Graphic Source: Alkermes plc
Introduction: What is Alkermes plc?
Alkermes plc (ALKS) is a global biopharmaceutical company focused on developing and commercializing products related to schizophrenia, Bipolar I Disorder, Opioid/Alcohol Dependence, and recently Oncology. They are focused on unmet medical needs in major therapeutic areas and retain a diversified portfolio of approved revenue-producing therapeutics and a promising pipeline.
Since its founding in 1987, Alkermes has since grown to over 2,235 employees with revenues of $1.17B and a market cap of $2.68B. Alkermes is headquartered in Ireland with mix-purpose facilities (R&D and manufacturing) also in the USA.
Products: Alkermes has three marketed products, two licensed products, and a few other technology leases that all bring in sustainable revenue of varying levels. Their first product was ARISTADA (aripiprazole lauroxil), a 6w-2m dosing extended-release intramuscular injectable approved in the U.S. for the treatment of schizophrenia. ARISTADA rolled out an add-on, ARISTADA INITIO, which is an extended-release formulation of aripiprazole lauroxil with a smaller particle size thus faster dissolution and more rapid achievement of relevant levels of aripiprazole in the body. It is used as an initiation supplement for ARISTADA. Their third product is VIVITROL (naltrexone for extended-release injectable suspension), a once-monthly non-narcotic, injectable medication approved in the U.S., Russia, and certain CIS countries for the treatment of alcohol and opioid dependence. Alkermes licenses other products and technology for royalty/licensing fees.
Customers/market: Alkermes operates primarily for patients being treated for 1) schizophrenia, 2) alcohol dependence, 3) Opioid dependence, 4) Bipolar I Disorder, 5) Multiple Sclerosis, and 6) Oncology.
Management: Planned 2021 changes regarding consolidating the three-classes of directors into one and reducing term length from 3-year to 1-year for board members are key changes that should create a more youthful, independent and innovative board. In terms of key management, please see below:
Chairman/CEO: Richard Pops serves as the Chairman and CEO of Alkermes. Richard has been the CEO since 1991, showing great leadership in developing Alkermes from a private 25-employee company to a global biopharmaceutical company with +2,200 employees.
CFO: Jim Frates serves as the Chief Financial Officer. Before joining in 1998, he was a VP at Robertson Stephens & Company (wealth management firm) and was a healthcare investment banker at Morgan Stanley (MS). Jim currently serves on the board of SAGE Therapeutics (SAGE) and previously served on the board at GPC Biotech AG for 5-years.
Executive VP of R&D and CMO: Craig Hopkinson, M.D., serves as Executive VP of R&D and Chief Medical Officer managing the clinical development programs for the ALKS pipeline. He has more than 20-years of experience across a broad range of therapeutic areas, including neuroscience, oncology, genetic diseases, neurodegenerative diseases, amongst others with particular knowledge in clinical study design and regulations. Before ALKS, he was Senior VP and Head of Global Medical Affairs for Vertex (VRTX) and held various leadership positions at Eisai, Elan, Actelion, and Pfizer.
Financial position: Alkermes’s financial position on a revenue basis is moderate for a biopharma company. The 3-Year CAGR comes to 9% with 2019 being the lowest growth at 7% y/y in 2019 reaching revenue of $1.17B. 2019 had a negative EBITDA of -$82M on top of a positive 2018 at $4.5M. Net losses have been incurred every year for the past 7-years but positive CFO for the past 3. Cash at 2Q 2020 remains 28x 2019 CFO-CAPEX highlighting a level of loss coverage with total debt amounting to only $391M (73% of cash) due 2023. The company has issued guidance in Q2 2020 and expects non-GAAP profitability in 2020 between $0-30M with revenues between $965-1,005M.
Investment thesis: The thesis is that Alkermes plc is for investors on the 1-2 year time horizon due to expectations of EPS profitability 2021 and later with a COVID-19 recovery expected over the course of 1-3 quarters. Unexpected events such as royalty revenues from VUMERITY have the potential to drive value for investors beyond the standard analyst expectations which outline a 1-10% return for investors within 1 year from September 2020. The current therapeutics developed have been successful and the company has kept up the innovation in their core field of schizophrenia while expanding into Bipolar I disorder and oncology. The following report will outline a variety of events and products that may change the outlook for investors and it should be clear that a strong upside and possible downside do exist but the FYE price target is projected at $17.46 (+5.5% upside).
Alkermes has 3 therapeutics on the market, 1 in regulatory review (passed Phase 3) and a pipeline of 2 others alongside a swath of licensed products generating significant manufacturing/royalty revenues.
