Depression Target Aside, Alkermes Still Has Two Blockbuster Therapies In Its Pipeline

| About: Alkermes plc (ALKS)

Summary

Alkermes just reported the failure of its depression drug trial.

The company dropped 45% of its market cap as a result, and is trading at a close to 60% discount on its year end 2015 price.

Two of its pipeline candidates are in phase III, and both target multi billion dollar indications, with one only requiring a phase III safety trial before approval.

Without R&D costs, the company would be profitable from its current operations.

Alkermes

On January 21, 2015, Alkermes plc (NASDAQ:ALKS) announced the topline data from two phase III trials of its lead development candidate, ALKS 5461. The company had was targeting major depressive disorder - a condition that affects nearly 7% of all Americans over age 18, approximately 16 million in the US during 2014. Both trials missed their endpoints of statistically significant improvement based on the industry standard depression rating scale - the Montgomery-Asberg Scale - and as a result, it looks as though Alkermes has lost its opportunity to target this potentially lucrative space.

In response to the release, markets sold off on the company, and Alkermes lost more than 45% of its market capitalization across one session. It currently trades at a slight premium to the release-induced lows, but remains at lows not seen since October 2013. I believe at this price the company is oversold, and as such, present an opportunity to get in at a discount ahead of a recovery.

While Alkermes intends to continue its ALKS 5461 development program, its future success now looks unlikely. Even if that program drops off completely, however, the company has a pipeline of promising candidates, a robust balance sheet and while currently running at a loss based on its R&D expenses, generates substantial revenues from its current products and manufacturing operations. Here's what's under the hood.

Throwing ALKS 5461 to the sidelines, the company's lead candidate becomes ALKS 3831. At the beginning of last year, the company announced positive interim data from a phase II investigating ALKS 3831 in a schizophrenia indication, and in April 2015, the company announced topline from the study. The trial compared Alkermes's candidate to a current SOC treatment in the schizophrenia space, Olanzapine, with a primary endpoint of equivalency to SOC and secondary of improvement in one of Olanzapine's associated side effects - weight gain. The drug hit both endpoints. Based on this data, the company kicked of a pivotal phase III on December, again comparing the drug with Olanzapine. Olanzapine is now produced generically, but if Alkermes can demonstrate superiority with its own candidate, be it from an efficacy perspective or in reduced number of, or severity of, adverse events, it could make a real dent in the schizophrenia space. Before it went off patent in 2011, Olanzapine (then called Zyprexa) generated $2.2 billion in the US and $4.7 billion in worldwide sales for Eli Lilly and Company (NYSE:LLY), meaning ALKS 3831 has real blockbuster potential if the ongoing pivotal goes well.

We've got a bit of a wait, with topline not expected before April 2018, but interim data should offer insight - the trial runs across a six-week period per patient, so there is plenty of scope/opportunity for collection and release of updates.

Next up is ALKS 8700. The drug is a phase III candidate with a Relapsing Remitting Multiple Sclerosis ("RRMS") indication. It's a prodrug, which is a type of drug that is either inactive or has limited efficacy on administration, but converts to active efficacy levels through a patient's metabolism post-administration. Current SOC for RRMS is Tecfidera, marketed by Biogen Inc. (NASDAQ:BIIB). Tecfidera is a formulation of what's called dimethyl fumerate ("DMF"), and while we're still not certain how the drug works, trials proved it effective in reduced relapse rate and increasing time to progression of disability in MS. However, it has some pretty serious side effects - one of which is a rare, fatal brain infection called progressive multifocal leukoencephalopathy ("PML"), which the FDA issued a warning for late 2014. ALKS 8700 is what's called monomethyl fumarate ("MMF"). It's closely related to DMF from a chemical structure standpoint, and Alkermes believes it can mimic the latter's efficacy while reducing the chance of AEs, based on its prodrug MOA. Tecfidera generates close to $3 billion annually for Biogen, meaning yet again, if ALKS 8700 gets an FDA nod, Alkeres will be targeting a true blockbuster market.

And that's not the most exciting thing about this treatment. The company reported results from a phase I trial early last year, which showed the drug to be well tolerated and equivalent to Tecfidera form an efficacy perspective. Based on this data, and following a meeting between the company and the FDA, the agency is allowing this phase I to form the basis of an NDA, with the added requirement of a two-year phase III to study safety. This means the company doesn't need to prove efficacy in a phase III, just show the drug to be safe. Further, with Tecfidera's risk profile, ALKS 8700 has plenty of leeway for its definition of safe. The trial kicked off in December, and data is expected by the end of Q3 2019.

So we've got two phase IIIs under way, one of which merely has to demonstrate a better safety profile than a drug that causes fatal brain infections, and both of which could give Alkermes access to billion dollar US markets. The company has $222 million cash on its books (as of September 30, 2015), and at time of last reporting had a further $140 million in net receivables on its balance sheet - much of which has likely realized by now. It generates circa $150 million revenues each quarter from its portfolio of already approved drugs, licensing royalties and manufacturing operations. It runs at a loss - $81 million during Q3 2015 - but remove its R&D expenses -$92.5 million across the same period - and it would be a profitable entity.

All this, and it's trading at a close to 60% discount on its 2015 close. Its depression drug may be in the gutter, but Alkermes is far from it.

There are risks, of course, as with any company in this position. Trials can be costly, and even with a reduced requirement of just demonstrating safety, have no guarantee of success. Both MS and schizophrenia are notoriously difficult to treat - as illustrated by the relatively weak safety profiles of current standard of care therapies - and Alkermes could very easily run into the same tolerability issues as have its peers over the next few years.

This said, as an opportunity to get in at a discount on an oversell, the company looks intriguing.

Disclosure: I/we 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.