XNAS:ALKS Alkermes PLC Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

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

 

OR

 

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)

 

Ireland

 

98-1007018

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

Connaught House

1 Burlington Road

Dublin 4, Ireland

(Address of principal executive offices)

 

+ 353-1-772-8000

(Registrant’s 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:

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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 issuer’s ordinary shares, $0.01 par value, outstanding as of July 20, 2012, was 130,858,842 shares.

 

 

 



Table of Contents

 

ALKERMES PLC AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012

 

 

 

Page No.

PART I - FINANCIAL INFORMATION

 

Item 1.

Condensed Consolidated Financial Statements:

3

 

Condensed Consolidated Balance Sheets — June 30, 2012 and March 31, 2012

3

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) — For the Three Months Ended June 30, 2012 and 2011

4

 

Condensed Consolidated Statements of Cash Flows — For the Three Months Ended June 30, 2012 and 2011

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

Item 3.

Quantitative and Qualitative Discloures about Market Risk

27

Item 4.

Controls and Procedures

27

 

 

 

PART II - OTHER INFORMATION

 

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 5.

Other Information

28

Item 6.

Exhibits

28

Signatures

29

Exhibit Index

 

 

Ex-31.1 Section 302 Certification of Chief Executive Officer

 

 

Ex-31.2 Section 302 Certification of Chief Financial Officer

 

 

Ex-32.1 Section 906 Certification of Chief Executive Officer and Chief Financial Officer

 

 

Ex-101 Instance Document

 

 

Ex-101 Schema Document

 

 

Ex-101 Calculation Linkbase Document

 

 

Ex-101 Labels Linkbase Document

 

 

Ex-101 Definition Linkbase Document

 

 

Ex-101 Presentation Linkbase Document

 

 



Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements:

 

ALKERMES PLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

 

 

June 30,

 

March 31,

 

 

 

2012

 

2012

 

 

 

(In thousands, except share and per
share amounts)

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

85,599

 

$

83,601

 

Investments — short-term

 

78,772

 

106,846

 

Receivables

 

135,656

 

96,381

 

Inventory

 

41,442

 

39,759

 

Prepaid expenses and other current assets

 

10,939

 

12,566

 

Total current assets

 

352,408

 

339,153

 

PROPERTY, PLANT AND EQUIPMENT, NET

 

299,536

 

302,995

 

INTANGIBLE ASSETS, NET

 

607,411

 

617,845

 

GOODWILL

 

92,740

 

92,740

 

INVESTMENTS — LONG-TERM

 

67,559

 

55,691

 

OTHER ASSETS

 

26,013

 

26,793

 

TOTAL ASSETS

 

$

1,445,667

 

$

1,435,217

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

58,127

 

$

79,154

 

Deferred revenue — current

 

10,012

 

6,910

 

Long-term debt — current

 

3,100

 

3,100

 

Total current liabilities

 

71,239

 

89,164

 

LONG-TERM DEBT

 

441,083

 

441,360

 

DEFERRED REVENUE — LONG-TERM

 

8,146

 

7,578

 

DEFERRED TAX LIABILITIES — LONG-TERM

 

34,199

 

34,512

 

OTHER LONG-TERM LIABILITIES

 

8,514

 

8,751

 

Total liabilities

 

563,181

 

581,365

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 15)

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

Preferred stock, par value, $0.01 per share; 50,000,000 shares authorized; zero issued and outstanding at June 30, 2012 and March 31, 2012, respectively

 

 

 

Ordinary shares, par value, $0.01 per share; 450,000,000 shares authorized; 130,967,811 and 130,212,530 shares issued; 130,730,280 and 130,177,452 shares outstanding at June 30, 2012 and March 31, 2012, respectively

 

1,306

 

1,300

 

Treasury stock, at cost (237,531 and 35,078 shares at June 30, 2012 and March 31, 2012, respectively)

 

(3,894

)

(571

)

Additional paid-in capital

 

1,390,473

 

1,380,742

 

Accumulated other comprehensive loss

 

(2,926

)

(2,713

)

Accumulated deficit

 

(502,473

)

(524,906

)

Total shareholders’ equity

 

882,486

 

853,852

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

1,445,667

 

