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Executives

Richard Pops - Chairman and CEO

Rebecca Peterson - Investor Relations

Analysts

David Friedman - Morgan Stanley

Alkermes plc (ALKS) Morgan Stanley Global Healthcare Conference Transcript September 11, 2012 10:55 AM ET

David Friedman - Morgan Stanley

All right. So, as all of you know, since you’re in the room, the next company is Alkermes. I just need to mention that we need to refer you to any disclaimers at morganstanley.com/researchdisclosures. And it’s my pleasure to welcome Richard Pops, who is the Chairman and CEO; and also Rebecca Peterson, who runs Investor Relations.

And Richard has been CEO of the company since he joined over 20 years ago and he has led the recent successful merger with Elan Drug Technologies which closed in May of last year, and it’s a great opportunity to have you with us today. So thanks for joining. I thought that I turn it over to you to provide some brief opening remarks and then we’ll go into Q&A.

Richard Pops

Perfect. Thanks everybody. Thanks for having us. So actually that, the transaction with Elan closed September 16th of last year. So we were just -- this is the one year anniversary of what would turned out to be a merger that made a lot of sense and it made sense looking at it from prospectively and I think, now with one year under our belt, its performing exactly the way we would have hoped, if it could.

So 33,000 feet, what we’re so excited about at this moment for this company is this combination of the financial here and now with the exclusive potential of the pipeline and not a notional pipeline, not an early pipeline, but a late pipeline.

And those two elements are rare to find in biopharmaceutical companies, particularly of our current size. So on the financial here and now, we have assembled based on our technologies, which are, I think fairly easily understood, now they are quite advanced.

We have a pipeline or portfolio of five major commercial products and these are commercial products approved in markets around the world. Five products that are almost all of them early in their commercial life with long patent protection, patent protections 20s for the most part.

So these five commercial products are contributing topline now, which is about a $0.5 billion and growing, that’s generating positive non-GAAP income, positive cash flow, positive EBITDA, and that’s continue to be the case for the foreseeable future.

So we can cross the rubicon. We become an economic enterprise of certain scale with long lived assets that are not interrelated in terms of [their core entities], they are very independent, they comprise of portfolio that’s very power and can last for long time.

It originates from a certain technical capability, manufacturing capability that we built over the last couple decades. So the probability we think of our being able to build more products is quite high.

The difference between the next-generation of products and the first generation of products, is that the first generation of products were essentially done under a partnering model, where we used big pharmas money and resources, and development expertise to help us build our capabilities and generate cash flows from royalties and manufacturing products.

This next wave of products, our proprietary products that comprise the pipeline take that learning and that understanding the technology and apply to drug for Elan account. This is not a new story. This is what Elan did a couple decade or so ago and transform themselves into a $10 billion plus company.

So we have a number of drugs now in development, two which are very important stage for investors to understand. One is the drug called ALKS 9070. ALKS 9070 is our own long-acting injectable for the treatment of schizophrenia. In this case it’s a long-acting pro-drug of aripiprazole.

This will build up the foundation. It’s been build with RISPERDAL CONSTA and INVEGA SUSTENNA, two of our biggest commercial products already sold by Johnson & Johnson.

So we’ve come to understand the long-acting atypical antipsychotic market. It’s a big market. It’s a $2 billion franchise and growing double digits. Its still underserved in terms of the medical necessity for these products and ALKS 9070 fills a very clear niche in that market, which is a desire for long-acting form of one of the better tolerated antipsychotic.

And ABILIFY is that type of drug. It’s a $4 billion drug. We are developing the long-acting injectable in Phase 3. We should have results from that Phase 3 clinical trial next year and those data will be sufficient to file for FDA approval in United States.

So 9070 is Phase 3 asset. It’s right in our power alley in schizophrenia long-acting medications and we are quite excited about it. Has a major effect in our models on evaluation if that drug is successful.

Second drug I’ll mention then we can talk where we want to take is 5461. 5461 is a drug that you have to say is more risky at this moment, because its based on only one efficacy study so far.

And that’s a drug for the treatment of depression, but particularly treatment-resistant depression for patients who have failed treatment with SSRI and conventional any depression medication.

This is based on our deep understanding of opioid receptor biology, which is good in our chemistry capability and opioid receptor modulators, as well as our clinical experience with opioid receptor modulation through VIVITROL and other work.

