Alkermes - The Underappreciated Biopharmaceutical

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About: Alkermes plc (ALKS)
by: Mott Capital Management
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Summary

Alkermes has recently presented data on ALKS 5461 for Major Depressive Disorder, ALKS 3831 for Schizophrenia and ALKS 8700 for MS.

Alkermes held an investor and analyst meeting on March 2, 2015. During the meeting the company provided guidance on possible revenue projections.

Based on these projection Alkermes could be worth up to $175/share.

By Michael J. Kramer, MS

Alkermes Plc (NASDAQ:ALKS), an integrated biopharmaceutical company, engages in the research, development, and commercialization of pharmaceutical products to address unmet medical needs of patients in various therapeutic areas. More recently, the company seems to be moving in the direction of specifically focusing on illnesses of major depressive disorder (MDD), schizophrenia and Multiple Sclerosis (MS). According to the NIMH, 6.7% of U.S. adults experience MDD per year, while 1% of Americans have schizophrenia. According to multiplesclerosis.net, it is estimated that 400k Americans have MS, and about 10,000 are diagnosed per year.

Alkermes has recently presented data on three drugs that seem to have positive effects for patients with these illnesses: ALKS 5461 for MDD, ALKS 3831 for Schizophrenia and ALKS 8700 for MS. We will take you through some of the interesting data points for each, and then discuss the likely sales projections from data provided by Alkermes.

The Data

On January 6, 2015, Alkermes reported efficacy data for ALKS 5461 that was statically significant regarding depression scores. The improvement started in week one and continued through week eight. The FORWARD one Phase 3 study had 66 patients, and was a once-daily adjunctive treatment for people who had inadequate response to commonly prescribed SSRIs and SNRIs. On January 7, 2015, the company announced positive top line data for its 300-patient Phase 2 trial of ALKS 3831. This is a once-a-day oral antipsychotic for schizophrenia. This data showed an efficacy equivalent to that of olanzapine, and significantly lower weight gain. During the study, the company found there was a 37% lower mean weight gain in week one and 51% lower mean weight gain in week 12 when compared to olanzapine. On April 6, 2015 Alkermes issued a press release announcing further data. This showed beneficial effect on weight gain observed during the first 3 months, and then on an additional 3 months. The mean change in weight from week 12 to 24 was 0.5%. Further, the company presented data for patients who received only olanzapine during the first 3 months, and who were then switched to ALKS 3831 in month 4 through 6. The data showed that for the first 3 months, there was significant weight gain consistent with prior studies of olanzapine. When these patients were switched to ALKS 3831 for the final 3 months, no further weight gain was observed. On February 9, 2015, the company announced top line Phase 1 data for ALKS 8700 for the treatment of MS. The trial was among 104 patients, and results showed Monomethyl Fumerate (MMF) exposure comparable to Tecfidera (Biogen (NASDAQ:BIIB)), with favorable gastro intestinal (NYSE:GI) tolerability. The percentage of GI-related side effects were 8.3% on ALKS 8700, compared to 41.7% on Tecfidera. Finally, on March 2, 2015, ALKS announced a new drug candidate, ALKS 7119, for the treatment of Alzheimer's agitation, MDD and other CNS indications. What is most interesting about ALKS 7119 is the combination of Dextromethorphan+Quinidine, Ketamine and Celexa. Dextromethorphan+Quinidine is Avnair Pharmaceutical's (recently acquired by Otsuka Holdings (OTCPK:OTSKF)) AVP-923, whichm in September of 2014, had statically significant data supporting a positive effect on Alzheimer's patients with agitation. Ketamine has been shown in trials to be effective in treating patient with severe MDD, although it has significant side effects. Finally, Celexa is produced by Actavis (NASDAQ:ACT), and is a proven SSRI. The company expects clinical trials to begin in Q3 '15. It should be interesting to see the outcome of this trial, considering all the parts of the new drug have pieces of evidence that suggest they may work individually.

Projections

Moving on to the opportunity these new drugs hold. On March 2, 2015, Alkermes held an investor and analyst meeting. During the meeting, the company outlined the drug pipeline, and also provided guidance as to possible revenue projections. It looked out to the year 2025, and gave tables in its presentation. The tables share various number of ranges and revenue projections based on population size, penetration and cost of the drug. We are going to take a look at the lower end, as we think the higher numbers are likely unachievable. The company slide show also notes sales numbers are not adjusted for inflation, so these numbers are all based on 2014/15 dollar values. For ALKS 5461, the company notes that there are 7.8 million patients in 2025 with treatment-resistant depression (TRD). Assuming Alkermes captures 15% of the population, or 1.2 million patients, and with a drug cost of $250 per month, the company projects net sales of $1.8 billion. For ALKS 3831, if it captures 10% of 3.1 million patients in 2025 with schizophrenia, at a cost of $700 per month, it projects net sales of $1.1 billion. For ALKS 8700, if the company captures 20% of the 75k DMF (Dimethylformamide)/MMF patients in 2025 at $54,000 per year, it projects net sales of $800 million. Alkermes does not give guidance on ALKS 7119. However, it does provide guidance for Aripiprazole Lauroxil in 2020, which is its drug for schizophrenia, with a PDUFA date of August 22, 2015. If the company captures 15% of patients on long-acting injectable (LAI), or 65k patients, with an average duration time of 6 months, then it projects $455 million in sale. It also gives guidance on Vivitrol for 2020, for the treatment of opioid/alcohol dependence. If Alkermes captures 95k patients at 3.5-month duration, the company projects $290 million in sales. If we just simply add all of the revenue assumptions together, we come to $4.4 billion in net sales. This is not including any of its current products on the market, or ALKS 7119, with which the company does about $600 million in sales today.

Valuation

Based on the numbers above, Alkermes could do about $5.0 billion a year in sales. If we assume 2% inflation by 2025, it could equal $6 billion in net sales - roughly 10x what the company does today. Yahoo shows current shares outstanding of 148.07 million shares, assuming no dilution going forward. Let us use the competitor drug makers' Price-to-Sales ratio (P/S) to determine what Alkermes's price target should be. We use a P/S ratio based on Eli Lilly and Company's (NYSE:LLY) (Zyprexa compared against ALKS 3831 trail) 3.91, Biogen's (Tecfidera compared against ALKS 8700) 10.32, Otsuka Holdings' (4578 JP, Abilify used as adjunctive treatment for MDD, competitor to ALKS 5461) 1.31. The average of the three, or 5.18 P/S, multiplied by $5 billion in sales equals a market cap of $25.9 billion, or $175 per share. This can produce a return of 175.5% from today's price of $63.52. This seems like a perfectly achievable price target over the next few years, as this pipeline continues to mature into possible FDA approval and launch from 2017-2020.

Risks

The obvious risks are that some or none of the drugs make it to FDA approval. Or that competitors come up with generic or better forms of its drugs. Also the general market risk that biotech stocks fall out of favor, and the current valuation metric being used go lower. Finally, Alkermes's projections could be incorrect, and there is the risk that the company does not achieve any of those targets.

Conclusion

Again, you can come up with your own assumption by going to the ALKS website and running through the slide show. You could make a strong case for much lower or higher net sales targets. Regardless, this is a promising company with great new products that is not getting the attention it so deserves.

Disclosure: The author is long ALKS.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.