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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-35299
ALKERMES PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
1 Burlington Road
Dublin 4, Ireland
(Address of principal executive offices)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act:
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No x
The number of shares of the issuers ordinary shares, $0.01 par value, outstanding as of July 20, 2012, was 130,858,842 shares.
ALKERMES PLC AND SUBSIDIARIES
The accompanying notes are an integral part of these condensed consolidated financial statements.
ALKERMES PLC AND SUBSIDIARIES
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
1. THE COMPANY
Alkermes plc (the Company) is a fully integrated, global biopharmaceutical company that applies its scientific expertise and proprietary technologies to develop innovative medicines that improve patient outcomes. Alkermes plc has a diversified portfolio of more than 20 commercial drug products and a substantial clinical pipeline of product candidates that address central nervous system (CNS) disorders such as addiction, schizophrenia and depression. Headquartered in Dublin, Ireland, Alkermes plc has a research and development (R&D) center and corporate offices in Waltham, Massachusetts, R&D and manufacturing facilities in Athlone, Ireland; and manufacturing facilities in Gainesville, Georgia and Wilmington, Ohio.
On September 16, 2011, the business of Alkermes, Inc. and the drug technologies business (EDT) of Elan Corporation, plc (Elan) were combined (this combination is referred to as the Business Combination, the acquisition of EDT or the EDT acquisition) in a transaction accounted for as a reverse acquisition with Alkermes, Inc. treated as the accounting acquirer. As a result, the historical financial statements of Alkermes, Inc. are included in the comparative periods. As part of the Business Combination, Antler Acquisition Corp., a wholly owned subsidiary of the Company, merged with and into Alkermes, Inc. (the Merger), with Alkermes, Inc. surviving as a wholly owned subsidiary of the Company. Prior to the Merger, EDT was carved-out of Elan and reorganized under the Company. At the effective time of the Merger, (i) each share of Alkermes, Inc. common stock then issued and outstanding and all associated rights were canceled and automatically converted into the right to receive one ordinary share of the Company; (ii) all then issued and outstanding options to purchase Alkermes, Inc. common stock granted under any stock option plan were converted into options to purchase, on substantially the same terms and conditions, the same number of ordinary shares of the Company at the same exercise price; and (iii) all then issued and outstanding awards of Alkermes, Inc. common stock were converted into awards of the same number, on substantially the same terms and conditions, of ordinary shares of the Company. As a result, upon consummation of the Merger and the issuance of the ordinary shares of the Company in exchange for the canceled shares of Alkermes, Inc. common stock, the former shareholders of Alkermes, Inc. owned approximately 75% of the Company, with the remaining approximately 25% of the Company owned by a subsidiary of Elan pursuant to the terms of a shareholders agreement.
Use of the terms such as us, we, our, Alkermes or the Company is meant to refer to Alkermes plc and its consolidated subsidiaries, except where the context makes clear that the time period being referenced is prior to September 16, 2011, in which case such terms shall refer to Alkermes, Inc. and its consolidated subsidiaries. Prior to September 16, 2011, Alkermes, Inc., was an independent pharmaceutical company incorporated in the Commonwealth of Pennsylvania and traded on the NASDAQ Global Select Stock Market under the symbol ALKS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements of the Company for the three months ended June 30, 2012 and 2011 are unaudited and have been prepared on a basis substantially consistent with the audited financial statements for the year ended March 31, 2012. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (U.S.) (commonly referred to as GAAP). In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, that are necessary to present fairly the results of operations for the reported periods.
These financial statements should be read in conjunction with the financial statements and notes thereto of Alkermes which are contained in the Companys Annual Report on Form 10-K for the year ended March 31, 2012, which has been filed with the U.S. Securities and Exchange Commission (SEC). The results of the Companys operations for any interim period are not necessarily indicative of the results of the Companys operations for any other interim period or for a full fiscal year.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Alkermes plc and its wholly-owned subsidiaries: Alkermes Ireland Holdings Limited, Alkermes Pharma Ireland Limited, Alkermes U.S. Holdings, Inc., Alkermes, Inc., Eagle Holdings USA, Inc., Alkermes Gainesville LLC, Alkermes Controlled Therapeutics, Inc., Alkermes Europe, Ltd., Alkermes Finance Ireland Limited, Alkermes Finance S.A R.L., Alkermes Finance Ireland (No. 2) Limited and Alkermes Science One Limited. Intercompany accounts and transactions have been eliminated.
ALKERMES PLC AND SUBSIDIARIES
Use of Estimates
The preparation of the Companys condensed consolidated financial statements in accordance with GAAP requires management to make estimates, judgments and assumptions that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates and judgments and methodologies, including those related to revenue recognition and related allowances, its collaborative relationships, clinical trial expenses, the valuation of inventory, impairment and amortization of intangibles and long-lived assets, share-based compensation, income taxes including the valuation allowance for deferred tax assets, valuation of investments and derivative instruments, litigation and restructuring charges. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
The Company operates as one business segment, which is the business of developing, manufacturing and commercializing medicines designed to yield better therapeutic outcomes and improve the lives of patients with serious diseases. The Companys chief decision maker, the Chairman and Chief Executive Officer, reviews the Companys operating results on an aggregate basis and manages the Companys operations as a single operating unit.
