Alkermes plc. — Form 10-Q summary
Reporting period: Quarter and six months ended September 30, 2012. This is fiscal 2013 Q2; the filing metadata’s “2012 Q2” does not match the period stated in the filing. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and performance
Alkermes is a global biopharmaceutical company with more than 20 commercial products and a clinical pipeline focused largely on central nervous system disorders. The results include the acquired Elan Drug Technologies (EDT) business for the full current periods, whereas 2011 results included EDT only after its September 16, 2011 acquisition. Comparisons are therefore not fully like-for-like.
| Metric | Three months ended Sep. 30, 2012 | Three months ended Sep. 30, 2011 | Six months ended Sep. 30, 2012 | Six months ended Sep. 30, 2011 |
|---|---|---|---|---|
| Total revenue | $124.0 | $72.0 | $276.2 | $133.9 |
| Operating income (loss) | $5.4 | $(11.8) | $37.6 | $(25.6) |
| Net income (loss) | $(16.7) | $(22.3) | $5.7 | $(35.5) |
| Basic and diluted EPS | $(0.13) | $(0.22) | $0.04 | $(0.36) |
| Operating cash flow | Not separately stated for the quarter | $45.0 | $(15.6) |
Manufacturing and royalty revenue was $107.3 million for the quarter and $245.7 million for the six months; product sales were $15.2 million and $27.6 million, respectively. R&D revenue declined to $1.5 million for the quarter and $2.9 million for the six months, largely because the 2011 periods included milestone payments.
Margins: Calculated gross margin (revenue less cost of goods manufactured and sold, divided by revenue) was approximately 66.5% for the quarter and 69.7% for the six months, compared with approximately 75.6% and 74.8%, respectively, in 2011. The filing does not report these percentages directly.
Financial position, liquidity and debt
- At September 30, cash and cash equivalents were $132.4 million; short- and long-term investments totaled $75.8 million. Combined cash, cash equivalents and investments were $208.1 million, down from $246.1 million at March 31, 2012.
- Working capital was $286.2 million, up from $250.0 million. Total current assets were $354.9 million and current liabilities were $68.7 million.
- Debt was $370.6 million carrying value ($375.0 million principal), compared with $444.5 million carrying value at March 31. The company refinanced its prior first- and second-lien loans with a $300 million term loan due 2019 and a $75 million term loan due 2016. Both bear floating interest at three-month LIBOR plus a spread, with a 1% LIBOR floor.
- Management expected the refinancing to reduce annual cash interest by approximately $18 million. The company reported compliance with debt covenants at September 30 and said available liquidity plus anticipated revenue should meet anticipated needs for the foreseeable future.
- Six-month capital expenditures were $11.2 million. Cash increased by $48.8 million during the period.
Material changes and unusual items
- Revenue rose 72% for the quarter and 106% for the six months, chiefly reflecting the full-period contribution from EDT. RISPERDAL CONSTA revenue declined; growth in INVEGA SUSTENNA/XEPLION and other EDT products contributed to the increase.
- Operating expenses rose 42% for the quarter and 50% for the six months. Higher manufacturing costs reflected EDT products; R&D expense increased with later-stage clinical activity, while SG&A fell as prior-year merger-related professional fees did not recur. Acquired-intangible amortization was $21.0 million for the six months.
- Interest expense included a $12.1 million refinancing charge and a $0.6 million loss reclassified from accumulated other comprehensive income on an interest-rate swap. Total interest expense was $22.6 million for the quarter and $32.8 million for the six months.
- VIVITROL revenue recognition changed in the quarter: revenue is now recognized on delivery to customers with an estimated return reserve. The change added a one-time $1.7 million to quarterly product sales; the reserve was estimated at 2% of sales.
- Six-month manufacturing and royalty revenue included $20.0 million from an option exercise to license intellectual property. Sale of a strategic investment generated a $1.2 million gain in the quarter.
Outlook, risks and contingencies
- No specific consolidated revenue or earnings guidance is provided. Management expected VIVITROL sales to continue growing and anticipated growth in the long-acting antipsychotic franchise as INVEGA SUSTENNA/XEPLION launches internationally.
- Management anticipated erosion in TRICOR 145 and RITALIN LA/FOCALIN XR during fiscal 2013 from expected generic competition. It also identified competitive and pricing risks for key products, including RISPERDAL CONSTA, INVEGA SUSTENNA/XEPLION and VIVITROL.
- Development milestones noted include ALKS 9070 Phase 3 data expected by the end of calendar 2013, ALKS 5461 Phase 2 data expected in the first half of calendar 2013, and an FDA target action date of March 1, 2013 for ZOHYDRO ER, a partner’s product using Alkermes technology.
- The company discontinued further development of ALKS 37 following Phase 2b results. The filing also cautions that clinical, regulatory, commercial, intellectual-property, foreign-exchange and investment-market risks could affect actual results.
- Alkermes disclosed ongoing Paragraph IV litigation in the U.S. and a similar suit in France, but said it did not believe current proceedings would have a material adverse effect. It reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls.
Investor facts to verify
- How much of reported revenue growth reflects the full-period inclusion of EDT versus underlying product growth, and how will product-level trends develop?
- Whether the expected $18 million annual cash-interest savings materialize, and the impact of floating rates, repayment requirements and restrictive loan covenants.
- How generic competition affects TRICOR 145 and RITALIN LA/FOCALIN XR, and whether the expected VIVITROL growth offsets competitive and pricing pressures.
- Whether clinical and regulatory timelines for ALKS 9070, ALKS 5461 and ZOHYDRO ER are achieved, and what additional development costs may result.
- The effects of VIVITROL’s revised revenue-recognition estimate and return reserve, as well as the sustainability of the one-time licensing revenue and other unusual items.