Business Context and Reporting Period
Company: Alkermes Plc.
Filing Type: Form 8-K (Current Report)
Date: November 27, 2017
Event: Entry into a Material Definitive Agreement with Biogen Swiss Manufacturing GmbH.
Alkermes granted Biogen a worldwide, exclusive license to develop, manufacture, and commercialize ALKS 8700, a novel oral monomethyl fumarate small molecule in Phase 3 development for relapsing forms of multiple sclerosis. Alkermes retains responsibility for development until FDA approval, after which Biogen assumes all development and commercialization costs.
Key Financial Metrics and Transaction Terms
Transaction Payments:
- Up-front Cash Payment: $28 million (expected to be recognized in Q4 2017).
- Option Payment: $50 million (payable upon Biogen's decision to continue collaboration after reviewing specific clinical data).
- Regulatory Milestone: $150 million (payable upon FDA approval of an NDA for ALKS 8700 on or before December 31, 2021).
- Royalties: Mid-teens percentage on worldwide net sales of ALKS 8700; tiered rates (high-single to low-double digits) on other Products.
Updated 2017 Financial Guidance (Mid-points used for reconciliation):
- Revenues: $870 million to $900 million (previously $850 million to $880 million).
- GAAP Net Loss: $140 million to $170 million (previously $160 million to $190 million).
- GAAP EPS (Basic/Diluted): Loss of $0.91 to $1.10 (previously $1.04 to $1.23).
- Non-GAAP Net Income: $5 million to $35 million (previously a range of $15 million loss to $15 million income).
- Non-GAAP EPS (Diluted): $0.03 to $0.22 (previously a range of $0.10 loss to $0.09 income).
Material Changes Versus Prior Period
The filing represents a significant shift in financial outlook driven by the Biogen collaboration:
- Revenue Increase: The $28 million up-front payment increases the top-line revenue guidance by approximately $20 million at the low end and $20 million at the high end compared to prior expectations.
- Profitability Shift: The company revised its outlook from a potential Non-GAAP net loss to a projected Non-GAAP net income for the full year 2017.
- Cost Structure: Biogen will cover a portion of 2017 development costs and all costs incurred thereafter, subject to budget limitations, reducing Alkermes' future cash burn for this program.
Guidance, Risks, and Contingencies
Management Commentary: Management utilizes Non-GAAP measures to evaluate underlying trends, adjusting for share-based compensation, amortization, depreciation, and other non-cash items. The reconciliation table indicates significant adjustments, including $85 million in share-based compensation and $60 million in amortization expense.
Key Risks and Contingencies:
- GI Inferiority Clause: If ALKS 8700 demonstrates gastrointestinal (GI) inferiority compared to Tecfidera (specifically regarding discontinuation rates), Biogen may recapture the $50 million option payment via royalty reductions, minimum annual payments may terminate, and the program may not revert to Alkermes upon termination.
- Revenue Recognition: The timing of the $28 million up-front payment recognition is pending final determination of accounting treatment, though expected in Q4 2017.
- Termination Rights: Biogen holds the right to terminate the agreement at will on a product-by-product basis or in its entirety.
- Forward-Looking Uncertainties: Risks include clinical trial delays, regulatory rejection, and the potential for ALKS 8700 to be shown ineffective or unsafe.
Investor Verification Checklist
- Verify the final accounting treatment and timing of the $28 million up-front payment recognition in Q4 2017.
- Monitor the results of the long-term safety and Phase 3 GI tolerability clinical trials to assess the risk of "GI Inferiority" and the potential loss of the $50 million option payment.
- Review the full text of the License and Collaboration Agreement (to be filed as an exhibit to the 2017 Form 10-K) for specific budget limitations on development costs.
- Track the progress of the NDA submission for ALKS 8700 to determine eligibility for the $150 million regulatory milestone payment by December 31, 2021.
- Compare actual Q4 2017 results against the updated guidance ranges for revenue and Non-GAAP net income.