$2.8 million that was previously classified as Proceeds from the issuance of ordinary shares under share-based compensation arrangements was reclassified to Employee taxes paid related to net share settlement of equity awards in the accompanying condensed consolidated statements of cash flows to conform to current period presentation.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard-setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.
In June 2011, the FASB issued guidance related to the presentation of comprehensive income. This accounting standard (1) eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders equity; (2) requires the consecutive presentation of the statement of net income and other comprehensive income; and (3) requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. The amendments in this accounting standard do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income, nor do the amendments affect how earnings per share is calculated or presented. This standard is required to be applied retrospectively and is effective for fiscal years and interim periods within those years beginning after December 15, 2011. As this accounting standard only requires enhanced disclosure, the adoption of this standard did not impact the Companys financial position or results of operations.
On September 16, 2011, the Company acquired EDT from Elan in a transaction accounted for under the acquisition method of accounting for business combinations, in exchange for $500.0 million in cash and 31.9 million ordinary shares of Alkermes, valued at $525.1 million based on a stock price of $16.46 per share on the acquisition date. EDT developed and manufactured pharmaceutical products that deliver clinical benefits to patients using EDTs experience and proprietary drug technologies, including the oral controlled release platform (OCR) and the bioavailability enhancement platform, including EDTs NanoCrystal® technology. The Company acquired EDT to diversify its commercialized product portfolio and pipeline candidates, enhance its financial resources in order to invest in its proprietary drug candidates, pursue additional growth opportunities and reduce its cost of capital.
ALKERMES PLC AND SUBSIDIARIES
The purchase price allocation resulted in the following amounts being allocated to the assets acquired and liabilities assumed at the acquisition date based upon their respective fair values summarized below (in thousands):
The following unaudited pro forma information presents the combined results of operations for the three months ended June 30, 2011 as if the acquisition of EDT had been completed on April 1, 2011. The unaudited pro forma results do not reflect any material adjustments, operating efficiencies or potential cost savings which may result from the consolidation of operations but do reflect certain adjustments expected to have a continuing impact on the combined results.
ALKERMES PLC AND SUBSIDIARIES
Investments consist of the following:
ALKERMES PLC AND SUBSIDIARIES
The Companys strategic investments include common stock in public companies with which the Company has or had a collaborative arrangement.
The proceeds from the sales and maturities of marketable securities, excluding strategic equity investments, which were primarily reinvested and resulted in realized gains and losses, were as follows:
The Companys available-for-sale and held-to-maturity securities at June 30, 2012 have contractual maturities in the following periods:
At June 30, 2012, the Company believes that the unrealized losses on its available-for-sale investments are temporary. The investments with unrealized losses consist primarily of corporate debt securities. In making the determination that the decline in fair value of these securities was temporary, the Company considered various factors, including but not limited to: the length of time each security was in an unrealized loss position; the extent to which fair value was less than cost; financial condition and near-term prospects of the issuers; and the Companys intent not to sell these securities and the assessment that it is more likely than not that the Company would not be required to sell these securities before the recovery of their amortized cost basis.
The Companys investment in Acceleron Pharma, Inc. (Acceleron) was $8.7 million at June 30, 2012 and March 31, 2012 which is recorded within Other assets in the accompanying condensed consolidated balance sheets. The Company accounts for its investment in Acceleron under the cost method as Acceleron is a privately-held company over which the Company does not exercise significant influence. The Company will continue to monitor this investment to evaluate whether any decline in its value has occurred that would be other-than-temporary, based on the implied value from any recent rounds of financing completed by Acceleron, market prices of comparable public companies and general market conditions.
The Companys investment in Civitas Therapeutics, Inc. (Civitas) was $1.7 million and $2.0 million at June 30, 2012 and March 31, 2012, respectively, which is recorded within Other assets in the accompanying condensed consolidated balance sheets. The Company accounts for its investment in Civitas under the equity method as the Company has an approximately 11% ownership position in Civitas, has a seat on the board of directors and believes it may be able to exercise significant influence over the operating and financial policies of Civitas. During the three months ended June 30, 2012 and 2011, the Company recorded a reduction in its investment in Civitas by $0.3 million and $0.1 million, respectively, which represented the Companys proportionate share of Civitas net losses for these periods.
ALKERMES PLC AND SUBSIDIARIES
5. FAIR VALUE MEASUREMENTS
The following table presents information about the Companys assets and liabilities that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:
The Company transfers its financial assets and liabilities measured at fair value on a recurring basis between the fair value hierarchies at the end of each reporting period. The following table illustrates the rollforward of the fair value of the Companys investments whose fair value is determined using Level 3 inputs:
During the three months ended June 30, 2012, there was one investment in corporate debt securities transferred from Level 2 to Level 1 as trading in this security increased to a level such that the fair value for the security could be derived from a quoted price in an active market. There were no transfers of any securities from Level 1 to Level 2 during the three months ended June 30, 2012.
