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Executives

Rebecca Peterson – VP of Corporate Communications

Jim Frates – SVP, CFO and Treasurer

David Broecker – President and CEO

Analysts

Cory Kasimov – J.P. Morgan

Enrique Iribarne – Roth Capital

Ian Sanderson – Cowen & Company

Andrew Hilgenbrink – Jefferies & Company

Patti Bank – Pacific Growth Equities

Alkermes, Inc (ALKS) F1Q09 (Qtr End 06/30/08) Earnings Call Transcript August 7, 2008 4:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Alkermes Conference Call to discuss the Company's first quarter financial results for fiscal 2009. At this time, all participants are in a listen-only mode. There will be a question-and-answer session to follow. Please be advised that this call is being taped at Alkermes' request.

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

Rebecca Peterson

Thanks you. Good afternoon, and welcome to the Alkermes conference call to discuss our financial results for first quarter of fiscal year 2009, which ended on June 30, 2008. With me this afternoon our; CEO, David Broecker; our CFO, Jim Frates and our Chairman Richard Pops.

Before we begin let me remind you that during the call today, 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, including our financial expectations for fiscal 2009 and our expectations concerning the therapeutic value and continuing 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 in our Annual Report on Form 10-K, filled on May 30, 2008 and other periodic reports filed with the SEC under the Securities and Exchange Act of 1934 as amended. We undertake no obligation to update or revise the information provided on this call.

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

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

Jim Frates

Thanks, Rebecca. Good afternoon everybody. I am pleased to report a profitable quarter driven by manufacturing and royalty revenues for RISPERDAL CONSTA in the previous announced payment from Lilly. On a GAAP basis, we achieved net income of $29.7 million or basic and diluted earnings per share of $0.31. On a pro forma basis, we reported net income of $9.5 million or $0.10 per basic and diluted share. Facial former net income is generated from our ongoing operation, and excludes the income recognized from Lilly's $40 million cash settlement we announced in June.

From a cash flow perspective, the company was cash flow positive for the quarter and we expect to be cash flow positive on an operational basis for the full fiscal year. For a full reconciliation of our pro forma net income to GAAP as well as details in our quarterly revenues and expenses, please see the press release that we’ve recently issued this afternoon.

Our financial performance is a testament to the strength of our business model. RISPERDAL CONSTA is a growing blockbuster product with long patent life, limited competition and with potential for our significant label expansion. In addition to RISPERDAL CONSTA we have a second potential blockbuster product with Exenatide once weekly. We also have the opportunity to grow additional commercial upside with VIVITROL and are expanding pipeline with proprietary products.

Our goal is to deliver results today and for the long-term and we are confident about the future. I will now highlight the most important elements of our first quarter results beginning with RISPERDAL CONSTA. End market sales by Johnson & Johnson for our first quarter were a $343 million an increased of 11% sequentially and 23% compared to the same period last year.

On their recent quarterly earnings call J&J stated that RISPERDAL CONSTA "achieved second quarter sales growth of 14% on an operational basis U.S. sales growth was 18% due to higher market share and market growth. Sales outside the U.S. were up 12% operationally due to the positive shift from oral to injectable therapies".

Our first quarter manufacturing revenues for RISPERDAL CONSTA were $36 million compared to $30.2 million for the same last year. Royalty revenues were $8.6 million for the quarter compared to $7 million for the same period last year. With patent protection into 20/20 and three sNDA submitted for label expansions by Johnson & Johnson we expect sales to continue to grow.

With respect to VIVITROL, growth sales by Cephalon during the quarter were $4.8 million, this compares to $4.1 million for the same period last year. Our share losses on the product during the first quarter were $6.7 million compared to $24.8 million for the same period last year.

The commercial team is executing on a focus business plan for the year and we and Cephalon expect to see the results of their efforts in the second half of the year. We are maintaining our expectation of VIVITROL sales in the range $25 million to $35 million for the fiscal year, but it is clear that we need to see sales increase through the rest of this year.

Turning to our financial profile, our strong cash position, gives us unique opportunities to invest in our business by developing our pipeline, repurchasing our common stock and improving our balance sheet. During the quarter we pursued these objectives. First, following the receipt of the $40 million payment from Lilly, we expanded our stock repurchase program by $40 million bringing the total share repurchase authorization to $215 million.

To-date we have repurchased $8 million shares of common stock for approximately $106 million. This leaves us approximately 94 million shares outstanding. We expect the actual number of shares at year-end to decrease as we continued to repurchase our common stock through the year.