$

1,435,217

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3



Table of Contents

 

ALKERMES PLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(unaudited)

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2012

 

2011

 

 

 

(In thousands, except per share
amounts)

 

REVENUES:

 

 

 

 

 

Manufacturing and royalty revenues

 

$

138,380

 

$

48,940

 

Product sales, net

 

12,372

 

9,686

 

Research and development revenue

 

1,487

 

3,257

 

Total revenues

 

152,239

 

61,883

 

EXPENSES:

 

 

 

 

 

Cost of goods manufactured and sold

 

42,070

 

16,219

 

Research and development

 

37,806

 

28,050

 

Selling, general and administrative

 

29,784

 

31,497

 

Amortization of acquired intangible assets

 

10,434

 

 

Total expenses

 

120,094

 

75,766

 

OPERATING INCOME (LOSS)

 

32,145

 

(13,883

)

OTHER (EXPENSE) INCOME, NET:

 

 

 

 

 

Interest income

 

299

 

502

 

Interest expense

 

(10,170

)

 

Other income, net

 

923

 

89

 

Total other (expense) income, net

 

(8,948

)

591

 

INCOME (LOSS) BEFORE INCOME TAXES

 

23,197

 

(13,292

)

INCOME TAX PROVISION (BENEFIT)

 

764

 

(54

)

NET INCOME (LOSS)

 

$

22,433

 

$

(13,238

)

 

 

 

 

 

 

EARNINGS (LOSS) PER ORDINARY SHARE:

 

 

 

 

 

Basic and diluted

 

$

0.17

 

$

(0.14

)

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES OUTSTANDING:

 

 

 

 

 

Basic

 

130,434

 

96,649

 

Diluted

 

134,945

 

96,649

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

Net income (loss)

 

$

22,433

 

$

(13,238

)

Unrealized (losses) gains on marketable securities:

 

 

 

 

 

Holding (losses) gains, net of tax of none and $313, respectively

 

(141

)

529

 

Unrealized (losses) gains on marketable securities

 

(141

)

529

 

Unrealized losses on derivative contracts

 

(72

)

 

COMPREHENSIVE INCOME (LOSS)

 

$

22,220

 

$

(12,709

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4



Table of Contents

 

ALKERMES PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2012

 

2011

 

 

 

(In thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

 

$

22,433

 

$

(13,238

)

Adjustments to reconcile net income (loss) to cash flows from operating activities:

 

 

 

 

 

Depreciation and amortization

 

18,018

 

1,908

 

Share-based compensation expense

 

8,162

 

5,660

 

Deferred income taxes

 

(313

)

 

Other non-cash charges

 

1,772

 

(130

)

Changes in assets and liabilities, excluding the effect of acquisitions:

 

 

 

 

 

Receivables

 

(39,275

)

(11,615

)

Inventory, prepaid expenses and other assets

 

(242

)

1,918

 

Accounts payable and accrued expenses

 

(18,931

)

(3,234

)

Deferred revenue

 

3,671

 

474

 

Other long-term liabilities

 

6

 

 

Cash flows used in operating activities

 

(4,699

)

(18,257

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchase of property, plant and equipment

 

(6,733

)

(924

)

Sales of property, plant and equipment

 

18

 

3

 

Purchases of investments

 

(40,621

)

(67,495

)

Sales and maturities of investments

 

56,686

 

75,240

 

Cash flows provided by investing activities

 

9,350

 

6,824

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from the issuance of ordinary shares under share-based compensation arrangements

 

1,340

 

11,824

 

Excess tax benefit from share-based compensation

 

105

 

 

Employee taxes paid related to net share settlement of equity awards

 

(3,323

)

(2,838

)

Principal payments of long-term debt

 

(775

)

 

Cash flows (used in) provided by financing activities

 

(2,653

)

8,986

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

1,998

 

(2,447

)

CASH AND CASH EQUIVALENTS — Beginning of period

 

83,601

 

38,394

 

CASH AND CASH EQUIVALENTS — End of period

 

$

85,599

 

$

35,947

 

SUPPLEMENTAL CASH FLOW DISCLOSURE:

 

 

 

 

 

Cash paid for interest

 

$

8,642

 

$

 

Cash paid for taxes

 

$

909

 

$

11

 

Non-cash investing and financing activities:

 

 

 

 

 

Purchased capital expenditures included in accounts payable and accrued expenses

 

$

827

 

$

720

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5



Table of Contents

 

ALKERMES PLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED STATEMENTS — (Unaudited)

 

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 shareholder’s 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 Company’s 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 Company’s operations for any interim period are not necessarily indicative of the results of the Company’s 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.

