Velcade successor: MLNM announced that MLN0415 an inhibitor of IKK beta is in late stage pre-clinical development. Inhibition of IKK
beta would, like Velcade, inhibit NFkB. However MLN0415 may have a superior tolerability profile. We expect more information on this
program at MLNM’s analyst day meeting.
from craig parker, lehman brothers. he’s the guy who downgraded from 10 to 8 a while back and, I believe, one of the guys who complained that the royalty rates were not disclosed, causing them to have to think for a moment or two. here he upgrades, fwiw.
btw, mlnm did not say that 0415 was a velcade successor.
does anyone know whether this comparison to T is valid? thanks.
sales
MLN1202, an antibody targeting CCR2, is a
candidate to become the next MLNM commercial product. Three studies are evaluating
MLN1202 in cardiovascular disease, rheumatoid
arthritis and relapsing remitting MS, all disease with an inflammatory component. The studies are all small, ~40 patients and are clearly
proof of concept. We expect more clarity in 2006 as data from these studies emerge. The proposed mechanism of action appears eerily
similar to Tysabri. However, withCCR2 limited predominantly to monocytes and macrophages, MLN1202 should be less
immunosuppressive than Tysabri.
Millennium Pharmaceuticals (MLNM - $ 8.51) 2-Equal weight
Recommendation Change
Clear Turning Point
Investment Conclusion
Alongside its better than expected Velcade sales
figure for Q3, MLNM announced a cost-cutting and
re-positioning plan that we think marks a clear
turnaround for the company. We can now see the
company achieving profitability in 2006 and
believe the new CEO will maximize the short term
Velcade sales potential as well as the long term
pipeline potential. We are raising our target price
to $10 and our rating to Equal Weight.
Summary
! MLNM reported US Velcade sales of $51 million,
about $2 million above our forecast. Q4 growth,
however, is not likely to rival the q-o-q growth
seen in Q3.
! The restructuring underway is sweeping in
breadth, the net impact of which should reduce
SGA and R&D expenses by 30% in 2006, making
the company potentially profitable in 2006.
! We are impressed with the new CEO's grasp of
the strategic and operational challenges facing
MLNM and her rapid action to remedy the most
pressing issues.
! She has also taken steps to maximize the short
term revenue potential for Velcade.
United States of America
Healthcare
Biotechnology
Reuters MLNM
Bloomberg MLNM
ADR
EPS ($) (FY Dec)
2004 2005 2006 % Change
Actual Old New St. Est. Old New St. Est. 2005 2006
1Q -0.07A N/A -0.09A -0.09A N/A N/A -0.05E -29% N/A
2Q -0.07A N/A -0.11A -0.11A N/A N/A -0.02E -57% N/A
3Q -0.18A N/A -0.02A -0.07E N/A N/A -0.02E 89% N/A
4Q -0.28A N/A -0.05E -0.07E N/A N/A 0.05E 82% N/A
Year -0.59A -0.34E -0.27E -0.34E N/A -0.03E -0.05E 54% 89%
P/E -31.5 -283.7
Market Data
Market Cap (Mil.) 2597
Float (%) 97
Dividend Yield N/A
Convertible Yes
52 Week Range 13.52 - 7.63
Financial Summary
Revenue FY05 (Mil.) 536.0
Five-Year EPS CAGR N/A
Return on Equity -12.20
Current BVPS 7.76
Debt To Capital (%) 4.25
Stock Overview
Stock Rating Target Price
New: 2-Equal weight New: $ 10.00
Old: 3-Underweight Old: $ 8.00
Sector View: 2-Neutral
EQUITY RESEARCH
2
For some time, we have thought that Millennium Pharmaceuticals’, Inc. (Nasdaq: MLNM) objective of achieving breakeven results in 2006
(on a non-GAAP basis) was not credible as it relied not only on exceptional growth of Velcade but also on partner revenue that was difficult
if not impossible to envision. With the cost reductions that were announced along with the Q3 financial results, MLNM now seems well
positioned to achieve break-even results even with only moderate growth in Integrilin related revenue and about 25% growth in Velcade.
While we have assumed that MLNM recognizes incremental corporate partner revenue, we believe that our revenue forecast could be
achieved with Velcade related milestone payments from Johnson & Johnson (NYSE: JNJ).
October 28, 2005
MLNM's new CEO - Deborah Dunsire - has apparently come to MLNM with a clear mandate to take the company in a new direction. The
cost cutting will take the company from 1,500 employees at the end of 2004 to 1,100 employees by the end of this year. She seems to have
also brought a clear commercial focus as she ascertained that the Velcade commercial organization was not broadly delivering key product
messages and as a result the company is increasing the size of the sales force by about 50% to 100 reps. This increase should translate to
continued growth in Velcade over the next several quarters at the very least.