ALKERMES PLC AND SUBSIDIARIES
During the three months ended June 30, 2012, there was one investment in corporate debt securities and one investment in international government agency debt securities that were transferred from Level 3 to Level 2 as trading in these securities resumed during the period. Also during the three months ended June 30, 2012, there were two investments in corporate debt securities that were transferred from Level 2 to Level 3 as trading in these securities ceased during the period.
The Companys international government agency debt securities and corporate debt securities classified as Level 2 are initially valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing market observable data. The market observable data includes reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events. The Company validates the prices developed using the market observable data by obtaining market values from other pricing sources, analyzing pricing data in certain instances and confirming that the relevant markets are active.
The Companys Level 3 securities consist of two corporate debt securities that are not currently trading and a third party pricing service was used to determine the estimated fair value of these securities. The third party pricing service develops its estimate of fair value through a proprietary model using variables including reportable trades and last trade date, bids and offers, trading frequency, benchmark yields, credit spreads and other industry and economic events. The Company validates the prices provided by its third party pricing service by reviewing their pricing methods and matrices, obtaining market values from other pricing sources, analyzing pricing data in certain instances and confirming the activity in the relevant markets. After completing its validation procedures, the Company did not adjust or override any fair value measurements provided by its pricing services at June 30, 2012.
In September and December 2011, the Company entered into interest rate cap agreements, and in September 2011, the Company entered into an interest rate swap agreement. These agreements are described in greater detail in Note 11, Derivative Instruments. The fair value of the Companys interest rate cap and interest rate swap agreements were based on an income approach, which excludes accrued interest, and takes into consideration then-current interest rates and then-current creditworthiness of the Company or the counterparty, as applicable.
The carrying amounts reflected in the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses approximate fair value due to their short-term nature. The fair value of the remaining financial instruments not currently recognized at fair value on the Companys condensed consolidated balance sheets consist of the $310.0 million first lien term loan facility (the First Lien Term Loan) and the $140.0 million second lien term loan facility (the Second Lien Term Loan and, together with the First Lien Term Loan, the Term Loans). The estimated fair value of the Term Loans, which was based on quoted market price indications (Level 2 in the fair value hierarchy) and may not be representative of actual values that could have been or will be realized in the future, at June 30, 2012 is as follows:
Inventory is stated at the lower of cost or market value. Cost is determined using the first-in, first-out method. Inventory consists of the following:
ALKERMES PLC AND SUBSIDIARIES
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
The Company reclassified $11.5 million of Furniture, fixture, and equipment and $0.7 million of Land at March 31, 2012 as Buildings and improvements to revise prior period presentation.
8. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following:
The Company recorded $10.4 million of amortization expense related to its intangible assets during the three months ended June 30, 2012. Based upon the Companys most recent analysis, amortization of intangible assets included within its condensed consolidated balance sheet as of June 30, 2012 is expected to be in the range of approximately $42.0 million to $70.0 million annually through fiscal year 2018.
As a result of the qualitative assessment performed as of October 31, 2011, the Company determined that it was not more-likely-than-not that the fair value of the reporting unit, which is the Company, was less than its carrying amount, and an impairment of goodwill was not recorded.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
ALKERMES PLC AND SUBSIDIARIES
10. LONG-TERM DEBT
Long-term debt consists of the following:
11. DERIVATIVE INSTRUMENTS
In December 2011, the Company entered into an interest rate cap agreement with Morgan Stanley Capital Services LLC (MSCS) at a cost of $0.1 million to mitigate the impact of fluctuations in the three-month LIBOR rate at which the Companys Term Loans bear interest. The interest rate cap agreement expires in December 2013, has a notional value of $160.0 million and is not designated as a hedging instrument. The Company recorded an immaterial amount of gain as other income in the accompanying condensed consolidated statements of operations and comprehensive income (loss) due to the increase in value of this contract during the three months ended June 30, 2012.
In September 2011, the Company entered into an interest rate cap agreement with HSBC Bank USA at a cost of less than $0.1 million to mitigate the impact of fluctuations in the three-month LIBOR rate at which the Companys Term Loans bear interest. The interest rate cap agreement became effective upon the issuance of the Term Loans, expires in December 2012, has a notional value of $65.0 million and is not designated as a hedging instrument. The Company recorded an immaterial amount of loss as other expense in the accompanying condensed consolidated statements of operations and comprehensive income (loss) due to the decline in value of this contract during the three months ended June 30, 2012.
In September 2011, the Company entered into an interest rate swap agreement with MSCS to mitigate the impact of fluctuations in the three-month LIBOR rate at which the Companys Term Loans bear interest. The interest rate swap agreement becomes effective in December 2012, expires in December 2014 and has a notional value of $65.0 million. This contract has been designated as a cash flow hedge and accordingly, to the extent effective, any unrealized gains or losses on this interest rate swap contract is reported in accumulated other comprehensive loss. To the extent the hedge is ineffective, hedge transaction gains and losses are reported in other (expense) income, net when the interest payment on the related debt is recognized.
