Break Down: Millennium Pharmaceuticals, Part 2

Put down that giant rat and put on your white lab jacket, because today we finish our Break Down of Millennium Pharmaceuticals (Nasdaq: MLNM)!

In part one, we discussed how Millennium is the top dog and -- as is often true with top dogs -- first mover in industrializing drug discovery and development. The company is top dog in its field when measured by market cap, research and development budget, alliances, and drug pipeline. If you missed the details, return to part one of the Break Down. Now, the second Rule Breaker criterion demands a...

Sustainable advantage gained through business momentum, patent protection, visionary leadership, or inept competitors.
This is the business momentum at Millennium: six drugs in clinical trials, more than 10 drugs in preclinical trials, at least 10 drugs in clinical trials by year end, its first two drugs likely on the market by year end, nearly two dozen alliances worth almost $2 billion, and more than 1,000 employees. Millennium's high-growth and cutting-edge stature attract top young scientists who are in high demand.

Then there's patent protection. As of February, Millennium had 51 patents according to the Soapbox report, Harvesting the Human Genome. This is low compared to some peers listed in the report, but Millennium is very deliberate and specific in filing its patents, so they should be of high quality. Additionally, patents at Millennium should balloon as research accelerates. As far as sustainable advantages, patents can protect a revenue-generating product from competition for several years.

There is one point of contention here, though: Millennium has proven skilled at generating drug targets, but we want to see the company put more drug candidates of its own into trials. Millennium hasn't created its current clinical drug pipeline, but acquired it. This is expected to change, and change to a great degree.

Finally, there's visionary leadership: Millennium's management is putting industrialized medicine on the map, which has led to the company's many alliances with pharmaceutical giants. And, most of the alliances are long-term, contributing to sustainability.

Excellent past share price appreciation, measured by a relative strength of 90 or higher.
Millennium's stock has risen 10-fold in the past 18 months, and its relative strength is 96. It would be 99, the highest possible, if the stock hadn't reached $158 per share this March, fallen to $60 soon after, then risen to today's $115. Most important, though, Millennium's stock has risen more than almost any other biotechnology stock in the past year, demonstrating that investors understand the company's leadership role in genomics-based drugs.

Good management and smart backing.
Millennium was initially supported by Mr. Brook Byers from the biotech braintrust of Kleiner Perkins Caufield & Byers, and by the venerable Mayfield venture capital fund. The fund's long list of successful investments include Redback Networks (Nasdaq: RBAK), now a $22 billion company, BroadVision (Nasdaq: BVSN), Tibco Software (Nasdaq: TIBX), and -- hey, let's hope it's successful -- The Motley Fool.

Now that Millennium is a $10 billion company with more than $640 million in cash and nearly $2 billion in contracted revenue, it doesn't need backing of the venture capital sort. Its new financial backing arrives from industry peers: Bayer, with a $450 million contract, Pfizer (NYSE: PFE), Eli Lilly (NYSE: LLY), Warner-Lambert (now part of Pfizer), American Home Products (NYSE: AHP), Pharmacia (NYSE: PHA), and others support Millennium by signing long-term contracts.

Lastly, Millennium lists the deep credentials of senior management on its website. The company's CEO, who was instrumental in its founding, hails from Mayfield Fund's health and science division.

The stronger the consumer brand, the better.
Similar to many potential Rule Breakers, Millennium doesn't have a consumer brand business (yet), and thus it does not have a consumer brand. Like Amgen (Nasdaq: AMGN), however, Millennium does have a strong trade brand.

Most -- if not all -- biotechnology companies in the world know Millennium's name. This isn't the same as millions of consumers knowing it, however, so Rule Breaker investors must determine whether to allow leeway.

I do allow leeway. I'm most interested in young Rule Breaker companies that have the leading name in their field, period. If they succeed, they can build a consumer brand later, if they desire. I would not worry, for example, whether Cisco Systems (Nasdaq: CSCO) had a strong consumer brand in the early 1990s. The race then was about technology, much like the race in biotech today. Now that it can afford to, Cisco Systems is building a consumer brand. With a focus on personalized diagnostics, Millennium will probably want to as well -- but only when the time is right.

A significant constituent of the financial media has recently called the company overvalued.
I couldn't find an article that specifically called Millennium overvalued, although many articles suggest that most biotech stocks are overpriced, including a recent article from Signals Magazine. If you have seen Millennium attacked as overvalued, please point us to it on the RB Companies discussion board.

Break Down Summary and Your Turn!
My conclusion is that Millennium Pharmaceuticals is a Rule Breaker in genomics-based drug discovery and it has the most vibrant business platform among its young peers -- one that includes large alliances, royalty programs, bioinformatics sales, diagnostic tests, and drug creation. Millennium could become one of the most respected biopharmaceuticals to emerge, with the dovetailing of genomic research and super technology.

What do you think? Is Millennium a Rule Breaker even though it lacks a consumer brand and hasn't been called overvalued? Post your thoughts!

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