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Alkermes, Inc. (NASDAQ:ALKS)

F3Q08 (Qtr End 12/31/07) Earnings Call

February 7, 2008 4:30 pm ET

Executives

Rebecca Peterson - VP of Corporate Communications

David Broecker - CEO

Jim Frates - CFO

Richard Pops - Chairman

Analysts

Cory Kasimov - JP Morgan

William Ho - Banc of America

Elliot Wilbur - Oppenheimer

Ian Sanderson - Cowen & Company

Dave Windley - Jefferies & Company

Operator

Welcome to the Alkermes conference call to discuss the company's third quarter financial results for fiscal 2008. (Operator Instructions).

Now I would like to introduce your host for today's conference call, Ms. Rebecca Peterson, Vice President of Corporate Communications at Alkermes. Please go ahead.

Rebecca Peterson

Thank you. Good afternoon and welcome to the Alkermes conference call to discuss our financial results for the third quarter of fiscal 2008, which ended on December 31, 2007.

With me this afternoon are our CEO, David Broecker; our CFO, Jim Frates; and our Chairman, Richard Pops.

Before we begin, let me remind you that during today's call we will make forward-looking statements relating to among other things our expectations concerning the commercialization of RISPERDAL CONSTA and VIVITROL, our future financial and business performance, and our expectations concerning the therapeutic value and continued development of our product candidates.

Listeners are cautioned that these statements are neither promises nor guarantees, but are subject to risks and uncertainties that could cause our actual results to differ materially from the results contemplated by these forward-looking statements.

You can find a list and a detailed description of these and other risks factors in our Annual Report on Form 10-K filed on June 14, 2007 and other periodic reports filed with the SEC under the Securities Exchange Act of 1934 as amended. We undertake no obligation to update or revise the information provided in this call.

This afternoon, Jim will discuss our third quarter financial results and David Broecker will provide an update on our business. We will then open up the call for Q&A.

Now I would like to turn over the call to Jim to review our financial results.

Jim Frates

Thanks, Rebecca. Good afternoon, everyone. I'll probably might do things a little differently on this call today, and that we will be keeping our prepared remarks brief and we'll focus our comments on the most important elements of the release rather than going through results line-by-line. A press release is quite comprehensive and I trust that you will read it and the results are clear and if you have any questions, of course, we will be here to answer and we'll get to that shortly.

In summary, you can see we're continuing to build a strong business and we ended calendar year 2007 in a strongest position we have ever been in, financially for sure, but also in terms of the progress and outlook of our late-stage programs as well as the excitement around our earlier stage pipeline programs that have gained momentum in the last several months.

Let's focus on the most important elements of the earnings release. I'll begin with RISPERDAL CONSTA. We and our partner Johnson & Johnson achieved a major milestone with RISPERDAL CONSTA during the quarter. Annual end market sales by Johnson & Johnson exceeded $1.1 billion in calendar year 2007. That is a 30% plus increase annually. As you know, we are the exclusive manufacturer of RISPERDAL CONSTA for J&J and we look forward to the continued success of this product.

Manufacturing revenues for the product were $12.9 million in our third fiscal quarter. That is exactly within the $10 million to $13 million range that we provided in our last earnings call and relates to the planned lower shipments to Johnson & Johnson as they managed their inventory levels. We do not control J&J's inventory, however, based on recent purchase forecast provided to us, we expect shipments to increase.

For our fourth fiscal quarter, we expect manufacturing revenues for RISPERDAL CONSTA to be back up between the $26 million to $30 million range. I will remind you that our fiscal year 2008 expectations ending in March 31, 2008 for manufacturing revenue for RISPERDAL CONSTA remain in the range of $95 million to $100 million, which we provided in May of 2007.

With respect to VIVITROL, gross sales by Cephalon during the quarter were $5 million. This compares to $2.3 million for the same period last year. We're pleased to see continued sequential sales growth, which we achieved during the quarter but we realigned our sales forces. We're continuing to strategically invest in VIVITROL well at the same time significantly reducing our expenses. We're making demons ratable progress towards our goal in bringing our product to breakeven by the end of calendar year 2008.