This drug is an oral compound. Its administered patients who would have failed to conventional treatments and what we like about it in early studies is that it’s shown very rapid effect on improving depression scores within seven days and very significant one as well.

We are currently in 130 patient Phase 2b study that will confirm or not the experience we saw in the first clinical trial. We expect those data in the first half of calendar 2013 as well. So with both 5461 and 7090, 2013 will be very, very critical data year for us.

And I’ll finish this with there is two other pipeline thing you should be aware about at late stage, there is a drug called ZOHYDRO, which is one of our partnered projects we get about 20% of the economics that was significant on the P&L.

This is a drug. It’s a pain product being developed by a small California-based company called Zogenix. It’s the first -- it should be the first hydrocodone product without acetaminophen. So as you know, Vicodin is hydrocodone plus the acetaminophen. There has been a call for hydrocodone-only product that doesn’t expose patients unnecessarily to high levels of Tylenol.

This should be the first. The NDA was filed in May. The PDUFA date is next March and as I said, we would get 20% of the economics from manufacturing and royalties on that. And then finally we have a drug moving into Phase 3 with J&J, which is a continuation of the franchise we built with INVEGA, SUSTENNA and CONSTA. This is a three-month formulation of INVEGA SUSTENNA.

So a single injection that would be administered to patient once every three months to build on the sequence of every two week CONSTA, every month SUSTENNA and now offering for patients and physicians once every three months. So that’s the profile of the company, a quick snapshot.

Question-and-Answer Session

David Friedman - Morgan Stanley

Great. Just to follow-on on that one, what’s the timeline from J&J’s standpoint on the three-month SUSTENNA?

Richard Pops

Rebecca will answer on SUSTENNA…

Rebecca Peterson

That’s in Phase 3 and we should expect data in 2014.

David Friedman - Morgan Stanley

And just stepping back, can you just bring the company a little bit more in terms of your organizational structure post the deal, the employee breakdown and that sort of thing?

Richard Pops

Sure. So this is a company with 1200 employees and it’s headquartered in Dublin, Ireland. One of the things we did it through the EDT transaction was we did what’s called an inversion. So Alkermes Inc. which was a Pennsylvania-registered company merged up into Alkermes plc., which is Dublin based. That has a logic to it because the business we bought had a 40-year operating history in Ireland.

We also have 450 employees in a very large manufacturing site in the middle of Ireland, town called Athlone. But it also has statutory effects on tax rate and what not particular for earlier stage assets as we transfer them into the Irish Athlone firm.

So for example, BYDUREON IP resides in Ireland, BYDUREON cash flows will be taxed at 12.5%, 5461 and 9070 are now have been transferred to Ireland that domicile the IP that’s in Ireland. So the tax rate on those products.

So that’s why we say you model the business out into the future as the pipeline products move in and as BYDUREON grows, you will see our effective tax rate dropping significantly. So we operate in Ireland.

We operate a large manufacturing site in Wilmington, Ohio where we make our injectable microsphere products. And we also operate our manufacturing site in Gainesville, Georgia which makes all dosage forms including DEA regulated things like ZOHYDRO where we can have opioids onsite. And then, our major R&D operations are in Massachusetts at Waltham.

David Friedman - Morgan Stanley

Got it. And with respect to the opportunity for BYDUREON follow-ons because that will be a driver on top of the boost from the AstraZeneca and Bristol-Myers salesforces, can you talk about the microspheres and the ability to squeeze them into smaller needles and just talk about the development plans for that franchise?

Richard Pops

So let’s start with BYDUREON at the highest level because in rooms like this for the last 10 years, we’ve been talking about the bulls and the bears of the long-acting GLP-1 agonist. And I think the exciting news is that BYDUREON is now approved around the world, number one.

Number two, there is a very highly competitive process evaluating Amylin for acquisition. And that combine $7 billion acquisition by a combination of Bristol Myers Squibb and Astrazeneca. And you can back calculate with that type of upfront payments, what people’s expectations maybe for BYDUREON because the value driver obviously in that transaction was BYDUREON.

And I think that it’s interesting the disparity between what those numbers yield and what kind of street consensus use are for BYDUREON. Somebody is right, somebody is wrong and I know that I’m hoping it comes up. But the basic -- the macro trend in the GLP-1 space is that GLP-1s are becoming standard part of the treatment algorithm for diabetes.

As you know, we don’t even go through the demographics but there are lot of patients. They all will progress through metformin and generic medications and the treatment algorithms now suggest the patient go into a GLP-1.