Product 1 (22% of 1H 2020 revenue): ARISTADA / ARISTADA INITIO are two therapeutics that work together to enhance the treatment results for schizophrenia. Schizophrenia is a serious brain disorder understood by the symptoms ranging from hallucinations and delusions to blunted emotions and social withdrawal. In the US, it’s estimated that 3.5M people are diagnosed, and globally 78M. 75% of patients have difficulty taking their oral medication regularly, making Alkermes’s injectable form competitive which further explains why 70% of their market share is coming from orals and only 30% from other long-acting injectables. Alkermes exclusively manufactures and commercializes the above two products in the US.
- ARISTADA is an extended-release intramuscular injectable approved in the US to treat schizophrenia. Scientifically, once in the body, it is converted to N-hydroxymethyl aripiprazole and functions to block certain receptors in the brain, particularly the D2 receptor, which are dopamine-overactive causing the abnormal behavior. ARISTADA has multiple dosage levels (4 options) and multiple dosing periods ranging from 1-month to 2-months, catering now to varying levels of schizophrenia.
- ARISTADA INITIO (aripiprazole lauroxil) is a single injection of 675mg used with a single 30mg dose of oral aripiprazole and is used to enhance the results of starting ARISTADA. Using Alkermes’s NanoCrystal tech, this new extended-release formulation of aripiprazole lauroxil comes in a smaller particle size enabling faster dissolution and more rapid results. Aripiprazole is a second-generation antipsychotic that balances dopamine/serotonin levels in the brain.
Product 2 (30%): VIVITROL is a once-monthly injectable medication (non-narcotic) approved in the US, Russia, and certain CIS countries for the treatment of alcohol and opioid dependence (post-detoxification). Opioid dependence is a serious brain disease that affects over 1.9M adults in the US (2019). Alcohol dependence is also classified as a brain disease that affects over 14.4M adults in the US, though getting this patient population to take medication is extremely challenging, but government financed programs are a huge growth driver. Scientifically, Vivitrol uses a polymer-based microsphere injectable extended-release technology that maintains necessary therapeutic levels via one injection every four weeks. Analysis has shown the above therapeutic levels are associated with over-active endorphin receptors which then release dopamine (rewarding negative behavior) but can be blocked (substance use produces no “high”) highlighting the benefit for medicating. Alkermes developed, commercialized, and exclusively manufactures VIVITROL in the U.S.
Product 3 (34%): INVEGA SUSTENNA/XEPLION & INVEGA TRINZA/TREVICTA are long-acting atypical antipsychotics owned and commercialized by Janssen, but are utilizing Alkermes’s proprietary molecular technologies. They target schizophrenia, schizoaffective disorder, and Bipolar I Disorder (brain disorder causing unusual drastic shifts in mood, energy, and ability to function | 1% of US population affected).
- SUSTENNA/XEPLION are approved in the US and EU, amongst others, for schizophrenia and schizoaffective disorder (a combination of schizophrenia symptoms and mood disorder symptoms, such as mania or depression | 1 in 300 are affected). It functions as either a monotherapy or adjunctive therapy utilizing paliperidone palmitate, which is an extended-release injectable. In the US, it is marketed as Invega Sustenna and in the EU as Xeplion. They use Alkermes’s nanoparticle injectable extended-release technology which increases the dissolution rate and allows for aqueous suspension in once-monthly intramuscular doses. INVEGA SUSTENNA/XEPLION are manufactured by Janssen.
- INVEGA TRINZA is approved in the US for schizophrenia as an add-on after 4 successful months of treatment with SUSTENNA. TREVICTA is the EU version for adults who are stable under usage with XEPLION. The TRINZA/TREVICTA combination is the first schizophrenia treatment where patients only need to dose once every three months (valuable during COVID-19 restrictions). INVEGA TRINZA/TREVICTA is manufactured by Janssen.
- RISPERDAL CONSTA is approved in the US for schizophrenia and as a monotherapy and adjunctive therapy to lithium or valproate for Bipolar I Disorder. For the reader’s knowledge, synergies between treating both of the above disorders from a pathway analysis and therapeutic option basis are vast and offer large opportunities. CONSTA is approved in many countries outside of the US for schizophrenia and as a maintenance treatment of Bipolar I Disorder. CONSTA uses the same polymer-based microsphere injectable extended-release tech as other Alkermes therapeutics, but the dosage needed is once every two weeks. The microspheres are manufactured by Alkermes.
Pipeline: ALKS 3831 (PDUFA: Nov. 2020) for Schizophrenia/Bipolar I Disorder has surpassed phase 3 and is currently in regulatory review with Alkermes already allocating significant marketing expenses to the launch, explaining higher than normal SGA expenses. Although it may cannibalize existing therapeutics, constant innovation is a value-added for investors, especially when it is accompanied by far fewer side-effects (e.g. weight gain). ALKS 4230 (potential monotherapy) is another pipeline product currently in phase 2 targeting oncological applications through two dosing forms intravenous, and subcutaneous, the latter being a key differentiator alongside molecular structure. Alkermes is also preclinical for Selective Histone Deacetylase Inhibitors targeting Neurodegenerative disorders.