 

6



Table of Contents

 

ALKERMES PLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED STATEMENTS — (Continued)

 

Use of Estimates

 

The preparation of the Company’s 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.

 

Segment Information

 

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 Company’s chief decision maker, the Chairman and Chief Executive Officer, reviews the Company’s operating results on an aggregate basis and manages the Company’s operations as a single operating unit.

 

Reclassifications

 

$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 Company’s financial position or results of operations.

 

3. ACQUISITIONS

 

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 EDT’s experience and proprietary drug technologies, including the oral controlled release platform (“OCR”) and the bioavailability enhancement platform, including EDT’s 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.

 

7



Table of Contents

 

ALKERMES PLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED STATEMENTS — (Continued)

 

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):

 

 

 

 

 

Cash

 

$

5,225

 

Receivables

 

59,398

 

Inventory

 

29,669

 

Prepaid expenses and other current assets

 

1,806

 

Property plant and equipment

 

210,558

 

Acquired identifiable intangible assets

 

689,000

 

Goodwill

 

92,740

 

Other assets

 

4,360

 

Accounts payable and accrued expenses

 

(18,650

)

Deferred tax liabilities

 

(48,448

)

Other long-term liabilities

 

(584

)

Total

 

$

1,025,074

 

 

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.

 

 

 

Three Months
Ended

 

(In thousands, except per share data) 

 

June 30, 2011

 

Revenues

 

$

124,837

 

Net loss

 

$

(2,643

)

Basic and diluted loss per ordinary share

 

$

(0.02

)

 

8



Table of Contents

 

ALKERMES PLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED STATEMENTS — (Continued)

 

4. INVESTMENTS

 

Investments consist of the following:

 

 

 

 

 

Gross Unrealized

 

 

 

 

 

 

 

 

 

Losses

 

 

 

 

 

Amortized

 

 

 

Less than

 

Greater than

 

Estimated

 

 

 

Cost

 

Gains

 

One Year

 

One Year

 

Fair Value

 

 

 

(In thousands)

 

June  30, 2012

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency debt securities

 

$

33,367

 

$

11

 

$

(7

)

$

 

$

33,371

 

International government agency debt securities

 

33,220

 

12

 

(11

)

 

33,221

 

Corporate debt securities

 

6,298

 

18

 

 

 

6,316

 

 

 

72,885

 

41

 

(18

)

 

72,908

 

Held-to-maturity securities:

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

4,246

 

 

 

 

4,246

 

U.S. government obligations

 

417

 

 

 

 

417

 

 

 

4,663

 

 

 

 

4,663

 

Money market funds

 

1,201

 

 

 

 

1,201

 

Total short-term investments

 

78,749

 

41

 

(18

)

 

78,772

 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency debt securities

 

47,492

 

 

(78

)

 

47,414

 

International government agency debt securities

 

9,194

 

 

(12

)

 

9,182

 

Corporate debt securities

 

9,008

 

 

 

(919

)

8,089

 

Strategic investments

 

644

 

1,030

 

 

 

1,674

 

 

 

66,338

 

1,030

 

(90

)

(919

)

66,359

 

Held-to-maturity securities:

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

1,200

 

 

 

 

1,200

 

Total long-term investments

 

67,538

 

1,030

 

(90

)

(919

)

67,559

 

Total investments

 

$

146,287

 

$

1,071

 

$

(108

)

$

(919

)

$

146,331

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency debt securities

 

$

62,925

 

$

67

 

$

(17

)

$

 

$

62,975

 

International government agency debt securities

 

25,646

 

22

 

(2

)

 

25,666

 

Corporate debt securities

 

12,324

 

27

 

 

 

12,351

 

 

 

100,895

 

116

 

(19

)

 

100,992

 

