Alkermes plc. — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended September 30, 2011. Unless otherwise noted, financial amounts below are in U.S. dollars; figures are rounded to millions. The filing’s comparative periods principally reflect legacy Alkermes, Inc., because the EDT business was included only from its September 16, 2011 acquisition date.
Business context and reporting period
Alkermes is a global biopharmaceutical company developing, manufacturing and commercializing medicines, with a portfolio of more than 20 commercial products and a pipeline focused in part on CNS disorders. On September 16, 2011, Alkermes combined with Elan’s Drug Technologies business (EDT), expanding its product portfolio and adding drug-delivery technologies, including oral controlled release and NanoCrystal.
The transaction was accounted for as a reverse acquisition, with Alkermes, Inc. treated as the accounting acquirer. Alkermes paid Elan $500.0 million in cash and issued 31.9 million shares valued at $525.1 million; former Alkermes, Inc. shareholders owned approximately 75% of the combined company, with an Elan subsidiary owning approximately 25%.
Financial results and liquidity
| Metric | Three months ended Sep. 30 | Six months ended Sep. 30 |
|---|---|---|
| Total revenue, 2011 | $72.0 million | $133.9 million |
| Total revenue, 2010 | $49.2 million | $91.5 million |
| Operating loss, 2011 | $(11.8) million | $(25.6) million |
| Net loss, 2011 | $(22.3) million | $(35.5) million |
| Net loss, 2010 | $(7.7) million | $(21.1) million |
| Basic and diluted loss per share, 2011 | $(0.22) | $(0.36) |
| Adjusted EBITDA, 2011 | $13.3 million | $16.9 million |
| Adjusted EBITDA, 2010 | $0.5 million | $(5.4) million |
Revenue comprised manufacturing and royalty revenue of $54.0 million for the quarter and $103.0 million for the half-year; net product sales of $9.9 million and $19.6 million; and R&D revenue of $8.1 million and $11.3 million, respectively. The filing does not provide a clear reported gross-margin percentage.
For the six months, operating cash flow was $(15.6) million, investing cash flow was $(393.1) million and financing cash flow was $459.4 million. Cash and cash equivalents were $89.2 million at September 30; short- and long-term investments totaled $151.3 million, bringing total cash, cash equivalents and investments to $240.5 million. Working capital was $265.4 million.
Debt had a $450.0 million principal amount ($444.2 million carrying value), consisting of a $310 million first-lien term loan due 2017 and a $140 million second-lien term loan due 2018. The loans bear floating rates initially set at three-month LIBOR plus 5.25% and 8.00%, respectively, with a 1.50% LIBOR floor. The company reported compliance with debt covenants at quarter-end. Total assets were $1.50 billion and shareholders’ equity was $909.7 million.
Material changes versus the prior comparable period
- Reported revenue increased versus 2010, but the comparison is not like-for-like: EDT contributed only 14 days of results in the current quarter. EDT contributed $9.1 million of revenue and $0.7 million of net income after acquisition.
- Manufacturing and royalty revenue rose, led by RISPERDAL CONSTA and newly consolidated EDT products. RISPERDAL CONSTA revenue was $44.3 million for the quarter and $92.8 million for the half-year; management cited higher pricing, royalties and, for the half-year, increased shipments.
- VIVITROL net sales were $9.9 million for the quarter and $19.6 million for the half-year. Management attributed higher gross sales to price increases and higher unit volumes; Medicaid rebates and chargebacks also increased.
- Net losses widened. R&D expense increased to $28.2 million for the quarter and $56.2 million for the half-year, with spending on ALKS 37 and ALKS 9070 among the cited drivers. SG&A rose to $36.2 million and $67.7 million, largely reflecting Business Combination professional fees, higher employee-related costs and EDT expenses.
- Interest expense increased to $7.6 million for the quarter and half-year, primarily reflecting the new term loans. The company recorded $22.3 million of EDT acquisition-related expenses during the six months, mainly in SG&A.
- The balance sheet expanded materially through the acquisition: it recorded $689.8 million of acquired intangible assets and $105.0 million of goodwill. Purchase-price allocation remained preliminary. The acquisition was funded with cash, shares and term loans.
Outlook, management commentary, risks and unusual items
- Management said the combination was intended to diversify the portfolio and pipeline, support investment in proprietary candidates, and improve growth opportunities and cost of capital. It described the combined business as intended to be profitable on a cash-earnings basis; this is a management objective, not a reported guarantee or quantified forecast.
- No specific company-wide revenue, earnings or cash-flow guidance is provided in the supplied filing text. Product and pipeline expectations include a January 28, 2012 FDA action date for BYDUREON; expected ALKS 37 Phase 2b results in mid-2012; and plans to advance ALKS 9070 into pivotal development by year-end 2011. These are forward-looking statements.
- Alkermes recognized $7.0 million of BYDUREON milestone revenue following first EU commercial sale and $3.0 million of milestone revenue related to VIVITROL approval in Russia. Under its newly adopted milestone method, substantive milestones are recognized when achieved; $5.0 million of earlier milestone payments remained deferred at September 30.
- A $13.2 million current tax expense related to transfer of BYDUREON intellectual property from the U.S. to Ireland was partly offset by a $9.5 million deferred tax benefit connected with acquisition accounting. The company maintained a full valuation allowance on U.S. and Irish deferred tax assets.
- Key risks include floating-rate debt and covenant restrictions, currency exposure, investment portfolio credit/liquidity/market risk, and possible impairment of acquired intangible assets or goodwill if development or commercial assumptions do not materialize. Management estimated that a 10% weakening of the U.S. dollar against the euro would increase budgeted euro-denominated expenses by $4.5 million for the remainder of fiscal 2012.
- The company and/or its partners were involved in Paragraph IV patent litigation concerning TriCor, Focalin XR, Avinza, Luvox CR and Megace ES, including proceedings in the U.S. and similar suits in Canada and France. The filing does not quantify a likely financial outcome. It reported no material off-balance-sheet arrangements.
- The acquired finite-lived intangible assets were expected to generate annual amortization of approximately $42 million to $76 million through fiscal 2017. The filing identifies this as a significant future expense and impairment-estimation area.
Most important facts for investors to verify
- How much of reported growth and future earnings is attributable to the EDT acquisition, and how comparable results are on a pro forma basis.
- Whether commercial performance of major products, especially RISPERDAL CONSTA, VIVITROL and EDT products, supports the acquired asset valuations and management’s cash-earnings objective.
- Debt service capacity under the $450 million floating-rate facilities, including actual interest costs, hedging coverage, covenant compliance and repayment requirements.
- BYDUREON’s FDA review outcome and the progress, timing and funding of the key pipeline programs.
- Potential effects of Paragraph IV litigation, tax matters, acquired intangible amortization and any subsequent purchase-price allocation or impairment adjustments.