Market Analysis: Given the vast majority of revenue stems from the schizophrenia market, it’s important to understand the dynamics. In 2020, the estimated market size for schizophrenia-related therapeutics is approximately $7.8B with a forecasted 2.5%-3.7% CAGR until 2023. It is certainly not the fastest-growing market, but increasing geriatric populations and an increasing number of patients seeking cost-effective and less burdensome help will remain key drivers pushing injectables over oral applications, but generics have a strong disruption opportunity leaving only about 10% of the market after entry for branded which are 2nd-3rd stage backups to generics.
2020 saw large declines in the number of patients accessing health facilities where dosing for injectables is allowed (heavily regulated) with VIVITROL units sold benchmarking COVID-19 related impact at a -22% and -6% decrease in the number of VIVITROL units sold for the 3- and 6-months ended June 2020. Oral supplements will be less affected than injectables like VIVITROL, which requires visiting a licensed medical professional. The recovery in patients returning to medical facilities for their once-monthly injections from Alkermes’s perspective will be slow and the effects of COVID-19 will be seen over the next few quarters. 2021 will see a resumption of activity and it can be further verified by analyst expectations of 2020 revenue at -16% y/y and 2021 at +11% y/y.
Lawsuits: On Sep 9, 2020, Alkermes filed a patent infringement lawsuit against Teva Pharmaceutical (TEVA) regarding their intellectual right to commercially manufacture, use, or sell a generic version of VIVITROL (naltrexone for extended-release injectable suspension) in the US. The original Alkermes patent is still valid until October 2029, but TEVA claims it is “invalid, unenforceable and/or will not be infringed”. The filing by Alkermes triggered a pause in approval of TEVA’s product for up to 30-months, but should be vigilantly monitored by investors.
ALKS Financial Position
Table Source: Self Created | Data Source: Seeking Alpha – ALKS
Revenue/cash flow: In 2019, ALKS’s revenue consisted of net Product sales (45%), Manufacturing and royalty revenues (38%), License revenue (12%), and R&D revenue (5%). Revenue has slowed since 2019 with a 3-year CAGR coming to 9%, held down by lower-than-average growth in 2019 which can be attributed to losses in manufacturing and royalty revenues (-$79M y/y) which equated to a total revenue loss of -7%. In terms of cash flow from operations (“CFO”), Alkermes historically is volatile (+ to -) in this regard, but has remained cash producing for the past 3-years in terms of CFO and is expected to continue with CFO in 2017 at $19M, 2018 $99M (+417% y/y), and 2019 $72M (-27%) with reasoning outlined below.
Manufacturing and Royalty Losses: This was due primarily to royalties/manufacturing revenue from Acorda Therapeutics (ACOR) related to a competitor’s generic form of AMPYRA entering the market (Sep. 18′) dropping ACOR’s product revenues -93% and Alkermes’s associated manufacturing/royalty revenues -$70M. It was partially offset by a +23% increase in FAMPYRA revenues. This shows investors the risk inherent in generic entrants which should keep investors diligent on the VIVITROL litigation (Sep. 2020). Product sales and licensing revenues were both up for 2019, highlighting less risk for those revenue streams.
Moving forward, 1H 2020 has shown the following breakdown:
Table Source: Self Created | Data Source: 10Q – ALKS
As can be seen above, R&D revenue is primarily the reason for 1H 2020 under-performance with the -$28M loss in revenue due to fewer services needed by Biogen (BIIB) following the completion of the phase 3 study for VUMERITY, which was approved (4Q 2019).
Revenue Catalyst (1) | Royalty Revenues: VUMERITY should bring in significant revenues based on the 15% royalty on worldwide net sales of VUMERITY and manufacturing revenues for Alkermes, however, COVID-19 was cited as the reason for a poor 2020 launch with Biogen only producing $16M in product sales since its December 2019 launch. The very similar product of Biogen, Tecfidera, in July 20′ lost a court hearing protecting its patent from generics which may damage the success of VUMERITY with its main competitive advantage only being increased gastro-safety. Some say that Tecfidera losing its patent will carve a place for VUMERITY opening up a $775M market, but as seen with other generic entrants revenue losses of 93% aren’t uncommon which means a possible +$115M quarterly royalty payout could turn into something closer to +$6M. It should be monitored moving forward.