Held-to-maturity securities:

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

4,236

 

 

 

 

4,236

 

U.S. government obligations

 

417

 

 

 

 

417

 

 

 

4,653

 

 

 

 

4,653

 

Money market funds

 

1,201

 

 

 

 

1,201

 

Total short-term investments

 

106,749

 

116

 

(19

)

 

106,846

 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency debt securities

 

35,493

 

 

(70

)

 

35,423

 

International government agency debt securities

 

10,257

 

 

(20

)

 

10,237

 

Corporate debt securities

 

8,009

 

 

 

(660

)

7,349

 

Strategic investments

 

644

 

838

 

 

 

1,482

 

 

 

54,403

 

838

 

(90

)

(660

)

54,491

 

Held-to-maturity securities:

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

1,200

 

 

 

 

1,200

 

Total long-term investments

 

55,603

 

838

 

(90

)

(660

)

55,691

 

Total investments

 

$

162,352

 

$

954

 

$

(109

)

$

(660

)

$

162,537

 

 

9



Table of Contents

 

ALKERMES PLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED STATEMENTS — (Continued)

 

The Company’s 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:

 

 

 

Three Months Ended

 

 

 

June 30,

 

(In thousands)

 

2012

 

2011

 

Proceeds from the sales and maturities of marketable securities

 

$

56,686

 

$

75,240

 

Realized gains

 

$

3

 

$

13

 

Realized losses

 

$

 

$

1

 

 

The Company’s available-for-sale and held-to-maturity securities at June 30, 2012 have contractual maturities in the following periods:

 

 

 

Available-for-sale

 

Held-to-maturity

 

 

 

Amortized

 

Estimated

 

Amortized

 

Estimated

 

(In thousands)

 

Cost

 

Fair Value

 

Cost

 

Fair Value

 

Within 1 year

 

$

58,753

 

$

58,751

 

$

5,863

 

$

5,863

 

After 1 year through 5 years

 

79,826

 

78,842

 

 

 

Total

 

$

138,579

 

$

137,593

 

$

5,863

 

$

5,863

 

 

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 Company’s 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 Company’s 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 Company’s 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 Company’s proportionate share of Civitas’ net losses for these periods.

 

10



Table of Contents

 

ALKERMES PLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED STATEMENTS — (Continued)

 

5. FAIR VALUE MEASUREMENTS

 

The following table presents information about the Company’s 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:

 

 

 

June 30,

 

 

 

 

 

 

 

(In thousands)

 

2012

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

1,201

 

$

1,201

 

$

 

$

 

U.S. government and agency debt securities

 

80,785

 

80,785

 

 

 

International government agency debt securities

 

42,403

 

34,307

 

8,096

 

 

Corporate debt securities

 

14,405

 

4,019

 

8,807

 

1,579

 

Strategic equity investments

 

1,674

 

1,674

 

 

 

Interest rate cap contracts

 

4

 

 

4

 

 

Total

 

$

140,472

 

$

121,986

 

$

16,907

 

$

1,579

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap contract

 

$

(594

)

 

(594

)

 

Total

 

$

(594

)

$

 

$

(594

)

$

 

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

2012

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

1,201

 

$

1,201

 

$

 

$

 

U.S. government and agency debt securities

 

98,398

 

98,398

 

 

 

International government agency debt securities

 

35,903

 

30,902

 

 

5,001

 

Corporate debt securities

 

19,700

 

 

14,045

 

5,655

 

Strategic equity investments

 

1,482

 

1,482

 

 

 

Interest rate cap contracts

 

20

 

 

20

 

 

Total

 

$

156,704

 

$

131,983

 

$

14,065

 

$

10,656

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap contract

 

$

(522

)

 

(522

)

 

Total

 

$

(522

)

$

 

$

(522

)

$

 

 

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 Company’s investments whose fair value is determined using Level 3 inputs:

 

 

 

Fair

 

(In thousands)

 

Value

 

Balance, April 1, 2012

 

$

10,656

 

Investments transferred into Level 3

 

1,579

 

Investments transferred out of Level 3

 

(10,510

)

Total unrealized losses included in comprehensive loss

 

(146

)

Balance, June 30, 2012

 

$

1,579

 

 

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.