In terms of MLNM's previously unfocused research efforts, she has all but eliminated inflammation from the discovery research function in
order to focus on oncology discovery. We applaud this narrowing of the research focus as MLNM had historically spent a high proportion of
its total R&D budget on research from which very few product candidates actually emerged. For example, all of MLNM's marketed and late
stage product candidates came from acquisitions.
For MLNM to have a compelling earnings and sales growth profile in 2007, we think it will need to add an additional product to its
commercial portfolio as we expect Velcade to experience competition from Revlimid in that time frame. At present, we would not expect any
of the current pipeline candidates to reach commercial fruition by then. What MLNM has now fashioned though is an earnings profile in
2007 that, if it were to have an additional sales driver, could demonstrate compelling earnings growth. Dr. Dunsire has rapidly shown herself
to have keen operational and strategic acumen - all that remains is for her to demonstrate the same acumen with business development
and in-license a product that could impact 2007-09 sales growth.
Q3:05 Summary
MLNM reported financial results for Q3:05 that were well above Lehman and consensus forecasts. Net loss on a GAAP basis for Q3:05 was
$73.8 million, or $0.24 per share, compared to $63.1 million, or $0.21 per share, for Q3:04. Excluding restructuring and amortization non-
GAAP net loss for Q3:05 was $6.5 million, or $0.02 per share, well above Lehman forecast of ($0.13) and ($0.07) consensus.
Total revenue for Q3:05 was $201.million (vs. Lehman estimates of $172 million and $158 million consensus) compared to $110.0 million in
Q3:04. Product sales constituted $50.9 million, co-promotion revenues $33.0 million, revenues under strategic alliance $105.1 million and
royalties $12.5 million of Q3:05 revenues. As a result of the restructured relationship with Schering-Plough (NYSE: SGP) for Integrilin
(eptifibatide) as of September 1, 2005, MLNM will no longer report co-promotion revenue for Integrilin and will begin recording royalties as a
separate line item.
In addition MLNM also announced the following ‘strategic refinements”:
- Continue to take a series of actions, which in the aggregate are projected to reduce operating expenses by approximately 30%
for FY:06 compared to FY:04.
- Substantially reduce MLNM’s efforts in inflammation discovery.
- Reduce the workforce (from 1,500 at the end of 2004) to approximately 1,100 by the end of 2005, by managing attrition,
eliminating Integrilin sales and marketing positions, reducing the number of positions in inflammation discovery and reducing
the number of positions in business support groups.
- Consolidate further MLNM’s Cambridge-based facilities.
- Continue to realize operating efficiencies and manage expenses.
MLNM also updated its FY:05 guidance:
- Non-GAAP net loss guidance lowered to $85 – 95 million from previously indicated <$100 million.
- Velcade U.S. net product sales guidance increased to $190 - 195 million from a previously indicated $185 – 195 million.
- MLNM expects to record restructuring charges in the range of $80 - 85 million in Q4:05 from the 2003 restructuring and the
2005 strategy refinement.
- Cash, cash equivalents, and marketable securities increased to $600 million at year end 2005. The original cash guidance
was set at > $500 million.
Product Sales Analysis
Velcade: Net product sales of Velcade in the U.S. increased by 35% to $50.9 million in Q3:05 from $37.7 million in Q3:04. This q-o-q
growth was driven by an increase in end user demand coupled with a 3.7% price increase effective July 1st. Based on a MLNM survey
conducted in September with 75 U.S. oncologists who treat significant numbers of multiple myeloma patients, increased Velcade use is
EQUITY RESEARCH
3
attributable to increased penetration in the front and second line setting while maintaining share in third line and beyond. MLNM continues
to see moderate usage use in mantle cell lymphoma. For Q4:05, MLNM is not expecting to see as large an increase in Velcade net product
sales as in Q3:05.
MLNM has seen growth in the Velcade front line penetration up to 9% Q3:05 from 5% last quarter, with the second-line penetration up to
45%, and third line between 40 - 50%. In addition, MLNM has received compendia listing in nine states for first line use and has
reimbursement in those nine states based on the listing. There are an additional 39 states who are considering the review of the Velcade
front line data. MLNM anticipates that, because the Velcade data is strong and there is such a need in myeloma, more states will start to
reimburse Velcade.