The following table summarizes the fair value and presentation in the condensed consolidated balance sheets for derivatives designated and not designated as hedging instruments:
The following table summarizes the effect of derivatives designated as hedging instruments on the condensed consolidated statements of operations and comprehensive income (loss):
ALKERMES PLC AND SUBSIDIARIES
The cash flow hedge was deemed to be effective at June 30, 2012. Accordingly, the Company included the $0.1 million loss incurred during the three months ended June 30, 2012 within accumulated other comprehensive loss. The Company expects that when this contract matures, any amounts in accumulated other comprehensive loss is to be reported as an adjustment to interest expense. The Company considers the impact of its and MSCS credit risk on the fair value of the contract as well as the ability of each party to execute its obligations under the contract. As of June 30, 2012, credit risk did not materially change the fair value of the Companys interest rate swap contract.
12. SHARE-BASED COMPENSATION
Share-based compensation expense consists of the following:
At June 30, 2012 and March 31, 2012, $0.5 million and $0.4 million, respectively, of share-based compensation cost was capitalized and recorded as Inventory in the condensed consolidated balance sheets.
13. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per ordinary share is calculated based upon net income (loss) available to holders of ordinary shares divided by the weighted average number of shares outstanding. For the calculation of diluted earnings (loss) per ordinary share, the Company uses the weighted average number of ordinary shares outstanding, as adjusted for the effect of potential outstanding shares, including stock options and restricted stock units.
The following potential ordinary equivalent shares have not been included in the net income (loss) per ordinary share calculations because the effect would have been anti-dilutive.
ALKERMES PLC AND SUBSIDIARIES
14. INCOME TAXES
The Company recorded an income tax provision of $0.8 million and an income tax benefit of $0.1 million for the three months ended June 30, 2012 and 2011, respectively. The tax provision of $0.8 million in the three months ended June 30, 2012 primarily relates to foreign taxes on income.
The Company records a deferred tax asset or liability based on the difference between the financial statement and tax basis of its assets and liabilities, as measured by enacted jurisdictional tax rates assumed to be in effect when these differences reverse. As of June 30, 2012, the Company has determined, based on the weight of all available evidence, that it is not more likely than not that the Companys remaining U.S. and Irish deferred tax assets will be realized and a valuation allowance has been recorded.
15. COMMITMENTS AND CONTINGENCIES
From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of business. The Company is not aware of any such proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its business, financial condition or results of operations.
The following discussion should be read in conjunction with our condensed consolidated financial statements and related notes beginning on page 3 of this Quarterly Report on Form 10-Q (Form 10-Q), and Managements Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended March 31, 2012 (the Annual Report), which has been filed with the Securities and Exchange Commission (SEC).
On September 16, 2011, the business of Alkermes, Inc. and its consolidated subsidiaries (Old Alkermes) and the drug technologies business (EDT) of Elan Corporation, plc (Elan) were combined (this combination is referred to as the Business Combination, the acquisition of EDT, or the EDT acquisition) under Alkermes plc. As part of the Business Combination, Antler Acquisition Corp., a wholly owned subsidiary of Alkermes plc, merged with and into Old Alkermes (the Merger), with Old Alkermes surviving as an indirect, wholly-owned subsidiary of the Company. Prior to the Merger, EDT was carved-out of Elan and reorganized under the Company.
Use of the terms such as us, we, our, Alkermes, or the Company in this Form 10-Q is meant to refer to Alkermes plc and its consolidated subsidiaries, except when the context makes clear that the time period being referenced is prior to September 16, 2011, in which case such terms shall refer to Old Alkermes. Prior to September 16, 2011, Old Alkermes was an independent biotechnology company incorporated in the Commonwealth of Pennsylvania and traded on the NASDAQ Global Select Stock Market (the NASDAQ) under the symbol ALKS.
Alkermes plc is a fully integrated, global biopharmaceutical company that applies its scientific expertise and proprietary technologies to develop innovative medicines that improve patient outcomes. We have a diversified portfolio of more than 20 commercial drug products and a clinical pipeline of product candidates that address central nervous system (CNS) disorders such as addiction, schizophrenia and depression. Headquartered in Dublin, Ireland, we have a research and development (R&D) center and corporate offices in Waltham, Massachusetts, R&D and manufacturing facilities in Athlone, Ireland, and manufacturing facilities in Gainesville, Georgia and Wilmington, Ohio.
We leverage our formulation expertise and proprietary product platforms to develop, both with partners and on our own, innovative and competitively advantaged medications that can enhance patient outcomes in major therapeutic areas. We enter into select collaborations with pharmaceutical and biotechnology companies to develop significant new product candidates, based on existing drugs and incorporating our proprietary product platforms. In addition, we apply our innovative formulation expertise and drug development capabilities to create our own new, proprietary pharmaceutical products.