 

11



Table of Contents

 

ALKERMES PLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED STATEMENTS — (Continued)

 

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 Company’s 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 Company’s 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 Company’s 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 Company’s 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:

 

 

 

Carrying

 

Estimated

 

(In thousands)

 

Value

 

Fair Value

 

First Lien Term Loan

 

$

306,351

 

$

308,836

 

Second Lien Term Loan

 

$

137,832

 

$

141,750

 

 

6. INVENTORY

 

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:

 

 

 

June 30,

 

March 31,

 

(In thousands)

 

2012

 

2012

 

Raw materials

 

$

13,935

 

$

12,841

 

Work in process

 

7,777

 

9,569

 

Finished goods (1)

 

19,173

 

16,968

 

Consigned-out inventory (2)

 

557

 

381

 

Total inventory

 

$

41,442

 

$

39,759

 

 


(1)

 

At June 30, 2012 and March 31, 2012, the Company had $1.6 million and $1.3 million, respectively, of finished goods inventory located at its third-party warehouse and shipping service provider.

 

 

 

(2)

 

At June 30, 2012 and March 31, 2012, consigned-out inventory relates to VIVITROL® inventory in the distribution channel for which the Company has not recognized revenue.

 

12



Table of Contents

 

ALKERMES PLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED STATEMENTS — (Continued)

 

7. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consist of the following:

 

 

 

June 30,

 

March 31,

 

(In thousands)

 

2012

 

2012

 

Land

 

$

8,189

 

$

8,189

 

Building and improvements

 

140,187

 

139,820

 

Furniture, fixture and equipment

 

188,398

 

177,729

 

Leasehold improvements

 

24,050

 

45,798

 

Construction in progress

 

37,304

 

44,766

 

Subtotal

 

398,128

 

416,302

 

Less: accumulated depreciation

 

(98,592

)

(113,307

)

Total property, plant and equipment, net

 

$

299,536

 

$

302,995

 

 

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:

 

 

 

 

 

June 30, 2012

 

 

 

Weighted

 

Gross

 

Accumulated

 

Net

 

(In thousands)

 

Amortizable Life

 

Carrying Amount

 

Amortization

 

Carrying Amount

 

Goodwill

 

 

 

$

92,740

 

$

 

$

92,740

 

 

 

 

 

 

 

 

 

 

 

Finite-lived intangible assets:

 

 

 

 

 

 

 

 

 

Collaboration agreements

 

12

 

$

499,700

 

$

(25,814

)

$

473,886

 

NanoCrystal technology

 

13

 

74,600

 

(2,720

)

71,880

 

OCR technology

 

12

 

66,300

 

(4,655

)

61,645

 

Total

 

 

 

$

640,600

 

$

(33,189

)

$

607,411

 

 

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 Company’s 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:

 

 

 

June 30,

 

March 31,

 

(In thousands)

 

2012

 

2012

 

Accounts payable              

 

$

12,766

 

$

18,400

 

Accrued compensation

 

13,331

 

25,023

 

Accrued interest

 

2,464

 

2,472

 

Accrued other

 

29,566

 

33,259

 

Total accounts payable and accrued expenses

 

$

58,127

 

$

79,154

 

 

13



Table of Contents

 

ALKERMES PLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED STATEMENTS — (Continued)

 

10. LONG-TERM DEBT

 

Long-term debt consists of the following:

 

 

 

June 30,

 

March 31,

 

(In thousands)

 

2012

 

2012

 

First Lien Term Loan, due September 16, 2017

 

$

306,351

 

$

306,822

 

Second Lien Term Loan, due September 16, 2018

 

137,832

 

137,638

 

Total

 

444,183

 

444,460

 

Less: current portion

 

(3,100

)

(3,100

)

Long-term debt

 

$

441,083

 

$

441,360

 

 

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 Company’s 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 Company’s 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 Company’s 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:

 

 

 

 

 

Fair Value at

 

(In thousands)

 

Balance Sheet Location

 

June 30, 2012

 

Interest rate swap

 

 

 

 

 

Liability derivative designated as a cash flow hedge

 

Other long-term liabilities

 

$

(594

)