Integrilin Co-Promotion: For the first two months of Q3:05, co-promotion revenue for Integrilin was $33.0 million. Effective September 1st
MLNM’s relationship with SGP around the U.S. development and commercialization of Integrilin was restructured from a co promotion to a
royalty arrangement. Under the new relationship structure MLNM receives a $35.5 million up-front payment which will be amortized over
several years. MLNM will also receive significant royalties on sales in the U.S. over the product's lifetime, extending beyond patent
expiration in 2014. MLNM should receive at least $85 million for Integrilin in both FY:06 and FY:07 as a result of the guaranteed royalty
payment.
Royalty Revenue: For September 2005 MLNM’s royalty revenue was $12.5 million and primarily included royalties from SGP for product
sales of Integrilin in the U.S. Royalty revenue also included royalties from Ortho Biotech, a subsidiary of JNJ, for sales of Velcade outside
the U.S.
Strategic Alliance: Revenue under strategic alliances was $105.2 million. This included the one-time sale of $71.4 million of Integrilin
inventory on September 1, 2005, per the transfer of U.S. commercialization rights, to SGP.
Expense Analysis – Taking unpleasant, but curative, medicine
COGS: MLNM recorded $89.0 million in COGS for Q3:05, up from $18.6 million in Q3:04. The Q3:05 increase was mainly due to a $71.4
million sale of Integrilin inventory to SGP in Q3:05.
R&D: R&D expenses for the Q3:05 decreased by 19% to $80.6 million from $99.0 million in Q3:04. The decrease was driven by reduced
spending in discovery and a decrease in development costs for Velcade compared to the higher level of spending in 2004 associated with
the preparation of the sNDA filing for Velcade in the multiple myeloma second-line treatment setting.
In addition MLNM further indicated in its earnings call that a historical division between R&D has been roughly 30 - 35% for Discovery and
the remaining invested in Research. As a result of MLNM’s re-structuring, MLNM expects to move Discovery closer to 25% of the total R&D
expenditures.
S,G&A: MLNM decreased its SG&A expenses for Q3:05 by 12% to $40.6 million from $45.9 million for the Q3:04. This decrease was
mainly due to reduced sales and marketing expenses resulting from the transfer of U.S. commercialization rights of Integrilin to SGP.
MLNM re-iterated its goal to reduce the workforce (from 1,500 at the end of 2004) to approximately 1,100 by the end of 2005, by managing
attrition, eliminating Integrilin sales and marketing positions, reducing the number of positions in inflammation discovery and reducing the
number of positions in business support groups. During its earnings call, MLNM gave further guidance that roughly 200 of the positions
eliminated were a consequence of the SGP agreement restructuring with the vast majority on the commercial side coming from sales and
marketing. With regard to the other 200 positions to be reduced, probably two-thirds will be R&D related, and the remaining one-third G&A
related positions.
EQUITY RESEARCH
4
Pipeline: More clarity November 2nd
Given the proximity of MLNM’s Analyst Day on November 2nd, the pipeline update was light on content. However, it seems apparent to us
that the new management team is streamlining and focusing efforts on a select number of candidates, including rationalizing the Velcade
program.
Velcade: Preparing for competition: The clinical development program is very broad with breadth being driven primarily by investigators;
management stated that 50 abstracts, including 6 oral, were submitted to ASH. The high level of interest and flood of data helps justify the
proposed sales force expansion; clearly MLNM’s primary objective is to increase the level of detailing and ensure that APEX survival data,
which was included in the product labeling at the end of Q1:05, is communicated effectively. With Celgene’s Revlimid waiting in the wings,
we think that Velcade will come under pressure and positive marketing messages will be key to defending the franchise in 2006. We think
there are a number of data points that should begin to emerge in 2006:
• Revlimid Combination: The University of Arkansas has enrolled 315 patients progressing from Total Therapy II into one of 3 arms,
Velcade, Velcade + Revlimid or low dose Velcade + Revlimid. This study is listed as ‘completed enrollment’ and we should see
data in 2006.
• Weekly Administration: From a competitive perspective, the weekly studies are of key interest due to the simplification of
administration and the impact on convenience. John Hainsworth initiated a study in Q2:04 evaluating weekly Velcade in relapsed
refractory multiple myeloma, patients not achieving a PR or better transitioned to the biweekly regimen. Also, in Q2:04 MLNM
initiated a phase 2 study evaluating standard dose Velcade or weekly Velcade in combination with Rituxan in relapsed NHL. We
expect interim data from both these studies could be at ASH this year
• First-line Setting: There are currently 3, first-line studies ongoing; one in the non-transplant setting, for which management
indicated that interim data will be forthcoming in 2006.
• Osteoblast Benefits: The University of Arkansas is evaluating the ability of Velcade to activate osteoblasts, which in the context of
multiple myeloma is an important question given the prevalence and morbidity associated with bony myeloma lesions.
