Alkermes plc — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; comparatives are the corresponding 2013 periods. Alkermes is a global biopharmaceutical company with more than 20 commercial products and a CNS-focused development pipeline. Figures below are in millions of U.S. dollars unless noted.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $160.0 | $139.8 | $443.6 | $441.9 |
| Operating expenses | $192.7 | $143.7 | $515.1 | $413.2 |
| Operating income (loss) | $(32.7) | $(3.9) | $(71.5) | $28.6 |
| Net income (loss) | $(40.0) | $(7.8) | $(60.6) | $2.6 |
| Diluted earnings (loss) per share | $(0.27) | $(0.06) | $(0.42) | $0.02 |
- Revenue increased 14% year over year in Q3, but was nearly flat for the nine-month period. Nine-month 2013 revenue included $30.0 million of IP license revenue unrelated to key development programs.
- Operating margins, calculated from reported operating income and revenue, were approximately (20.5)% in Q3 2014 versus (2.8)% in Q3 2013, and (16.1)% for the first nine months of 2014 versus 6.5% in 2013. Gross margin is not separately stated in the filing.
- Manufacturing and royalty revenue was $132.0 million in Q3 and $373.7 million year to date. Product sales, net, primarily VIVITROL, were $25.8 million and $64.5 million, respectively.
- Q3 R&D expense rose to $78.3 million from $45.9 million; nine-month R&D increased to $197.6 million from $115.2 million. SG&A rose to $51.9 million from $39.5 million in Q3 and to $145.1 million from $107.1 million year to date. Management attributed the increases chiefly to pipeline investment and aripiprazole lauroxil prelaunch activity.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $136.2 million; short- and long-term investments totaled $580.1 million. Cash, equivalents and investments together were $716.3 million, versus $450.0 million at December 31, 2013. Working capital was $702.8 million, up from $469.2 million.
- Nine-month operating cash flow was $(2.5) million, compared with $109.4 million provided in 2013. Investing cash flow was $(309.5) million, primarily reflecting net investment purchases; financing cash flow was $280.7 million, including $248.4 million net proceeds from an ordinary-share offering.
- Balance-sheet debt, including current and long-term portions, was $359.6 million, down from $364.3 million at year-end 2013. The MD&A separately states outstanding borrowings of $361.5 million; the filing text does not reconcile this difference. The term loans mature in 2016 and 2019.
- Management expected operating funds to cover anticipated working capital, capital expenditures and debt service for at least the next 12 months. It also cited $140 million of incremental term-loan capacity, subject to conditions including a leverage test.
Developments, outlook and risks
- Q3 revenue gains included INVEGA SUSTENNA/XEPLION and BYDUREON; nine-month manufacturing and royalty revenue declined, notably because of lower RISPERDAL CONSTA and other-product revenue. Management cited generic competition as a pressure on legacy products.
- Alkermes submitted the aripiprazole lauroxil NDA in August 2014; the FDA accepted it in October and set a PDUFA date of August 22, 2015. Management expected to begin clinical testing of a two-month formulation by year-end 2014 and said SG&A would continue increasing in 2015 as launch planning advanced.
- Management expected data from the three core ALKS 5461 Phase 3 efficacy studies in 2016. It expected ALKS 3831 Phase 2 topline results in early 2015, ALKS 8700 results in Q1 2015 and ALKS 7106 results in the first half of 2015.
- Unusual nine-month items included a $15.3 million gain on the sale of the Acceleron investment and a $12.3 million gain on the sale of Athlone property and equipment. In October, following Civitas’s acquisition, Alkermes reported receiving $30.0 million for manufacturing equipment and $27.2 million for its equity interest, with a further $2.3 million subject to escrow release.
- VIVITROL net sales included a $1.4 million charge related to a limited needle-clog recall. The filing also describes patent litigation involving FOCALIN XR, TRICOR, MEGACE ES, AMPYRA and ZOHYDRO ER, but says management did not believe the proceedings would have a material adverse effect. No material change to previously disclosed risk factors was reported.
- Key risks include clinical and regulatory outcomes, commercialization and launch execution, generic competition, reliance on partner products and sales, foreign-exchange exposure, investment-market risk, and the ability to meet debt covenants and obligations. Forward-looking statements are subject to these and other uncertainties.
Important facts for investors to verify
- Reconcile the MD&A’s $361.5 million borrowings figure with the $359.6 million debt total on the balance sheet.
- Track whether aripiprazole lauroxil receives FDA approval by the stated PDUFA date and the costs and timing of any launch.
- Assess whether growth in key partnered products offsets declines from RISPERDAL CONSTA and legacy products facing generic competition.
- Monitor pipeline spending, operating cash generation and the use of proceeds from the share offering and asset sales.
- Review the outcome of the disclosed patent proceedings and any material developments in product quality, including the VIVITROL recall.