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Alkermes, Inc. (NASDAQ:ALKS)

Credit Suisse 2012 Healthcare Conference

November 14, 2012 05:00 PM ET

Executives

James Frates - CFO

Analysts

Catherine Arnold - Credit Suisse

Catherine Arnold - Credit Suisse

So we are going to get into the Alkermes presentation with – certainly with the EDT integration and portfolio transition, there is no shortage of topics to discuss. So we’re happy to have the CFO of Alkermes, Jim Frates, with us. So I’ll turn it over to Jim.

James Frates

Thanks, Catherine. It’s great to be back here. I think this is my 14th as to when I started it was the DLJ Conference and I still have a snappy green windbreaker from DLJ back in the day. But it’s been – it’s always good to come out here and see investors from I have seen people from the West Coast, from Canada, from New York, from Boston, which is very nice and of course all the folks listening on the webcast.

But its – and Alkermes has changed remarkably over the last 14 years, now a Company with cash flow and over $500 million in annual revenues. It’s been fun to be part of that transition. And I will make forward-looking statements today. It’s pretty hard to talk about a Biotech Company without talking about the future and I think we have an exciting future ahead of us.

So please review our SEC filings and risk factors that you will find there. As it is also a very risky business. But one of the things we pride ourselves on actually is that, we think we’ve gotten over a major hump with over 20 products that we have rights to selling around the world. We have a very, very powerful financial engine.

We’re going to talk about five key commercial products that are very much in their early stage of their launches around the world. They’re all approved. So we have the FDA regulatory risk behind us in these products. And they all have the opportunity to surprise, I believe on the upside. We’re very happy with all of them. They have long patent lives and so we don’t have any cliffs we are looking at and we think that’s unique.

Also for a Company of our size, roughly $2.5 billion market cap plus or minus that diversification is something that you very rarely find. So we’re not dependent on any one product. But again have upside for many. I think combined with that we have a management team that over 14 years in my own case, Richard, our CEO has been there for over 20; there is very much a track record. And I think you can – we know many of you over the years and there is a track record and a commitment, I hope to manage the business actively and that’s something that I think is one of the hallmark.

So, we will talk a lot about the financial engine and the financial performance, since the combination with EDT slightly over a year-ago. But the other thing that’s very important for us, is we believe very firmly in the power of science. And the power of high quality science probably comes from our early days interacting with Genentech, Johnson & Johnson, Eli Lilly, other pharmaceutical companies where we see the value of the long-term valuable products that change the way patient outcomes and patient experiences occur. That’s what drives us.

We have focus on high science and developing products that matter with long patent lives. We think that’s how the industry creates the most value. The era of me-too products is long gone, certainly listening to professor Reinhart today. That elasticity that’s going to be now coming to pharmaceutical pricing is something where you’re going to have to create a real benefit in terms of health outcomes and pharmacoeconomic outcomes for the patients and we think our pipeline in our five key products fit into that very well. They’re unique – very much unique in their own right and have long patent lives.

We also have a very much an ROI driven strategy on R&D, and we will talk about that. What does that mean? That means get to major answers fast. Let’s get to proof-of-concept fast, if in known areas where we’re making a medical difference. And if we can do that fast, we ought to have a better outcome in our long-term investments.

Just a snapshot of our financials in the growth. It’s been driven by the growth of our products and by the EDT combination. You can see our fiscal ’13 expectations, we were happy to be able to raise them on our earnings call at the beginning of the month as the EDT business and the broad business continues to perform well. So revenues in the $510 million to $540 million range and it’s pretty exciting to talk about a non-GAAP diluted earnings of $0.88 to a $1.2 per share.

And I should mention too, we’re talking about generating between $120 million and $140 million of cash this year before we get to CapEx of around $25 million. So, that’s a very exciting thing for us, generating cash is something we focus a lot on and we will be focused on earlier. Earlier in the year I should also mention too, our capital structure, we have about $375 million in debt, down from the $450 million we incurred from the EDT acquisition last year. We did a very nice financing to refinance that and pay-off $75 million of debt in September. And now the blended interest on that debt for us is roughly – is exactly 4.4%, as long as LIBOR stays below 100 and it looks like with under the guidance of Chairman Bernanke, that certainly is the goal for the next few years. So, we’re very pleased with that, with our capital structure. That’s going to free up roughly – that refinancing is going to free up roughly $18 million in additional cash for you all, our shareholders, rather than our debtholders. So, that’s a good thing for us as well.

