Alkermes plc — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods unless otherwise noted. Alkermes is a global biopharmaceutical company focused primarily on CNS medicines, with marketed products and a clinical pipeline. Financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $217.4m | $180.2m | $628.0m | $532.2m |
| Operating loss | $(38.4)m | $(61.1)m | $(153.7)m | $(185.1)m |
| Net loss | $(36.3)m | $(62.7)m | $(148.2)m | $(187.3)m |
| Loss per share, basic and diluted | $(0.24) | $(0.41) | $(0.97) | $(1.24) |
- Q3 revenue rose about 21%; nine-month revenue rose about 18%. Product sales, net, were $93.7m for Q3 and $258.9m for nine months, up about 34% and 47%, respectively.
- Manufacturing and royalty revenue was $122.7m in Q3 and $366.6m for nine months. Product sales growth reflected VIVITROL and ARISTADA; ARISTADA’s two-month dose launched in June 2017.
- Expenses increased: nine-month R&D was $308.4m versus $297.5m, SG&A $310.7m versus $277.0m, and cost of goods manufactured and sold $116.2m versus $97.2m. Management attributed higher SG&A largely to marketing, patient-access support and headcount growth.
- The filing does not report a consolidated gross margin. Product-sales deductions were 44.3% of gross product sales in Q3 2017 and 44.8% for the first nine months, compared with 43.2% and 42.7%, respectively, in 2016.
- Cash used in operating activities was $16.7m for nine months, improving from $71.4m used in 2016. Capital expenditures were $33.5m. Cash and cash equivalents declined to $165.1m from $186.4m at year-end 2016.
- Cash and investments totaled $568.9m at September 30, 2017, versus $619.2m at December 31, 2016. Debt was approximately $282.0m, principally a term loan due September 2021. Management said existing cash and investments should fund anticipated working capital and other cash requirements for at least 12 months from the filing date.
- Total assets were $1.75bn and shareholders’ equity was $1.19bn at quarter-end. Current assets were $781.6m against current liabilities of $256.0m.
Material changes and unusual items
- Net loss narrowed year over year as proprietary-product revenue grew, partly offset by higher operating expenses.
- A $13.6m Q3 gain from remeasurement of contingent consideration followed Recro’s July submission of a Meloxicam product NDA and FDA acceptance for review. The contingent-consideration liability was $79.1m at September 30.
- Alkermes recorded a $10.5m impairment charge in Q3 for its remaining investment in Reset Therapeutics, reflecting its view that Reset could not generate earnings supporting the investment’s carrying value.
- Adoption of share-based payment accounting guidance resulted in a $61.5m favorable cumulative-effect adjustment to accumulated deficit. Nine-month income tax benefit was $5.9m.
Outlook, development programs and risks
- Management expected to complete the ALKS 5461 rolling NDA submission in January 2018. For ALKS 8700, it expected to complete required nonclinical studies in 2018 and file a 505(b)(2) NDA in the second half of 2018. Results from the ALKS 3831 ENLIGHTEN-2 study were expected in fall 2018.
- ALKS 6428 did not meet its primary endpoint in one Phase 3 study; a second Phase 3 study was ongoing. ALKS 3831 met the prespecified primary endpoint in ENLIGHTEN-1, while analysis of a separate Phase 2 study in patients with schizophrenia and alcohol use disorder continued.
- AMPYRA faces material patent uncertainty. A court upheld the company’s formulation patent, set to expire in July 2018, but invalidated four Acorda patents; appeals were pending. Generic competition could begin as early as July 2018, or earlier depending on appeal outcomes, and could reduce manufacturing and royalty revenue. Management also expected revenue pressure ahead of generic entry.
- Otsuka’s challenge to ARISTADA approval was rejected on appeal in August 2017; Otsuka’s deadline to seek further review was November 27, 2017, absent an extension.
- The company received a U.S. Attorney subpoena in June 2017 for documents related to VIVITROL and said it was cooperating. It reported no material legal losses considered probable at quarter-end. An IPR decision concerning a patent covering BYDUREON, RISPERDAL CONSTA and VIVITROL was expected by November 30, 2017.
- New revenue guidance effective in 2018 was expected to change recognition timing for certain partner manufacturing arrangements: revenue for those contracts would be recognized as products are manufactured rather than upon shipment. The financial impact remained under assessment.
- Management cautioned that results, clinical and regulatory timelines, market competition, patent outcomes, currency movements and debt-covenant or financing risks could differ materially from expectations.
Important facts for investors to verify
- Appeal outcomes and potential timing of generic AMPYRA entry, including the effect on Alkermes’ manufacturing and royalty revenue.
- VIVITROL and ARISTADA sales growth, net pricing and the trajectory of rebates, discounts and other product-sales deductions.
- Progress and regulatory outcomes for ALKS 5461 and ALKS 8700, and key ALKS 3831 trial results against the disclosed timelines.
- Cash burn, investment balances and debt-service capacity; reconcile management’s 12-month liquidity statement with subsequent results and commitments.
- Developments concerning the VIVITROL subpoena, contingent consideration tied to Meloxicam, and the expected effect of the 2018 revenue-recognition change.