Alkermes plc. — Q3 2018 Form 10-Q
Business context and period: Alkermes is a global biopharmaceutical company developing, manufacturing and commercializing medicines, with a focus on central nervous system disorders. This unaudited report covers the three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless noted.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $248.7 million | $217.4 million | $778.5 million | $628.0 million |
| Operating loss | $(37.2) million | $(38.4) million | $(99.1) million | $(153.7) million |
| Net loss | $(34.4) million | $(36.3) million | $(129.6) million | $(148.2) million |
| Basic and diluted loss per share | $(0.22) | $(0.24) | $(0.84) | $(0.97) |
Q3 revenue increased about 14%; nine-month revenue increased about 24%. Proprietary product sales, net, rose 24% in Q3 and 23% for the nine months. The filing does not report a consolidated gross margin.
- Revenue mix: Q3 manufacturing and royalty revenue was $116.4 million, product sales were $116.0 million, and R&D revenue was $16.3 million. Nine-month figures were $359.3 million, $317.7 million, $53.3 million, and $48.3 million of license revenue.
- Product sales: Q3 VIVITROL sales were $79.9 million and ARISTADA sales were $36.1 million; nine-month sales were $218.8 million and $98.9 million, respectively. Growth reflected higher unit sales; ARISTADA also had price increases in January and July.
- Expenses: Operating expenses increased 12% in both comparison periods, with higher SG&A—up $29.1 million in Q3 and $74.5 million year to date—primarily reflecting commercial, employee, marketing and patient-support investments. Nine-month R&D expense was $316.4 million, versus $308.4 million.
- Cash flow: Nine-month operating cash flow was $38.8 million, versus an outflow of $16.7 million in 2017. Investing cash outflow was $14.4 million, including $51.8 million of capital expenditures; financing provided $0.4 million. Cash and cash equivalents increased $24.7 million to $216.0 million.
- Liquidity and debt: Cash and investments totaled $578.5 million at September 30, 2018, down from $590.7 million at year-end 2017. Debt was approximately $279.9 million, principally term loans due March 2023. The company stated existing cash and investments should cover anticipated requirements for at least 12 months after the filing date.
Material changes and unusual items
- In June, Alkermes recognized $48.3 million of Biogen license revenue after Biogen elected to make a $50 million payment tied to BIIB098 development data. Biogen also funds BIIB098 development costs, subject to annual budget limits. This contribution materially supported the year-over-year reduction in net loss.
- Alkermes adopted revenue standard Topic 606 on January 1, 2018 using the modified retrospective method. Adoption increased opening retained earnings by approximately $0.8 million and changed the timing and classification of certain revenue. The filing’s nine-month figures without Topic 606 would have been revenue of $774.4 million and net loss of $133.1 million, compared with reported revenue of $778.5 million and net loss of $129.6 million; reported comparative periods were not restated.
- Generic AMPYRA products, including an authorized generic, entered the U.S. market in September after patent litigation developments. Alkermes expects generic competition to continue reducing AMPYRA manufacturing and royalty revenue. Nine-month AMPYRA/FAMPYRA revenue fell to $68.3 million from $79.0 million.
- A March debt refinancing extended maturity from 2021 to 2023, reduced the stated LIBOR spread from 2.75% to 2.25%, and increased covenant flexibility. It generated a $2.3 million refinancing charge.
- Athlone restructuring reduced headcount by 24 and generated $3.6 million of charges in Q1; related severance payments were completed by June 30.
- Contingent consideration declined to $67.5 million from $84.8 million at year-end. The nine-month $17.3 million fair-value reduction was recorded as expense and reflected, in part, delayed anticipated IV Meloxicam approval following an FDA complete response letter.
Outlook, commentary and risks
- As of the filing, FDA action on ALKS 5461 was targeted for January 31, 2019, with an advisory committee meeting scheduled for November 1, 2018. The FDA had previously issued and then rescinded a refusal-to-file letter; Alkermes noted efficacy evidence and bridging questions could remain relevant to review.
- Topline ALKS 3831 ENLIGHTEN-2 results were expected in Q4 2018, with an NDA submission planned for mid-2019 if the program was successful. A BIIB098 NDA filing was expected in Q4 2018. Alkermes had initiated the combination phase of the ALKS 4230 study in September 2018.
- Key risks include clinical and regulatory uncertainty, product manufacturing and commercialization risks, reimbursement and pricing pressures, patent challenges and generic competition, and the ability to meet debt covenants and service obligations. The company reported no material change to its disclosed risk factors and no probable material litigation losses at September 30.
- Pending matters include AMPYRA patent litigation and generic competition, an IPR challenge to a VIVITROL patent, a subpoena concerning VIVITROL to which Alkermes said it was cooperating, and a securities class action alleging misleading statements concerning VIVITROL marketing practices. Alkermes was not a party to the cited INVEGA SUSTENNA ANDA lawsuit against Teva.
Most important facts for investors to verify
- Whether product-sales growth can offset expected further AMPYRA revenue declines following U.S. generic entry.
- Progress and regulatory outcomes for ALKS 5461, ALKS 3831, BIIB098 and ALKS 4230, including the timing and conditions attached to potential milestones.
- How much reported performance depends on Biogen collaboration revenue and on Topic 606 revenue timing and presentation.
- Whether cash generation, capital spending and debt service remain consistent with management’s stated liquidity outlook.
- Developments in VIVITROL, AMPYRA and other patent or legal matters, and any resulting commercial or financial effects.