This document contains and incorporates by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In some cases, these statements can be identified by the use of forward-looking terminology such as may, will, could, should, would, expect, anticipate, continue or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition, or state trends and known uncertainties or other forward-looking information. Forward-looking statements in this Form 10-Q include, without limitation, statements regarding:
You are cautioned that forward-looking statements are based on current expectations and are inherently uncertain. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to various risks and uncertainties, including the risks and uncertainties described or discussed in this Form 10-Q and in our Annual Report (including, without limitation, in Item 1A Risk Factors thereof).
The forward-looking statements contained and incorporated herein represent our judgment as of the date of this Form 10-Q, and we caution readers not to place undue reliance on such statements. The information contained in this Form 10-Q is provided by us as of the date of this Form 10-Q and, except as required by law, we do not undertake any obligation to update any forward-looking statements contained in this document as a result of new information, future events or otherwise.
On September 16, 2011, the business of Old Alkermes and EDT were combined under Alkermes. We paid Elan $500.0 million in cash and issued Elan 31.9 million ordinary shares, which had a fair value of $525.1 million on the closing date of the Merger, for the EDT business. Upon consummation of the Merger, the former shareholders of Old Alkermes owned approximately 75% of the Company, with the remaining approximately 25% of the Company owned by a subsidiary of Elan pursuant to the terms of a shareholders agreement.
The Business Combination was accounted for using the acquisition method of accounting for business combinations with Old Alkermes being treated as the accounting acquirer under accounting principles generally accepted in the United States (U.S.) (GAAP), which means that the operating results of Old Alkermes are included for all periods being presented, whereas the operating results of the acquiree, EDT, are included only after the date of acquisition. Accordingly, the financial results presented for the three months ended June 30, 2011 reflect only the operations of Old Alkermes.
Net income for the three months ended June 30, 2012, was $22.4 million or earnings of $0.17 per ordinary share basic and diluted, as compared to a net loss of $13.2 million, or a loss of $0.14 per ordinary share basic and diluted, for the three months ended June 30, 2011. Total revenues increased by 146% during the three months ended June 30, 2012, as compared to the three months ended June 30, 2011, which was primarily due to the expansion of our product portfolio as a result of the Business Combination and a $20.0 million sale of certain of our intellectual property unrelated to our key clinical development programs. Operating expenses increased by 59% during the three months ended June 30, 2012, as compared to the three months ended June 30, 2011, which was primarily due the inclusion of expenses associated with the former EDT business and increased clinical study costs due to the advancement of pipeline candidates into later stages of development, partially offset by the elimination of one-time merger related costs related to the Business Combination.
ESTABLISHED LICENSED-PRODUCT PORTFOLIO
Our commercial products are described in the table below, including, among other things, the territory in which the marketer has the right to sell the product, once approved, and the source of revenues for us:
KEY COMMERCIAL PRODUCTS
We have five principal commercial products which either currently, or in the future, are expected to contribute meaningfully to our revenues.
RISPERDAL CONSTA and INVEGA SUSTENNA/XEPLION
RISPERDAL CONSTA and INVEGA SUSTENNA/XEPLION, which are two long-acting atypical antipsychotics, incorporate our extended-release injectable technology. They are products of Janssen. RISPERDAL CONSTA is the first and only long-acting, atypical antipsychotic approved by the U.S. Food and Drug Administration (FDA) for the treatment of schizophrenia and for the treatment of bipolar I disorder. INVEGA SUSTENNA/XEPLION is a once-monthly, long-acting injectable atypical antipsychotic approved by the FDA for the acute and maintenance treatment of schizophrenia in adults.
In June 2012, we announced that Janssen initiated a phase 3 clinical research program for a three-month formulation of INVEGA SUSTENNA for the treatment of schizophrenia. Two phase 3 studies are expected to enroll approximately 1,800 patients with schizophrenia and will assess the efficacy, safety and tolerability of the three-month injectable formulation. The clinical studies are expected to be completed in the second half of calendar year 2014.
Dalfampridine extended-release tablets are marketed and sold in the U.S. under the trade name AMPYRA by Acorda. Prolonged-release fampridine tablets are marketed and sold outside the U.S. under the trade name FAMPYRA by Biogen Idec. AMPYRA was approved by the FDA in January 2010 as a treatment to improve walking in patients with MS as demonstrated by an increase in walking speed. Efficacy was shown in people with all four major types of MS (relapsing remitting, secondary progressive, progressive relapsing and primary progressive). It is the first and, currently, only product to be approved for this indication. A product of Acorda, it incorporates our OCR technology. FAMPYRA received conditional marketing approval in the European Union (EU) in July 2011 and is currently being sold by Biogen Idec in select countries outside of the U.S. AMPYRA and FAMPYRA are manufactured by us.