Beyond multiple myeloma, the next key data set will be from the registration enabling study of Velcade in mantle cell lymphoma (MCL); we
expect a sNDA in early 2006. A compendia listing for MCL has been granted but management stated that only 9 states were currently
reimbursing for Velcade in MCL. Currently the is fairly “modest” use of Velcade in both MCL and NHL which we expect will accelerate as the
impact of new data and improved sales force effectiveness gain traction.
To date, we think the data in solid tumors has been disappointing, but management confirmed that investigator interest is still high and
MLNM is continuing to invest in solid tumors; a study of Velcade combined with Doxil for anthracycline-refractory breast cancer was recently
opened. Studies are ongoing in prostate and lung cancer, including a SWOG study in 1st line small cell lung cancer which is closed to
accrual with data expected in 2006.
MLN1202: Stepping into the spotlight: As evidenced by three ongoing phase 2 studies, MLN1202, an antibody targeting CCR2, is a
candidate to become the next MLNM commercial product. Three studies are evaluating MLN1202 in cardiovascular disease, rheumatoid
arthritis and relapsing remitting MS, all disease with an inflammatory component. The studies are all small, ~40 patients and are clearly
proof of concept. We expect more clarity in 2006 as data from these studies emerge. The proposed mechanism of action appears eerily
similar to Tysabri. However, withCCR2 limited predominantly to monocytes and macrophages, MLN1202 should be less
immunosuppressive than Tysabri.
MLN518: Following on from promising data in a relapsed setting, MLNM has initiated a study of MLN518 in combination with induction
chemotherapy for newly diagnosed AML patients. MLN518 targets Flt3 signaling, a highly competitive area, but MLNM believes that
MLN518 has a highly competitive product profile; CTEP will be initiating studies in glioma, renal and prostate cancers.
EQUITY RESEARCH
5
Velcade successor: MLNM announced that MLN0415 an inhibitor of IKK beta is in late stage pre-clinical development. Inhibition of IKK
beta would, like Velcade, inhibit NFkB. However MLN0415 may have a superior tolerability profile. We expect more information on this
program at MLNM’s analyst day meeting.
Clinical Trials
Millennium - Impor tant Clinical T r ials
Dru g Study Summary Indicat ion P has e Stat u s Data/T iming
MLN1202 Dose escalation, not currently treated Multiple Sclerosis Phase 2 Enrollment 2006
MLN1202
Placebo controlled dose escalation, active disease despite
DMARD Rheumtoid Arthritis Phase 2 Enrollment 2006
MLN1202 Placebo controlled dose escalation, risk of atherosclerotic dx Cardiovascular Phase 2 Enrollment 2006
MLN2222 Dose escalation, healthy volunteers & CABG, Xoma run CABG Phase 1 Enrollment 2006
MLN2704 Dose escalation, chemotehrapy naïve Prostate cancer Phase 2 Enrollment 2005
MLN-3897 2nd dose esclation study Autoimmune Phase 1 Enrollment 2005
MLN518 Sngle arm 518/chemo, newly diagnosed AML Phase 1/2 Enrollment 2007
Velcade Veclade, Velcade relapsed patients Multiple Myeloma Phase 4 Enrollment 2006/7
Velcade VAD vs Velcade dex > Transplant, 1st line Multiple Myeloma Phase 3 Enrollment 2007/8
Velcade VAD +/- chemo vs Velcade AD +/- chemo > transplant, 1st line Multiple Myeloma Phase 3 Enrollment 2007/8
Velcade Melphalan/prednisone +/- Velcade, 1st line non transplant patients Multiple Myeloma Phase 3 Enrollment 2007/8
Velcade Velcade/Thalidomide/Dexamethasone +/- Adriamycin, relapsed Multiple Myeloma Phase 3 Enrollment 2007/8
Velcade Velcade+/- Doxil, relapsed Multiple Myeloma Phase 3 Enrollment 2007/8
Velcade
Velcade vs Velcade/Revlimid vs low does Velcade/Revlimid,
