Alkermes plc — Form 10-Q Summary
Reporting period: Three and nine months ended December 31, 2011. This is fiscal 2012 Q3, although the request metadata labels it 2011 Q3. Amounts are in U.S. dollars; financial statements are unaudited.
Business context
Alkermes develops, manufactures and commercializes medicines, with a focus on central nervous system disorders, and operates as one business segment. On September 16, 2011, it acquired Elan’s Drug Technologies business (EDT) for $500.0 million in cash and 31.9 million Alkermes shares valued at $525.1 million. The transaction was accounted for as a reverse acquisition, with Alkermes, Inc. as accounting acquirer. Consequently, current-period results include EDT only from September 17, while prior-period results do not include EDT; comparisons are not like-for-like.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2011 | Prior-year quarter | Nine months ended Dec. 31, 2011 | Prior-year period |
|---|---|---|---|---|
| Total revenue | $125.6 million | $44.0 million | $259.5 million | $135.5 million |
| Operating loss | $(5.0) million | $(11.9) million | $(30.6) million | $(32.0) million |
| Net loss | $(14.8) million | $(11.4) million | $(50.3) million | $(32.5) million |
| Basic and diluted loss per share | $(0.11) | $(0.12) | $(0.46) | $(0.34) |
| Adjusted EBITDA (non-GAAP) | $29.7 million | $(4.1) million | $45.9 million | $(8.7) million |
| Cash used in operating activities | Not provided for the quarter | $(17.8) million | $(14.2) million |
Quarterly revenue growth chiefly reflects the acquired EDT portfolio; manufacturing and royalty revenue was $112.8 million, product sales $10.6 million, and R&D revenue $2.3 million. Quarterly operating loss narrowed, but net loss increased, primarily reflecting $10.5 million of interest expense on new term loans and $11.9 million of acquired-intangible amortization. The nine-month period included $26.7 million of EDT transaction-related expense in SG&A. Adjusted EBITDA is a company-defined non-GAAP measure and excludes, among other items, interest, taxes, depreciation and amortization, share-based compensation and certain transaction costs.
At December 31, 2011, cash and cash equivalents were $85.3 million, short-term investments $128.1 million and long-term investments $20.5 million; combined cash and investments were $234.0 million, versus $294.7 million at March 31, 2011. Working capital was $277.9 million, versus $204.9 million. Total assets were $1.506 billion and shareholders’ equity $904.9 million. Inventory was $46.1 million.
Debt had a $444.8 million carrying value ($450.0 million principal): a $310 million first-lien term loan due 2017 and a $140 million second-lien loan due 2018, both with floating-rate exposure. The loans are secured by substantially all company and guarantor assets. The company reported compliance with debt covenants at quarter-end. Nine-month investing cash outflow was $395.6 million, principally reflecting the EDT acquisition; financing cash inflow was $460.3 million, principally from term-loan proceeds.
Material changes versus prior periods
- EDT added significant revenue, manufacturing operations, assets and debt to the consolidated business from the acquisition date; reported growth therefore includes a material acquisition effect.
- The acquisition added $689.0 million of identifiable intangible assets and $105.7 million of goodwill. Amortization expense was $13.7 million for the nine months; management estimated annual amortization of approximately $42 million to $76 million through fiscal 2017.
- R&D and SG&A expenses rose year over year, reflecting EDT, increased clinical-program activity, higher headcount and transaction-related professional fees. Cost of goods manufactured and sold also increased with the acquired portfolio.
- Alkermes recorded a $13.2 million current tax expense associated with transferring BYDUREON intellectual property from the U.S. to Ireland and a $10.2 million deferred tax benefit related to acquisition accounting. The nine-month income-tax provision was $3.7 million.
Outlook, risks and unusual items
- Management expected a modest R&D increase and higher SG&A in fiscal 2013 due to a full year of EDT operations, with further R&D investment as ALKS 9070, ALKS 37 and ALKS 5461 advanced. It also expected higher manufacturing costs and a full year of term-loan interest in fiscal 2013.
- Management said cash, investments and anticipated revenue were expected to meet anticipated liquidity and capital needs for the foreseeable future. This is a forward-looking statement, not a guarantee.
- In January 2012, after quarter-end, the FDA approved BYDUREON. Alkermes expected a February U.S. launch and a $7.0 million milestone upon first U.S. commercial sale.
- Pipeline outlook included phase 3 initiation for ALKS 9070, with data expected mid-2013; phase 2b ALKS 37 results expected mid-2012; and phase 2 ALKS 5461 MDD data expected in the first half of 2013.
- Key risks include clinical and regulatory uncertainty, commercialization and partner dependence, generic and other competition, debt service and floating interest rates, foreign-exchange movements, investment-market and credit risks, and potential impairment of acquired intangible assets or goodwill. The company disclosed Paragraph IV and similar patent litigation in the U.S., Canada and France, but did not believe the matters would have a material adverse effect.
- Management reported no goodwill impairment after its October 2011 qualitative assessment. The acquisition purchase-price allocation remained preliminary. The company reported no material off-balance-sheet arrangements and no material change in internal control over financial reporting, apart from continuing integration-related process changes.
Important facts for investors to verify
- Assess underlying revenue and profitability excluding EDT’s partial-period contribution and acquisition-related costs; the reported periods are not directly comparable.
- Review the $450 million principal debt burden, variable-rate terms, amortization requirements, covenant restrictions and future interest expense.
- Track cash conversion: operating activities used $17.8 million over nine months despite positive adjusted EBITDA; reconcile the non-GAAP measure to GAAP results.
- Monitor EDT purchase-price allocation, intangible-asset amortization and impairment assumptions, as well as commercialization and development outcomes for key products and pipeline candidates.
- Confirm BYDUREON’s U.S. launch and milestone timing, and evaluate exposure to generic competition, partner performance, litigation, currency movements and investment-market risk.