We collaborated with Amylin on the development of a once-weekly formulation of exenatide, BYDUREON, for the treatment of type 2 diabetes. BYDUREON, a once-weekly formulation of exenatide, the active ingredient in Amylins BYETTA® (exenatide), uses our polymer-based microsphere injectable extended-release technology. Amylin is responsible for commercializing exenatide products, including BYDUREON, in the U.S. Eli Lilly and Company (Lilly) has exclusive rights to commercialize exenatide products outside of the U.S. until December 31, 2013 or such earlier date as agreed upon between Lilly and Amylin pursuant to the terms of their transition agreement, following which Amylin will have such exclusive rights.
In June 2012, Bristol-Myers Squibb Company (Bristol-Myers) and Amylin announced that Bristol-Myers will acquire Amylin, subject to the successful completion of a cash tender offer and second step merger and satisfaction of other customary closing conditions. Bristol-Myers and AstraZeneca PLC also announced that, following the completion of Bristol-Myers proposed acquisition of Amylin, the
companies intend to enter into collaboration arrangements, based on the framework of their existing diabetes alliance, regarding the development and commercialization of Amylins portfolio of products, including BYDUREON.
In June 2012, Amylin and we announced results from a long-term extension of the DURATION-1 study, which showed that BYDUREON was associated with clinically significant and sustained improvements in glycemic control during four years of treatment in adults with type 2 diabetes. Patients completing four years of BYDUREON treatment experienced clinically significant improvements in A1C (1.7 percentage points) and fasting plasma glucose (-37 mg/dL) from baseline. A1C is a measure of average blood sugar over three months. Although BYDUREON is not indicated for weight loss, patients treated with BYDUREON also lost an average of 5.5 pounds from baseline. Along with Amylin, we also announced the results from an analysis of seven randomized clinical studies demonstrating that patients treated with BYDUREON experienced improvements in A1C, fasting glucose, weight and pulse pressure, regardless of baseline body weight. Results from an additional study were announced in June that showed that a significantly greater proportion of patients treated with BYDUREON achieved target glucose levels and weight loss compared to those treated with LEVEMIR® (insulin detemir).
VIVITROL is the first and only once-monthly injectable medication for the treatment of alcohol dependence and the prevention of relapse to opioid dependence, following opioid detoxification. The medication uses our polymer-based microsphere injectable extended-release technology to deliver and maintain therapeutic medication levels in the body through just one injection every four weeks. We developed, and currently market and sell, VIVITROL in the U.S. and Cilag GmbH International (Cilag) sells VIVITROL in Russia and other countries in the Commonwealth of Independent States (CIS).
Other Commercial Products
We expect revenues from our other commercial products will decrease in the future due to existing and expected competition from generic manufacturers. For a more detailed discussion of current and expected future revenue contribution of such products, please see Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report which has been filed with the SEC.
KEY DEVELOPMENT PROGRAMS
We also have several proprietary and partnered product candidates in various stages of development.
We are studying ALKS 9070 for the treatment of schizophrenia. ALKS 9070 is designed to provide once-monthly dosing of a medication that converts in vivo into aripiprazole, a molecule that is commercially available under the name ABILIFY®. ALKS 9070 is our first product candidate to leverage our proprietary LinkeRx product platform. A phase 3 trial to assess the efficacy, safety and tolerability of ALKS 9070 in approximately 690 patients experiencing acute exacerbation of schizophrenia is currently on-going and the clinical data from this study, expected mid-calendar 2013, will form the basis of a New Drug Application (NDA) to the FDA for ALKS 9070 for the treatment of schizophrenia.
ALKS 5461 is a combination of ALKS 33 and buprenorphine that we are developing to be a non-addictive therapy for the treatment of major depressive disorder (MDD) in patients who have an inadequate response to standard antidepressant therapies. ALKS 5461 has also been evaluated for the treatment of cocaine dependence. A phase 2 study is currently on-going to evaluate the efficacy and safety of ALKS 5461 when administered once daily for four weeks in approximately 130 patients with MDD who have inadequate response to antidepressant therapy. Data from this study are expected in the first half of calendar year 2013. Also, a phase 1b study of ALKS 5461 for cocaine dependence funded through a $2.4 million grant from the National Institute on Drug Abuse (NIDA) has completed. The single-center, placebo-controlled trial was designed to assess the safety, tolerability, pharmacokinetics and pharmacodynamics of ALKS 5461 in opioid-experienced cocaine abusers. Results from the study showed that ALKS 5461 was generally well tolerated and once-daily sublingual administration of ALKS 5461 blocked subjective effects of co-administered cocaine. No further studies of ALKS 5461 for cocaine dependence are planned at this time.
ALKS 33 is an oral opioid modulator characterized by limited hepatic metabolism and durable pharmacologic activity in modulating brain opioid receptors. ALKS 33 is being evaluated as a potential treatment for alcohol dependence; there are currently no ongoing clinical trials of ALKS 33 for the treatment of alcohol dependence.
