Alkermes Plc (ALKS) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Alkermes second quarter 2003 financial results conference call. At this time all participants are in a listen-only mode. There will be a question and answer session to follow. Please be advised that this call is being taped at Alkermes' request. At this time, I would like to introduce your host for today's call, Ms. Rebecca Peterson, Director of Corporate Communications at Alkermes. Please go ahead.

Good morning and welcome to Alkermes conference call to discuss our financial results for the second quarter of 2002, excuse me 2003. I am Rebecca Peterson, Director of Corporate Communications of Alkermes and with me this morning is Richard Pops, our CEO and Jim Frates, our CFO.

During this call, Rich will provide some introductory comments and then Jim will review our financial results for the quarter and discuss our financial guidance for the remainder of fiscal 2003. Rich will then review the recent highlights of the quarter and then take some questions.

Some of the statements that we make during the call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. While we believe that our expectations in making these statements are reasonable, actual results could differ materially from our expectations as a result of a number of factors including, but not limited to whether the issues raised in the non-approvable letter for Risperdal Consta can be resolved in a timely manner, if at all, actions by our partners with regard to making marketing and regulatory filings, whether sales of Risperdal Consta will reach expected levels, whether the exchange offer we announced this morning will be successful and achieve its intended results.

Decisions by the FDA or foreign regulatory authorities regarding our product candidates, the outcome of clinical and pre-clinical work we are pursuing, whether product candidates have seen promising now or result unapproved marketable products, potential changes in cost, scope and duration of clinical trials, and decisions we make about the timing and scope of proprietary product development. For a more detailed list and descriptions of these risks and uncertainties, please see the reports filed by Alkermes with the SEC. Alkermes disclaims any intention or obligation to update or revise any forward-looking statements. With that, I will turn the call over to Richard.

Thank you Rebecca. Hi everybody. I wanted to make just a couple of remarks before turning the call over to Jim, in order to give you a sense of really the intensity of the activity here at Alkermes. There is a tremendous amount of energy here at the company, as we turn the corner from what was obviously a very surprising occurrence over December with the receipt of the non-approvable letter from the FDA for Risperdal Consta and as we get back on our plan.

One thing you will see about this company is that we are very actively managing this business, and we are beginning to see some of the results. We feel quite strongly that we are going to merge from this period a stronger company, now why? Because we have taken this opportunity to evaluate the business from top to bottom and to focus in on the most important and economically valuable opportunities and to manage the company and tune it towards profitability.

I will cover some of the specific programs when Jim is done with his financial comment, but in quick summary I wanted to just point out three key things that you should be aware of that we have been focusing on and acting on in the past four months. Number one, obviously, is Risperdal Consta, an incredibly, incredibly important process for us, certainly, from economic point of view, but what gets lost sometimes in the focus on economics is the importance of the product from a medical point of view. Interesting, as the product launches now in markets around the world and begins to be used by patients and physicians we are being reminded of the need for the product and of its significant medical value. Now approved in eight countries and launched in three with more on the way. Johnson & Johnson, our partner has great expectations for this product and we are getting our first indications of the interest in the product from the marketplace. J&J is quite determined to gain approval as are we, for this product in the US. A tremendous amount of work has been done since July 1st and we are very encouraged by the data, the feedback from a host of outside consultants, the commitment of the project teams and from both companies and from J&J management.

At Alkermes large scale production facility in Ohio, we are manufacturing commercial quantities and we are preparing expanded facilities in personnel to support the brand at significant projected levels on a global basis and I will tell you a bit more about that later. Number two is really the other partnerships. This summer, we explained to you all and we took the task of taking a look at every one of our partnerships with the idea of focusing our resources on those that have highest expected net present value.

That analysis and the resulting series of discussions with partners is drawing to a close. We expect to move forward obviously with J&J with Risperdal Consta. We are conducting a phase three Clinical Trial of Nutropin Depot in adult growth hormone deficiency in collaboration with Genentech. We have been generating exciting data with Eli Lilly in both of our pulmonary programs, both inhaled insulin and inhaled human growth hormone, and we are excited by our opportunities there. AC2993 in collaboration with Amylin has become and is an important program here in Alkermes.

