By Karen Pihl-Carey and Mary Welch

Shares of Millennium Pharmaceuticals Inc. dropped 25 percent on Friday, following news of a planned merger with LeukoSite Inc.

The company also announced its merger with a subsidiary company and released its third-quarter financial results Friday.

The stock-for-stock deal with Cambridge, Mass.-based LeukoSite includes Millennium's issuance of 7.6 million shares and options, which equates to about $635 million in value at Thursday's stock price of $83.468. The deal is part of a Millennium strategy to build a premiere biopharmaceutical company that can sustain itself by having compounds in the clinic and drugs on the market at the same time. (See BioWorld Today, Oct. 15, 1999, p. 1.)

"After the conclusion, which we expect in first quarter, LeukoSite will become Millennium," said Kevin Starr, chief financial officer of Millennium, also based in Cambridge. "We intend to fully integrate this company, not operate it as a separate company."

As part of that same reasoning, Millennium decided to purchase shares of its majority-owned subsidiary Millennium BioTherapeutics (MBio) Inc. from Eli Lilly & Co, of Indianapolis. Lilly owned 18 percent of MBio, or roughly 2 million shares. Millennium paid Lilly $15 a share, making that deal worth $30 million.

Starr said Millennium saw value in its subsidiary, but decided it would be more valuable merged with the parent company.

"We're moving into a time where critical mass is key," he told BioWorld Today. "Leveraging this massive discovery and biology effort is best done together, not separately."

Investors and some analysts seemed displeased with Millennium's news. The company's stock (NASDAQ:MLNM) closed Friday at $62.25, down $21.218. LeukoSite's stock (NASDAQ:LKST) closed at $25, up 87.5 cents.

"I still like the deal and don't understand why others don't seem to like it," said Mike King, a senior analyst with BancBoston Robertson Stephens Inc., of New York. "I have no idea why the stock is down."

King suggested there may be concerns of dilution, clinical risks or increased burn rates, but he didn't buy any of it.

"Listen," he told BioWorld Today, "Mark Levin (Millennium's president and CEO) has taken this company from a valuation of $300 million, without the aid of one single public offering, to $3 billion, and now you're telling me you're questioning his judgment? I don't want to be a slavish follower, but I think it's premature to second-guess a guy who has done a marvelous job with the company, its technology, its valuation and its shareholder value."

The two mergers announced Thursday evening were not included in the third-quarter financial results released Friday. They will not affect results until early 2000, when the deals are completed, Starr said.

A meeting for LeukoSite shareholders to vote has not yet been set, but Starr said Millennium has a lockup provision that says top shareholders and the LeukoSite board of directors, who represent about 20 percent of the company, will vote in favor of the merger.

For the three months ended Sept. 30, Millennium posted revenue under strategic alliances of $40.3 million, compared with $26.4 million in the previous year's third quarter. The company had a net loss of $4.5 million, 12 cents per share, compared with $6.2 million, 21 cents per share, in the previous year. Cash and cash equivalents equaled $225.2 million.

For the nine-month period, the company posted revenue of $128.6 million, compared with $75.7 million for the same period the previous year. The net loss was $1.4 million, 4 cents per share, compared with a loss of $12.8 million or 44 cents per share.

"As we've been predicting all year, our plan is to come in at break-even for the full year," Starr said. "We had a very significant growth of revenue . . . the quarter was pretty much as forecasted."

Millennium will begin moving LeukoSite's employees into Millennium's offices, consolidating the departments, as soon as possible, Starr said. The merger will not affect any existing partnerships with either company.

"Where we think it has a major impact on partnerships is our future partnerships," Starr said. "This is opening the door for us to develop different kinds of relationships with [pharmaceutical companies]."

To the merged company, LeukoSite will bring five products in clinical development, including its most advanced candidate, Campath, a humanized monoclonal antibody for refractory chronic lymphocytic leukemia (CLL). Campath has demonstrated a 33 percent objective major response rate in patients with no other treatment alternatives. It is expected to go to market in the second half of 2000, and clinical trials continue for expanded use of the drug in CLL, non-Hodgkin's lymphoma and multiple sclerosis. LeukoSite is developing the drug in a 50/50 joint venture with Ilex Oncology Inc., of San Antonio. Schering AG's Berlex Laboratories Inc., of Montvale, N.J., will market Campath in the U.S. and Europe, while LeukoSite and Ilex will market it in the Asian Pacific Rim countries. Each company will receive one-third of the U.S. profits and equivalent royalties on European sales.

Behind Campath, LeukoSite has LDP-02 for inflammatory bowel disease, which just completed a Phase IIa trial to treat ulcerative colitis and is scheduled to begin another Phase IIa trial for Crohn's disease this quarter. It also has LDP-01 for stroke in Phase IIa trials, LDP-977 for asthma ready to go into Phase II trials by the end of the year, and LDP-341 for cancer in Phase I trials.

The company has nine preclinical programs in asthma, allergy, rheumatoid arthritis, multiple sclerosis, transplantation, HIV and restenosis. The programs are partnered with Warner-Lambert, of Morris Plains, N.J.; Roche BioSciences, of Palo Alto, Calif.; and Kyowa Hakko Kogyo Co., of Tokyo.

Starr said Millennium expects to have 10 products in the clinic in 2000. The company will look at LeukoSite's and Millennium's compounds and decide which are the best.

"We think with this transaction, we could build one of the premiere pipelines in our industry in a very quick order," he said.