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Millennium Pharmaceuticals, Inc. (MLNM) is a leading biopharmaceutical company incorporating large-scale genetics, genomics, high throughput screening and informatics in an integrated science and technology platform.

This innovative drug discovery platform is applied across the entire research process, from gene identification through patient management, to accelerate and transform the discovery and development of proprietary therapeutic and diagnostic products and services. Millennium is focused on researching and developing treatment for cancer and inflammatory diseases.

Currently, Millennium has two marketed products. Integrilin (eptifibatide), a GP IIb-IIIa inhibitor, helps prevent the aggregation of blood platelets that, when allowed to form clots, can obstruct the flow of blood through the coronary arteries. Integrilin is used in patients undergoing percutaneous coronary intervention [PCI], including angioplasty or intracoronary stenting, and has been shown to decrease the incidence of death or myocardial infarction in patients with acute coronary syndrome [ACS] and unstable angina.

Millennium co-promoted Integrilin with Schering-Plough (SGP) in the U.S. through August 31, 2005. However, starting in September 2005, the company licensed complete U.S. rights to Schering-Plough in return for an upfront $35.5 million and royalties on U.S. sales. The new deal allows Millennium to reduce costs on Integrilin promotion and development. The royalty rate will be no less than $85 million for 2006 and 2007. The company will continue to receive royalties on ex-U.S. sales from partner GlaxoSmithKline (NYSE:GSK).

Millennium's future lies with Velcade (bortezomib). Velcade is a modified dipeptidyl boronic acid derived from the amino acids leucine and phenylalanine and formulated as a mannitol ester. Millennium received approval on May 13, 2003 in the U.S. (April 27, 2004 in the E.U.) to market Velcade for the treatment of multiple myeloma [MM] patients who have demonstrated disease progression on at least two prior therapies (3rd-line). Millennium further expanded the drug s label with an approval for the treatment of patients that have received at least one prior therapy (2nd-line) in early 2005. Velcade also received approval for the treatment of patients with relapsed mantle cell lymphoma [MCL] in December 2006. In May 2007, Velcade received another approval as a 2nd line combination therapy with Doxil for the treatment of patients with multiple myeloma who have not previously received Velcade.

INVESTMENT THESIS

Velcade
Velcade is the company's only product on the market and the key growth driver for Millennium. Velcade was approved in U.S. (May 2003), EU (April 2004) and Japan (October 20, 2006) for the 2nd line or 3rd line treatment of multiple myeloma (MM, also known as myeloma or plasma cell myeloma). MM is a cancer of the blood in which malignant plasma cells are overproduced in the bone marrow. MM is the second most common cancer of the blood, representing approximately one percent of all cancers and two percent of all cancer deaths. We believe the relapsed and refractory (2nd or 3rd line) multiple myeloma market represents a $500 million market opportunity.

Management believes it has roughly 40-50% market share in this 3rd-line use, and 55% penetration into the 2nd-line use. Upside to our forecasts will come from gaining traction in the 2nd-line use, and eventually gaining approval for use in the 1st-line setting. Management believes they have roughly 10% market share in this off-label use already. Millennium, in collaboration with its European partner, Ortho Biotech, recently initiated phase III trials to study Velcade in the 1st line (front-line) setting.

Velcade is being co-developed by Millennium and Ortho Biotech, a Johnson & Johnson (NYSE:JNJ) company. Millennium is responsible for commercialization of Velcade in the U.S. and Ortho Biotech is responsible for commercialization in the EU and rest of the world. Janssen Pharmaceutical K.K., another Johnson & Johnson company, is responsible for commercialization in Japan.