We reduced our loss on VIVITROL each quarter during fiscal 2008 from approximately $25 million in the first quarter to $18 million in the second quarter and now down to approximately $7 million for the third quarter. And all that while increasing sales quarter to quarter.

Addiction is a serious disease and we continue to believe that over the long term VIVITROL will play an important role in this market place. Another major highlight for the quarter included the receipt of significant income in cash from the sale of our stake in Reliant Pharmaceuticals to GlaxoSmithKline.

The sale generated income to Alkermes of $171.3 million, which is net of $3.3 million in taxes. We received $166.9 million when the transaction closed this past December and we expect to receive up to an additional $7.7 million when the 15-month escrow period expires.

We are using proceeds from our Reliant sale to buyback our stock, which we believe represented an excellent investment for our shareholders. To date, we have repurchased approximately 2.3 million shares of our common stock for $33.3 million. Our buying activity stopped when we entered the blackout period between the close of our quarter and today's earning announcement.

Now that we have announced earnings we will be back in to the market. Today we announced an accelerated buyback program to repurchase $60 million of our common stock through the end of May 2008. With this accelerated program in place, we have committed over $93 million to repurchasing our stock since our Board authorized the repurchase planned last November.

Turning to our financial profile, our business is stronger than ever. As of December 31, 2007, our balance sheet included over $516 million in cash and investments, and we expect to be cash flow positive on an operating basis for the full fiscal year.

Our net income for the third quarter was $168.9 million or $1.66 per basic and $1.63 per diluted share, including a $171.3 million net of taxes for the sale of our stake in Reliant, and share-based compensation expense of $5.2 million. On a pro forma basis, net income for the third quarter was $2.8 million or $0.03 per basic and diluted share.

Finally with one quarter left in our fiscal year, I want to briefly comment on our financial expectations for the full fiscal 2008.

While we expect GAAP net income to significantly exceed our full year financial expectations due to the Reliant transaction. If we exclude the net impact of Reliant, we expect to remain within our fiscal 2008 expectations. Consistent with what we have stated before, we continue to anticipate GAAP net income in the range of $10 million to $15 million for fiscal 2008 or basic EPS of approximately $0.10 to $0.15 per share based on an weighted average of 101 million shares outstanding.

Let me close by briefly providing my perspective on the financial condition and events at Alkermes. Our stock buyback program, which I mentioned earlier is an investment at Alkermes and a reflection of our confidence in the earnings power of our business model. We are focused on our goal of developing and commercializing multiple innovative products to build a major company, and we are very excited about the future.

In order to give you a financial picture of the type of company we are striving to be, we recently provided a more specific long-term goal mainly to deliver earnings per share of $2 to $3 in 2013.

Underlying this assumption is continued growth of RISPERDAL CONSTA, uptick in VIVITROL, and a successful commercialization of both exenatide once weekly and AIR Insulin.

To conclude, we made solid progress in 2007, which has set the stage for continued achievements in calendar 2008. The financial foundation of Alkermes is very strong, providing us with the ability to invest in our pipeline, while focusing our long-term profitability in growth. We have an important year ahead of us and I look forward to updating you on our progress.

With that I will turn the call over to David.

David Broecker

Thanks, Jim and good afternoon, everyone. As Jim mentioned, we end calendar year 2007 in unprecedented financial position. More importantly, however, we entered calendar year 2008 with a continued focus on building a growing multi-product company with the capabilities to develop and commercialize products that really make a difference in patients' lives.

I would like to update you on each of our major products and programs and provide a brief overview of our development pipeline. Let's start with RISPERDAL CONSTA. We have shipped more than 20 million vials since launch of this product. This is a reflection not only of our significant manufacturing expertise, but of years of patients and physicians experience with this important product.

Last calendar year, RISPERDAL CONSTA officially became a blockbuster product achieving more than $1 billion in worldwide sales. Looking to the future, we continue to believe that RISPERDAL CONSTA sales will grow. Importantly, J&J continues to invest in this brand. This week at a scientific conference in Switzerland, J&J presented positive data from a one-year Phase III study of RISPERDAL CONSTA in the maintenance treatment of frequently relapsing bipolar disorder.