So let’s delve into the five key products. I will quickly touch on each of them. If you follow the Company, you know them well. RISPERDAL CONSTA and INVEGA SUSTENNA, both long-acting atypical antipsychotics. You will note too, we really like this space; we’re developing our own proprietary product, a long-acting form of ABILIFY called 9070, which I will touch on when we get to the pipeline products. These are both products that are sold by Johnson & Johnson around the world. Roughly on par – on pace rather, to do $2.5 billion in worldwide sales. And we get a roughly – it’s a roughly 7.5% royalty on INVEGA SUSTENNA and a 10% royalty that we manufacture out of that nets us about 7.5% on end sales of RISPERDAL CONSTA.

And again, the long patent life that is continuing to extend as we get patent term extensions now out to 2019 and 2023 in the U.S. and 2021 and 2022 in Europe or the EU. We have AMPYRA, which is a product that was developed initially by EDT, outlicensed to Acorda. We get a very substantial royalty on that in the high teens. We make the product for Acorda and for Biogen as it’s sold around the world and we’ve been able to help extend the patent life as well to 27 in the United States and 25 in the EU. Now this is a product that helps MS patients walk better and is being studied in now cerebral palsy and stroke by Acorda.

VIVITROL is a product that we developed at Alkermes ourselves and we sell in the United States. Patent protection there goes through 2029 and we are in the second year of the launch in opioid dependence, which is becoming more and more of a problem. And we think VIVITROL a long-acting opioid antagonist, it’s a long-acting form of naltrexone that blocks opioid receptor and according label granted by the FDA, prevents relapse to opioid dependence. So we’re very excited about that product, still in its early phases of growth and adoption. And then of course there is BYDUREON, which we developed with our partners Amylin, its now part of Bristol-Myers and AstraZeneca and patents there run to 24 to 25 around the world. So very exciting.

RISPERDAL CONSTA and INVEGA SUSTENNA, we’ve looked at these franchises together. J&J sells them both. We’ve seen nice double-digit 15% to 20% growth around the world for this franchise. And you see that growth has been very, very substantial for us over time and forms close to half of our revenues and ultimate profits from the two products.

We think that growth is going to continue. Right now the use of these products is mainly focused on people who relapse frequently. And I think as more focus becomes clear on the clinical outcomes, both with CONSTA and now SUSTENNA you’re going to see the opportunity to move that up and really look at preventing relapse to begin with as oppose to just being reserve for people who frequently relapse. And as more people talk about long-acting atypical antipsychotics and we see the better outcomes that market share should grow.

AMPYRA/FAMPYRA, as it’s viewed outside the United States. Again this is Acorda’s product showing very nice growth. They’ve reiterated their guidance for the calendar year and our 18% royalty is quite substantial for us through the year.

We’re excited that Biogen is continuing to launch the product outside the United States and they’re doing quite well with that. They obviously know a thing or two about selling MS products and they seem quite excited about the launch of FAMPYRA around the world, and we’re going to know in early 2013 how the pricing outcomes with the German review will go and currently we’re reflecting that at a conservative price through the help of Biogen and the guidance of Biogen and so we’re looking forward to getting that behind us and continuing to see the launch and growth of the AMPYRA.

VIVITROL our own product is really coming into its own. It’s really – its growing about 30% year-over-year; it’s still though a product that is – that we’ve predicted will sell between $45 million and $55 million, a very, very small portion of the overall opioid market. Now again this requires opioid patients to be detoxified, to be opioid free, before they start with VIVITROL, but the prevention of relapse is a key indication and the fact that you can ensure that you have the antagonist onboard a month at a time is something that’s obviously very, very critical for people trying to recover from opioid dependence.

This is a disease that is growing. Barely a week goes by that you don’t read stories about the scourge that opioid dependence is causing. Mainly – of course from heroin and other illicit opioids, but also from the abuse of prescription opioids as more and more young people are being exposed to those opioids and really getting mixed up with opioid dependence without really even understanding how opioids work. So, over a million people suffer from this in the United States every year and we’re really scratching the surface right now with VIVITROL. So, we’re excited to see the growth continue.

BYDUREON, which is our partnership now with Bristol-Myers and AstraZeneca; we get a pure royalty of roughly 8% on BYDUREON sales around the world. This is a new class of GLP-1 antagonist glucagon-like proteins. They are new and they are quite powerful and a very, very exciting development in the treatment of diabetes. So, as BYDUREON and the GLP class grows the differentiation with BYDUREON is its weekly dosing, it’s the first weekly product for the treatment of type 2 diabetes.

