Alkermes plc — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing; selected unaudited Q4 results are noted below. Amounts are in U.S. dollars.
Business context
Alkermes is a global biopharmaceutical company developing, manufacturing and commercializing medicines, independently and with partners. Its portfolio and pipeline focus primarily on central nervous system disorders, including schizophrenia, addiction, depression and multiple sclerosis. Revenue comes from U.S. sales of VIVITROL and ARISTADA and royalties and manufacturing revenue from products commercialized by partners.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Total revenue | $903.4 million | $745.7 million |
| Operating loss | $147.9 million | $208.7 million |
| Net loss | $157.9 million | $208.4 million |
| Loss per diluted share | $1.03 | $1.38 |
| Cash from operating activities | $19.2 million | Cash used: $63.8 million |
| Cash, cash equivalents and investments at year-end | $590.7 million | $619.2 million |
| Debt principal outstanding at year-end | $284.3 million | Not stated here on a comparable principal basis |
- Revenue increased 21%. Product sales, net rose to $362.8 million from $256.1 million; manufacturing and royalty revenue increased to $505.3 million from $487.2 million. FY 2017 also included $28.0 million of Biogen license revenue.
- VIVITROL net sales were $269.3 million, up from $209.0 million; ARISTADA net sales were $93.5 million, up from $47.1 million. Net product sales represented 55.2% of gross product sales, versus 57.6% in 2016, reflecting higher deductions for rebates, discounts and other allowances.
- Cost of goods manufactured and sold was $154.7 million. The filing does not provide a single consolidated gross-margin measure.
- R&D expense increased to $412.9 million from $387.1 million; SG&A increased to $421.6 million from $374.1 million. Higher commercialization investment and pipeline spending contributed to the expense growth.
- Year-end current assets were $808.8 million and current liabilities $291.1 million. Management said cash and investments were expected to fund anticipated working capital, capital expenditures and debt service for at least 12 months from issuance of the financial statements.
- Term Loan B-1 principal was $284.3 million, bearing interest at LIBOR plus 2.75% (0.75% LIBOR floor) and maturing September 2021. The debt is secured by a first-priority lien on substantially all company and guarantor assets. Alkermes reported compliance with debt covenants at year-end.
- Planned 2018 capital expenditures were approximately $85 million. The company reported no off-balance-sheet arrangements.
Selected Q4 2017: Revenue was $275.4 million, operating income was $5.8 million, and net loss was $9.8 million ($0.06 per share). The quarter included the $28.0 million Biogen license payment in revenue and a $20.6 million income tax provision.
Changes versus prior period
- Revenue growth was led by VIVITROL and ARISTADA sales and increased Janssen royalties on INVEGA SUSTENNA/XEPLION and INVEGA TRINZA/TREVICTA. Total sales of those Janssen products reached $2.6 billion, compared with $2.2 billion in 2016.
- Risperdal Consta-related revenue declined: Janssen’s end-market sales fell to $805 million from $893 million. Alkermes’ combined manufacturing and royalty revenue for the product was $84.9 million, down from $87.2 million.
- The operating loss narrowed by $60.8 million, despite increased R&D and SG&A, as revenue growth outpaced expense growth. Operating cash flow also improved by $83.0 million to positive $19.2 million.
- Cash and investments declined by $28.4 million year over year. The company spent $51.3 million on property, plant and equipment and increased inventory to $93.3 million from $63.0 million.
- Other income included a $21.6 million increase in the fair value of contingent consideration related to the Gainesville divestiture; this was a valuation gain, not operating revenue. Alkermes also recorded a $10.5 million impairment of its Reset Therapeutics investment.
Outlook, pipeline and risks
- Management expected growth in VIVITROL and ARISTADA sales and continued growth in its long-acting antipsychotic franchise, while noting competitive and pricing pressures. No formal consolidated revenue or earnings guidance is provided in the filing text.
- ALKS 5461: the company completed its NDA submission in January 2018 for adjunctive treatment of major depressive disorder. Two phase 3 studies had missed their primary endpoint; another phase 3 study reported positive results. FDA approval remained uncertain.
- ALKS 3831: one phase 3 study met its primary efficacy endpoint; results from the weight-gain study were expected in fall 2018. Alkermes planned an NDA submission in the first half of 2019 if the program succeeded.
- BIIB098: following its November 2017 Biogen agreement, Alkermes received $28 million upfront and could receive a $50 million option payment, a $150 million approval payment and royalties. Expected development milestones included initial head-to-head study results in the first half of 2018 and a planned NDA filing in the second half of 2018. Payments and royalties are contingent, not assured.
- AL NCD, an ARISTADA initiation product, had an FDA target action date of June 30, 2018. Initial phase 1 data for cancer candidate ALKS 4230 were expected in 2018.
- Generic competition presents a material risk to AMPYRA revenue. A court upheld one patent expiring July 2018 but invalidated four other patents; appeals were pending. Alkermes warned generic entry could reduce manufacturing and royalty revenue, potentially before July 2018 depending on the appeal outcome. Janssen also sued Teva over a proposed generic INVEGA SUSTENNA.
- In June 2017, Alkermes received a U.S. Attorney subpoena concerning VIVITROL and said it was cooperating. A shareholder securities class action filed in November 2017 alleged misleading statements concerning VIVITROL marketing. The company reported no probable litigation losses at December 31, 2017; outcomes and potential exposure remain uncertain.
- The Tax Cuts and Jobs Act prompted a $21.5 million discrete tax expense from the reduction in the U.S. federal tax rate. Alkermes reported a $14.7 million full-year tax provision despite its pretax loss, and said its tax accounting remained subject to finalization.
- Other principal risks include dependence on partners (Janssen represented 33% of 2017 revenue), product and customer concentration, clinical and regulatory uncertainty, manufacturing and supplier dependence, reimbursement and pricing pressure, foreign exchange exposure, and debt covenants. A 10% strengthening of the U.S. dollar was estimated to reduce 2017 revenue by about $26.8 million before expense offsets.
Important facts for investors to verify
- Progress and timing of the ALKS 5461, ALKS 3831, BIIB098 and AL NCD regulatory and clinical milestones, and the potential for delay or failure.
- AMPYRA patent appeal outcomes, settlement entry dates for generic competitors, and resulting effects on Alkermes’ manufacturing and royalty revenue.
- VIVITROL subpoena and securities litigation developments, including any effect on promotional practices, costs or commercialization.
- Sales trends, pricing, rebates and partner performance for Janssen products, VIVITROL and ARISTADA; assess the 33% revenue contribution from Janssen.
- Cash burn, planned 2018 capital spending, debt service and covenant compliance, alongside the company’s stated 12-month liquidity expectation.
- Final effects of U.S. tax law changes and the recoverability of deferred tax assets and carryforwards.