On October 26, 2006, Millennium and Ortho Biotech entered into a two-year agreement to jointly promote Velcade in the U.S. starting January 2007. Millennium will pay a portion of the Ortho Biotech sales effort dedicated to Velcade. Ortho Biotech will also be entitled to a proportionate share of revenues should sales associated with the increased promotional effort exceed pre-specified targets. Millennium will continue to be responsible for commercialization, manufacturing and distribution of Velcade in the U.S. The current agreement between Millennium and Ortho Biotech Products, L.P. for the promotion of Velcade outside the U.S. remains unchanged. We see this as a positive for Millennium, since Ortho Biotech has all the resources and expertise to promote Velcade in the U.S.

In order to expand the Velcade franchise, the company is making efforts to expand the label of Velcade. On December 10, 2006, Millennium reported positive preliminary results from the phase III trial of Velcade in combination with Dexamethasone [VD] vs the combination therapy regime of vincristine, adriamycin and dexamethasone triplet [VAD] in newly diagnosed MM (1st line) at the 48th Annual Meeting and Exposition of the American Society of Hematology [ASH]. Data showed that the Velcade and dexamethasone combination achieved a complete and near complete response (CR/nCR) rate of 20 percent, greater than a two-fold improvement (9%) over the vincristine, adriamycin and dexamethasone triplet [VAD], a commonly used therapy in this treatment setting. Velcade and dexamethasone showed an overall response rate (CR and partial response) of 82 percent compared to a 67 percent rate for VAD. The trial is part of a comprehensive registration-enabling phase III program evaluating Velcade in the treatment of newly diagnosed MM patients in the transplant and non- transplant settings. The phase III trial will continue to enroll patients to achieve the target of 480 patients. An early filing opportunity may be possible in 2007.

Millennium also presented the results of a phase II trial of Velcade in combination with doxil and dexamethasone [VDD] for 1st line treatment of newly diagnosed MM patients after autologous stem cell transplantation [ASCT] at the 2006 annual ASH meeting. VDD achieved an 89% overall response rate [ORR] with a 32% complete and near complete response rate (CR/nCR) and 53% complete and very good partial response rate [CR/VGPR]. VDD appeared to improve probability of achieving CR/nCR and VGPR after transplantation compared to results from randomized studies with single or tandem transplantation. In the 17 patients who went on to ASCT, ORR improved to 96 percent with 54 percent achieving CR/nCR and 79 percent achieving a CR/VGPR. VDD was well tolerated and safe; fatigue, pneumonia/infection and neuropathy (only mild) are the most common adverse events. Millennium will present updated results from the phase II trial at the upcoming International Myeloma Workshop in Greece.

The company also presented the interim data of a phase III trial of Velcade in combination with Doxil in 646 relapsed (2nd line) MM patients who had received at least one prior therapy compared to Velcade alone. Velcade plus Doxil achieved a statistically significant improvement in time to disease progression [TTP], the primary endpoint of the study, compared to Velcade alone. Based on a pre-planned, interim analysis from the phase III trial, the FDA approved the combination of Velcade + Doxil as a 2nd line treatment for patients with multiple myeloma who have not previously received Velcade on May 21, 2007.

Also at the 2006 annual ASH meeting, Millennium and Celgene presented the results of a phase I trial on Velcade + Revlimid for first-line treatment of multiple myeloma. The combination therapy achieved 58% overall response rate with 6% complete response rate and was well tolerated and safe. We expect to see updated results from the trial at the upcoming International Myeloma Workshop in Greece and initiation of a phase II trial in 2007.

Management's goal is to continue to conduct label expanding trials for Velcade in multiple myeloma [MM], as well as several other new indications. On December 8, 2006, the FDA granted full approval of Velcade for the treatment of patients with relapsed mantle cell lymphoma [MCL]. MCL is a subtype of Non-Hodgkin s Lymphoma [NHL]. The approval was based on the positive phase II data from the PINNACLE trial on Velcade in MCL presented at the Annual Meeting of the American Society of Clinical Oncology [ASCO] in June 2006. Overall response rate, including complete response rate, was 33%. The median duration of response was 9.2 months. Additional data from the phase II study was provided at the 2007 ASCO meeting. Overall response rate of 88 percent was observed with 82 percent of patients achieving a mean CR/Cru.