We are moving ahead with Serono on the development of Prolease formulation of recombinant human follicle stimulating hormone or (FSH). Really the area of concern is GlaxoSmithKline. We have a collaboration with them that covers four areas in the field of Respiratory products. This collaboration is not moving at a pace that we are satisfied with. Based on the diligence provisions of the contract that we have negotiated to provide for least cycle circumstances. We have the opportunity to reclaim two of those fields from GSK, two of the four from GSK at the end of this month, and we plan to do so.

The other two fields also have diligence provisions, but they remain under the control of GSK, but because we have developed encouraging data in this program, which we have talked about before in summary. We are looking forward to having the freedom to operate again in these two fields, and we will see what happens with the remaining two.

Number three, the balance sheet. We ended the September quarter with about $81m of cash. Now withstanding the fact that we have significant additional assets that don't show up in that number namely approximately $150m of guaranteed payments from J&J, Risperdal Consta coming on stream around the world about $123m of gross property plants and equipment assets on the balance sheet and a $100m investment that we made in Reliant Pharmaceuticals at the end of last year. We want to strengthen the balance sheet.

For this reason, we announced today a transaction we are quite excited about; a really innovative transaction that takes advantage of these current market conditions. If it is completed, the exchange offer that we announced in a press release this morning will enable us to exchange $200m of outstanding convertible notes for a $115m of new 7-year convertible notes. In addition it provides us with the flexibility to raise up to another $50m if we choose to.

The terms are good, the market conditions are good. If you like the deal we raise some additional money. Importantly, the structure is designed to enable us to be debt free once our stock price trades above a set price for 20 of the 30 trading days. That price along with other specific parameters will be set based on market pricing at the time of the completion of the exchange. But if it where to happen today, for example that that price would price would be about $20 per share.

So, with the stock trading above approximately $20 per share for 20 of 30 days, we would have the ability to automatically convert all the notes into equity and be debt free. What we are doing then is we are taking advantage of the confluence of our confidence in Risperdal Consta. The current pricing of our bond and the increasing strength of the common stock and we believe that the timing, the stars have aligned now for this significant type of exchange.

We are doing this with our colleagues at Piper Jaffrey. The convertible desk there that was the group that came from Roberts and Stevens, who originally did both of our convertible note issues. So, we have a good team behind this. Our goal is to exchange the existing convertible note for new ones that provide us with the opportunity to emerge debt free and well capitalized long before the date of maturity of the note.

So, there has been a flurry of activity here and since July 1st and more on going. And we are quite energized. We continue to face significant risks and uncertainties as always and I don't ever want to suggest otherwise. But I did want to let you know that we are making good progress and there has been a significant positive development since the end of the June quarter. With that as preamble, I'll turn it over to Jim.

Thanks Rich and good morning everybody. We believe that with our restructuring and our focus on our key products, we are on track and focused on our goals of profitability. So first I'll review the financials for the quarter and then discuss our financial guidance for fiscal 2003. Research and development revenue under collaborative arrangements was $9.5m, for the 3 months ended September 30, 2002 compared with $14.5m for the same period last year. The net loss attributable to common shareholders was $67.8m or a dollar five basic and diluted loss per common share compared with $12.6m or 20 cents basic and diluted earnings for common share for the second quarter last year.

We included a portion of Reliant's losses in our income statement, and we had two non-recurring charges in the second quarter. So the net loss for the quarter excluding the $35.3m non-cash charge related to our share Reliant's losses, the write off of $2.7m in deferred merger cost related to the termination of our proposed merger with Reliant and the $3.7m restructuring charge was $26.2m or 41 cents basic and diluted loss per common share. The increase in the net loss was primarily the result of an increase in R&D, combined with a decrease in revenue as Risperdal Consta evolves from a development stage project into a commercial program.

At September 30, 2002 we had total cash in investments of $80.9m versus a $118.7m on June 30, 2002. This decrease is a result of our quarterly operating loss, our non-recurring charges such as severance associated with our restructuring and in an investment of over $10m in CAPEX for the quarter.

As Rich mentioned, we also have a number of assets, which we can monetize overtime if necessary. These include our 19.6 ownership interest in Reliant as well as a $123m of fixed assets and the stream of minimum revenues our partnership with Johnson and Johnson and stores(ph) now that Risperdal Consta has been approved in Germany and the UK. We are also taking proactive steps to deal with our capital structure.

