Alkermes plc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; unaudited. Comparisons are with the corresponding 2013 periods. Alkermes is a global biopharmaceutical company with more than 20 marketed products and a CNS-focused development pipeline.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $153.4m | $138.6m | $283.6m | $302.1m |
| Operating income (loss) | ($22.8m) | $13.5m | ($38.7m) | $32.5m |
| Net income (loss) | $3.7m | $7.3m | ($20.6m) | $10.3m |
| Diluted EPS | $0.02 | $0.05 | ($0.14) | $0.07 |
| Operating cash flow | Not separately reported for quarter | $5.3m | $68.1m |
- Q2 revenue increased 11%, led by higher INVEGA SUSTENNA/XEPLION and BYDUREON revenues and VIVITROL product sales. Six-month revenue declined 6%, including the absence of $30.0m of non-key-program IP license revenue recorded in the 2013 period.
- Q2 operating expenses were $176.2m, up from $125.1m; six-month expenses were $322.4m, up from $269.5m. R&D spending rose to $119.3m for the half-year from $69.3m, principally reflecting ALKS 5461 pivotal-trial activity. SG&A rose to $93.2m from $67.6m, including increased launch preparation and share-based compensation.
- Derived operating margins were approximately (14.9)% in Q2 2014 versus 9.8% in Q2 2013, and (13.6)% for the first half versus 10.8% in 2013.
- Q2 net income included a $15.3m gain on sale of the Acceleron investment and a $12.3m gain on sale of Athlone property and equipment. Excluding those gains, the quarter had an operating loss and only modest pretax income. The Athlone sale generated $17.5m, of which $3.0m remained in escrow pending services.
- Six-month operating cash flow fell to $5.3m from $68.1m, reflecting the net loss and greater working-capital use, including higher prepaid taxes and inventory-related spending. Investing activities used $245.8m, largely due to net investment purchases; financing provided $261.3m, primarily from the January share offering.
Liquidity, debt and balance sheet
- At June 30, cash and cash equivalents were $188.3m and investments totaled $525.6m, for combined cash, cash equivalents and investments of $713.9m, versus $450.0m at December 31, 2013. Working capital was $784.8m, up from $469.2m.
- Debt carrying value was $361.1m, including $6.8m current, compared with $364.3m at year-end. The term loans mature in 2016 and 2019. The filing’s MD&A separately cites outstanding borrowings of $363.2m; investors should reconcile this figure with the balance-sheet carrying amount.
- Management expected operating cash generation to fund anticipated working capital, capital spending and debt service for at least 12 months. The term loan facility had $140m of incremental capacity, subject to conditions.
- Total assets were $1.86bn and shareholders’ equity was $1.35bn at June 30, 2014.
Business developments, outlook and risks
- Following positive Phase 3 results for aripiprazole lauroxil, Alkermes planned to submit an NDA to the FDA in Q3 2014 and expected launch-related SG&A to continue increasing. The trial’s common adverse events included insomnia, akathisia and headache.
- Alkermes initiated the pivotal FORWARD program for ALKS 5461; results from its three core Phase 3 efficacy studies were expected in 2016. Development spending and trial outcomes remain uncertain.
- Other pipeline activity included Phase 2 studies of ALKS 3831, a Phase 1 study of ALKS 8700 initiated in July 2014, and planned clinical development of ALKS 7106. Janssen was pursuing development and regulatory filings for longer-interval INVEGA SUSTENNA.
- Management cited generic competition as a risk to revenues from older partnered products and expected some other marketed-product revenues to decline. The company also reported a limited VIVITROL recall related to a needle-clog issue, resulting in a $1.4m charge in Q1 2014.
- Alkermes reported ongoing patent litigation and other proceedings involving FOCALIN XR, TRICOR, RITALIN LA, MEGACE ES and AMPYRA, but said it did not believe these would have a material adverse effect. It reported no material change to previously disclosed risk factors and no material off-balance-sheet arrangements.
- In May 2014, the company committed up to €7.4m to a healthcare-focused investment partnership; $0.5m had been paid by quarter-end.
Most important facts to verify
- Whether accelerated R&D and commercial launch spending produces the expected pipeline and product-launch milestones.
- The sustainability of partnered-product royalties, particularly the growth in INVEGA SUSTENNA/XEPLION and declines in RISPERDAL CONSTA and older products.
- The reconciliation of reported debt figures and the company’s ability to maintain liquidity and meet debt obligations.
- The impact of VIVITROL recall-related costs, generic competition, patent proceedings and other disclosed contingencies.
- Whether reported quarterly profitability is repeatable, given the substantial one-time investment and property-sale gains.