Millennium also presented data from the phase II study of Velcade in B-cell lymphoma, a subset of NHL, at the 2007 ASCO meeting. Results showed that overall survival [OS] rate was 100 percent after a median follow-up of 12 months and complete response and unconfirmed complete response (CR/CRu) rate was 83 percent, a much superior rate compared to the 55 percent to 75 percent observed with the standard care of treatment. Meanwhile, earlier in April 2006, Millennium initiated a phase III trial of Velcade in combination with Rituxan in patients with relapsed or refractory follicular lymphoma, a subtype of non-Hodgkin's lymphoma [NHL]. The phase III trial was based on previous positive phase II results. The final results were presented at the 2006 annual ASH meeting. In the phase III trial, 670 patients will be given Rituxan with or without Velcade. The primary endpoint is progression-free survival. Secondary endpoints of the study include the overall response rate and duration of response.

The company is also working on several other phase II trials with Velcade in patients with locally advanced or metastatic non-small cell lung cancer [NSCLC]. Millennium is studying Velcade in combination with other cancer agents such as Taxotere, Alimta, and EGFR-inhibitors such as Tarceva. The company plans to study the drug in a trial called PEAK, for patients that fail EGFR-inhibitors in bronchiovascular carcinoma [BAC]. Other phase II trials in prostate cancer and ovarian cancer are underway. With a fully-expanded label to include all these indications, Velcade could offer a billion-dollar opportunity worldwide. Yet, our model forecasts current U.S. sales growth to slow to single-digit growth and forecasts only $425 million in sales in 2009. We have yet to model approval for any solid tumor indications. We are optimistic on approval in 1st-line multiple myeloma and mantle cell lymphoma, but skeptical of significant uptake thanks to the dominant position of Rituxan and the impending blockbuster status of Revlimid.

At the 2007 ASCO meeting, Millennium reported results presented by the University of Arkansas for Medical Sciences and the Center for Cancer Research and Biostatistics on Total Therapy 3 [TT3]. TT3, a phase II study for the treatment of newly diagnosed multiple myeloma patients, involves dosing of patients with two cycles of a combination called VTD-PACE (VELCADE, thalidomide, dexamethasone, cisplatin, adriamycin, cyclophosphamide and etoposide) as an induction therapy prior to and as maintenance following stem cell transplantation. Results from the study showed a significant improvement over previously reported results from Total Therapy 2 [TT2], a current standard of care, which did not include Velcade. These data were presented at the 43rd Annual Meeting of the American Society of Clinical Oncology [ASCO] in Chicago in June 2007.

Financials
Millennium relies heavily on Velcade for both short term and long term growth. Due to fierce competition, sales growth in Velcade will slow down in 2007. Actually, Velcade sales in 2006 were $220.5 million, a 14.8% growth over 2005, which was less than half of the growth rate of 34.2% in 2005 over 2004.

In the first quarter of 2007, Velcade US sales were $58.6, in line with our estimate of $58.5 million. Although 1Q07 sales of Velcade was up 9.9% compared to the first quarter of 2006, but the growth rate was much lower than the growth rate of 19.1% in the first quarter of 2006. Royalties increased by 19.4% to $36.4 million, which, together with Velcade, were not enough to offset the decline of alliance revenue, which was down 59.3% to $15.7 million. As a result, total revenue in the first quarter of 2007 were $110.7 million, which was about $4 million less than our estimate of $114.5 million, and was down 10% from the same period of 2006. We estimate full year 2007 Velcade sales will be $252.1 million. Total revenue will be $466.1 million, which is 4.2% down from the same period of 2006. We believe that forming alliances and continuing to grow the collaborative revenue line is important for top line growth.