And as more and more GP’s understand the benefits of the GLP class we think BYDUREON should benefit and the strength of Bristol-Myers and AstraZeneca around the world will help make that happen. So, we are working with them in further development of improved dosage forms and in terms of prefilled syringes and the like and are very excited to see them bring their marketing power to bear in BYDUREON.

So that’s the commercial business as it stands today. And this is really just looking – this slide just looks at the evolution of Alkermes over the last year. And then to move forward there is news and growth around each of these products, I’ve touched on them. Further launches in the EU by Biogen, the franchise growth and long-acting atypical, the growth in criminal justice initiative’s as we seek to help States and the Federal criminal justice system transition opioid dependant folks out of prison and potentially lower the recidivism rate of people addicted to opioids. So we’re working on expanding that, but that as one looks forward, we look at the growth in the pipeline out three or four years, we ought to have new products coming to market, and I’m going to touch on a few key ones.

The ones I won't mention further; J&J is developing a three month formulation of INVEGA SUSTENNA. That’s quite exciting, that’s in Phase 3 clinical studies now and I did touch on the line extensions, a weekly prefilled syringe and also a monthly product that Bristol-Myers is going to be continuing to work on, that we were working on with Amylin. Also we don’t have the time really to go into ZOHYDRO which is a long-acting form of hydrocodone without acetaminophen that is made by Zogenix. We have a nice high double-digit royalty on that and they have filed for that product in the United States. There are real issues with the use of acetaminophen and liver toxicities and liver replacements that need to happen as a result of that, and there is a panel that Zogenix just announced is happening on December 7. So, that’s the next focus in that product.

I will touch on 9070 our long-acting Aripiprazole and 5461 with a little bit more detail. But, first this notion of how we think about our investment in R&D. And it’s very much; this shows an example of our R&D expenses for last year. The large dark blue, over half of what we spent on R&D is in late stage human clinical studies. They’re obviously very expensive, particularly in the area of schizophrenia, where you’re talking about inpatient studies in that disorder. And then the next group that we spent money on is our proof of concept work, to try and get to these answers as I mentioned in humans to see if our ideas have opportunities that are worth investing further in Phase 3 clinical studies, and a lot less in the pure discovery areas and the infrastructure. So, we don’t have a focus in any particular disease state. We have world class formulation scientists and development folks, but no desire or particularly a skill set in any particular disease area and we think that’s an advantage for us because the return on investment in those areas while that work is very, very good. As you all know it’s very, very expensive and it’s very, very risky. And so we try and leave that for others and are focusing our area on improving medications and delivery systems and ideas under the lit lamppost of known pharmacology, so we can move faster and hopefully have a better return on investment. So, that’s been our R&D strategy and I think to date it’s worked quite well with VIVITROL, we believe with 9070 and 5461 coming further. So there’s a number of catalyst in 2012.

Our Phase 3 for 9070 is underway, and we should have results by the end of calendar ’13. ALKS 5461 has 130 patients Phase 2 which is really a confirmatory study that should be through in the first half of calendar ‘13. We have the NDA review underway is with ZOHYDRO as I mentioned. The [pen] and weekly and monthly formulation is moving forward with BYDUREON and the three month in INVEGA SUSTENNA.

So just a moment on why a long-acting form of ABILIFY. We think moving the opportunity set in long-acting antipsychotics beyond just the Paliperidone and RISPERDAL family is very, very important. When we went out to look in the market and do our market research, the number one answer from physicians in terms of the other product they wanted, the long-acting form of was ABILIFY. This is a product that with $5 billion in sales. It’s used extensively in bipolar disorder and schizophrenia.

We’re studying in schizophrenia specifically and we were able to move quickly with our formulation into Phase 3 after we established in a Phase 1 clinical study the PK profile of the long-acting. And one of the things -- one of the questions we don’t have to answer in the clinical program is whether ABILIFY actually treats schizophrenia. We know that, we obviously have to show it for ourselves and the regulatory agencies, but that is a scientific question that is well known. If we can deliver ABILIFY for 30 days it should treat schizophrenia.

So, the FDA has established a clear path to an NDA with a single efficacy study, that one is underway and in roughly 690 patients around the world, studying it against placebo in acute schizophrenia which will be, as I said reading out late next year. We think we have advantages in the product presentation and also in the dose ranges we can cover all the oral doses of ABILIFY which is going to give us advantages in the marketplace we believe. And this just really illustrates the -- each of the doses will have equivalence of the 10mg, 20mg and 30mg doses for ABILIFY which in PK modeling show up in the dark lines which is allowed by our long-acting technology.