progressing after total Therapy II Multiple Myeloma Phase 3 Enrollment 2007/8
Velcade Weekly Velcade > bi-weekly if SD or PD, relapsed Multiple Myeloma Phase 2 Enrollemnt 2005/6
Velcade
EPOCH/Rituxa/Velcade: PR> Velcade maontenance 18 mo. Vs
velcade @ relapse
Mantle cell
lymphoma Phase 2 Enrollment 2006/7
Velcade Single arm, relapsed refractory
Mantle cell
lymphoma Phase 2 Enrollment Completed ASH 05
Velcade
Velcade (std dose)/Rituxan vs Velcade (weekly)/Rituxan, Rituxan
naïve/relapsed
Non-hodgkins
lymphoma Phase 2 Enrollment ASH 05
Velcade Velcade/Gemzar/carboplatin, ist line NSCLC Phase 2 Enrollment Completed ASCO 06
Velcade Single arm velcade, BAC features NSCLC Phase 2 Enrollment 2007/8
Velcade Taxotere/Erbitux X 4> Erbitux Vs Taxotere/VelcadeX4 >Velcade NSCLC Phase 2 Enrollment 2007/8
source: L ehman Brothers and Company reports
EQUITY RESEARCH
6
Source: Lehman Brothers Estimates, Company Reports
Millennium: Potential 2005/06 catalysts
MLN 3897, Phase 2 go
no/go
3Q05 4Q05 1Q06 2Q06
MLN 1202 phase
1 data in RA and
MS
EXACT DATE UNKNOWN
Velcade, relapsed MCL
data, ASH 12/3-12/6
Velcade,
relapsed MCL
sNDA
MLN 8054, Phase
1 initiation
Velcade, 1st line
SCLC,
SWOG339,
ASCO 6/2-
6/6
MLN 518, Initiate Phase 2
AML, single agent
MLN 518, Phase 1/2
AML, + chemo
MLN 2704, go no/go
MLN 02 phase 1,
new cell line
MLN 1202, Initiate phase 2
athersclerosis
Velcade,
prostate/ovarian
cancer go no/go
Velcade/Rituxan,
NHL go no/go
Velcade, Initiate
phase 1 stroke
Divested Integrilin
to SGP
Execute additional
in/out license
agreement
MLN 1202,
Initiated phase
2 MS
MLN 1202,
Initiated phase
2 RA
MLN 0415, Phase
1 initiation
MLN 3701, Phase
1 initiation
MLN 518, CTEP sponsored studies,
glioma, renal & prostate
EQUITY RESEARCH
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Millennium Pharmaceuticals (MLNM)
Projected Income Statement
Dollars in thousands, except per share
Fiscal year ends December 31
2004E 1Q05A 2Q05A 3Q05E 4Q05E 2005E 2006E 2007E
Revenues
Integrilin co-promotion rev $206,264 $42,826 $47,661 $33,037 $123,524
Velcade $144,148 $44,795 $43,892 $50,942 $51,497 $191,127 $261,051 $294,440
Royalties $12,514 $26,139 $38,653 $125,968 $138,889
Strategic Alliance Revenues $98,890 $36,090 $19,092 $105,186 $22,943 $183,311 $96,816 $104,430
Total revenues $448,206 $123,711 $110,645 $201,679 $100,580 $536,615 $483,834 $537,759
Operating expenses
Cost of sales 70,286 14,581 16,680 89,020 18,063 138,344 80,289 85,241
R&D 402,558 86,154 86,939 80,632 70,406 324,131 285,462 311,900
SG&A 196,644 51,637 52,060 40,623 30,174 174,494 135,474 145,195
Total operating expenses 669,488 152,372 155,679 210,275 118,643 636,969 501,225 542,336
Operating income ($221,282) ($28,661) ($45,034) ($8,596) ($18,063) ($100,354) ($17,391) ($4,577)
Interest Income $11,221 $4,442 $14,737 $4,902 $4,662 $28,743 $17,254 $15,460
Interest Expense ($10,691) ($2,588) ($2,315) ($2,820) ($2,574) ($10,297) ($10,691) ($10,691)
Amortization of goodwill (33,512) (8,500) (8,500) (8,500) (8,500) (34,000) (34,000) (34,000)
Restructuring (38,033) (1,107) (2,999) (58,791) (1,000) (63,897) - -
other 40,000 - - - - - - -
Income before taxes (non-GAAP) ($180,752) ($26,807) ($32,612) ($6,514) ($15,976) ($81,909) ($10,828) $192
Income Tax - - - - - - - -
Net Income/ Loss ($180,752) ($26,807) ($32,612) ($6,514) ($15,976) ($81,909) ($10,828) $192
EPS (GAAP) (0.84) (0.12) (0.14) (0.24) (0.08) (0.58) (0.14) (0.11)
EPS (non GAAP) (0.59) (0.09) (0.11) (0.02) (0.05) (0.27) (0.03) 0.00
Weighted average shares, diluted 299,070 306,590 307,761 308,848 309,037 308,059 311,140 314,251
Source: Lehman Brothers Estimates, Company Reports
Analyst Certification:
I, Craig C. Parker, hereby certify ………. |