Interest rate caps

 

 

 

 

 

Asset derivatives not designated as a hedging instruments

 

Other long-term assets

 

$

4

 

 

The following table summarizes the effect of derivatives designated as hedging instruments on the condensed consolidated statements of operations and comprehensive income (loss):

 

 

 

 

 

Amount

 

 

 

 

 

Amount

 

Reclassified from

 

 

 

 

 

Recognized in

 

Accumulated Other

 

 

 

 

 

Accumulated Other

 

Comprehensive Loss

 

Amount of

 

 

 

Comprehensive Loss

 

into Earnings

 

Loss Recorded

 

(In thousands)

 

(Effective Portion)

 

(Effective Portion)

 

(Ineffective Portion)

 

June 30, 2012

 

$

(594

)

$

 

$

 

 

14



Table of Contents

 

ALKERMES PLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED STATEMENTS — (Continued)

 

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 Company’s interest rate swap contract.

 

12. SHARE-BASED COMPENSATION

 

Share-based compensation expense consists of the following:

 

 

 

Three Months Ended

 

 

 

June 30,

 

(In thousands)

 

2012

 

2011

 

Cost of goods manufactured and sold

 

$

1,081

 

$

556

 

Research and development

 

2,310

 

1,935

 

Selling, general and administrative

 

4,771

 

3,169

 

Total share-based compensation expense

 

$

8,162

 

$

5,660

 

 

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.

 

 

 

Three Months Ended

 

 

 

June 30,

 

(In thousands)

 

2012

 

2011

 

Numerator:

 

 

 

 

 

Net income (loss)

 

$

22,433

 

$

(13,238

)

Denominator:

 

 

 

 

 

Weighted average number of ordinary shares outstanding

 

130,434

 

96,649

 

Effect of dilutive securities:

 

 

 

 

 

Stock options

 

3,276

 

 

Restricted stock units

 

1,235

 

 

Dilutive ordinary share equivalents

 

4,511

 

 

Shares used in calculating diluted earnings (loss) per share

 

134,945

 

96,649

 

 

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.

 

 

 

Three Months Ended

 

 

 

June 30,

 

(In thousands)

 

2012

 

2011

 

Stock options

 

6,165

 

7,877

 

Restricted stock units

 

 

1,554

 

Total

 

6,165

 

9,431

 

 

15



Table of Contents

 

ALKERMES PLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED STATEMENTS — (Continued)

 

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 Company’s 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.

 

16



Table of Contents

 

Item 2. Management’s Discussion and Analysis of Financial Condition and 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 Management’s 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.

 

Forward-Looking Statements

 

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:

 

·

 

our expectations regarding our financial performance, including revenues, expenses, gross margins, liquidity, capital expenditures and income taxes;

 

 

 

·

 

our expectations regarding the commercialization of our products, including the sales and marketing efforts of our partners and, for VIVITROL® (naltrexone for extended-release injectable suspension), our ability to establish and maintain successful sales and marketing, reimbursement and distribution arrangements;

 

 

 

·

 

our expectations regarding our products, including the development, regulatory review (including expectations about regulatory approval and regulatory timelines) and therapeutic and commercial potential of such products and the costs and expenses related thereto;

 

 

 

·

 

our expectations regarding the initiation, timing and results of clinical trials of our products;

 

 

 

·

 

our expectations regarding the successful manufacture of our products, by us or our partners, for clinical use and commercial sale;

 

 

 

·

 

our expectations regarding the competitive landscape, and changes therein, related to our products;

 

 

 

·

 

our expectations regarding our collaborations and other significant agreements relating to our products and our ability to establish and maintain successful development collaborations;

 

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·

 

our expectations regarding the impact of new accounting pronouncements;

 

 

 

·

 

our expectations regarding our intellectual property rights, ability to protect our intellectual property rights and not infringe upon third-party intellectual property rights;

 

 

 

·

 

our expectations regarding near-term changes in the nature of our market risk exposures or in management’s objectives and strategies with respect to managing such exposures; and

 

 

 

·

 

our expectations regarding future capital requirements and capital expenditures and our ability to finance our operations and capital requirements.

 

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.

 

Executive Summary

 

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 shareholder’s 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.