This scheme shows us why Aripiprazole we think is going to help expand the market. The idea is moving it into a quadrant away from where RISPERDAL and ZYPREXA and GEODON and other maybe more powerful antipsychotics are viewed into the ones and raising-up that opportunity for more tolerable antipsychotics. This is why the physicians want to use Aripiprazole with if the patients aren’t working or if they on the RISPERDAL and Paliperidone family. This gives us an opportunity to open up what we think is going to be a new set of patients and a very large opportunity as we look at the $23 billion market for the atypical franchise around the world with all the products. You can see in the light blue on the right hand side of the screen and the dark blue on the left, the SEROQUEL and ABILIFY slices of this pie, and we think that’s a fantastic place to be and one that should offer a great deal of further growth.

It’s interesting, the long-acting preps as shown in the bottom slices, RISPERDAL, CONSTA and INVEGA really make up about 6.5% of the overall market right now. So, we think there’s a lot of growth opportunity and as the remaining orals go generic the share of voice in the marketplace will really be left to these -- to the folks selling the long-acting preps, J&J ultimately likely Otsuka and ourselves and we think that’s a very, very good place to be.

Let me finish with 5461, this one is more of a high risk product but one with very, very interesting opportunities and it’s for the treatment of -- treatment refractory depression or major depressive disorder in folks that have failed SSRIs or SNRIs. ALKS 33 and Buprenorphine are co-formulated, this is so called 5461. ALKS 33 is a proprietary antagonist that we’ve developed, as part of our program in VIVITROL and opioid dependence, we have been working a lot in the opioid area and we have this proprietary antagonist and then we have Buprenorphine which you know is Suboxone which is an agonist, a partial agonist. And when they’re put together, the activity in the – it’s interesting, you’re both turning on the receptor and blocking the receptor at different parts of the receptor at the same time. And you might think of this as having your -- rather than the car simply idling, by putting your foot on the gas and the break, you’re causing the engine to behave very, very differently even though you’re not moving the car.

And so, the opportunity was this idea that it’s been well know for over a century that opioids treat depression and treated very, very effectively. Of course they have many liabilities associated with the potential for addiction. And we believe we’ve been able to separate that addictive potential of opioids from their ability to treat depression. And we’re running as I mentioned earlier a 130 patients at 30 sites, a Phase 2b clinical study essentially to recreate what we did with 33 patients late last year. So I will orient you here, we have the placebo on the left-hand side. We have again patients who are failing SSRIs and SNRIs. And then we had two different dose ratios of buprenorphine to 33 were treated in, roughly 14 patients – 13 patients each. And we saw improvement in each of the treatment groups, but in the one to one ratio, which is what we’re studying in the current Phase II, we saw all the patients improve and I should point out there is a pointer here, this is not the average of the patient or error bar, rather it’s the full data set. So this is the full breadth of patients, 25% to 75% of the patients were here, the solid line is the median and the plus sign is the mean. And so you saw very consistent data and a very, very major improvement in PAN scores.

Depressive products are approved with PAN scores in the order of improvement not PAN score, sorry. These are HAMD scores. PAN scores would be schizophrenia. Improvement in HAMD of 2 or 3 percentage points and we saw a mean improvement of roughly 6 percentage points with a P value in 13 patients. So obviously small numbers, but this got us and our experts very, very excited about a potentially new mechanism in the treatment of depression, which would have major implications long-term. Oral once a day tablet, that’s actually given sublingually because of the properties of buprenorphine. And we are very, very excited to see this data in the first half of next year.

So to wrap it up, and this is really the just a slide on the market, but to wrap it up, we’re very pleased that we’ve been able to put the EDT merger integrated well, deliver now on almost four quarters of growth. And what we’ve said out to do, we have a very powerful financial engine, going to be delivering over a $100 million of free cash flow this year, which is a major change from the old Alkermes that you might know. And we have that platform prepared on the backs of the five key products for the next decade or more, given their patent life and their competitive position.

We also have a pipeline, which we think is very interesting in areas like long-acting atypical antipsychotics and treatment refractory depression that we think we can get a lot of upside growth and potential for, as well as the continued growth in VIVITROL and opioids and the treatment for opioid dependence. So we’re working hard to manage the business and manage our pipeline well and I guess we have a break out session next door, if we have further questions. Thanks for your attention.

Question-and-Answer Session

[No Q&A for this event]

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Source: Alkermes' Management Presents at Credit Suisse 2012 Healthcare Conference (Transcript)

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