Alkermes Plc. annual report, FY2019

Alkermes plc. — FY2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. This is an annual report; fourth-quarter figures are noted separately where relevant. Amounts are in U.S. dollars.

Business context

Alkermes is a global biopharmaceutical company developing, manufacturing and commercializing medicines, with a portfolio focused on neuroscience, including addiction and schizophrenia, and a development pipeline spanning neuroscience and oncology. It sells VIVITROL, ARISTADA and ARISTADA INITIO in the U.S. and earns royalties and manufacturing revenue from products commercialized by partners, including Janssen and Biogen. In November 2019, it acquired Rodin Therapeutics, expanding its research into synaptopathies.

Financial performance and liquidity

Metric	FY2019	FY2018
Total revenue	$1,170.9 million	$1,094.3 million
Product sales, net	$524.5 million	$450.3 million
Manufacturing and royalty revenue	$447.9 million	$526.7 million
License revenue	$145.8 million	$48.4 million
Operating expenses	$1,346.4 million	$1,193.4 million
Operating loss	$175.5 million	$99.1 million
Net loss	$196.6 million	$139.3 million
Loss per share, diluted	$1.25	$0.90
Cash from operating activities	$72.1 million	$99.3 million

• Revenue rose 7%; the operating loss widened, with operating expenses up 13%. The filing identifies the $86.6 million Rodin acquired in-process R&D charge, greater commercial support costs and a $13.4 million restructuring charge as key expense drivers.
• VIVITROL net sales increased to $335.4 million from $302.6 million. ARISTADA and ARISTADA INITIO net sales increased to $189.1 million from $147.7 million.
• Janssen-related revenue was 28% of consolidated revenue, down from 29%. Biogen-related revenue was 17%, up from 10%, reflecting VUMERITY-related milestones and development revenue.
• Cash, cash equivalents and investments totaled $614.4 million at year-end, versus $620.0 million a year earlier. Outstanding debt was $277.1 million; shareholders’ equity was $1,085.4 million.
• Investing activities used $141.8 million, including $90.9 million of property and equipment additions. Management expected approximately $50 million of capital expenditures in 2020.
• Liquidity: management stated existing cash and investments were expected to fund anticipated working-capital and other cash needs for at least 12 months after the financial statements were issued. The company reported compliance with debt covenants at year-end.

Material changes and notable items

• Product sales growth was offset in part by a $78.8 million decline in manufacturing and royalty revenue. AMPYRA U.S. generic entry drove a 93% decrease in AMPYRA revenue; VUMERITY and FAMPYRA revenue partially offset the decline.
• Janssen royalties on INVEGA SUSTENNA/XEPLION and INVEGA TRINZA/TREVICTA increased to $256.9 million from $241.4 million. RISPERDAL CONSTA revenue declined to $66.4 million from $71.1 million.
• VUMERITY received FDA approval in October 2019. Alkermes received a $150 million milestone payment in November and is eligible for a 15% royalty on worldwide net sales, subject to agreement terms. Biogen assumed development and commercialization responsibilities after approval; Alkermes was appointed toll manufacturer, subject to Biogen’s options.
• Rodin was acquired for an upfront cash payment of approximately $98.1 million, with up to $850 million in potential clinical, regulatory and sales milestone payments. Alkermes expensed $86.6 million of acquired IPR&D because it had no alternative future use; the contingent milestones were not recorded as a liability at year-end.
• The fourth quarter included $144.75 million of license revenue, primarily related to the VUMERITY approval milestone. Fourth-quarter revenue was $412.7 million and net loss was $5.4 million; the quarter included $86.6 million of Rodin IPR&D expense and $13.4 million of restructuring expense.
• The October 2019 restructuring reduced headcount by approximately 160 employees. Substantially all of the $13.4 million charge was expected to be paid by the end of 2020.

Outlook, risks and contingencies

• Management expected U.S. VIVITROL sales to benefit from continued market penetration and ARISTADA/ARISTADA INITIO to gain share; it also expected growth in the long-acting antipsychotic franchise. These are expectations, not guarantees.
• The ALKS 3831 NDA, seeking approval for schizophrenia and bipolar I disorder, was accepted by the FDA in January 2020, with a PDUFA target action date of November 15, 2020. Approval, timing and any DEA scheduling remain uncertain.
• ALKS 4230 remained in Phase 1/2 clinical studies for advanced solid tumors. Clinical and regulatory outcomes for development candidates remain uncertain.
• Key risks include dependence on a limited set of products and licensees, generic and branded competition, reimbursement and pricing pressure, manufacturing and supply concentration, regulatory and clinical uncertainty, and patent challenges.
• Legal matters include U.S. Attorney document requests concerning VIVITROL, a securities class action related to ALKS 5461 disclosures, patent proceedings involving products such as INVEGA SUSTENNA and RISPERDAL CONSTA, and prior AMPYRA generic litigation. The company said no potential material litigation losses were considered probable at December 31, 2019.
• Debt consisted primarily of $279.3 million in 2023 Term Loans, bearing interest at LIBOR plus 2.25% with a 0% floor and maturing in March 2023. The company cited LIBOR transition uncertainty and restrictive debt covenants as risks.
• Alkermes reported an accumulated deficit of $1.4 billion and cautioned that sustained profitability is not assured. No cash dividends were expected in the foreseeable future.

Important facts for investors to verify

• Whether growth in proprietary product sales and VUMERITY royalties can offset the decline in AMPYRA-related revenue and other partner-product revenue.
• Actual VUMERITY commercial uptake, royalty receipts, manufacturing economics and any effect of Biogen’s manufacturing options or the GI Inferiority provision.
• ALKS 3831’s FDA review outcome and timing, including safety, weight/metabolic profile and any required DEA scheduling.
• Whether operating expenses, including R&D and commercial spending, decline or grow after the restructuring, and whether cash generation improves.
• Progress and potential costs of Rodin programs, including the conditions and likelihood of up to $850 million in milestone payments.
• Developments in VIVITROL government inquiries, securities litigation, patent challenges and potential generic-entry timing.
• Cash and investment levels, 2020 capital spending, debt service and covenant compliance; confirm current values in subsequent filings.