The study met its primary endpoint and showed that the time to relapse was significantly longer in patients receiving RISPERDAL CONSTA plus standard treatment compared to the placebo group. J&J plans to use these results to file an NDA for this indication during the first half of calendar year 2008.

In addition to expanding the label and frequently relapsing bipolar disorder, last November J&J submitted an application to the FDA to approve RISPERDAL CONSTA as a deltoid injection for schizophrenia. Currently, RESPIREDAL CONSTA is administered as a gluteal injection. Enabling injection in the upper arm may be easier for some patients and practitioners.

RISPERDAL CONSTA is the first and only long-acting atypical anti-psychotic commercially available for patients. While other companies are developing additional long-acting products, their future success is unknown compared to RISPERDAL CONSTA. With the wealth of real world data and the years of patient and physician experience, we believe RISPERDAL CONSTA will remain the gold standard for long-acting therapy.

Turning to VIVITROL, we're continuing to make progress in expanding the utilization of this important product for alcoholism. As you know, we recently realigned our sales team and are focusing on areas where we feel there is significant opportunity for sales adoption and growth.

We're pleased to have increased gross sales to $5 million during our third fiscal quarter. Our job now is to show you the results in terms of continued sales growth.

In addition we recently signed an agreement with Janssen Pharmaceuticals to commercialize the product in Russia and we're planning to initiate a Phase III study of VIVITROL for opioid dependence in the first half of calendar year 2008.

Let me move to exenatide once weekly. As you have heard on Amylin's recent earnings call, the companies believe that Phase III data for exenatide once weekly is the best ever seen for a diabetes medication.

The efficacy and safety data observed in the clinical program prompted Amylin to expand this program to make even more clear the potential clinical superiority of exenatide once weekly. As Amylin described, the plan is to conduct three marketing studies this year designed to show superiority.

The goal of these studies is to position exenatide once weekly as the best product for the treatment of Type II diabetes. At Alkermes, we are continuing to supply clinical trial material for these superiority studies and are transferring the manufacturing process to Amylin.

We are pleased with the progress our teams are making and we continue to be on track for commercial readiness by the end of calendar year 2008. I would now like to move on to comment on a couple of our other pipeline programs.

With respect to AIR Insulin, we and our partner Eli Lilly and Company are working together on a variety of activities to complete the Phase III clinical program and to prepare for an NDA filing next year.

We are optimistic about AIR Insulin because even with the advent of novel approaches that are reshaping the diabetes landscape, we and many others in the diabetes community think that most patients will eventually require insulin. The exit of other inhaled insulin products from the market place underscores the need for system simplicity.

Our AIR technology enables us to provide patients with a practical convenient system that fits in the palm of their hands. Together with Lily we have in place a comprehensive clinical development program designed to assess safety, efficacy and importantly outcomes in diabetic patients compared to other treatment options.

If the Phase III data are positive, we believe AIR Insulin can become a very important treatment option for these patients. We are also excited about the opportunity for ALKS 27, a respiratory product that we hope to develop as a once daily treatment for COPD. ALKS 27 is an inhaled formulation of trospium chloride and the anti-cholinergic approved for overactive bladder that leverages our AIR technology.

As we have mentioned previously, we are evaluating partner opportunities around this program and continue to optimize the product for the next stage of clinical development.

Also within our pipeline, we are developing ALKS 29 for the treatment of alcohol dependence. ALKS 29 is in oral combination opioid antagonist and GABA modulator. We are currently working on the development of proprietary formulations of this product that we will evaluate in the clinic this year.

We also recently announced our first lead development candidate, ALKS 33, to emerge from our library of novel opioid receptor compounds, which we in-licensed from Rensselaer Polytechnic Institute. ALKS 33 is also being developed for addiction, and we plan to file an IND and begin a Phase I study of ALKS 33 this calendar year.

In conclusion, we have a busy year ahead of us and are focused on the following milestones during the calendar year. Number one, initiation of marketing trials for exenatide once weekly; number two, completion of the technology transfer to Amylin in order to bring online the commercial manufacturing facility for exenatide once weekly; number three, initiation of a pivotal study for VIVITROL for the treatment of opioid dependent; number four, initiation of clinical studies for ALKS 29, ALKS 27 and ALKS 33; number five, completion of all the registration trials for insulin; and number six, addition of at least one new product candidate to our pipeline.

