Alkermes plc — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Alkermes is a global biopharmaceutical company developing, manufacturing and commercializing medicines, with a portfolio focused largely on central nervous system disorders.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $225.2 million | $191.8 million; up 17% |
| Operating loss | $61.9 million | $70.9 million loss |
| Net loss | $62.5 million; $0.40 per share | $68.9 million; $0.45 per share |
| Operating margin | -27.5% | -37.0% (calculated from reported figures) |
| Operating cash flow | $(26.8) million | $(13.7) million |
| Capital expenditures | $18.5 million | $9.4 million |
| Cash and investments | $542.1 million | $590.7 million at December 31, 2017 |
| Debt | $280.9 million carrying value; $284.3 million principal | $281.4 million carrying value at December 31, 2017 |
| Working capital | $501.6 million | Based on March 31 current assets less current liabilities |
Product sales, net rose 20% to $91.8 million: VIVITROL contributed $62.7 million (up from $58.5 million) and ARISTADA $29.2 million (up from $18.0 million). Manufacturing and royalty revenue was essentially flat at $114.6 million. Research and development revenue increased to $18.7 million, primarily reflecting the Biogen collaboration for BIIB098.
Reported revenue and earnings comparability is affected by adoption of Topic 606 on January 1, 2018. Under the prior accounting method, Q1 2018 revenue would have been $208.0 million and net loss $74.5 million, versus reported revenue of $225.2 million and net loss of $62.5 million. Topic 606 adoption increased opening accumulated earnings by approximately $0.8 million; reported operating cash flow was unchanged by the adoption.
Material changes and management commentary
- Management attributed higher revenue chiefly to increased VIVITROL and ARISTADA sales. Total expenses increased 9% to $287.0 million, primarily reflecting investment in commercialization.
- SG&A increased $16.0 million to $118.1 million, mainly from employee costs and marketing and professional services for VIVITROL and ARISTADA. R&D expense was $108.3 million, compared with $104.8 million.
- Product sales gross-to-net deductions rose to 48.3% of gross sales from 42.3%; Medicaid rebates and chargebacks were significant components.
- Operating cash use increased year over year, which the company attributed principally to higher employee and supplier payments and refinancing fees, partly offset by increased customer receipts.
- Cash and investments declined by $48.6 million from year-end. Management stated existing cash and investments were expected to fund working capital, capital expenditures, and debt service for at least 12 months after filing.
Outlook, financing, risks and unusual items
- Debt refinancing: In March 2018, Alkermes extended its term-loan maturity from September 2021 to March 2023 and reduced the LIBOR spread from 2.75% to 2.25%, removing the LIBOR floor. The refinancing generated a $2.3 million charge; the company also reported $1.8 million in related cash fees. The credit agreement includes restrictive covenants.
- Pipeline: In April 2018, the FDA accepted the ALKS 5461 NDA after initially issuing and then rescinding a refusal-to-file letter. The target action date is January 31, 2019; the FDA’s review includes concerns cited in the initial letter about evidence of effectiveness and bridging to buprenorphine. AL NCD had a June 30, 2018 target action date. The company expected ALKS 3831 ENLIGHTEN-2 results in Q4 2018 and planned an NDA submission in the first half of 2019 if the program succeeded. It expected to file a BIIB098 NDA in the second half of 2018 and initial ALKS 4230 Phase 1 data during 2018.
- Commercial and patent exposure: The company warned of potential generic AMPYRA competition as early as July 2018, depending on appeals in patent litigation, and expected manufacturing and royalty revenue to decline ahead of anticipated generic entry. Oral argument was scheduled for June 7, 2018. A Teva generic challenge to INVEGA SUSTENNA was filed against Janssen, not Alkermes; Amneal filed a VIVITROL patent-review petition on April 20, 2018.
- Other legal matters: Alkermes disclosed a U.S. Attorney subpoena concerning VIVITROL and a putative securities class action alleging misleading statements about VIVITROL marketing practices. The company said no potential material litigation losses were considered probable at March 31, 2018.
- Unusual operating item and commitment: A restructuring at the Athlone facility reduced planned headcount by 24 and produced charges of $3.6 million. Alkermes also entered a lease for approximately 220,000 square feet of Waltham office and laboratory space, expected to be occupied in early 2020, with a 15-year initial term.
- The filing provides no formal full-year financial guidance. Management noted risks from clinical and regulatory outcomes, commercialization, generic competition, reimbursement, manufacturing, litigation, foreign exchange and restrictive debt covenants. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much of reported revenue and improved net loss reflects Topic 606 timing rather than underlying demand; compare with the company’s prior-GAAP figures.
- Whether VIVITROL and ARISTADA growth can persist while commercial spending and gross-to-net deductions remain elevated.
- AMPYRA patent appeal outcomes, timing of generic entry, and the resulting effect on manufacturing and royalty revenue.
- FDA review progress and decision dates for ALKS 5461 and AL NCD, including resolution of the ALKS 5461 effectiveness and bridging issues.
- Cash burn, capital spending and debt service relative to the $542.1 million cash-and-investments balance and the term-loan covenants.
- Developments in the VIVITROL government inquiry, securities litigation and patent challenges, as well as the financial terms and obligations of the new Waltham lease.