And the two choices right now are Victoza and BYETTA/BYDUREON, increasingly BYDUREON. And what’s interesting is that all the other pharmaceutical company playing this game based on the data we see so far, we don’t really see anybody that’s got better product than BYDUREON but people feel like they need to be in that space because so many patients are going to be treated with GLP-1. So with the only weekly medication for type II diabetes in existence was BYDUREON.

It’s a major competitive positioning. It’s not when to take all but it’s a very important scope to hang a positioning on. And as we continue to progress the brand and what we can do is move from the first incarnation of BYDUREON which is a vial powder and vial diluent, they get mixed together and inject once a week. That can be then segue to a dual-chamber syringe that doesn’t require manipulation to different vials.

Two, then a prefilled syringe suspension administered weekly to potentially once a month formulation in a syringe that doesn’t require reconstitution. So you can see just continued as more and more concentric shells of the market get exposed to the use of GLP-1, you want more and more patient friendly alternatives to be able to capture more and more of this exciting market.

And it’s important that I make that point because it’s not about the core of the bull’s eye with everybody fighting in a zero some way for certain number of patients. I think they are about more like the TNF market or the statin market or something like that or more engines drive more utilization, more utilization, more and more patients come in, more and more dosage forms become useful for different types of patients and what not. But the general phenomenon is the incoming tide lifting the various ships and we think BYDUREON has potential of being incredibly competitive.

The microsphere itself that the essence of BYDUREON is a polymeric microsphere, that contains the peptide. The same peptide that is in BYETTA, simply capsulated in biodegradable polymers. Super simple idea, it’s super complicated to do, particularly given how labile, fragile a peptide is.

So once it’s encapsulated in the right way in this polymeric metrics which can then degrade inside the party of program grade. We can pick that microsphere. We can put it into a vial like first generation BYDUREON. We can put in a dual-chamber syringe half of it is powder, the other half is diluent that generation two. I think you can replace the aqueous diluent with a non-aqueous diluent and then you can mix the microspheres of diluent and put in the syringe.

And you can load more microspheres or increase the core load of the microspheres and make the duration longer than a week as well but essential that the quantum element in each case is the microsphere and that’s where our idea is.

David Friedman - Morgan Stanley

That’s very helpful. Thank you. Let me pause and see if there are any questions from the audience. Okay.

Unidentified Analyst

Excuse me. In terms of the schizophrenia markets, SUSTENNA has obviously launched very, very well and doesn’t appear to be cannibalizing CONSTA to really any degree. Can you just discuss the outlook for both including J&J’s initiatives? Obviously, there is the additional line extension for SUSTENNA, which is you mentioned data in 2014 but just talk about the rollout globally and future prospects?

Richard Pops

It almost underscores the point I was just making about the GLP-1 market. So, the reason SUSTENNA has not cannibalized CONSTA is because the overall penetration into the medical opportunity is vanishingly small under 5% in the U.S. with medicines that have proven superior medical and pharmacoeconomic outcome.

The limitation has been, there has only been one company selling one product. So every other company has the opportunity to detail against that product. As more entrance and more products enter the marketplace, I think what we will see is expansion from market general.

So, INVEGA SUSTENNA addressed an opportunity in the market place that CONSTA actually created in the sense, CONSTA was the drug that proved to clinicians and payors the long-acting atypicals made medical and economic sense.

But it was a ministered every two weeks and required re-constitution by the nurse prior to the injection, still led to becoming a $1.5 billion drug. With SUSTENNA added on top of that was not necessarily safety efficacy. We added convenes of a prefilled syringe and it added monthly duration on top of the two week duration.

Now, we’ve launched regionally RISPERDAL CONSTA with the monthly duration, I don’t think it would have been as easy to launch with the two weeks. That’s where clinician make a decision put something of two weeks of medication. If they’re wrong, they have two weeks to figure it out. If they are wrong with the monthly at the first time, it’s a big economic investment and clinical investment, but it makes sense now that you bet people on two-week medication to extend it two month to month.

Likewise, you would never started this market with three months INVEGA SUSTENNA, three month is made possible by the existence in one month. So that’s kind of the progression. We see this market actually becoming even more dynamic because we are coming to market we believe with successful trial result with a long-acting form of a ABILIFY which address a difference slice of the patient population in risperidone or ZYPREXA would address.