To conclude, we are pleased with the advancements we are making in our business and look forward to updating you on the progress in the coming months.

With that, I'll turn the call back to Rebecca.

Rebecca Peterson

Thanks, David. Operator, we will now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from Cory Kasimov from JP Morgan.

Cory Kasimov - JP Morgan

Great. Good afternoon, everyone.

Jim Frates

Hi, Cory.

Cory Kasimov - JP Morgan

I guess starting with CONSTA, I'd be interested in just getting your reaction to yesterday's FDA advisory committee meeting for Zyprexa Depot?

David Broecker

Cory, this is David, great question. I don't know if you sat through and watched the whole thing. I was only able to kind of catch the tail end.

Cory Kasimov - JP Morgan

Yeah, unfortunately I did.

David Broecker

We thought it was fascinating. And I think the big takeaway for us is data matters. We didn't really know a lot about Zyprexa Depot going into the advisory panel, and obviously there was some lively discussion about what it looks like.

I think the other thing is the recognition that not all long-acting antipsychotics are going to be the same in this marketplace. So it's going to be very interesting, I think, to see what happens at the FDA, particularly around the label for this product going forward.

Cory Kasimov - JP Morgan

Okay. And then, last question with CONSTA is are you aware of Lilly's or J&J for that matters with regards to palmitate with their strategy for ex-US regulatory filings?

David Broecker

At this point what we've been told or what we know is that it hasn't bee filed, palmitate hasn't been filed in Europe. And we understand that there were some additional requirements that the European regulatory agencies wanted to see. But that's kind of all we know at this point.

Cory Kasimov - JP Morgan

Okay. And then one question, if I might, on exenatide once weekly. There is still discussion, obviously, out there as you are well aware that the FDA may not require a bioequivalence study. Can you discuss the precedent there as well as your experience with this matter, especially as it relates to CONSTA and VIVITROL?

David Broecker

Yeah, we can comment on that. For the specifics of interaction with the FDA around once weekly exenatide, I would just continue to refer people back to Amylin since they are the ultimate NDA holder on this. And I know that they are planning to provide update that they have more information and insight into this as we go forward.

But as it relates to some of the other programs, as you mentioned, we've got experience doing this a couple of times. With RISPERDAL CONSTA we actually didn't have to go through an elaborate comparability plan because we supplied material for the clinical studies out of the commercial scale equipment. So there was no need to do any sort of bridging type of work to show comparability there.

However on VIVITROL, for our Phase III program, what we did was we produced all of the clinical material at the one kilogram scale. So when it came time to scale that up, we had to show comparability to that one kilogram material. And we're talking about dozens and dozens of batches of one kilogram material.

And we were able to negotiate with the FDA essentially a chemical comparability type of strategy where we showed what the in-vitro release profiles of that one kilogram material were compared to the large scale material. And the FDA bought into that. It was, obviously, data driven and we worked side by side with the FDA, and we were able to get approval for that. So that's what we did for VIVITROL.

Cory Kasimov - JP Morgan

Okay. All right. That's helpful. And then, finally, one just housekeeping question. I just want to make sure I caught this right, so this is for Jim. With regards to the repurchase program the $33.3 million, you said that stopped at the end of the fiscal third quarter, so that's at the end of December. There's been nothing so far then this quarter.

Jim Frates

That's correct.

Cory Kasimov - JP Morgan

Okay. Great. Thanks. Thanks a lot. Thanks for taking the questions.

David Broecker

Thanks, Cory.

Operator

Thank you. Our next question comes from William Ho from Banc of America.

William Ho - Banc of America

Hi, guys. Couple of quick questions. First of all, with respect to Johnson & Johnson and paliperidone palmitate, I mean do you know much about the properties of that compound? We haven't been able to find much. And after yesterday I am very significantly concerned about LAI, but had additional questions about the future of palmitate relative to CONSTA.