 

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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:

 

Product

 

Indication

 

Technology

 

Territory

 

Revenue Source

 

Marketer

RISPERDAL® 
CONSTA
®

 

Schizophrenia Bipolar I Disorder

 

Extended-release microsphere

 

Worldwide

 

Manufacturing and Royalty

 

Janssen

INVEGA® 
SUSTENNA
® 
XEPLION
®

 

Schizophrenia

 

NanoCrystal®

 

Worldwide

 

Royalty

 

Janssen

AMPYRA® 
FAMPYRA
®

 

Treatment to improve walking in patients with multiple sclerosis (“MS”)

 

Oral Controlled Release (“OCR”) (MXDAS®)

 

U.S.
Worldwide

 

Manufacturing and Royalty

 

Acorda Therapeutics, Inc. in U.S. Biogen Idec (ex-U.S. under sublicense from Acorda)

BYDUREONTM

 

Type 2 diabetes

 

Extended-release microsphere

 

U.S.
Worldwide

 

Royalty

 

Amylin

VIVITROL

 

Alcohol dependence Opioid dependence

 

Extended-release microsphere

 

U.S.
Russia and Commonwealth of Independent States (“CIS”)

 

Product sales Manufacturing and Royalty

 

Alkermes plc
Janssen

TRICOR® 
LIPANTHYL
® 
LIPIDIL
® 
SUPRALIP
®

 

Cholesterol lowering

 

NanoCrystal

 

Worldwide

 

Royalty

 

Abbott

ZANAFLEX® 
CAPSULES
® 
ZANAFLEX
® 
TABLETS

 

Muscle spasticity

 

OCR (SODAS®)

 

U.S.

 

Manufacturing and Royalty

 

Acorda

AVINZA®

 

Chronic moderate to severe pain

 

OCR (SODAS)

 

U.S.

 

Manufacturing and Royalty

 

Pfizer

EMEND®

 

Nausea associated with chemotherapy and surgery

 

NanoCrystal

 

Worldwide

 

Royalty

 

Merck

FOCALIN® XR
RITALIN LA
®

 

Attention Deficit Hyperactivity Disorder

 

OCR (SODAS)

 

Worldwide

 

Manufacturing and Royalty

 

Novartis

MEGACE® ES

 

Cachexia associated with AIDS

 

NanoCrystal

 

U.S.

 

Royalty

 

Strativa Pharmaceuticals (a business division of Par Pharmaceutical Companies, Inc.)

LUVOX CR®

 

Obsessive-compulsive disorder

 

OCR (SODAS)

 

U.S.

 

Manufacturing and Royalty

 

Jazz Pharmaceuticals plc

RAPAMUNE®

 

Prevention of renal transplant rejection

 

NanoCrystal

 

Worldwide

 

Manufacturing

 

Pfizer

NAPRELAN®

 

Various mild to moderate pain indications

 

OCR (IPDAS®)

 

U.S.
Canada

 

Manufacturing

 

Shionogi Sunovion Pharmaceuticals Canada, Inc.

 

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Table of Contents

 

VERAPAMIL SR
VERELAN
® 
VERELAN
® PM
VERAPAMIL PM
VERECAPS
® 
UNIVER
®

 

Hypertension

 

OCR (SODAS)

 

Licensed on country/region basis throughout the world

 

Manufacturing

 

UCB Kremers-Urban Watson; Cephalon; Aspen; Orient Europharma

DILZEM SR
DILZEM XL
DILTELAN
ACALIX CD
DINISOR
TILAZEM CR
CARDIZEM CD

 

Hypertension and/or Angina

 

OCR (SODAS)

 

Licensed on country/region basis throughout the world

 

Manufacturing and Royalty (for CARDIZEM CD only)

 

Cephalon; Pfizer; Roemmers; Kun Wha; Orient Europharma; Sanofi-Aventis

AFE Ditab® CR
(AB Rated to Adalat CC
®) (Nifedipine) (A)

 

Hypertension

 

OCR (MXDAS®)

 

U.S.

 

Manufacturing

 

Watson Pharmaceutical

 

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.

 

AMPYRA/FAMPYRA

 

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.

