Alkermes plc. — Form 10-K summary
Reporting period: Fiscal year ended March 31, 2012. The filing also reports the fourth quarter of fiscal 2012 (January–March 2012); it is not a calendar-year 2011 fourth-quarter filing. Amounts below are U.S. dollars.
Business context
Alkermes develops, manufactures and commercializes medicines, with a focus on central nervous system disorders. It earns manufacturing and royalty revenue from partner-marketed products and product-sale revenue from U.S. VIVITROL. On September 16, 2011, Alkermes combined with Elan’s drug technologies business (EDT). The transaction is accounted for as an acquisition, with Old Alkermes the accounting acquirer: EDT results are included only from the acquisition date, so fiscal 2012 and fiscal 2011 are not directly comparable.
Key financial results
| Metric | FY2012 | FY2011 |
|---|---|---|
| Total revenue | $390.0 million | $186.6 million |
| Operating loss | $88.3 million | $45.6 million |
| Net loss | $113.7 million | $45.5 million |
| Net loss per share, diluted | $0.99 | $0.48 |
| Cash used in operating activities | $2.5 million | $5.9 million |
Revenue increased approximately 109%, largely reflecting the acquired EDT portfolio. Manufacturing and royalty revenue was $326.4 million; net product sales were $41.2 million; and research and development revenue was $22.3 million. Five key products contributed 60% of consolidated revenue. Janssen represented 48% of revenue, down from 83% in each of the prior two fiscal years.
Fiscal 2012 expenses included $127.6 million of cost of goods manufactured and sold, $141.9 million of R&D, $137.6 million of selling, general and administrative expense, and $71.2 million of acquired-intangible amortization and impairment. The $71.2 million included $25.4 million of amortization and a $45.8 million impairment of acquired in-process R&D. Revenue less cost of goods was approximately $262.4 million (about 67% of revenue); this is a simple calculation, not a company-reported gross margin. Operating loss was about 23% of revenue.
For the fourth quarter of fiscal 2012, revenue was $130.5 million versus $51.1 million in the prior-year quarter; net loss was $63.4 million versus $13.1 million. Fourth-quarter expenses included the $45.8 million IPR&D impairment.
Cash, debt and liquidity
- At March 31, 2012, cash, cash equivalents and investments totaled $246.1 million, compared with $294.7 million a year earlier; working capital was $250.0 million.
- Operating cash flow was negative $2.5 million. Investing activities used $417.2 million, primarily reflecting the $500.0 million cash payment for EDT; financing activities provided $464.8 million, mainly from term-loan proceeds.
- Debt carrying value was $444.5 million at year-end. The loans were originally $310 million first-lien and $140 million second-lien, with floating rates of three-month LIBOR plus 5.25% and 8.00%, respectively, subject to a 1.50% LIBOR floor. The first lien matures in 2017 and the second lien in 2018. The company reported compliance with debt covenants at March 31, 2012.
- Management said available cash and investments, anticipated revenue and interest income were expected to meet current anticipated liquidity and capital needs for the foreseeable future. Fiscal 2013 capital expenditures were expected to be approximately $25 million.
Material changes, outlook and risks
- The EDT acquisition added $165.0 million of revenue and $6.3 million of net loss from the acquired business after closing. Consideration was $500.0 million in cash and 31.9 million shares valued at approximately $525.1 million. Fiscal 2012 also included $29.1 million of acquisition-related expense.
- Management expected revenue growth from its five key products and aimed to expand margins by growing expenses more slowly than revenue; it provided no numerical revenue or earnings guidance. For fiscal 2013, it expected modestly higher R&D, higher SG&A and cost of goods, and higher interest expense due to a full year of term-loan interest.
- Pipeline milestones included ALKS 9070 entering Phase 3; Phase 2 programs included ALKS 37 and ALKS 5461. Management described expected study results and timelines, which remain subject to clinical and regulatory uncertainty.
- Principal risks include reliance on partners’ commercialization and sales, dependence on key products, generic and other competition, manufacturing concentration and supply interruptions, reimbursement and pricing pressure, patent litigation, foreign-exchange exposure, and debt service and restrictive covenants. A 10% strengthening of the U.S. dollar was estimated to reduce fiscal 2012 manufacturing and royalty revenue by approximately $11.5 million.
- The company reported Paragraph IV and similar patent cases involving certain products but said it was not aware of proceedings expected to have a material adverse effect. Management and the auditor reported effective internal control over financial reporting.
Investor verification priorities
- Separate organic performance from EDT’s partial-year contribution; review the unaudited pro forma information and its stated limitations.
- Track sales, partner execution and revenue concentration across Janssen products, AMPYRA/FAMPYRA, BYDUREON and VIVITROL, including VIVITROL’s net-sales allowances.
- Review loan pricing, amortization, required repayments, covenant headroom and the effects of floating rates despite the reported hedges.
- Assess the $45.8 million IPR&D write-off, future acquired-intangible amortization (estimated at $40–$70 million annually through fiscal 2017), and assumptions underlying goodwill and intangible valuations.
- Verify pipeline trial outcomes and regulatory progress, and monitor generic litigation, reimbursement changes, manufacturing capacity and foreign-currency impacts.