Second, since our call in May, we took advantage of the dislocation in the credit markets and repurchased a portion of our Non-Recourse RISPERDAL CONSTA Secured 7% Notes at an average of 4% discount to par. As you may remember, we issued a $170 million of these original issued discount bonds in February 2005, and principal payments are schedule to begin in April 2009 and stretch through the end of January 2012.

In June we repurchased $15 million of bonds for price of $14.1 million. Additionally in the second quarter, we repurchased $60 million of bonds for $57.7 million. These repurchase save us a substantial amount of cash on the schedule principal repayments as well as on future interest charges at a rate of 9.75%. As a results of these transaction we’ve reduced our debt by just over 44% and we’ll safe approximately $15 million in cash expenses over the remaining life of the bonds.

Finally, I want to comment briefly on our improved financial expectations for fiscal 2009. As result of anticipated higher revenue from RISPERDAL CONSTA and lower SG&A expense we are increasing our financial expectations for the fiscal year. We now expect GAAP net income to range from $19 to $24 million or basic earnings per share of $0.20 to $0.26. This compares to our previous net income expectation in the range of $10 to $15 million or a $0.11 to $0.16 per basic share.

I will now highlight the line items that we are updating. You can find the complete review of our expectations in today’s financial press release. We now expect total revenue to a range from $205 to $230 million compared to our previous expectation of $200 to $225 million. We expect total manufacturing revenues to a range from a $116 to $129 million compared to our previous expectation of $113 to $125 million.

We expect manufacturing revenues from RISPERDAL CONSTA to range from a $109 to $118 million compared to our previous expectation of $106 to $114 million. As you know our manufacturing revenues fluctuate through to the year due to the timing and product mix of our shipments to Johnson & Johnson. For our second fiscal quarter we expect manufacturing revenues from RISPERDAL CONSTA to be in a range of $25 to $30 million. We expect royalty revenues from RISPERDAL CONSTA to a range from $34 million to $36 million compared to our previous range of $32 to $35 million.

Turning to our expenses, we are decreasing our expectation for SG&A expenses to a range of $50 to $55 million compared to our previous range of $55 to $60 million. We now expect cash flow from operations to range from $50 to $55 million compared to an earlier expectation of $25 to $30 million. We expect net interest income and expense for the year to remain at approximately zero.

In the second quarter we will have a one time non-cash charge of approximately $2 million related to the 7% notes. Since in July, we repurchased $57.7 million of the bond at the price slightly higher than the carrying value of the original issue discount debt. These non-cash charges will be more than offset by the future cash savings on interest expense and principal payments I reviewed earlier.

We now expect basic earnings per share for fiscal 2009 to range from $0.20 to $0.26. These per share calculations are based on the current share account of $94 million shares outstanding. To conclude we made solid progress during the first fiscal quarter. Financially, we were profitable and cash flow positive on an operating basis. We also continue to repurchase our stock and improved our balance sheet by reducing our debt.

The business is stronger than ever and we have a great deal momentum as we had into middle of the fiscal 2009. I look forward to updating you on our progress in the coming months. With that I’ll turn the call over to David to provide an update on our products and our portfolio. Dave?

David Broecker

Good afternoon everyone and thank you Jim for your detailed review of what was a great quarter. We are making progress across all fronts of our business from our most advanced commercial product, RISPERDAL CONSTA to our earlier stage pipeline projects.

I will not give you comprehensive review of all our programs today, but really want to focus on two key programs, RISPERDAL CONSTA and Exenatide once-weekly. I’d also like to provide brief update on VIVITROL and two of our pipeline programs ALKS 27 for COPD and ALKS 33, an oral alcohol candidate.

We have never felt more confidence about our prospects. RISPERDAL CONSTA is a blockbuster product and sales continue to grow. We have another potential blockbuster with Exenatide once-weekly and the program is on track for NDA submission.

We believe RISPERDAL CONSTA and Exenatide once-weekly along with growing contributions from VIVITROL will enable us to generate earnings of $2 to $3 per share in 2013. We’re also planning for beyond 2013 while leveraging our technology platforms, commercial scale manufacturing capability and R&D expertise to create new proprietary product opportunities. The bottom line is that we are building a multi-product commercial enterprise with excellent prospects for growth.

Let me start with RISPERDAL CONSTA, giving that tremendous success J&J continues to invest in this important brand. Over the past nine months J&J submitted three supplemental new drug applications to the FDA for RISPERDAL CONSTA. One for use as a deltoid injection, a second seeking approval for use in frequently relapsing bipolar disorder and most recently a third seeking approval for use in the broader indication of bipolar disorder.

