Strap on your lab goggles! Millennium Pharmaceuticals (Nasdaq: MLNM) is our third company Break Down, following Akamai (Nasdaq: AKAM) and USinternetworking (Nasdaq: USIX). By September, we will have wrung several companies through a Break Down in search of our next purchase. This Break Down study is meant to demonstrate, as well as possible, how we think about companies as we consider them for Rule Breaker status, and how we finally decide what to purchase.

Now, your first question today should be, "Why Millennium?"

In 1999, David Gardner wrote that biotechnology is likely to be the most important industry, and thus create the most value, over the next 25 years. Given this belief, early that year we knew we wanted to invest in a few biotech leaders. We already owned Amgen (Nasdaq: AMGN) and we knew that we might buy Celera Genomics (NYSE: CRA). David's other favorite biotech company in April of 1999 was Millennium. The stock traded at $16 per share then. It's $115 per share now.

Top dog and first mover in an important emerging industry...
Hoisting a market capitalization of $10.7 billion above its shoulders, Millennium is the value-creation leader among all genomics-based biopharmaceutical companies. Investors have granted Millennium the largest market value for several reasons: Millennium has the most alliance revenue of any genomics-based company, with nearly $2 billion in signed contracts, and it has the most alliances, period; it has the highest research and development (R&D) spending among its drug-seeking peers; and it has the largest drug pipeline among genomics-based drug companies.

So, on three vital measures, the company is top dog.

Millennium finds drug targets for clients and develops its own drugs, too (finding drug targets, in the case of Millennium, mainly means identifying new, or unidentified, genes that will be responsive to various therapies). Its main revenue streams are:

  1. Alliance revenue earned by delivering drug targets to partners

  2. Royalties earned on drugs that partners create from Millennium targets, and royalties on partners' drugs created using Millennium discovery technology

  3. A proprietary drug pipeline
Business #1: Deliver drug targets to partners
Millennium is the top dog and first mover in a process called industrialized medicine. The company's goal is to greatly increase efficiency and productivity in the drug discovery business. Millennium accomplishes this by analyzing every step of the discovery and production process, identifying steps that can be improved, and addressing them with in-house technology or appropriate alliances. How well can this "hurry-up-and-discover" process work?

To meet just one of its goals (to deliver 225 new drug targets to Bayer for funding of $465 million), Millennium must discover nearly 50% more drug targets in the human body than have been used in the past 100 years, and Millennium must do so in only five years. It is estimated that all the drugs sold in the world today are based on 500 drug targets within the body. Millennium must find 225 more. So far, the company is on track to reach its five-year goal of 225, and Bayer is just one of Millennium's clients.

Millennium has 19 drug, information, and technology-related collaborations with 11 major pharmaceutical companies. The partnerships are worth $1.8 billion in contracted revenue. The company should top $2 billion in collaboration revenue contracts by December 31.

Business #2: Royalties on successful drugs
Millennium is paid to deliver drug targets to clients, and it will also be paid royalties on most candidates it discovers that are later developed and sold by clients. In these cases, Millennium won't need to fund expensive development trials, take the risks involved, or pay to market these new drugs to collect royalties. Millennium can also earn royalties on drugs that are discovered by clients who use its discovery technology.

Business #3: Develop its own drugs and diagnostics
With a focus on oncology, inflammation, and metabolic disease (and with candidates for asthma, cardiovascular disease, obesity, arthritis, and MS, among others), Millennium's drug pipeline promises to fill up. Millennium should have 10 drugs in clinical trials by the end of 2000. The company already has six drugs in clinical trials, and at least 10 in preclinical trials. The company's first drug, CAMPATH, should be on the market by the end of this year.

CAMPATH is used to treat leukemia and it has been given a fast-track review by the Food and Drug Administration. If successful, sales for the drug could reach $220 million. CAMPATH and Millennium's other clinical trial drugs were acquired in December with the purchase of LeukoSite.

The other Millennium product that should reach a broad market before 2001 (it is already offered at the Massachusetts General Hospital) was created internally. A diagnostic test called Melastatin measures how likely skin cancer is to metastasize. This knowledge can alter treatment decisions.

Top dog, first mover summary
Millennium's business boils down to efficiently organizing and researching to speedily discover drug candidates across many diseases, and then developing the resulting drug candidates. Based on its end-to-end technology and science platform, Millennium sells both information and discovery techniques to partners, collects royalties on resulting successes, and creates drugs. Millennium is industrializing drug development. It is also personalizing it. Management has a goal to develop predictive medicine that delivers the right drug to the right person on an individual basis.

Millennium is the top dog based on market capitalization, number and size of partnerships, R&D spending, and drug pipeline. It is first mover in its genomics-based businesses, too. In fact, Millennium invented the notion of industrialized drug discovery and production. This decade, we should see how effective this will be.

Tomorrow is part two of our Millennium Break Down. Until then, please share your thoughts on the company on the Rule Breaker Companies discussion board. Fool on!

Suggested Reading:
  • Millennium FAQ
  • Daily Double on Millennium, 08/10/00
  • Motley Fool Interviews Millennium's CEO, 03/22/00
  • Millennium Website
  • Harvesting the Human Genome, Soapbox Report
  • Biotechnology Crash Course, Fool's Den, 7/18/00
  • A Foolish Checklist for Biotech Investing, Fool's Den, 6/13/00