Revenue Catalyst (2) | Product Sales: Alkermes still retains the bulk of their revenue from internal product sales (45% of 2019) which requires an analysis of their prospective results for 2020 and 2021. VIVITROL’s product sales – gross, decreased -20% and -5% for the 1Q/1Q and 1H/1H respectively due to COVID-19 related impacts. This was offset by pricing increases of +6% for VIVITROL (starting June 2020). This new pricing may erode returns in the medium term, but more than likely will offer improved sales figures in 2H 2020 due to the inelasticity of the products. ARISTADA and ARISTADA INITIO came unscathed in 1H 2020 due to their advantage of longer-dosage periods resulting in gross sales increasing 52% 1h/1h highlighting strong momentum and market share attainment (Units sold increased 42% 1h/1h). 2Q 2020 results also included the ARISTADA +6% price increase (started April 2020) which should strengthen sales figures even further in the short term on top of ARISTADA’s existing ca 80% gross margin. All-in-all, the strong momentum of ARISTADA and the dual pricing impacts for both products (ARISTADA & VIVITROL) should create an opportunity for investors to realize improved margins in the short term and attainment of product sales due to momentum and issuances.
Revenue Catalyst (3) | All Segments: As seen in Q1 2020, COVID-19 related events were particularly harmful with VIVITROL units sold declining -22% and -6% for the 3- and 6-months ending June 2020. This is due to the fact VIVITROL and some of Alkermes’s other licensed products (ex ARISTADA) function as injectables required to be administered by a licensed medical professional, often in the form of visits to health facilities. COVID-19 created large barriers to accessing the facilities where these products could be administered, but ARISTADA at a 2-month dosing option from day one is showing great growth countering COVID-19. The company responded well though to VIVITROL losses, with increasing their injection-site network in June and began to see Vivitrol units sold stabilize. The expectation by Alkermes as outlined in the 10Q of Q2 was that the impact of COVID-19 would decrease patient volume with financial effects extending over the next few quarters. This makes 2020 a particularly challenging year, but making 2021 a year of high growth as a resumption of new-baseline revenue targets gets beat.
Balance sheet composition
Table Source: Self Created | Data Source: Seeking Alpha – ALKS
In terms of the balance sheet, there is not a significant amount of risk. Total debt up +34% seems concerning on the surface, but it is entirely related to an increase in capital leases whereas LT-debt decreased -$1M in 1H 2020 with a final due date of March 2023 (+2.5 years) and a non-burdensome interest rate of 2.25%+Libor. The cash position is stable at $533M above the 3-year average ($503M), with accounts receivable bringing in no serious concern. In terms of assets, PPE gives investors a certain level of protection at its $473M valuation and most factors seen in the balance sheet are attributable to a growing company.
With a following of 10 analysts, Alkermes’s average expectations can be assumed accurate with deviations from uncertain events outlined above. Analyst assumptions of a no-growth scenario for the stock ALKS in 2020 with 2021 outlining an upside potential ranging from 1%-10% is conservative when compared with Alkermes 2020 Guidance. Alkermes in their 2Q conference call (July 2020) outlined a more robust upside potential as seen below:
Table Source: Q2 2020 Alkermes plc Earnings Conference Call Presentation
In reality, it seems that certain events, such as the VUMERITY launch, flexible margins seen in Q2, COVID-19 recovery across product types, and an investor sentiment change based on the positive press from the above events may trigger an optimistic scenario greater than the forecasted analyst expectations. Those expectations outline multiple contractions in 2021 and a weaker growth scenario than the author expects due to a more recent analysis of the events and Alkermes’s guidance.
Table Source: Self Created | Data Source: Seeking Alpha – ALKS, Q2 2020 Alkermes plc Earnings Conference Call Presentation
Analysts introduced a -10% contraction for 2021 when they valued the company on a price/sales basis and that is included in the above valuation, but it may be too conservative. When comparing to historical sentiment-bounded multiples, it can be seen that FWD EV/Revenues multiples have contracted since Jan 19′, but it is not forced to remain so. Multiple expansions and contractions are part of market/corporate sentiment and it appears that an optimistic case can be furthered due to the below historical ranges and a robust revenue target for Pessimistic/Optimistic scenarios using Alkermes Guidance.
In conclusion, it can be expected that the valuation above contains the full-balance of expectations that are reasonably expected with today’s information. The investor can expect a range between 0-11% return for 2020 and a more certain 1-11% return by 2021.
In conclusion, with three marketed products, a robust pipeline, and enough licensing revenue to support further value-driving enhancements, Alkermes is strategically positioned for consistent growth with enough probabilistic opportunities for an enterprising investor. Potential upsides can range from a high-momentum product acceptance with the Dec 19′ launched VUMERITY therapeutic driving royalty/manufacturing revenue to a resumption of patient activity driving VIVITROL product sales. Management seems to be responsive and has enough solidified corporate connections through successful product developments to enable an optimistic basis. The balance sheet’s cash position seems sufficient to drive the needed CAPEX/R&D and new upcoming products are sure to excite investors. It is now the author’s expectation that Alkermes plc should conservatively reach a price target of $17.46 (+5.5% upside) by FYE 2020.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.