mobilization of comparable number of CD34+ cells into circulation
as 4 days of G-CSF. This data coupled with that of phase II raise questions
about whether MOZOBIL can be used alone to mobilize stem cells in hematologic
cancer patients or in healthy volunteering for allogeneic transplantation. In
terms of pricing and market opportunity, this characteristic could bode well
for Millennium.
ULTIMATELY THE SUCCESS OF MOZOBIL WILL DEPEND ON PRICING AND USAGE IN OTHER
INDICATIONS
Although Millennium gave no guidance on MOZOBIL pricing, the company cited
economic aspects of stem cell transplants and its complications as a reason for
potential premium pricing. The management cited that stem cell transplants are
very expensive. Moreover, transplant failure can lead to longer hospital
stays, higher mortality and postoperative complications, all which lead to
higher medical costs.
If the phase III trials can reproduce phase II results, we can envisage broad
MOZOBIL usage with G-CSF in all patients undergoing stem cell transplants, not
just for the 60-80% of patients who are poor mobilizers.
The market opportunity for MOZOBIL, a small molecule CXCR4 chemokine
antagonist, could be $250 million worldwide and $100 million in the U.S.,
assuming the cost of MOZOBIL at $5,000, in our view. In the U.S., we estimate
that there are 20,000 transplants done annually while 25,000 procedures are
undertaken in Europe.
Since G-CSF costs $500 per administration for 5-10 days, we assume premium
pricing at the upper end of this range. Furthermore, pricing premium could be
greater if future studies prove than MOZOBIL can be used alone as a monotherapy
without G-CSF.
Other possible opportunities for for MOZOBIL are its use as stem cell mobilizer
in allogeneic transplants and as chemotherapy sensitizers in other hematologic
malignancies, such as acute myelogenous leukemia (AML) and chronic lymphocytic
leukemia (CLL). However, allogeneic transplants are associated with high
mortality, related to fungal infections, interstitial pneumonia and graft-vs-
host disease, and data for use as chemotherapy sensitizers are too early to
tell.
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.
Our work shows that amultiple 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,
given our anlaysis). 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.
MILLENNIUM QUARTERLY P&L ($MMS)
Source: CIR
MILLENNIUM ANNUAL P&L ($MMS)
Source: CIR
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
ANALYST CERTIFICATION APPENDIX A-1
I, Yaron Werber, research analyst and |