And Otsuka is developing its own formulation long-acting formulation of ABILIFY, which we think is a good thing because now we are going to essentially triple the promotional intensity in the marketplace. The noise not just for doctors but for payors, Medicaid people like that to increase the education, increase the logic that supports the use of long-acting medications around the world.

CONSTA and SUSTENNA are global phenomenon. CONSTA actually more the sales came from OUS, come from OUS and in the U.S., sold in 92 countries around the world, INVEGA SUSTENNA is just launching into this whole range of countries through 2012, 2013 and so on.

So, I think as governments are own include become more focused on cost. I think there is a lot of instinct to drive people towards the use of drug like SUSTENNA and CONSTA.

Unidentified Analyst

Yeah. They can clearly lower costs by keeping people out of the hospital and our Connaught speaker yesterday former governor, Leavitt talked about bending the cost curve and how innovation in the future is going to be to bend the cost curve. It certainly seems like these drugs should be perceived that way but clearly the adoption isn’t reflecting that.

So is there anything else that J&J is doing to better sell the value proposition and the cost reduction opportunities associated with SUSTENNA versus oral ZYPREXA?

Richard Pops

I think J&J is doing as good job as they can do, is the only sponsor. I think the feel good benefit from multiple companies telling policy makers. And in the risk, there has been only one drug and you are doing when pushing it is entirely self-serving analysis that you can make it. We’ve already seen Otsuka repackaging data that’s from CONSTA and SUSTENNA and making arguments to payors or to the community about the use of long-acting medications in schizophrenia. We think that’s fantastic actually.

So I think it’s just -- it's something that needs more separate voices making the argument. Thank for the drugs on patent for long time. So you have the time, you have enough runway to make these types of investment.

Unidentified Analyst

True. And when the patents do expire, how do you envision the generic threat?

Richard Pops

I think it’s very -- its going to be very difficult to make generic formulations of these drugs. Now talk about the self-serving comment right that but you look at difficult it’s been for FDA and the generics to come up with Concerta -- a generic Concerta that’s a once a day oral product that complicated PK profile.

We are talking about PK profiles that last over multiple weeks and our not linear. They are hardly linear. So what a determination bioequivalence add to the point where regulator feels that substitutable with the medicine that’s in a very serious disease like schizophrenia, that’s point number one.

Point number two that if you can across that hurdle and you start to manufacture the stuff and I would say on -- if you look at continuing of the -- a pharmaceutical manufacturing processes from easy to hard, easy being hammering powders into tablets and tablets press hard being aseptic dry power manufacturing of microspheres. We’re -- we’re kind of add near this limit.

This is really tough stuff and generic companies don’t have the capacity to make large scale aseptic emotions with aseptic powder filling. So these are (inaudible) plant cost $800 million to replicate what we do in Ohio.

So this is not SUSTENNA part. So with patents going out into the 20s for CONSTA, we are really going to be focus too much on generic for long time.

Unidentified Analyst

Got it. And can you talk a little bit more about multiple sclerosis or Amylin, I mean for Alkermes in the outlook?

Richard Pops

Well, our participation in the MS market is true. Our collaboration with the Acorda and Biogen with the drug called AMPYRA in the U.S., FAMPYRA outside the U.S., which is a drug actually is developed by Alkermes’ predecessor EDT. It’s a once -- it's a twice a day formulation of a very simple molecule that improves walking in patients with MS. And it’s launched very nicely in the U.S.

It launched so fast that it actually disappointed some of the Wall Street folks. You feel like its going to stand that rate. But if you kind of normalize it in its second full year, Acorda is guiding to $250 million to $275 million of sales of AMPYRA in the U.S. Biogen is selling FAMPYRA outside the U.S. and launching quite well.

So it’s a unique product. It’s on patent for a good long time. There is no other competitive product. You are compelling -- just competing against the nurture of -- there never haven’t been a drug for the treatment that’s a cheap and that’s per se but improves walking in patients with MS.

So it’s a very important drug for the patient that respond to it. And so that’s our role and now we have a significant economic interest in that because we get 18% of top line around the world. So it’s far more than just a kind of a simple royalty arrangement because we’re the innovator of the product. According to clinical work in Biogen market but we maintain the manufacturing and significant part of the top line.

David Friedman - Morgan Stanley

Got it. And then with respect to the fiscal '13 outlook, there is not going to be a benefit in the short-term due to conservative guidance and the way generic entries. Could you just frame the financial impact that you see from two small drugs going generic and how investors should think about on the top and bottom line and the timing variables here?

