Alkermes plc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; unaudited. Alkermes is a global biopharmaceutical company focused on developing, manufacturing and commercializing medicines, particularly for central nervous system disorders.
Financial performance and condition
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Total revenue | $151.4 million | $153.4 million | $312.6 million | $283.6 million |
| Operating loss | $52.5 million | $22.8 million | $79.8 million | $38.7 million |
| Net income (loss) | $(46.1) million | $3.7 million | $(76.8) million | $(20.6) million |
| Basic and diluted EPS | $(0.31) | Basic $0.03; diluted $0.02 | $(0.52) | $(0.14) |
| Operating cash flow | Not presented quarterly | $(13.3) million | $5.3 million |
- Q2 revenue declined modestly year over year; first-half revenue increased. Q2 product sales, net, primarily VIVITROL, rose to $37.2 million from $21.6 million. First-half manufacturing and royalty revenue was nearly flat at $241.9 million.
- Losses widened as R&D expense increased to $87.9 million in Q2 and $158.2 million for the first half, while SG&A rose to $71.5 million and $134.6 million, respectively. Management attributed the increases to pipeline investment and preparations for a potential ARISTADA launch.
- Margins: the filing does not provide a clear consolidated gross-margin measure. Cost of goods manufactured and sold was $30.4 million in Q2 and $70.4 million for the first half.
- At June 30, cash and cash equivalents were $196.9 million; short- and long-term investments totaled $635.5 million. Total cash and investments were $832.4 million, versus $801.6 million at year-end 2014.
- Debt carrying value was $354.8 million, including $6.8 million current and $348.1 million long-term. The filing’s MD&A separately states $356.4 million of borrowings outstanding; investors should reconcile this difference. Term Loan B-1 is due in 2019 and B-2 in 2016.
- Total assets were $1.915 billion and shareholders’ equity was $1.399 billion at June 30. Current assets were $1.017 billion and current liabilities $134.2 million.
Material changes and unusual items
- In April, Alkermes sold its Gainesville, Georgia facility, related product manufacturing and royalty revenue, and certain meloxicam rights to Recro. Consideration included $54.0 million cash, warrants valued at $2.1 million at closing, and contingent consideration initially valued at $57.6 million. Alkermes recorded a $9.9 million gain; contingent consideration was valued at $59.1 million at quarter-end, with a $1.5 million fair-value gain recorded in Q2.
- The Gainesville sale reduced revenue from RITALIN LA/FOCALIN XR and other products. Management expected the loss of the RITALIN LA/FOCALIN XR, VERELAN and ZOHYDRO ER franchises to reduce 2015 manufacturing and royalty revenue by about $40 million versus 2014, alongside an approximately $25 million reduction in cost of goods manufactured.
- Year-over-year comparisons also reflect prior-year gains: Q2 and first-half 2014 included a $12.3 million gain on an Athlone property sale and a $15.3 million gain on sale of an Acceleron investment.
- For the first half, investing cash outflow was $31.8 million, including $24.8 million of capital expenditures; financing provided $17.9 million. Cash and equivalents declined $27.2 million.
Outlook, management commentary and risks
- Management said current cash and investments should fund anticipated working capital, capital expenditures and debt service for at least 12 months. The company also cited potential incremental term-loan capacity, subject to conditions.
- ARISTADA’s FDA decision date was August 22, 2015. Management was preparing for a possible launch later in 2015, but a July 2015 Otsuka Citizen Petition asked the FDA to refuse or delay approval; Alkermes opposed the petition. Approval and timing remained uncertain.
- Management expected SG&A to continue rising in 2015 as ARISTADA launch preparation accelerated. The company reported positive phase 2 results for ALKS 3831 and planned to advance it into pivotal development in Q4 2015; it also planned pivotal development for ALKS 8700 in Q4 2015. ALKS 5461 phase 3 data were expected in 2016.
- Key risks include regulatory decisions and delays, clinical trial outcomes, manufacturing and third-party execution, competition and generic erosion, currency movements, and the valuation and timing of Gainesville contingent payments. The filing noted Paragraph IV patent litigation involving TRICOR, MEGACE ES and AMPYRA, but management did not expect known proceedings to have a material adverse effect.
- No quantified full-year revenue or earnings guidance is provided in the supplied filing text. Management’s stated outlook items are expectations, not guarantees.
Important facts for investors to verify
- Outcome and timing of the ARISTADA FDA review, including the Otsuka petition and any resulting approval conditions.
- Whether VIVITROL growth and royalty revenue from partner products can offset the Gainesville franchise revenue loss and declines in RISPERDAL CONSTA.
- Progress, costs and results of ALKS 5461, ALKS 3831, ALKS 8700 and other development programs.
- Cash burn, capital spending, debt-service capacity and reconciliation of the $356.4 million borrowings disclosure with the $354.8 million debt carrying value.
- Assumptions underlying the $59.1 million fair value of Gainesville contingent consideration and the potential milestone and royalty receipts.