Alkermes plc — Form 10-Q summary
Business context and period. Alkermes is a global biopharmaceutical company with more than 20 commercial products and a CNS-focused development pipeline. This report covers the three and six months ended September 30, 2013; the comparable periods are September 30, 2012. The company changed its fiscal year-end from March 31 to December 31, effective in 2013, and planned to report a transition period ending December 31, 2013. Financial figures below are in U.S. dollars.
Financial performance and position
| Metric | Three months ended Sep. 30, 2013 | Prior year | Six months ended Sep. 30, 2013 | Prior year |
|---|---|---|---|---|
| Total revenue | $139.8 million | $124.0 million | $278.4 million | $276.2 million |
| Operating income (loss) | $(3.9) million | $5.4 million | $9.7 million | $37.6 million |
| Net income (loss) | $(7.8) million | $(16.7) million | $(0.4) million | $5.7 million |
| Diluted EPS | $(0.06) | $(0.13) | $(0.00) | $0.04 |
| Operating cash flow | Not separately presented for the quarter | $54.1 million | $45.0 million |
- Revenue mix: Manufacturing and royalty revenue was $118.6 million for the quarter and $238.4 million year to date; product sales were $19.2 million and $36.6 million, respectively. Research and development revenue was $2.0 million and $3.5 million.
- Margins: Calculated gross margin, using revenue less cost of goods manufactured and sold, was approximately 67.5% for the quarter and 67.2% year to date, versus 66.5% and 69.7%, respectively, in the comparable periods. Operating margin was approximately (2.8)% for the quarter and 3.5% year to date, versus 4.4% and 13.6%.
- Cash and liquidity: At September 30, cash and cash equivalents were $173.5 million, short- and long-term investments totaled $221.7 million, and working capital was $449.9 million. Cash, cash equivalents and investments totaled $395.3 million, up from $304.2 million at March 31, 2013.
- Debt: Balance-sheet debt was $365.9 million, including $6.8 million current; stated outstanding principal was $368.3 million. Debt balance declined from $369.0 million at March 31. Management cited refinancing completed in fiscal 2013 as reducing principal from $450 million to $375 million and the blended interest rate from 7.6% to 3.4%.
- Cash flow: Six-month investing cash flow was $(8.1) million, compared with $75.0 million provided in the prior year, largely reflecting lower net proceeds from investment sales. Financing cash flow was $30.5 million provided, versus $71.2 million used, with prior-year flows affected by debt refinancing. Cash increased by $76.5 million during the period.
Material changes and drivers
- Quarterly revenue rose 13% year over year, while six-month revenue was nearly flat. The quarter’s comparison benefited from higher sales and royalties on INVEGA SUSTENNA/XEPLION, AMPYRA/FAMPYRA and BYDUREON, and higher VIVITROL sales. For the six-month period, these gains were offset by lower TRICOR 145 and other manufacturing and royalty revenue, including a $20 million intellectual-property license payment in the prior-year period.
- Five key commercial products represented 73% of quarterly revenue and 72% of six-month revenue, compared with 59% and 56%, respectively, a year earlier.
- Six-month operating income fell to $9.7 million from $37.6 million, and net income shifted to a small loss. R&D expense rose to $79.4 million from $72.9 million, SG&A to $72.4 million from $61.2 million, and intangible amortization to $25.6 million from $21.0 million. Lower interest expense partly offset increased operating costs.
- VIVITROL gross sales increased 41% for the quarter and 39% year to date, driven by unit growth; higher rebates and other deductions reduced net sales as a share of gross sales.
- Accumulated deficit was $500.4 million at period-end. A $3.0 million discrete tax benefit from resolution of substantially all uncertain tax positions contributed to the period’s tax result; the company continued to maintain a valuation allowance against a significant portion of deferred tax assets.
Outlook, commentary and risks
- Management expected long-acting antipsychotic franchise revenue and AMPYRA/FAMPYRA to continue growing, while anticipating erosion in RITALIN LA/FOCALIN XR and TRICOR 145 from generic competition. It expected R&D expense to increase in calendar 2014 as late-stage trials progress and SG&A to increase with aripiprazole lauroxil launch preparation.
- The Athlone restructuring targets up to 130 job reductions and termination of manufacturing services for certain older products. Alkermes estimated annual cost savings of $15 million to $20 million by 2016 and beyond, with accelerated depreciation charges expected of $7.5 million for the nine months ending December 31, 2013 and $7.8 million in 2014. The restructuring accrual was $11.4 million at September 30.
- Pipeline developments included completion of enrollment in the aripiprazole lauroxil Phase 3 study, with data expected in the first half of 2014; planned Phase 3 development of ALKS 5461 in early 2014 after positive Phase 2 results and FDA Fast Track designation; and Phase 2 testing of ALKS 3831, with topline results expected in the first half of 2015. These are forward-looking expectations, not assurances of approval or commercial success.
- Management said operating cash generation should fund anticipated needs for the foreseeable future and noted potential incremental term-loan capacity of $140 million, subject to conditions. It reported no material change in risk factors from the prior annual report, no material off-balance-sheet arrangements, and no known legal proceedings expected to have a material adverse effect. Various U.S. Paragraph IV matters were ongoing.
- Unrealized investment losses were assessed as temporary. The company disclosed investment-market, foreign-currency, clinical, regulatory, competition, collaboration, and financing risks. Disclosure controls were deemed effective as of September 30, 2013; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether growth in INVEGA SUSTENNA/XEPLION, AMPYRA/FAMPYRA and VIVITROL can offset generic-related erosion and the prior-year license-revenue comparison.
- Timing, results, regulatory prospects and commercialization costs for aripiprazole lauroxil, ALKS 5461 and other pipeline programs.
- Progress and realized savings from the Athlone restructuring, including remaining severance and accelerated depreciation charges.
- Debt principal, interest-rate exposure, liquidity needs and the terms governing additional borrowing capacity.
- Future tax expense and the recoverability of deferred tax assets, alongside the effect of share-based compensation and investment valuation changes.
- Potential outcomes of Paragraph IV litigation and exposure to generic competition, partner performance and product concentration.