ALKS 37 is an orally active, peripherally restricted opioid antagonist for the treatment of opioid-induced constipation, (OIC). In May, 2012, we announced results from our phase 2b multicenter, randomized, double-blind, placebo-controlled, repeat-dose study for ALKS 37 in approximately 150 patients. The study was designed to assess the safety, tolerability, pharmacokinetic profile and efficacy of ALKS 37. Although ALKS 37 was generally well tolerated at all dose levels and subjects taking ALKS 37 demonstrated an increase in bowel movements compared to baseline, the product profile did not satisfy our pre-specified criteria for advancing into phase 3 clinical trials. Based
on this evaluation, Alkermes has decided not to advance ALKS 37. A second phase 2b study of ALKS 37 for the treatment of OIC is concluding, and no additional clinical studies for ALKS 37 are planned.
ZOHYDRO ER (hydrocodone bitartrate extended-release capsules) is a novel, oral, single-entity (without acetaminophen), controlled-release formulation of hydrocodone in development by Zogenix, Inc. (Zogenix) for the U.S. market. ZOHYDRO ER utilizes our oral controlled-release technology, which potentially enables longer-lasting and more consistent pain relief with fewer daily doses than the commercially available formulations of hydrocodone. In May 2012, Zogenix announced that it submitted an NDA to the FDA for ZOHYDRO ER, and in July 2012, Zogenix announced that the FDA accepted for review the NDA for ZOHYDRO ER. The FDA has assigned a target action date of March 1, 2013 for the ZOHYDRO ER NDA. We will earn manufacturing revenues in the U.S. for ZOHYDRO ER and are entitled to receive a royalty on U.S. sales of ZOHYDRO ER, if approved. We have maintained all rights to the product in territories outside the U.S. and will seek to develop and license the product through commercial partnerships in those territories.
Results of Operations
Manufacturing and Royalty Revenues
Manufacturing fees are earned for the manufacture of products under arrangements with our collaborators when product is shipped to them at an agreed upon price. Royalties are earned on our collaborators sales of products that incorporate our technologies. Royalties are generally recognized in the period the products are sold by our collaborators.
Under our RISPERDAL CONSTA supply and license agreements with Janssen, we earned manufacturing revenues at 7.5% of Janssens unit net sales price of RISPERDAL CONSTA and royalty revenues at 2.5% of Janssens net sales of RISPERDAL CONSTA. The decrease in RISPERDAL CONSTA manufacturing and royalty revenues for the three months ended June 30, 2012, as compared to the three months ended June 30, 2011, was primarily due to a 33% decrease in the quantity shipped to Janssen and a 12% decrease in royalty revenues; partially offset by a 15% increase in the net unit sales price. Janssens end-market sales of RISPERDAL CONSTA were $354.8 million and $403.6 million during the three months ended June 30, 2012 and 2011.
We expect revenues from RISPERDAL CONSTA and INVEGA SUSTENNA/XEPLION, our long-acting atypical antipsychotic franchise, to continue to grow, as INVEGA SUSTENNA/XEPLION is launched around the world. Under our INVEGA SUSTENNA/XEPLION agreement with Janssen, we earn royalties on end-market sales of INVEGA SUSTENNA/XEPLION of 5% up to the first $250 million in calendar-year sales; 7% on calendar-year sales of between $250 million and $500 million; and 9% on calendar-year sales exceeding $500 million. The royalty rate resets at the beginning of each calendar-year. A number of companies, including us, are working to develop products to treat schizophrenia and/or bipolar disorder that may compete with RISPERDAL CONSTA and INVEGA SUSTENNA/XEPLION. Increased competition may lead to reduced unit sales of RISPERDAL CONSTA and INVEGA SUSTENNA/XEPLION, as well as increasing pricing pressure. RISPERDAL CONSTA is covered by a patent until 2021 in the EU and 2023 in the U.S., and INVEGA SUSTENNA/XEPLION is covered by a patent until 2018 in the EU and 2019 in the U.S., and as such, we do not anticipate any generic versions in the near-term for either of these products.
Included in other manufacturing and royalty revenues for the three months ended June 30, 2012 is $20.0 million of license revenue related to the sale of certain of our intellectual property unrelated to our key clinical development programs.
The increase in royalty revenues from TRICOR 145, AMPYRA/FAMPYRA, RITALIN LA/FOCALIN XR, INVEGA SUSTENNA/XEPLION, VERELAN and the other manufacturing and royalty revenues were due to the addition of the portfolio of commercialized products from the former EDT business. Our financial expectations for the TRICOR 145 and RITALIN LA/FOCALIN XR franchise for fiscal year 2013 anticipates revenue erosion from generic competition assuming generic entry in mid-calendar 2012, with revenues declining by roughly one-half each quarter, starting in the second quarter of fiscal 2013.
We expect AMPYRA/FAMPYRA sales to continue to grow as Acorda continues to penetrate the U.S. market with AMPYRA and Biogen Idec continues to launch FAMPYRA in the rest of the world. AMPYRA is covered by a patent until 2027 in the U.S. and FAMPYRA is covered by a patent until 2025 in the EU, and as such, we do not anticipate any generic versions of these products in the near-term. A number of companies are working to develop products to treat multiple sclerosis that may compete with AMPYRA/FAMPYRA, which may negatively impact future sales of the products.