Our long-term model does not predict impressive profitability for the company. We estimate Millennium will make even in 2008 with non-GAAP EPS of $0.05 including stock based expense. Millennium will achieve full profitability in 2009 with earnings per share of $0.33. We believe that Millennium must continue to form strategic alliances in an attempt to grow revenues. Although the lower cost structure resulting from the new Integrilin deal will help, we do not believe the ramp in sales of Velcade will be enough to turn Millennium into a large-cap biotechnology powerhouse. The pipeline, admittedly robust and interesting, is still far too early-stage to contribute to revenue growth before 2009.

The company is dramatically reducing its therapeutic development now down to just oncology and inflammatory disease. In fact, Millennium is only conducting discovery work in the oncology field. Millennium also plans to reduce headcount in areas where the work can now be outsourced cost-effectively. Overall, headcount will decrease by approximately 14 percent, resulting in a planned employee body of just fewer than 1,000.

At March 31, 2007, Millennium had $819 million in cash, cash equivalents and marketable securities. The company had long term debt of $250 million. Cash burn is not a concern at this point of time.

Competitive Landscape

Unfortunately, competition in the multiple myeloma setting is set to heat up significantly with both Revlimid and Thalomid now approved for this indication. Revlimid, also approved for myelodysplastic syndrome [MDS] 5q chromosomal deletion, posted sales of $123.8 million in the fourth quarter of 2006, far exceeding Velcade sales of $55.1 million in the fourth quarter of 2006. Celgene's (NASDAQ:CELG) Thalomid posted sales of $110.2 million in the fourth quarter of 2006. U.S. Velcade sales of $55.1 million in the fourth quarter were in line with our estimate of $55.5 million, but only up 5.2% year over year.

Total Velcade sales in 2006 were $220.5 million, a 14.8% increase year over year. In the first quarter of 2007, Velcade sales were $58.6 million, which is in line with our estimate of $58.5 million. Celgene reported Revlimid sales of $146 million in the first quarter, exceeding our estimate of $142 million. However, sales of Celgene's Thalomid stalled in the first quarter, coming in at $106 million, reflecting a year-over-year decline of 1.1 percent. We believe from 2007 and beyond, however, Velcade may start to struggle now that oncologists have significant other treatment options available for multiple myeloma. For fiscal 2007, we estimate Velcade U.S. sales of $252.1 million, up 14.4% over 2006, but down from the 2006 growth rate 14.8%.

Further, Ortho and Millennium received some negative news in July 2006 when the National Institute of Health and Clinical Evidence [NICE], the UK's cost-benefit monitoring agency, recommended against Velcade inclusion on the health services list given an unclear value. We believe NICE's decision is the result of cheaper thalidomide available and the approval of more potent Revlimid. This has material impact on Velcade sales in EU if this trend spreads around the rest of Europe.

Drug Candidates under Development
Millennium has a number of interesting early-to-mid stage candidates for oncology, cardiology, and inflammatory diseases.

Specifically:

  • MLN1202 is a phase II chemokine receptor (CCR2) monoclonal antibody candidate for inflammatory disease that management is excited about. MLN1202 is currently under development for scleroderma, multiple sclerosis, and atherosclerosis. Millennium was also working on this candidate in rheumatoid arthritis, but management recently decided to focus on the three previous indications instead. Millennium recently reported positive top-line results from a phase II study of patients at high risk for atherosclerosis. MLN1202 showed statistically significant and sustained clinical activity compared to the placebo control arm and was found to be well-tolerated.
  • MLN3897 (AVE9897) is another chemokine receptor (CCR1) in phase I development with partner Sanofi-Aventis. Millennium is studying the compound for rheumatoid arthritis [RA] and multiple sclerosis. On November 28, 2006, the company initiated phase II trial for MLN3897 in combination with methotrexate in 186 patients with RA.
  • MLN02 is a humanized monoclonal antibody that binds to the T-cell integrin alpha 4 beta 7 with potential in a variety of gastrointestinal diseases, including ulcerative colitis. In May 2007, Millennium resumed the clinical program for MLN02 following favorable results from a previous randomized phase II trial involving 181 ulcerative colitis patients. The clinical program consists of a phase II doseranging trial in ulcerative colitis patients and phase I study in normal healthy volunteers.
  • MLN518 is a receptor tyrosine kinase inhibitor under phase II development for acute myelogenous leukemia. Previous phase I data demonstrated anti-leukemic activity.
  • In late 2005 management brought two candidates into the clinic: MLN3701, another oral CCR1 inhibitor, and MLN8054, an oral selective aurora kinase inhibitor. The company will study both candidates in phase I pharmacokinetic / pharmacodynamic trials. Millennium presented encouraging preliminary results from the phase I trial of MLN8054 at the 2007 ASCO meeting, validating its potential. MLN8237 is a backup candidate for MLN8054 and it entered clinical trials in the second quarter of 2007. During the second quarter of 2006, MLN6095 entered the clinical. The candidate is a small molecule inhibitor of inflammatory targets. In late August 2006, Millennium advanced MLN0415 to phase I trial. MLN0415 is an oral, selective, small molecule inhibitor of IKK2, which targets a major inflammatory pathway.
  • In April 2007, the company announced the advancement of a new small molecule, MLN4924, a novel inhibitor of Nedd 8 Activating Enzyme [NAE], from discovery to the development pipeline. NAE is an unprecedented target in the protein homeostasis pathway that acts upstream of the proteasome, the target of Velcade. NAE regulates a subset of proteins that controls the regulation and survival of cancer cells. In xenograft models, MLN4924 has demonstrated significant anti-tumor activity in several solid and liquid tumors. Millennium also presented research results on the molecule at the ASCO 2007 meeting which showed the substantial activity demonstrated by MLN4924 in a broad range of preclinical solid and hematological tumor. IND-enabling work is ongoing, and a phase I trial with the molecule is planned for 2008. MLN4924 is the seventh molecule to advance from the Millennium discovery organization to the development pipeline in the past three years.

  • The AnorMED Deal

    On October 17, 2006, Millennium decided not to increase its offer to acquire AnorMed. Millennium s decision was in response to Genzyme's increased bid to acquire AnorMed in an all cash offer of $580 million which is higher than Millennium s $515 million offer. As a result of the decision, Millennium is entitled to receive a termination fee of $19.5 million from AnorMED per the support agreement.

    RECENT NEWS

    June 4, 2007: Millennium Pharmaceuticals, Inc. announced the presentation of positive data for Velcade. These data include results from a phase II trial for subcutaneous [SC] administration of Velcade, a new option under evaluation. Results were also presented from the international phase III trial of Velcade + Doxil, which served as the basis for the recent U.S. approval of the combination and showed significant improvement in time to disease progression compared to Velcade alone.

    June 3, 2007:
    Millennium Pharmaceuticals, Inc. presented results of research on a new oncology molecule, MLN4924, a first-in-class, small molecule inhibitor of the Nedd 8 Activating Enzyme [NAE]. The data on NAE were presented at the Annual Meeting of the American Society of Clinical Oncology [ASCO] in Chicago. Data presented showed that NAE, validated as an oncology target in hematological and solid tumors, is a novel target in the protein homeostasis pathway that specifically controls a subset of proteins which regulates survival of cancer cells. Data also showed that MLN4924 demonstrated substantial activity in a broad range of preclinical solid and hematological tumor models.

    June 3, 2007: Millennium Pharmaceuticals, Inc. reported results presented by the University of Arkansas for Medical Sciences and the Center for Cancer Research and Biostatistics on the phase II study of Total Therapy 3 (TT3). TT3, a treatment for newly diagnosed multiple myeloma patients, includes a Velcade based therapy prior to and as maintenance following stem cell transplantation. These results showed a significant improvement over previously reported results from Total Therapy 2 (TT2), a current standard of care, which did not include Velcade. These data were presented at the Annual Meeting of the American Society of Clinical Oncology [ASCO] in Chicago.