Richard Pops

So the important message I think for folks is we are asking you to think about the way we think about which is what we’ve compiled these companies that have portfolio and the portfolio of revenue driving a product is what we will guide to.

And what’s interesting that the portfolio is really behave as such. So what you are referring to, we had modeled generic entry for one of the legacy EDT products. We had modeled that generic entry will come into market on July 1st of this year, didn’t happened, it could happen tomorrow, it could happen next week, we don’t know.

But that would have a positive variance in terms of the way we would model the year financially. But that can be offset because of the timing of an order of CONSTA from J&J. We’re switching a European batch for an America -- a U.S batch, which is half the price.

So there’s all these moving elements in this model and that’s why if we hear that TRICOR, we don’t get generic for an extra month. We are not going to raise our guidance by that amount, because there is too many moving elements in the model. The basic hydraulics, so that this is a $0.5 billion topline that’s growing and engine of the growth are the new the five big products.

The new products and that they’re offset a bit by the delay, by the gradual erosion of some of the old EDT legacy products, which are coming off and we’ve given folks kinds of how to model that.

David Friedman - Morgan Stanley

Got it.

Rebecca Peterson

And David that why we gave a range, I mean, I think, you always see us giving revenue guidance in bracket as accordingly.

David Friedman - Morgan Stanley

Sure. And then you had mentioned the timing of orders of CONSTA switching Europe batches for U.S batches. Could you just talk a little bit more about that and your visibility three months out on the next quarter? Just internally how much visibility you have and then how much people or to what degree people should be prepared for positive and negative surprises on some of those variables?

Richard Pops

Well, just to be clear, it varies product-by-product, CONSTA we manufacture for J&J, SUSTENNA we don’t. So on the CONSTA side we get 10% on the global sales, 7.5% of which comes in as we deliver manufactured veils to them into their inventory. And those are ordered in lumps and U.S. batch is worth twice much as OUS batch.

So if on December 20th of the quarter they decide, we rather take an extra U.S. batch this quarter and that’s delayed, that’s kind of profound effect on the quarter. So we’ve always said, you probably should think about it on an annual basis as you look at margin and as you look at growth. The only way to track actually unit growth, so the royalty come on it, which is the 2.5%, [you have IMS] numbers to show what the growth, what the overall trend is doing.

Looking ahead as INVEGA SUSTENNA and BYDUREON come into the model more aggressively quantitatively, those are both 100% margin product. So they begin to have an effect on margins and also the smoothness of the royalty, of the total line overtime. But historically if you look back at CONSTA, it’s a fairly jagged line quarter-by-quarter smooth self out over time.

David Friedman - Morgan Stanley

And could you just talk about the balance sheet, your cash flow outlook and your appetite for further deals to leverage your tax rate in Ireland?

Richard Pops

So, the company financially is quite strong. We have couple hundred million dollars of cash, much cash we have…

Rebecca Peterson

Yeah.

Richard Pops

… it’s enough write-down to worry about any more.

Rebecca Peterson

Right.

Richard Pops

And we have $450 million of acquisition debt that we are in the process we announced last week of refinancing will pay down a bit of it and refinance at lower terms that’s driven by the fact that that EBITDA line has come up significantly, our coverage ratios have improved, we’ve upgraded by the credit rating agencies last week. So that’s all very, very positive.

Rebecca Peterson

Cash flow guidance of $60 to $80.

Richard Pops

So we are guiding $68 million of positive cash flow with non-GAAP about $25 million higher than that because that will just add back to CapEx that we are expecting. Now the Irish, a bit of interesting, because just wanted to be clear that we contrast what we are doing compared to what some others might do with it.

We are not using this tax rate or domicile as a platform them for acquisition of companies and arbitraging tax rate. We are an innovation new product driven company. You will see us advantage of the tax rate primarily. We should transfer those assets as I mentioned.

But that said as we see many opportunities in the future we’ll certainly take advantage of our cash structure to optimize it. But our objective is we are not walking around with hammer like everything to nail now, we can just try to make it Irish and move into Ireland. We are going to build the company kind of more classic way of innovation driven non-substitutable or import new products with their high margin products.

David Friedman - Morgan Stanley

Great. Well, I think, we are out of time. Thanks so much for joining us today. We appreciate it.

Richard Pops

It’s my pleasure. Thank you very much.

Rebecca Peterson

All right.

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