 

BYDUREON

 

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 Amylin’s 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

 

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companies intend to enter into collaboration arrangements, based on the framework of their existing diabetes alliance, regarding the development and commercialization of Amylin’s 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

 

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 “Management’s 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

 

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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

 

 

 

Three Months Ended

 

Change

 

 

 

June 30,

 

Favorable/

 

(In millions)

 

2012

 

2011

 

(Unfavorable)

 

Manufacturing and royalty revenues:

 

 

 

 

 

 

 

RISPERDAL CONSTA

 

$

36.8

 

$

48.5

 

$

(11.7

)

AMPYRA/FAMPYRA

 

17.1

 

 

17.1

 

TRICOR 145

 

12.0

 

 

12.0

 

INVEGA SUSTENNA/XEPLION

 

11.1

 

 

11.1

 

RITALIN LA/FOCALIN XR

 

10.9

 

 

10.9

 

VERELAN

 

6.0

 

 

6.0

 

Other

 

44.5

 

0.4

 

44.1

 

Manufacturing and royalty revenues

 

$

138.4

 

$

48.9

 

$

89.5

 

 

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 Janssen’s unit net sales price of RISPERDAL CONSTA and royalty revenues at 2.5% of Janssen’s 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. Janssen’s 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.

 

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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:

 

 

 

Three Months Ended

 

 

 

June 30,

 

(In millions)

 

2012

 

% of Sales

 

2011

 

% of Sales

 

Product sales, gross

 

$

17.7

 

100.0

%

$

14.1

 

100.0

%

Adjustments to product sales, gross:

 

 

 

 

 

 

 

 

 

Medicaid rebates

 

(1.3

)

(7.3

)%

(1.2

)

(8.5

)%

Chargebacks

 

(1.3

)

(7.3

)%

(1.2

)

(8.5

)%

Reserve for inventory in the channel (1)

 

(0.7

)

(4.0

)%

(0.7

)

(5.0

)%

Other

 

(2.0

)

(11.3

)%

(1.3

)

(9.2

)%

Total adjustments

 

(5.3

)

(29.9

)%

(4.4

)

(31.2

)%

Product sales, net

 

$

12.4

 

70.1

%

$

9.7

 

68.8

%

 


(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

 

 

 

Three Months Ended

 

Change

 

 

 

June 30,

 

Favorable/

 

(In millions)

 

2012

 

2011

 

(Unfavorable)

 

Research and development revenue

 

$

1.5

 

$

3.3

 

$

(1.8

)

 

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.

 

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Costs and Expenses

 

Cost of Goods Manufactured and Sold

 

 

 

Three Months Ended

 

Change

 

 

 

June 30,

 

Favorable/

 

(In millions)

 

2012

 

2011

 

(Unfavorable)

 

Cost of goods manufactured and sold

 

$

42.1

 

$

16.2

 

$

(25.9

)

 

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 EDT’s 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

 

 

 

Three Months Ended

 

Change

 

 

 

June 30,

 

Favorable/

 

(In millions)

 

2012

 

2011

 

(Unfavorable)

 

Research and development expense

 

$

37.8

 

$

28.1

 

$

(9.7

)

 

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

 

 

 

Three Months Ended

 

Change

 

 

 

June 30,

 

Favorable/

 

(In millions)

 

2012

 

2011

 

(Unfavorable)

 

Selling, general and administrative expense

 

$

29.8

 

$

31.5

 

$

1.7

 

 

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

 

 

 

Three Months Ended

 

Change

 

 

 

June 30,

 

Favorable/

 

(In millions)

 

2012

 

2011

 

(Unfavorable)

 

Amortization of acquired intangible assets

 

$

10.4

 

$

 

$

(10.4

)

 

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.

 

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Table of Contents

 

Other (Expense) Income, Net

 

 

 

Three Months Ended

 

Change

 

 

 

June 30,

 

Favorable/

 

(In millions)

 

2012

 

2011

 

(Unfavorable)

 

Interest income

 

$

0.3

 

$

0.5

 

$

(0.2

)

Interest expense

 

(10.2

)

 

(10.2

)

Other income, net

 

0.9

 

0.1

 

0.8

 

Total other (expense) income, net

 

$

(9.0

)

$

0.6