David Broecker

We haven't seen a lot of information either. I think there were some recent abstracts that came out. I'm looking at Rebecca here maybe for some help.

Rebecca Peterson

Yeah. Very early Phase IIa data on paliperidone palmitate, but we really haven't seen anything beyond that besides the fact that the studies have been completed for sometime now.

William Ho - Banc of America

Okay. And then, is there anything you can tell us about the manufacturing revenues with respect to CONSTA. They jumped around a little bit, is there anything that drives J&J's decision? Is there seasonality or anything else that we can help smooth that out in our model?

Jim Frates

Yeah, William, it's Jim. We've always talked about the manufacturing revenues being lumpy. I think there are a couple of things. One is they are selling it in almost 80 countries around the world and its various inventory levels, number one. Number two is, as you know, the price is very different outside the United States versus inside the United States. And so, depending on how many batches we ship to ex-US versus US batches in a quarter, that will also help some impact.

It's lumpy quarter-to-quarter, but if you take a step back and look at it on a full year basis actually, you can see that increase that matches very closely actually with the sales increases that we're seeing. So we've given guidance for 95 to 100 for the full fiscal year. And as I mentioned, we're standing by that at this time.

William Ho - Banc of America

On a worldwide revenue standpoint, it seems like sales are becoming pretty much stable or are fairly robust at 295, do you see that constant over the foreseeable term or how do you see that moving in the future?

Jim Frates

I think at this stage we expect it to grow. I mentioned we have a purchase forecast from J&J that obviously extends out into next year. And interesting, I think, if you compare year-to-year fourth quarter to fourth quarter, we're up 30%. And actually, if you compare it to last year's fourth quarter, last year's December quarter, our fiscal third quarter, you see the same kind of small amounts of growth at the end of the year.

I think with the work that J&J just presented on the bipolar disorder and the fact that they are moving aggressively to filing bipolar, which as you know is the bigger part of the atypical antipsychotic market, and the fact that they are planning to file for the deltoid injection, I think we see both of those as very, very positive for the future of CONSTA.

William Ho - Banc of America

Okay. Thank you.

Jim Frates

You are welcome.

Operator

Thank you. Our next question comes from Elliot Wilbur from Oppenheimer.

Elliot Wilbur - Oppenheimer

Thank you. Just a quick follow-up on Jim's commentary. Jim, just based on your understanding, what is the timeline for the filing of CONSTA bipolar indication?

Rebecca Peterson

Thanks for the question. Just to be clear, the deltoid application has been filed. It was filed in November of '07. And J&J plans to file in the first half of this year for the frequently relapsing bipolar disorder.

Elliot Wilbur - Oppenheimer

Okay. And just a follow-up on that, Rebecca, is the deltoid application related to bipolar indication or --

Rebecca Peterson

For the schizophrenia market.

Elliot Wilbur - Oppenheimer

Okay. And then, I want to ask you a couple of questions on VIVITROL as well. I guess with respect to the goal of reaching profitability on the partnership by yearend, I mean do you think we're kind of at a point frankly where you've ratcheted down expenses as much as they can go and really have to look to the topline now to kind of enable you to sort of cross that threshold?

And then, looking at the Cephalon side of the equation, clear that their net losses have decelerated significantly over the past couple of quarters, and I am just wondering if you can give us sort of an update there as to what their current level is, commitment is and any sort of update in terms of the actual number of people you still have in the field promoting the product?

David Broecker

Elliot, this is David, and I will comment may be qualitatively, and Jim might then comment quantitatively on some of the numbers and things. We did what we said we were going to do in terms of realigning the sales organization as we came into the end of last year.

All total now in the, what we call the VIVITROL business unit, we've got about 90 people and about 70, 75 of those are actually field based people. The rest of the people are basically dedicated to the marketing and medical affair support of the program. It's a truly integrated organization.

So from that standpoint, it's made up of Cephalon and Alkermes people. And sometimes Alkermes people report to Cephalon and Cephalon people report to Alkermes. So from a commitment standpoint, it's very much an integrated partnership, both of us very committed. I think, overall, we are committing about 35% or 40% of the resources and they are committing about 55% or 60% of the resources.