    June 3, 2007: Millennium Pharmaceuticals, Inc. announced positive data from the phase II clinical trials of Velcade in newly diagnosed non-Hodgkin's lymphoma [NHL] patients at the 43rd Annual Meeting of the American Society of Clinical Oncology in Chicago. These data showed that the addition of Velcade to current standards of care produced high complete response [CR] rates in patients with newly diagnosed B-cell lymphoma [BCL] and mantle cell lymphoma [MCL].

    June 3, 2007: Millennium Pharmaceuticals, Inc. presented preliminary results from a phase I study of MLN8054, a first- in-class, orally-administered, small molecule to the Aurora A kinase, at the 43rd Annual Meeting of the American Society of Clinical Oncology in Chicago. In addition, the Company initiated a new Phase I clinical program for MLN8237, a second-generation Aurora A kinase inhibitor.

    May 21, 2007: Ortho Biotech Products, L.P., announced the FDA has approved the use of Doxil in combination with Velcade for Injection to treat patients with multiple myeloma who have not previously received Velcade and have received at least one prior therapy. Source: Millennium Pharmaceuticals, Inc.

    VALUATION
    We rate the shares of Millennium Sell with a price target of $9.00. We estimate 2009 EPS of $0.33 including share based compensations. Currently, biotech industry is trading at 38 x P/E. We use this industry average P/E, multiplied by our 2009 estimated EPS of $0.33, discounted at 20% for two years, we arrive at our target price of $9.00. We believe investors are discounting Millennium due to the slowing growth of Integrilin and the lack of meaningful reacceleration of Velcade. Investors are probably concerned that Velcade sales will stall now that Celgene has approval for Revlimid in MDS (in the U.S. only) and MM (in both U.S. and EU).

    RISKS

  • The first risk to our price target is the unexpected Velcade sales growth in the US and international markets.
  • Second risk is the unexpected alliance revenue growth in the coming quarters which will affect our models.
  • The broad market performance and biotech industry as a whole will have material impact on our target.

  • KEY POINTS

  • We are maintaining our Sell rating on the shares of Millennium based on the first quarter performance. Although Velcade U.S. sales and royalties grew 9.9% and 19.4% respectively, alliance revenue was down 59.3% in the first quarter of 2007. As a result, total revenue for the first quarter was $110.7 million, $3.8 million less than our estimate of $114.5 million and was down about 10% from the first quarter of 2006.
  • Velcade is the only product on the market and is the key growth driver for Millennium. However, competition is fierce. Both Revlimid and Thalidomide are approved for multiple myeloma [MM]. Both competitors prevail in sales over Velcade.
  • We believe from 2007 and beyond, Velcade may start to struggle now that oncologists have have significant treatment options available for multiple myeloma. For 2007, we estimate Velcade sales of $252.1 million, up 14.4%. However, total revenue will only be $466.2 million, down 4.2% from 2006.
  • We believe Millennium must expand Velcade labels and diversify its product portfolio in order to achieve sustainable growth. However, this won't happen until 2008 when Velcade plus Dex may be approved for 1st line treatment of MM. Our price target for Millennium is $9.00 per share.
  • Millennium Pharmaceuticals, Inc. is a drug discovery and development company, incorporating large-scale genetics, genomics, high throughput screening and informatics in an integrated science and technology platform. Millennium relies heavily on Velcade, the company's only product on the market, for both short term and long term growth. However, Velcade's growth has slowed down since 2006 due to stiff competition from Celgene's Revlimid and Thalidomide. As such, we maintain our Sell rating on the shares with a price target of $9.

    MLNM 1-yr chart:

    Source: Millenium Pharmaceuticals A Sell On Strong Competition, Slowed Growth