A Fundamental Take On Alkermes' Turnaround Story

May.29.13 | About: Alkermes plc (ALKS)

The beauty about turnaround stories is the potential they hold for giving great returns. The beast therein, is the risk of believing the story too early or too late. Alkermes Plc (ALKS) is a fully integrated, global bio-pharmaceutical company with more than 20 commercial drug products and a clinical pipeline of product candidates for central nervous system disorders. Alkermes has R&D and manufacturing facilities in Ireland, where it is headquartered, and in the US. The company develops new product candidates, based on existing drugs, and also creates new proprietary products and technologies. It is banking its future success mainly on 5 key products for which it has received US/EU approvals.

These products are for multiple sclerosis complication, Opioid dependence, alcohol dependence, schizophrenia and Type 2 diabetes. The drugs are in the early phase of the product cycle, and hence the possibility of faster growth in revenues is relatively higher. The product pipeline consists of drugs like ZOHYDRO ER (pain) for which patent has been filed, and other drug candidates like Exenatide (Type 2 diabetes), Aripiprazole Lauroxil (schizophrenia), INVEGA SUSTENNA (schizophrenia), ALKS 5461 (major depressive disorder), and ALKS 3831 (schizophrenia), which are in phase 2/phase 3 of trial. The stock is up 98% over the last one year, and here is a look at how the numbers have been doing over the past 4 years. It is important to note that in September 2011, Alkermes, Inc. and Elan Corporation, Plc (NYSE:ELN) (the drug technology business) were merged to create Alkermes, Plc. FY2013 was the first year full year when the effect of the merger reflected in the financials.

Year Ending

Mar 31, 2010

(Million)

Mar 31, 2011

(Million)

Mar 31, 2012

(Million)

Mar 31, 2013

(Million)

Revenue

$178.28

$186.64

$389.98

$575.55

Net Income

-$39.63

-$45.54

-$113.68

$24.98

Net Profit Margin

-22.23%

-24.40%

-29.15%

4.34%

Click to enlarge

Quarter Ending

Mar 31, 2012

(Million)

June 30, 2012

(Million)

Sep 30, 2012

(Million)

Dec 31, 2012

(Million)

Mar 31, 2013

(Million)

Revenue

$130.47

$152.24

$123.98

$135.91

$163.42

Net Income

-$63.36

$22.43

-$16.71

$16.26

$3.00

Net Profit Margin

-48.56%

14.73%

-13.48%

11.96%

1.84%

Click to enlarge

As evident, the growth in revenues has been tremendous, and the company has been able to report a profit in FY2013 after many years. If one looks at the quarterly performance, though the figures are not very consistent, the last two quarters have been profitable. However, it is important to ponder on how much of this turnaround story has already been factored by the substantial rise in stock price recently.

Prior to the turnaround, the company had been reporting losses for several years, and the accumulated deficit on the balance sheet is nearly $500 million. The P/E for the stock is in excess of 180, and it is trading at nearly 7.7 times sales and 4.6 times book value. Importantly, management guidance for the next 9 months is for a net profit margin of around 0 to 6%. The expected revenue growth on a proforma basis for the 12 months ending December 31, 2013 is around 8.5%. The company's 5 key commercial products, which comprised of 55% of the revenues in the last quarter, are expected to grow by 25%.

Considering the anticipated growth scenario, it is unlikely that the valuation metrics will catch up dramatically with the price soon. Further, significant YoY growth may be difficult in the next quarter due to the base effect. The low PEG of 0.37 and forward P/E (fye March 31, 2015) of 22, add pressure of expectations on the company to perform at a much higher growth rate. Slippages may lead to strong negative reaction from the market. To put it in perspective, Cubist Pharmaceuticals (CBST), a stock with better valuation metrics was recently downgraded by some analysts after missing earnings estimates. The giants of pharmaceutical industry like Astra Zeneca Plc (AZN) and Eli Lilly & Co (LLY) trade at less than 15 times earnings despite having high dividend yields.

Thus, a major part of the turnaround and the near term expectations may have been factored by the stock price already. Alkermes is likely to remain expensive in the near term. If we add to that the probability of slippages by the company and chance of the overall market to correct, then Alkermes easily becomes an "avoid" stock. A few percentages above the current price, it may become a definite sell.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.