Rule Breaker Portfolio We're Buying

The Rule Breaker Port announces that it is buying shares of Millennium Pharmaceuticals sometime in the next five business days. This eight-year-old biotech company is the top dog in young biotechs when it comes to alliance revenue, partnerships, cash and lack of cash burn, and drug pipeline depth. The stock has been clobbered of late.

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By Jeff Fischer (TMF Jeff)
September 26, 2001

We've glanced flirtatiously at Millennium Pharmaceuticals (Nasdaq: MLNM) for well over a year. Our interest has grown stronger as its price has fallen, to the point where we made the company one focus stock in this month's issue of The Motley Fool Select. Now it's time to dance.

In the next five business days, we'll purchase approximately $25,000 worth of this young biotech company's stock to hold for as long as we feel the business merits. We'll buy to hold through thick and thin, if merited; through bad times in the world, and back into good -- to better times ahead.

Millennium is a young marvel. While you and I were still drooling idiots at eight years of age (I was, you weren't?), Millennium at eight-years is a company with $2 billion in potential alliance revenue. The company spent an impressive $94 million on research and development (R&D) last quarter, and yet it didn't burn any of its $1.5 billion in cash to speak of, partly because it has revenue flowing and it shares some R&D expenses with large partners.

Partners include Bayer, Eli Lilly (NYSE: LLY), Abbott Labs (NYSE: ABT), American Home Products (NYSE: AHP), Pharmacia (NYSE: PHA), Bristol-Myers Squibb (NYSE: BMY), and several others, together making Millennium the top dog in forging biotech/pharmaceutical alliances. Most of the alliances involve Millennium finding drug targets for partners, and some alliances have Millennium sharing its proprietary drug target discovery technique, which it calls "industrialized medicine."

The average drug can take 16 years from discovery to reach the market. Millennium is aiming to cut that time nearly in half.

The business
Millennium Pharmaceuticals is focused on drug discovery and development -- not a new industry. But Millennium's entire approach to the drug discovery process is new, a.k.a, Rule Breaking. The company has three key business divisions.

• Technology. Millennium's technology has been its bread and butter, resulting in billions of potential alliance revenue and more than $200 million in yearly revenue today. The technology platform Millennium created aims to produce "gene to patient" (G2P) solutions to disease. Find a gene that is instrumental in disease; find specific instances of its behavior; use the knowledge to treat specific patients. Millennium uses proprietary technology to analyze immense volumes of gene expression data to arrive more quickly at potential cures. Just last week Millennium announced that it had delivered 140 validated drug targets to Bayer and expanded the two companies' contract.
• Therapeutics. Drugs are where it's at in the long run. Millennium is focused on curing cancer, metabolic diseases, including obesity, and inflammation diseases, including asthma, arthritis, and cardiovascular disease. The company has seven compounds in 11 human clinical trials for different indications [see product pipeline]. Seven of these trials are in phase II (of III). At least one compound, LDP-341, for cancer, has the potential to be a blockbuster seller. Millennium's first drug, CAMPATH, for leukemia, began selling this summer. The company also has more than 25 compounds in preclinical trials, and it aims to have 12 compounds in human trials by year-end, at least some of the five new compounds likely arriving to Millennium through acquisition.
• Predictive Medicine. This division focuses on identifying genes' activity in relation to particular drugs for best possible treatment. This division also develops diagnostic tests, which have great long-term potential (perhaps second only to drugs). Millennium's first diagnostic test, now reaching the market, detects the presence of melastatin in a patient. Millennium's end goal with predictive medicine is personalized medicine -- delivering the best possible drug to each patient based on genetics. Also, an aim is to be able to predict likely diseases in individuals and prevent them.

The stock price
In the last few weeks, Millennium has declined from nearly $30 per share to touch $15 as of Friday. At about $16, the company has a market capitalization of $3.5 billion. Counting the company's $1.5 billion in cash (and it should have about the same amount of cash at the end of the year) and negligible long-term debt, Millennium's enterprise value is currently $2 billion.

That's interesting, given that Millennium should have $240 million in revenue this year and may have $2 billion in total alliance revenue the next handful of years. Given this, even when you discount the alliance revenue to net present value, it appears that the current stock valuation is placing very little value on Millennium's drug pipeline -- and we flat out disagree with that.

Given 11 trials, odds are that two or three drugs currently in trials will reach the market. These odds jibe with current estimates that sales could top $800 million by 2005. Grant revenue a 20 multiple and the share price could be five times today's price in little more than four years. The downside? Another 50% to $8 per share would give the company an enterprise value that's less than its cash. That's not likely. Unless, well, if all the drugs in trials fail, then anything could happen to the downside.

This stock is extremely volatile and certainly risky, but at today's valuation, we see enough long-term potential (and likely potential) reward to make the risks that we're taking acceptable.

The outlook
Millennium expects to have break-even operations by 2003 or 2004. By the time it reaches break-even, the company should still have a boatload of cash remaining, perhaps more than $1 billion (assuming that more isn't spent to acquire other companies, which could happen). So, as buyers, we get a rich and growing drug pipeline, a robust and new technology platform, a pile of valuable alliances, two new products now on the market, and assurance that the cash won't run out.

Some predict profitable operations before the end of 2005. That may sound far away, but we're already near 2002. Plus, we're not in a hurry. There is no reason to invest in a biotech company for the short term.

Millennium and Human Genome Sciences
More than a year ago, we considered Millennium next to Human Genome Sciences (Nasdaq: HGSI). For a long time, we thought that it'd make sense to own both. Now we may. Though we sold our HGS shares last week for tax reasons, we intend to buy them back in about 30 days. Those shares will sit alongside our new Millennium shares, almost acting as one combined position. We'll do this partly because it's impossible to tell which one of these two leaders may perform better or really hit it big. We'll own both in case either does.

As always, what you do at home is your call. Realize that Millennium will be a small portion of our portfolio (less than 10%) and is not being bought with margin. If you're interested in learning much more about the company, check out this month's issue of The Motley Fool Select, where Millennium was given detailed analysis.

Millennium -- as with Human Genome Sciences, Celera (NYSE: CRA), and Amgen (Nasdaq: AMGN) -- we wish you God Speed in fighting disease. Keep Breaking the Rules about what can and can't be done.

Jeff Fischer has beneficial interest in Millennium Pharmaceuticals, as shown on his profile. The Fool has a full disclosure policy.