Earlier today, we announced the filing of registration statements with the SEC, for a propose exchange offer of a $115m of phase amount of 6.52 percent convertibles senior subordinated notes due in 2009, for our $200m phase amount of currently outstanding 3.75 percent convertibles subordinated notes due in 2007, and we are offering to our exchanging note holders, the ability to purchase up to an additional $50m of new notes for cash.

As Rich mentioned, if the exchange offer and the cash offer are consummated, fully subscribed and achieved the results we intend, this transaction will lower our debt obligations while making the conversion into equity much more likely in the near term, given our view of Alkermes prospects. In addition to this exchange, we are offering the exchanging note holder's the ability to purchase up to $50m in additional new notes for cash.

So, when we close this transaction and if all goes according to plan, we'll have a $165m in debt down from our current $200m associated with these notes and an additional $50m in cash on the balance sheet. If we are now reviewed by the SEC, this transaction could close as early as mid December after our 20-day tender offer period. At the time the exchange offer is commence, we will file a tender offer statement with the SEC.

The tender offer statement including the related perspectives and other documents will contain important information about the exchange offer and the cash offer. We will make the perspectives and related documents available to all holders of our existing convertible notes at no expense to them. The tender offer statement, the perspectives and all related documents filed with the SEC, will also be available for free at the SECs website at www.sec.gov.

Let me move on and provide you with financial guidance for Alkermes for fiscal 2003. As you know, we've not updated guidance since July when we learned the delay in Risperdal Consta in the United States. Now that we have a better understanding of the timeline for Risperdal Consta, we can give you updated guidance today. Our revenue projection for Alkermes for the full fiscal year 2003 ranges from $45 to $50m down from our previous guidance of $70 to $75m.

The decrease in research and development funding and revenues, is a result of an expected decrease in funding from partners as well as the delay in Risperdal Consta in the United States. As Rich stated, we've engaged in an overall strategic review of our pipeline in partnerships, to make sure that those expected revenue sources are solid as we can predict.

We projected research and development expenses for fiscal 2003, will be approximately $100 to $105m down from the previous guidance of $105 to $115. The decrease is primarily attributed to the review of our pipeline and also includes some cost related to the expansion of our commercial facilities both in Massachusetts and Ohio.

We projected G&A expenses for fiscal 2003 will be about $25m on an operating basis and roughly $28m when we include the one time fees in expenses associated with the previously announced termination of our merger with Reliant, which are in this fiscal quarter that we reported today. Thus part of any non-cash charges associated with Reliant and our restructuring charges, we anticipate recording a net operating loss of between $80 and $85m in fiscal 2003.

While we do not typically give guidance beyond our current fiscal year due to all the variables which can affect our business, our best estimate for fiscal year 2004 is a net operating loss ranging from $35 to $40m below this years projection. Finally as our pipeline continues to expand and mature and we begin to receive revenue from sales of Risperdal Consta. We continue to aim for breakeven of profitability in calendar 2005. Though I will reiterate that guidance is highly dependant on the timing and the nature of the launch of Risperdal Consta in the US. With that I'll turn the call back to Rich.

Thanks Jim. And we'll finish up with an update on the pipeline and then we'll take questions. Let's go back to Risperdal Consta for a moment. The key events of this quarter as it relates to Risperdal Consta, obviously, were the first approvals and launches of Risperdal Consta and J&J's receipt of the non-approvable letter in the US. As most of you know, but I'll state for those who don't, Risperdal Consta is our long-acting formulation of J&J's atypical antipsychotic drug Risperdal and it's intended to improve compliance and reduce relapse among schizophrenic patients. The long-acting formulation is made possible by the use of Alkermes Medisorb drug delivery technology. In August of this year, Risperdal Consta was approved and launched in Germany, the UK, and Austria. It has been approved in Switzerland, New Zealand, Mexico, and the Netherlands and we learned yesterday of its approval in Iceland. So far both we and J&J have been very pleased with the results in the market, but of course the data are limited. When we asked J&J to give us a way of characterizing the early data for your benefit, the response was that the product is exceeding their expectations in the markets where it's being sold.

