Millennium's Future Remains Cloudy

It's been a lousy year for holders of Millennium Pharmaceuticals ( MLNM).

To turn things around, Cambridge, Mass.-based Millennium must convince a skeptical Wall Street that it can become a growth story again. Millennium's multiple myeloma drug Velcade continues to post year-over-year sales growth, but the rate of that growth has slowed as the drug's penetration into the advanced multiple myeloma market matures.

And while Millennium still appears to be on track to reach profitability in 2006, confidence in this goal has waned over the past 12 months because sales of Velcade have managed to hit only the low end of the company's guidance. Because of intense competition, there's been no real help either from Integrilin, the company's blood-thinning drug used during certain heart surgeries.

"Millennium has guided to profits in 2006, but right now, this goal appears to be reachable more on expense cuts than on sales growth," says SG Cowen analyst Phil Nadeau, whose own model for the company has it reaching only break-even in 2006. SG Cowen doesn't rate stocks but Nadeau believes Millennium is fairly valued at these levels; his firm doesn't have a banking relationship with the company.

For growth-hungry biotech investors, backing into profitability by cutting costs is considered almost cheating, which helps explain Millennium's current woes. After slipping 2.3% to $12.09 on Thursday, the biopharmaceutical firm is down 34% this year, seriously underperforming the 1% gain in the Nasdaq Biotechnology Index and 7.5% gain in the Amex Biotechnology Index.

Adding insult to shareholders' injury, analysts' net-loss estimates for Millennium in 2004 and 2005 have grown (and top-line estimates have dropped) over the past 12 months as Velcade sales have not lived up to the more bullish expectations.

Millennium CFO Marsha Fanucci says the company is "doggedly" working toward its goal of reaching profitability in 2006.

"It's in the crosshair and we're on track," she says of putting the company into the black. "I think we've demonstrated to the outside world that we've put together a loss profile to reach profitability and we're delivering on that."

Wall Street is looking for Millennium to lose $175 million this year, $107 million in 2005, and earn $8 million in 2006. On an earnings-per-share basis, that works out to a net loss of 55 cents and 36 cents in 2004 and 2005, respectively, and earnings of 2 cents in 2006.

Velcade was approved in May 2003 as a first-in-class treatment for multiple myeloma patients who had failed three or more previous therapies. Sales in 2003 totaled $59 million and are expected to reach about $140 million in 2004, but that's only the low end of the company's $140 million-$160 million guidance for the year.

Fanucci says the company is pleased with Velcade's performance this year. "When you launch a new product, there are all kinds of vagaries to making guidance," she said. "Our guidance for Velcade sales was $140 million to $160 million, so we feel good about falling into that range."

One of the keys to reinvigorating the Millennium story will be to expand the use of Velcade. First, the company is working on moving the drug's use up the so-called treatment ladder in multiple myeloma. An application for second-line use in multiple myeloma already has been filed with the FDA, with an affirmative approval decision widely expected next year.

At last week's meeting of the American Society of Hematology, the company presented positive data from midstage studies of Velcade in front-line, or newly diagnosed, multiple myeloma. Pivotal phase III studies in this indication, the most commercially lucrative in multiple myeloma, will be started by year-end or early 2005, says David Schenkein, Millennium's vice president of clinical oncology development.

But even further penetration for Velcade in multiple myeloma is not likely to get investors very excited in the near term, some analysts say. Second-line Velcade use could cannabilize use in later-stage patients, while approval for first-line multiple myeloma is a bit far down the road. Instead, the company has to make Velcade work in additional (and bigger) cancer markets. The best opportunities right now appear to be in a couple of different forms of lymphoma, including mantle cell lymphoma and possibly non-Hodgkin's lymphoma, as well as non-small cell lung cancer.

Millennium is expected to make a so-called "go, no go" decision on a phase III Velcade non-small cell-lung cancer study in January, with an announcement likely at the JP Morgan Healthcare Conference, Fanucci says. Interim data from a phase II non-Hodgkin's lymphoma study of Velcade in combination with Genentech ( DNA) and Biogen Idec's ( BIIB) Rituxan will be presented at the closely watched American Society of Clinical Oncology meeting in May.

Drug pipelines get biotech investors excited, but Millennium's lineup is a bit too dependent on experimental drugs still in the early stages of clinical testing. One exception might be MLN2704, a monoclonal antibody combined with a chemotherapy drug that targets a specific antigen found on prostate cancer cells. Data from a phase I/II study of MLN2704 is expected to be released at a prostate cancer meeting in February. Fanucci says the company considers expansion of Velcade and Integrillin's approved treatment options as part of its late-stage drug pipeline. However, Wall Street doesn't look at it the same way.

Some analysts and investors believe Millennium could help itself by licensing new late-stage drug candidates or by making another company acquisition. That's easier said than done. With Big Pharma in the doldrums, competition for potential growth-revving product candidates has become more intense, and potential sellers are raising prices.

Adam Feuerstein writes regularly for RealMoney.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to adam.feuerstein@thestreet.com.

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