Bipolar disorder is a serious chronic disease affecting 5.7 million people in the U.S. and approximately 27 million people worldwide. If approved, RISPERDAL CONSTA would be the first and only long acting treatment available for use in bipolar disorder providing patients and physicians with an important new treatment option.

In addition to our commercial formulation, we are working with J&J to develop the four week formulation of RISPERDAL CONSTA. J&J is interest in our four week formulation underscores our belief that RISPERDAL CONSTA is one of the best ways to treat patients and is an extremely valuable component of J&J antipsychotic franchise. The program is on track and we expect J&J to begin a Phase I PK study of the four week formulation in the first quarter of calendar year 2009.

I will now turn it to Exenatide, once weekly. The major event during the quarter was the pre-NDA meeting that the collaboration held with the FDA. We were very pleased with the outcome of the meeting, as it reaffirmed our development and regulatory approach for the program. First, our discussions with the agency lead us to believe that the Duration-1 study provides the necessary safety and efficacy data required for submission.

Second, we received more clarity on the potential strategies for showing comparability between clinical study material and material manufactured at the commercial facility. As the Amylin stated on its recent earnings call, the collaboration will submit data to the FDA for the in vitro and vivo correlation studies, which will be reviewed in the next few months. The collaboration is also moving forward with other strategies to demonstrate comparability. The timeline for an NDA submission, by the end of the first half of 2009 remains intact with opportunities to accelerate the filing.

The collaboration is continuing to work hard across all fronts which includes finalizing the commercial facility, shipping commercial scale material for use in ongoing and planned clinical trials and implementing superiority studies designed to position Exenatide once weekly competitively in the marketplace. The economics of this program are very attractive for Alkermes, as Exenatide once weekly will be a profitable product for us from the very first day of sales. As you know, Alkermes has no launch costs, capital expenses for this product.

Now, I’d like to provide a brief update on VIVITROL. We are now working with Cephalon to increase sales in the U.S. our strategy for expanding VIVITROL includes development of the product in new markets as well as for a new indication opioid dependence.

On Monday we announced that the Russian regulatory authorities approved VIVITROL for the treatment of alcohol dependence. The approval of VIVITROL in a second country is an exciting milestone and we expect J&J to launch VIVITROL in Russia by end of this calendar year. While the approval of VIVITROL in the U.S. and Russia was based on a careful analysis of a single Phase III study, regulatory authorities in the U.K. and Germany recently informed us that additional clinical data was required prior to approval in these markets. As a result we have withdrawn our marketing authorization application and planed to resubmit the MAA with data from future clinical studies.

Finally we are very pleased to have initiated a registration study for the use of VIVITROL and the treatment of opioid dependence. In contrast to alcohol dependence, the current U.S. market for opioid dependence treatment is over $500 million and growing. With its unique profile VIVITROL could be the only long acting non-addictive medicine for opioid dependent patients.

I would now like to give you a quick update on two earlier stage product opportunities, ALKS 27 and ALKS 33. We are making strong progress on the ALKS 27 program. As a remainder ALKS 27 is an inhaled product candidate for the treatment of COPD, Chronic Obstructive Pulmonary Disorder that leverages our air technology.

Last year we’ve reported positive clinical data from a Phase IIa that showed that single doses of ALKS 27 demonstrated a rapid onset of action and produce the significant improvement in lung function compared to placebo. We are manufacturing clinical trial material for our phase II dose ranging study which is expected to start in the first quarter of calendar year 2009.

We are also on track to file our IND and begin a phase I study of ALKS 33 and help the volunteers by the end of calendar year 2008. ALKS 33 is a novel molecule that emerged from our proprietary library of opioid modulators with broad application in the area of addiction and other behavioral reward disorders. The profile that is emerging through ALKS 33 is unique. Pre-clinical studies indicate that the compound is not metabolized by the liver, which may be an advantage over currently available oral therapies for addiction.

As I stated earlier this year, we are committed to providing more visibility on our pipeline throughout the year. We intent to announce two additional development programs during the calendar year and we will share additional details about these programs once the clinical plans are in place.

I’ll finish with the review of the program updates we expect in the coming months. We expect updates on the sNDA filings for RISPERDAL CONSTA; we will update you on the clinical program and regulatory timeline for Exenatide once weekly, we will provide an update on the launch of VIVITROL in Russia, we are working toward an NDA filing and Phase I study ALKS 33 and toward to Phase II study ALKS 27 and we also plan to disclose two additional pipeline candidates.

