Alkermes plc — Form 10-Q summary
Reporting period: Three and nine months ended December 31, 2012 (fiscal 2013 third quarter); financial statements are unaudited. Unless stated otherwise, figures below are in millions of dollars. Alkermes is a global biopharmaceutical company with more than 20 commercial products and a CNS-focused pipeline. The September 2011 acquisition of Elan’s drug technologies business (EDT) affects year-over-year comparability: 2011 results include EDT only after the acquisition date.
Financial results
| Metric | Three months ended Dec. 31, 2012 | Three months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Revenue | $135.9 | $125.6 | $412.1 | $259.5 |
| Operating income (loss) | $25.3 | $(5.0) | $62.8 | $(30.6) |
| Net income (loss) | $16.3 | $(14.8) | $22.0 | $(50.3) |
| Diluted earnings (loss) per share | $0.12 | $(0.11) | $0.16 | $(0.46) |
- Quarterly revenue increased 8%; nine-month revenue increased 59%. The company attributed quarterly growth mainly to key commercial products and the nine-month increase largely to EDT products included for a longer period.
- Calculated gross margin (revenue less cost of goods manufactured and sold) was approximately 71% for the quarter versus 66% a year earlier, and approximately 70% for the nine-month period versus 71%.
- Quarterly operating results improved on higher revenue and lower expenses, including lower clinical-trial and merger-related costs. Nine-month operating results turned positive, but the comparison also reflects acquisition timing and prior-year merger costs.
- Quarterly interest expense was $4.7, versus $10.5 a year earlier. Nine-month interest expense rose to $37.5 from $18.0, including a $12.1 refinancing charge.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $71.2, compared with cash used of $17.8 in the prior-year period. Investing activities provided $43.7, versus cash used of $395.6; financing activities used $62.6, versus proceeds of $460.3. Cash increased to $135.9 from $83.6 at March 31, 2012.
- Cash, cash equivalents and investments totaled $239.3 at December 31, 2012, versus $246.1 at March 31; working capital was $310.2, versus $250.0. Total assets were $1,411.8 and shareholders’ equity was $919.9.
- Debt carrying value was $369.1, including $6.8 current; the stated principal balance was $373.3. The September 2012 refinancing replaced prior term loans with a $300.0 seven-year tranche and a $75.0 four-year tranche, both floating-rate loans with a 1% LIBOR floor. Debt is secured by substantially all company and guarantor assets, subject to exceptions; the company reported covenant compliance.
- Capital spending on property, plant and equipment was $14.0 for the nine months. The company stated that operating cash generation should be sufficient for foreseeable working-capital and other cash needs; additional borrowing capacity was available subject to facility conditions.
Material changes, outlook and risks
- The refinancing reduced outstanding debt and management expected approximately $18.0 of annual cash-interest savings. The filing also says interest expense is expected to decrease beyond fiscal 2013 as a result of the refinancing and debt paydown.
- VIVITROL revenue recognition changed in 2012: revenue is now recognized upon delivery, with an estimated return reserve. The change added a one-time $1.7 to product sales in the September 2012 quarter; the December 31 return reserve was $3.0. VIVITROL gross sales increased 42% in the quarter and 37% for nine months, reflecting higher unit volumes.
- Product performance was mixed. INVEGA SUSTENNA/XEPLION and AMPYRA/FAMPYRA revenues grew; RISPERDAL CONSTA revenues declined. TRICOR 145 royalties fell sharply after generic entry in November 2012, and management expected continued erosion in TRICOR and RITALIN LA/FOCALIN XR revenues amid generic competition.
- Management expected growth in the long-acting antipsychotic franchise as INVEGA SUSTENNA/XEPLION launches internationally, and anticipated continued VIVITROL growth. These statements are expectations, not quantified company-wide revenue guidance; the filing provides no clear numerical full-year revenue or earnings forecast.
- Pipeline milestones included expected late-2013 data from a Phase 3 aripiprazole lauroxil study and expected second-quarter 2013 data from a Phase 2 ALKS 5461 study. In January 2013, Alkermes reported positive topline Phase 1 results for ALKS 3831 and planned to meet with FDA and begin Phase 2 in mid-2013. For ZOHYDRO ER, the FDA advisory committee voted 2–11 against approval; an FDA decision date of March 1, 2013 was noted.
- Risks include clinical and regulatory uncertainty, product competition and pricing pressure, generic launches, dependence on collaborators and commercial products, and potential investment-market and foreign-exchange exposure. Management reported no material change to the risk factors in its prior annual report. It disclosed Paragraph IV litigation and a similar suit in France, but did not believe current claims would materially harm the company. No material off-balance-sheet arrangements were reported.
- The company recorded a valuation allowance on remaining U.S. and Irish net deferred tax assets because realization was not considered more likely than not. Annual goodwill testing found no impairment; management stated a decline of at least 47% in estimated fair value would be needed before the EDT reporting unit’s carrying value exceeded its fair value.
Important facts for investors to verify
- Separate underlying growth from the effects of the EDT acquisition and the one-time VIVITROL revenue-recognition change.
- Track product-level trends, especially generic-related erosion in TRICOR and possible competition affecting other established products.
- Assess whether the refinancing delivers the expected interest savings, while monitoring floating-rate exposure, required principal payments and restrictive covenants.
- Follow regulatory and clinical outcomes for ZOHYDRO ER and the named pipeline programs, including whether projected milestones occur.
- Review the assumptions supporting VIVITROL return reserves, deferred-tax-asset valuation allowances and the goodwill impairment assessment.