Millennium Pharmaceuticals

(MLNM)

reported first quarter results Tuesday that were three cents shy of Wall Street estimates. But the bigger issues facing the biotechnology firm are its lofty valuation, and whether it can transform successfully from a gene hunter to a drug developer.

In a quarter some analysts saw as a non-event for a company that has yet to do much beyond research, the Cambridge, Mass.-based company posted a first quarter loss of $34.2 million, or 16 cents per share, before special charges. Wall Street was looking for a net loss of 13 cents, according to consensus estimates from

Thomson Financial/First Call

.

Revenue for the quarter totaled $50.4 million, consisting of drug development payments from large pharmaceutical partners. The company's wider net loss was a result of higher-than-expected expenditures for research and development and general overhead fueled by Millennium's drug-testing programs.

Millennium will be excused for its first-quarter miss if it gets drugs to market on time. The company began life as a research-driven company cracking the human genetic code to find promising targets for new drugs. But instead of just selling those targets to other companies, Millennium wants to be its own drugmaker, a more lucrative business.

Millennium shares closed Tuesday up 2 cents to $32.51 per share. The company's stock is off roughly 60% from its 52-week high of $89.81 last November. But since hitting a recent low of $22 in late March, shares have rallied more than 47%.

The conundrum facing investors is whether Millennium is a must-have stock today, or whether it should be left on the vine to ripen a bit. Campath, the company's first potential drug, is expected to gain approval from U.S. drug regulators later this quarter. But one drug does not a successful biopharmaceutical company make.

Recent investor distaste for genetic research companies has Millennium down to a sweeter valuation. Last November when the company packed a whopping $19 billion market cap, Millennium traded at a mouth-puckering 81 times 2001 revenue.

But Millennium is not cheap, even with its recent selloff. Sporting a $7 billion market cap, the company currently trades at 30 times this year's estimated revenue and 24 times estimated 2002 revenue. By comparison,

Genentech

(DNA)

, a marquee biotech name, trades at 13 times estimated 2001 sales. And Genentech, unlike Millennium, has real products and earnings.

Still, Millennium's valuation is not out of line with its peers.

Vertex Pharmaceutical

(VRTX) - Get Report

currently trades at 25 times 2002 sales, while

Curagen

(CRGN)

trades at 41 times 2002 sales. On the high end,

Human Genome Sciences

(HGSI)

trades at 72 times estimated 2002 earnings.

"Valuating companies like Millennium is a tough call because investors have shown this year that they hate the entire sector," says

SG Cowens

analyst Bill Tanner, who rates the company a strong buy, with the caveat that his firm doesn't downgrade solely on valuation. He says he's not pushing the stock at its current level.

"There isn't much going on to move Millennium one way or the other over the next two or three months," he adds, "but if you're a long-term believer in the whole genomics story, Millennium is a good pick." SG Cowen doesn't do banking for Millennium.

If, as expected this quarter, the

U.S. Food and Drug Administration

approves Campath, the drug will hit the market immediately to treat patients suffering from chronic lymphocytic leukemia. But the drug is not expected to be a huge seller and Millennium must share revenue and profits with

Schering AG

(SHR)

and

Ilex Oncology

(ILXO)

.

Next up for the company is LDP-341, an experimental cancer-fighting drug that has shown promising results in early human testing. The company also has several additional cancer drug candidates still being evaluated in the laboratory. Alliances with drug giants like

Abbott Laboratories

(ABT) - Get Report

and

Roche

are helping fund the research.

Doug Lind, biotech analyst at

Morgan Stanley Dean Witter

, calls LDP-341 Millennium's "first potential blockbuster" in a recent bullish research report.

"With its pipeline and its pharma relationships, it is increasingly difficult to question Millennium's leadership position in converting genomic information into the discovery of new targets and drugs," Lind writes. He rates the company market outperform and his firm doesn't bank for Millennium.

But the Millennium story today is still more promise than reality. That may not be enough to win over investors leery of over-the-top biotech hype.

"I think investors are looking for Millennium to push something very sexy into

clinical trials," says Tanner. "Unfortunately, most of the company's most promising drug candidates aren't there yet."