To conclude we are very pleased with the progress we’ve made during the quarter and look forward to updating you on our business in the coming months. With that I’ll turn the call back to Rebecca.

Rebecca Peterson

Thanks. Operator, we’ll open it up for question-and-answer session.

Question and Answer Session

Operator

(Operator instructions) Our first question comes from Cory Kasimov of J.P. Morgan

Cory Kasimov – J.P. Morgan

Hi, thank you. Good afternoon guys.

Jim Frates

Hello Cory.

Cory Kasimov – J.P. Morgan

Hey, how are you?

Jim Frates

Good.

Cory Kasimov – J.P. Morgan

Could you remind us how far en advance J&J typically orders their supply of RISPERDAL CONSTA?

Jim Frates

Sure Cory. We actually work with a number of forecast, so there is long range of plan were it began, because we have to provide capacity for them, so as you know we have two lines and we have a third line that they’ve invested in and we can bring online if we need it, but then they have a committed forecast which is about four or five months out. So, as we look forward through the year we try and measure their orders as well as the growth prospects that we see in the marketplace.

Cory Kasimov – J.P. Morgan

And that’s where your guidance comes from, correct?

Jim Frates

Exactly.

Cory Kasimov – J.P. Morgan

Okay and then I guess also to the point, can you comment on any changes that if any that you’ve noticed in J&J ordering patterns with (inaudible) for just now few weeks away?

Jim Frates

Well, I mean I think that it’s hard for us to know what’s driving the changes in J&J’s orders other than the marketplace and that’s what we’re focused on. So, I think we’ve seen an increase in those orders over the last few months, which is why we’re changing our guidance in the upper direction.

Cory Kasimov – J.P. Morgan

Okay, fair enough. And then in terms of bipolar, could you estimate now approximately how much of CONSTA used is currently off-label in the bipolar indication? Do you have any insight into that?

David Broecker

Cory, this is Dave. We’ve really don’t have any insight into that; that’s probably a question you have to ask J&J.

Cory Kasimov – J.P. Morgan

Okay, and then finally with regards to the comparability testing for LAR, I’m familiar with the three tests that are currently being debated and some being run. Is it an option now to take the data that you generate from the IVIVC study that’s being run right now and potentially filing with that and then taking and still running the subsequent trial and filing those as an amendment in the second quarter of 2009, when you would have anticipated finishing them in the first part.

Jim Frates

Cory good question, again I think our initial strategy is to train and obviously get it moving forward with the IVIVC comparability strategy and as we highlighted in the call, and I think it is really in Amylin’s earnings call, the plan was to submit some of the data to the FDA in the next couple of months, that to basically get their pre-approval that this is acceptable so that we can file NDA and then not have to worry about the rest of those other strategies. So, that’s where we’re had it.

Cory Kasimov – J.P. Morgan

Okay. Alright great thanks for taking the questions.

Rebecca Peterson

Thanks Corey.

Jim Frates

Welcome.

Operator

Thank you. Our next question comes from Enrique Iribarne of Roth Capital.

Enrique Iribarne – Roth Capital

Good afternoon gentlemen.

Jim Frates

Hi.

Enrique Iribarne – Roth Capital

I have a question; could you give us any comments or updates on RISPERDAL CONSTA in Japan?

Rebecca Peterson

We have filed for regulatory approval in Japan and have not yet heard back from the Regulatory Authorities. I would have to refer you for J&J on specific timing as to when they expect approval, but clearly that’s another growth opportunity for the product.

Enrique Iribarne – Roth Capital

Okay, thank you very much.

Jim Frates

Thanks.

Operator

(Operator instructions) Our next question comes from Ian Sanderson, of Cowen & Company.

Ian Sanderson – Cowen & Company

Hi, good afternoon and thanks for taking the questions.

Jim Frates

Hey, Ian.

Rebecca Peterson

Hi, Ian.

Ian Sanderson – Cowen & Company

On VIVITROL, could you just update us on what the sales and promotional support for VIVITROL looks like now between yourselves and Cephalon and on the SG&A guidance can you talk about, well both in the quarter end the outlook what is the major change here that it’s causing the reduction in the SG&A spend, and then finally, any update on the ownership of the ALKS 27 program?

Jim Frates

Sure Ian. Let me just make sure I get that in order, so in general you can look at our sales and marketing expenses. The overall expenses for the partnership are about $10 million each quarter and I would say that you can use Standard Pharmaceutical approaches where we’re looking at 50% or so in SG&A in that area.