Product Sales, net
Our product sales consist of sales of VIVITROL in the U.S. to wholesalers, specialty distributors and specialty pharmacies. The following table presents the adjustments deducted from VIVITROL product sales, gross to arrive at VIVITROL product sales, net for sales of VIVITROL in the U.S. during the three months ended June 30, 2012 and 2011:
(1) Our reserve for inventory in the channel is an estimate that reflects the deferral of the recognition of revenue on shipments of VIVITROL to our customers until the product has left the distribution channel as we do not yet have the history to reasonably estimate returns related to these shipments. We estimate the product shipments out of the distribution channel through data provided by external sources, including information on inventory levels provided by our customers as well as prescription information.
The increase in product sales, gross for the three months ended June 30, 2012, as compared to the three months ended June 30, 2011, was due to a 21% increase in the number of units sold. We expect VIVITROL sales to continue to grow as we continue to penetrate the opioid dependence indication market in the U.S. As previously noted, we defer the recognition of revenue on shipments of VIVITROL to our customers until the product has left the distribution channel. During the three months ended September 30, 2012, we will have sufficient history to estimate returns upon shipment of VIVITROL into the distribution channel, and we will no longer defer the recognition of revenue until the product has left the distribution channel. We expect that this change will result in a decrease to our provision for product returns and result in an increase in product sales, net to be recognized during the three months ended September 30, 2012.
In addition, we anticipate that Janssen-Cilag will increase sales of VIVITROL in Russia and the CIS, which are recorded as manufacturing and royalty revenues. In addition, there exists the potential to launch the product in other countries around the world. A number of companies, including us, are working to develop products to treat addiction, including alcohol and opioid dependence that may compete with VIVITROL, which may negatively impact future sales of VIVITROL. Increased competition may lead to reduced unit sales of VIVITROL, as well as increasing pricing pressure. VIVITROL is covered by a patent that will expire in the U.S. in 2029 and in Europe in 2021 and, as such, we do not anticipate any generic versions of this product in the near-term.
Research and Development Revenue
Research and development (R&D) revenue is generally earned for services performed and milestones achieved under arrangements with our collaborators. The decrease in R&D revenue for the three months ended June 30, 2012, as compared to the three months ended June 30, 2011, was primarily due to the $3.0 million milestone payment we earned upon the receipt of regulatory approval for VIVITROL in Russia for the opioid dependence indication during the three months ended June 30, 2011.
Costs and Expenses
Cost of Goods Manufactured and Sold
The increase in cost of goods manufactured and sold in the three months ended June 30, 2012, as compared to the three months ended June 30, 2011, was primarily due to the $29.8 million increase in cost of goods manufactured from the addition of EDTs portfolio of commercialized products, partially offset by a $4.7 million decrease in cost of goods manufactured from RISPERDAL CONSTA due to a decrease in the quantity of RISPERDAL CONSTA shipped to Janssen.
Research and Development Expense
The increase in R&D expense in the three months ended June 30, 2012, as compared to the three months ended June 30, 2011, was primarily due to a $5.1 million increase related to clinical study activity and the addition of $4.7 million of R&D expense from for the former EDT business. The increase in clinical study expense was primarily due to the ALKS 9070 development program, which has both phase 3 and phase 1 studies underway partially offset by a decrease in activities related to the ALKS 37 program as we decided not to advance ALKS 37 after the results from the phase 2b multicenter, randomized, double-blind, placebo-controlled, repeat-dose study were announced in May 2012.
A significant portion of our R&D expenses (including laboratory supplies, travel, dues and subscriptions, recruiting costs, temporary help costs, consulting costs and allocable costs such as occupancy and depreciation) are not tracked by project as they benefit multiple projects or our technologies in general. Expenses incurred to purchase specific services from third parties to support our collaborative R&D activities are tracked by project and may be reimbursed to us by our partners. We account for our R&D expenses on a departmental and functional basis in accordance with our budget and management practices.
Selling, General and Administrative Expense
The decrease in selling, general and administrative (SG&A) expense for the three months ended June 30, 2012, as compared to the three months ended June 30, 2011, was primarily due to an $8.3 million decrease in professional services expense primarily due to costs incurred in connection with the Business Combination during the three months ended June 30, 2011, partially offset by the addition of $5.4 million of SG&A costs from the former EDT business.
Amortization of Acquired Intangible Assets
In connection with the Business Combination, we acquired certain amortizable intangible assets with a fair value of $643.2 million, which are expected to be amortized over 12 to 13 years. We amortize our amortizable intangible assets using the economic use method, which reflects the pattern that the economic benefits of the intangible assets are consumed as revenue is generated from the underlying patent or contract. Based upon our most recent analysis, amortization of intangible assets included within our consolidated balance sheet as of June 30, 2012, is expected to be in the range of approximately $42.0 million to $70.0 million annually through fiscal year 2018.
Other (Expense) Income, Net