Alkermes Outlook Remains Bleak

May.26.09 | About: Alkermes plc (ALKS)

By: Grant Zeng, CFA

Alkermes Inc. (NASDAQ:ALKS) reported fiscal fourth quarter (ended March 31, 2009) financial results on May 21, 2009.

Total revenues for the quarter ended March 31, 2009 were $43.9 million, down 30% compared to $62.4 million for the same period in 2008.

Manufacturing revenues for the quarter were $24.7 million compared to $31.8 million for the same period in 2008, a decrease of 28.7% year over year.

Vivitrol sales were $4.5 million in fiscal fourth quarter 2009, compared to $4.3 million from fiscal fourth quarter 2008. Alkermes began to record product sales (Vivitrol) as part of its total revenue in fiscal fourth quarter of 2009 ended March 31, 2009 due to the termination of marketing rights in the US effective December 1, 2008.

Royalty revenues for the quarter ended March 31, 2009 were $8.3 million compared to $7.7 million for the same period in 2008, an increase of 7.8%. Royalty revenues were based on RISPERDAL CONSTA sales of $325 million for the quarter ended March 31, 2009, compared to $309 million for the same period in 2008. Risperdal Consta is marketed by Johnson & Johnson (NYSE:JNJ).

Research and development (R&D) revenue under collaborative arrangements for the quarter ended March 31, 2009, was $1.6 million, compared to $20.9 million for the same period in 2008, a decrease of 92% due to the termination of AIR Insulin program and Vivitrol marketing rights in the US.

Net collaborative profit for Vivitrol for the quarter ended March 31, 2009 was $4.8 million, compared to $2 million for the same period in 2008. The company will record another $5 million collaborative profit for Vivitrol in first fiscal quarter 2010.

Net loss was $13.6 million or a diluted loss per share of $0.14, including $3.2 million of share-based compensation expenses. For the same period in 2008, net loss was $0.3 million or a diluted loss per share of $0.00, which included $3.97 million of share-based compensation expenses.

At March 31, 2009, Alkermes had cash and total investments of $404.5 million, compared to $423.6 million at December 31, 2008, and $460.4 million at March 31, 2008. During the fiscal year, Alkermes repurchased a principal amount of $93.0 million of its non-recourse RISPERDAL CONSTA secured 7% notes for $89.4 million. The company also used cash during the fiscal year to repurchase 1.6 million shares of common stock for $18.0 million as part of an ongoing stock repurchase program. Cash burn is not a concern for us at this point.

Overall, the financial results were in line with our expectations. What worries us is the fiscal 2010 guidance the company gave during the conference call and news release for the earnings report. The guidance is way lower than our projections. The company projects total revenue between $182 -$197 million, versus our estimate of $232.5 million. Projected net loss for fiscal 2010 by the company was between $30 - $40 million, versus our estimate of net profit of $1.4 million. As such, we lowered our estimates for the next three fiscal years.

Alkermes faces tough challenges in the coming quarters following a series of negative business developments. Termination of the AIR Insulin program by Eli Lilly (NYSE:LLY) has resulted in a loss of annual R&D funding of over $50 million for Alkermes. Vivitrol sales may continue to suffer after the termination of commercialization rights to Vivitrol in the US by Cephalon (NASDAQ:CEPH). Recent problems with Byetta put further pressure for the company’s sustainable growth.

Also, sales growth of Risperdal Consta, the biggest revenue contributor to Alkermes, has been diminishing since the first quarter of fiscal 2009.

We think the company has entered into uncharted territory. With shrinking revenue and profitability, the risk/reward profile has shifted to the risk side for the company. We maintain our Sell rating for the shares with a price target of $7.