I just came back from their sort of POA meeting, plan of action meeting that they had done in Florida in January, and I can just tell you that the group is very energized, very focused on what is it going to take to show that kind of sales growth and trajectory that's going to get us to the end of the year, and they've got variety of plans. Again, I don't want to go into the details of those, but just suffice it to say, we've got the team, they are energized, they are focused and very confident on their abilities to deliver this year.

Jim Frates

Yeah. And Elliot, from a cost perspective, of course, we need to see the revenues continue to grow. I think we are very, very happy with the fact that we didn't lose a beat even as we realign the sales force and targeted it. And I think that's quite extraordinarily, frankly. And I think that both Cephalon and Alkermes are committing through this year.

The key thing is that at a certain point cutting expenses any further, once they are in that rational part and you have the right sales force in place and you've got the right strategies, it doesn't make a whole lot of sense. As of January 1 this year we are going forward, we are splitting the cost, essentially splitting 50/50 both the revenues and expenses with Cephalon.

And you've seen their net loss come down mostly because most of the SG&A expenses run through Cephalon's P&L what runs through our P&L are the further R&D and manufacturing of the products. So I think we're quite optimistic about VIVITROL going forward into 2008. And this wouldn't be the first product in a new market that had a slow start, but it ultimately came out to be very, very meaningful for their sponsors.

Elliot Wilbur - Oppenheimer

Okay. Thanks. I just had a one quick follow-up asked the same question, I think, I asked time. With respect to ALKS 29, at what point are we going to get a little better sense as to sort of what exactly that the actives are in that program?

David Broecker

I think I alluded to it in my conference call script that we're really working now on to finding the proprietary product nature of this. And so, I think once we get through some of that work, we'll be able to give you a lot more clarity on that. So, probably second half of this year.

Elliot Wilbur - Oppenheimer

All right. Thanks for fielding the questions

David Broecker

Thanks.

Jim Frates

You bet.

Rebecca Peterson

Thanks, Elliot.

Operator

(Operator Instructions)

Our next question comes from Ian Sanderson from Cowen & Company.

Ian Sanderson - Cowen & Company

Good afternoon. Thanks for taking the questions. First, actually Jim, you talked a little bit about the move towards cost sharing, and what exactly is the P&L impact of the cost sharing of VIVITROL in the current quarter, is it just that net collaborative profits line will turn negative

Jim Frates

No. I think net collaborative profit line will cut down, but it's not going to turn negative. So, recall Cephalon books all the revenue of sales and then have a good portion of the expenses, but they are essentially losing less money than we're losing.

Ian Sanderson - Cowen & Company

Okay.

Jim Frates

So they are sending us the balance, so we each lose the same amount of money at this point. And that will turn over into sending us money to each match the profit. We also have each quarter about $1.3 million of milestone recognition because, remember, they paid us $270 million upfront to license VIVITROL. We spent a $120 million to first launch the product, then for the second half of last year Cephalon was funding all the losses essentially.

And then, moving forward though, we still get to keep that $150 million of license revenue and the SEC has us recognized that over the life of the products, so we do about $1.3 million a quarter. So the funds flow is still positive to Alkermes. And I think there's a table on our press release, essentially the Alkermes expense for the year suited for the quarter was $3.8 million.

Ian Sanderson - Cowen & Company

Okay.

Jim Frates

So that was essentially our part of it or half of the net loss.

Ian Sanderson - Cowen & Company

Although you weren't into the 50/50 cost sharing in the December quarter, correct?

Jim Frates

That's correct. So that was funded by Cephalon, but that will be going forward. That's kind of the magnitude of where we're at in terms of the loss on VIVITROL.

Ian Sanderson - Cowen & Company

Okay. And second question on ALKS 27, what's the next development milestone that we should be looking for here?

David Broecker

Well, I think we've got a couple of things going on. We'll continue to have active partner discussion. And so, what we're trying to do is not lose any forward momentum on the rest of the clinical program. So we continue to do some optimization of the product configuration. And what we hope to do is sign a partnership and enter into a clinical study by the end of this year.