Ian Sanderson – Cowen & Company

So, I think it was more just in terms of the structural; has the support for VIVITROL stabilized since you made the original cuts at the end of last year?

Jim Frates

Yes, that’s right, yes sorry about that. So, what we did in October and November, December timeframe is we brought down the size of the sales force about 70 people now.

We have about 15 people in the field and that’s what you see running through our SG&A expense and Cephalon has the remaining 55 and as you look at our SG&A expense, really some of the savings that we had in the restructuring have come out larger than we anticipated and secondly, Cephalon is taking some of the activities in SG&A that we originally planned in our budget. So that’s why you see that savings in SG&A. So, it’s also stable to the rest of the year we think.

So, on ALKS 27, on the ownership but, I think it’s our view that contractually we have the obligations to move forward with that product and we’re moving forward with that intent.

Ian Sanderson – Cowen & Company

Okay, thank you.

Jim Frates

You’re welcome.

Operator

(Operator instructions) Our next question comes from Andrew Hilgenbrink Jefferies & Company

Andrew Hilgenbrink – Jefferies & Company

Thanks guys, taking my question.

Jim Frates

Hi, Andrew.

David Broecker

Hi, Andrew.

Andrew Hilgenbrink – Jefferies & Company

Can you comment on the Particle Size that’s in RISPERDAL CONSTA versus Exenatide LAR would be and are they comparable, do you expect to need a difference size needle to inject or well it could be comparison, I guess?

David Broecker

Again, off the top of my head I couldn’t tell you what the Particle Size Distribution of either product are and the delivery systems are quite different; one is the deep IM injection, the other is a sub-Q injection. So, hard to draw inferences or comparisons between RISPERDAL CONSTA and what the administration and that product will look like compared to Exenatide once weekly.

Andrew Hilgenbrink – Jefferies & Company

Do you guys have made decisions on what size of needle would be used for Exenatide LAR or is that completely on Amylin’s side of it?

Jim Frates

Could you repeat the question Andrew again?

Andrew Hilgenbrink – Jefferies & Company

Have you guys made any decisions on the needle size that would be used with Exenatide LAR or is that on Amylin’s?

Rebecca Peterson

Yes Andrew, so we’re using a needle gauge size, it’s a 23 gauge needle, it’s a quarter inch needle thin walled and it’s a very low injection volume under Amylin. So, as you know 90% of the patient in the clinical trial or who finished the clinical trial, the Phase III elected to go onto the extension and people seem quite satisfied with the needle and ability to take their medication only once a week.

Andrew Hilgenbrink – Jefferies & Company

Great, thank you guys.

Jim Frates

Okay.

Rebecca Peterson

Thanks Andrew.

Operator

There is a follow-up question from Ian Sanderson of Cowen & Company.

Ian Sanderson – Cowen & Company

Just a quick update on the ALKS 29 program and where that currently stands and if may see some data out of that sometime next year?

David Broecker

Ian, David here. The plan is to get that and was planning by the first quarter calendar year 2009. So, we anticipate that probably towards the middle of next year we should have some date on that.

Ian Sanderson – Cowen & Company

Okay, thank you.

Rebecca Peterson

Thank you. Operator, are there any further questions?

Operator

Yes, actually we have one more question, Patti Bank of Pacific Growth.

Patti Bank – Pacific Growth Equities

Good afternoon. Just two quick questions on CONSTA; can you just talk about inventory levels, they were brought down end of last year if they are kind of normalized now and where they stand and then also can just update us on the manufacturing side in terms of the manufacturing lines and what the capacity of those are?

Jim Frates

Sure, yes we haven’t seen a dramatic in the inventory levels this year and so we don’t think that J&J is making major changes in that regard; we think we went through that last year. In terms of the manufacturing capacity, we’ve talked about in the past as each of our lines having about $750 million or $800 million of end sales capacity with RISPERDAL CONSTA by current prices. So, you can do the math; we have two lines up in running now; that gets you to about $1.5 billion to $1.6 billion and a third line ready to come on board, that will bring us up over $2 billion worth of end user capacity and so we feel like we’re well prepared as the sales continue to grow.

Patti Bank – Pacific Growth Equities

Great, thanks.

Jim Frates

You’re welcome.

David Broecker

Thanks Patti.

Operator

I’m not showing any further questions.

Rebecca Peterson

Great, thanks everyone for dialing in and we will be available afterwards if there are any additional questions. Have a good evening.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may all disconnect. Everyone have a great day.

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