Business context and reporting period
Alkermes plc is a global biopharmaceutical company focused on developing, manufacturing and commercializing medicines, particularly for central nervous system disorders. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods unless noted. The company adopted revenue standard Topic 606 on January 1, 2018 using the modified retrospective method, so prior-period figures were not restated.
Financial performance and condition
Amounts are in millions of dollars except per-share data.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $304.6 | $218.8 | $529.8 | $410.6 |
| Operating loss | $(0.1) | $(44.5) | $(62.0) | $(115.4) |
| Net loss | $(32.6) | $(43.0) | $(95.2) | $(111.9) |
| Basic and diluted loss per share | $(0.21) | $(0.28) | $(0.61) | $(0.73) |
- Revenue rose 39% in Q2 and 29% for the first half. Q2 included $48.3 million of Biogen license revenue and $18.3 million of R&D revenue; together, $66.6 million related to the BIIB098 collaboration. The company also reported $109.8 million of proprietary product sales in Q2, up 24%.
- Q2 VIVITROL sales were $76.2 million, up from $66.1 million; ARISTADA sales were $33.6 million, up from $22.7 million. For the first half, net product sales increased to $201.6 million from $165.2 million.
- Manufacturing and royalty revenue was nearly flat at $128.2 million in Q2 and $242.8 million for the first half. Growth in royalties from INVEGA products was offset principally by weaker AMPYRA/FAMPYRA revenue; the company cited declining AMPYRA demand amid expected generic competition.
- Operating expenses increased 16% in Q2 and 13% in the first half. Q2 R&D expense was $106.8 million and SG&A was $138.3 million; SG&A growth reflected commercialization, patient-support and staffing investments. The reported Q2 income-tax provision was $8.2 million despite a pretax loss.
- Six-month operating cash flow was positive $5.3 million, versus use of $36.2 million in 2017. Investing activities used $40.5 million, including $35.4 million of property and equipment additions; financing activities used $0.2 million. Cash and cash equivalents declined $35.4 million to $155.8 million.
- At June 30, cash and investments totaled $560.5 million, compared with $590.7 million at year-end 2017. Debt carrying value was $280.4 million, mostly long-term. The company refinanced its term loan in March, extending maturity to March 2023 and reducing the LIBOR margin to 2.25% with no LIBOR floor. Management said existing cash and investments should fund anticipated needs for at least 12 months from the filing date.
The filing does not present a single overall gross-margin measure. The reported Q2 result was close to operating break-even, while net loss included significant non-operating and tax items.
Material changes, outlook and risks
- Revenue accounting: Topic 606 accelerated or shifted recognition for certain manufacturing, license and collaboration arrangements. The company reported Q2 revenue of $304.6 million under Topic 606 versus $317.7 million on the former basis, and six-month revenue of $529.8 million versus $525.7 million. Net loss would have been $26.0 million for Q2 and $100.5 million for the first half without adoption, compared with reported losses of $32.6 million and $95.2 million, respectively. Cash flows were unchanged by adoption.
- Unusual valuation item: A $19.6 million Q2 expense related to the reduced fair value of contingent consideration from the Gainesville divestiture, following Recro’s FDA complete response letter for IV Meloxicam. The first-half expense was $21.5 million. This weighed on net results despite the improvement in operating loss.
- Pipeline outlook: ALKS 5461’s NDA was accepted for FDA review; the FDA had tentatively scheduled an advisory committee meeting for November 1, 2018 and set a target action date of January 31, 2019. Management expected ALKS 3831 ENLIGHTEN-2 results in Q4 2018 and planned an NDA submission in mid-2019 if development was successful. A BIIB098 NDA filing was expected in Q4 2018; initial ALKS 4230 phase 1 results were expected in 2018. These are forward-looking expectations, not guarantees. No numerical company-wide revenue or earnings guidance is provided in the supplied filing text.
- Commercial and legal exposure: AMPYRA patent litigation remained on appeal; the company warned generic competition could begin as early as July 31, 2018, with potential adverse impact on manufacturing and royalty revenue. Amneal petitioned for inter partes review of a VIVITROL patent. The company also disclosed a government subpoena concerning VIVITROL and a securities class action alleging misleading statements about VIVITROL marketing; defendants moved to dismiss. Management reported no material litigation losses considered probable at June 30.
- Other developments: ARISTADA INITIO received FDA approval in June 2018. A restructuring at the Athlone facility reduced headcount by 24 and generated $3.6 million of charges in the first half, with substantially all related payments made by June 30. A new 220,000-square-foot Waltham lease is expected to begin around 2020. The company expects the forthcoming lease accounting standard to materially affect its balance sheet.
- Key risks include generic competition and patent outcomes, clinical and regulatory uncertainty, product commercialization and reimbursement, and the company’s ability to meet debt obligations and fund operations. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether generic AMPYRA entry occurred and how it affected Alkermes’ manufacturing and royalty revenue after the patent litigation and appeal.
- Progress and outcomes for ALKS 5461 FDA review, ALKS 3831 trials, BIIB098 filing, and ALKS 4230 development against the stated timelines.
- Underlying revenue and earnings trends after separating the BIIB098 milestone-related revenue, Topic 606 timing effects, and contingent-consideration fair-value expense.
- Cash generation, capital spending, available liquidity and debt terms, including the distinction between the reported $280.4 million debt carrying value and the $283.5 million principal balance cited in MD&A.
- Developments in VIVITROL-related government and securities proceedings and the VIVITROL patent review, as well as potential financial or reputational consequences.