Ian Sanderson - Cowen & Company

At one point, I think earlier this year the though was that you would go into Phase II program regardless of whether you had a partner or not. Is that still the thinking or now is it more optimize, get the partner and then do the Phase II?

David Broecker

There were lots of moving parts, and I think what our current assumption is, is probably getting a partnership.

Ian Sanderson - Cowen & Company

Okay.

David Broecker

But obviously we have a year to work on that. And if at the end of the year something happens different than that, we can make that decision now.

Ian Sanderson - Cowen & Company

Okay. Thank you.

Operator

Thank you. Our next question comes from Dave Windley from Jefferies & Company.

Dave Windley - Jefferies & Company

Hi. Thanks for taking the question. Just clarify on the last one, David, the year that you speak of for ALKS 27 is calendar '08?

David Broecker

Yes.

Rebecca Peterson

Yeah.

Dave Windley - Jefferies & Company

Okay. Jim, on the VIVITROL on Ian's question there, I guess I'm trying to understand that VIVITROL P&L is losing single digit millions of dollars at this point, is that right?

Jim Frates

That's correct. In the fourth quarter, December 2007 quarter, so the fourth calendar quarter the net loss on VIVITROL was $6.92 million.

Dave Windley - Jefferies & Company

Okay. And so you split that staring in March, and then you take $1.3 million of cost reimbursement or amortization of the milestone payment, and how does that end up as a positive number? What element am I missing to make that a positive number?

Jim Frates

Because there are also funds that Cephalon pays to us, Dave, some quarters, so net collaborative profit. We have expenses that we always have shown in our expense lines. And when we get payments from Cephalon, we also have to show out somewhere, and that runs through net collaborative profit.

Dave Windley - Jefferies & Company

Okay. Are those payments, though, not part of what makes that P&L come to $7 million?

Jim Frates

No. The payments are just the cash flows. The P&L is what's spent, because, again, remember Cephalon has all the revenues coming in on their topline. We don't have any revenues coming into the top line.

Dave Windley - Jefferies & Company

All right. Okay. All right.

Jim Frates

And ultimately, at the end of the day, if there is a loss in the quarter, come March, if there is the same loss in the quarter of $7 million, our half of the loss are $3.5 million.

Dave Windley - Jefferies & Company

Okay.

Jim Frates

If our expenses are a little bit more then Cephalon will have to send its money to make it balance out at $3.5 million of loss for each company.

Dave Windley - Jefferies & Company

Okay. All right, that makes sense to me. And then, beyond that, would you take down additional cost reimbursement to cover that?

Jim Frates

No. The milestone revenue going out forward for us is essentially straight line.

Dave Windley - Jefferies & Company

Just that one number, okay. Moving on then, can you walk me through the approximate timeline for the Cilag deal in Russia? I mean you said you hope to start a Phase III study in '08, what would be the review cycle, the late stage development, and then the review, and launch cycle on that approximately?

David Broecker

Yeah. A couple of things, Dave, that you might be confusing. With regard to starting a new Phase III study, what we are talking about is doing an opioid study to expand the label for opioid dependency. And that's going to start here in the first half of this calendar year 2008, independent of Janssen and the deal we signed for Russia.

Dave Windley - Jefferies & Company

Okay.

David Broecker

So we're doing that separately and independently. But now turn to Cilag or Janssen, we signed the deal with them, $5 million milestone, another $34 million worth of potential milestone payments. It's a royalty deal. We are in the process of sending them our file essentially, and they are going to be responsible for translating that and then submitting that to the Russian regulatory agencies for approval.

And I think that the approximate timing on that is probably looking at, again, I'm not that familiar with the details of that, but probably towards the end of this year or beginning the next calendar year, we can hopefully see approval of that product.

Dave Windley - Jefferies & Company

Okay.

David Broecker

And then they are responsible for the launch of it in that market.

Dave Windley - Jefferies & Company

Okay. Thank you

Operator

Thank you. This does conclude the question and answer session of today's program. Thank you.

Rebecca Peterson

Thanks everyone for dialing in. And if you have any additional questions, Jim and I will both be available. Have a good evening.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect.

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Source: Alkermes Inc., F3Q08 (Qtr End 12/31/07) Earnings Call Transcript
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