Both we and J&J are optimistic about the commercial prospects for Risperdal Consta. With respect to the timing of potential approval in the US, J&J has requested that we not give specific guidance at this time. We've told any one who's asked us that we are actively encouraging J&J to provide such guidance and we expect to them to be willing to do so at some time. But please do not confuse J&J's reluctant to disclose their plans with the intensity with which they are pursuing the various alternatives. They would just rather keep this as confidential information at this time. In the meantime, separate from the regulatory activity, we are manufacturing commercial quantities of Risperdal Consta and expanding our facilities in Wilmington, Ohio to accommodate J&J's projected worldwide demand. This expansion is well underway. When we are done next year we'll have manufacturing capacity to supply J&J with Risperdal Consta sufficient to generate peak revenues to Alkermes well in access of 100 million dollars per year.

Now let me move on to some of the other important points in the rest of the pipeline. As you know a key element of our strategy has been to develop a pipeline of proprietary products. Meaning products that we develop on our own, based on our drug delivery technology and whose increased therapeutic value we can then capture for our own account. This is taking a page from the album business plan of course. First develop the products in collaboration with partners to prove the validity of the technologies and then move to apply them to drugs for own account. The most mature product in our proprietary pipeline is Vivitrex which is our extended-release formulation naltrexone. Used for the treatment of alcoholic and opiate dependence, it's currently available in daily oral dosage form. We designed Vivtrex to revise therapeutic concentrations of naltrexone over a one month period and we tested it in phase I and phase II clinical trials and presented those data to you. The product candidate is based on the same drug delivery system as Risperdal Consta and there by it leverages our extensive formulation and manufacturing experience with that dosage form. Vivitrex is currently enrolling in Phase III clinical trials. This enrollment is proceeding extremely well and we plan to enroll the full complement of 600 patients. We expect that this enrollment will be completed in the first quarter of calendar 2003. With a six-month endpoint to this study, we were therefore expect to announce results in the second half of 2003.

As you may know we also have other proprietary programs underway, which we have not announced. Yesterday we disclosed for the first time the existence of one these products. The inhaled formulation of epinephrine that we are quite excited about. In the press release, we announced the successful completion of the Phase I study of the product candidates, which we call AIR epinephrine. The inhaled formulation offers an alternative drug delivery method for epinephrine, which is currently self administered by injection for the treatment of anaphylaxis, which is a sudden potentially life threatening allergic reaction triggered often by bee stings or insect bites or food allergies or other things. AIR epinephrine was developed using our novel pulmonary technology that we call AIR. And this is based on delivering dry powder aerosols composed of large porous particles. This is the technology that is the basis of our partnership with Eli Lilly for Insulin and for Human Growth Hormones and with GSK as well.

We believe that AIR epinephrine could offer important therapeutic advantages over the currently widely used injectable form of epinephrine. We think the patients in our market research so far shows that the interest in an inhaled formulation of epinephrine versus an injection is substantial. We have completed two studies of AIR epinephrine and we have met with regulatory authorities now in US and in Europe with respect to its continuing development. We intend to continue to develop this product for our own account. But given our projections as to the ultimate commercial opportunity for this product candidate, we will consider co-development and marketing opportunities with companies that could enhance the value of the brand primarily through large marketing organizations. I think I'll stop here.

We continue to make progress in our other programs that I mentioned in the beginning of the call. But instead of taking you through every product candidates, I'll stop here and open it up for questions. In closing, I just like to say we are deeply committed as we have been for a long time to building this company. Leveraging a superb capability in advanced formulations into a portfolio of important products. In collaboration with pharmaceutical companies, partners, and importantly and increasingly for our own account as well. With that we'll open it for questions.

Thank you. If you have a question at this time please press the one key on your touchtone phone. If your question has been answered or wish to remove yourself from the question queue, please press the pound key. One moment for our first question. Our first question comes from Ian Sanderson from SG Cowens. Please proceed.

Jim, can you hear me?

Yeah, we can hear you, go on Ian .

Couple of questions, first on Risperdal Consta. What would under the agreement with J&J and assuming just foreign sales for the next year or so, what would be the timing when you start to record royalty revenues? Does the agreement mean that it does not, you don't start showing royalty revenues until calendar 2003 or does it have to hit the minimum before you start hitting -- start reporting royalty revenues and secondly can you just give an update on the Nutropin Depot for adults clinical program and when we may see some data there?

Sure Ian, I'll take the answer on Risperdal and I'll turn the hGH question to Rich. In terms of when we record revenues, as you know, we get a mix of manufacturing fees when we make products for J&J as well as royalties when they make sales. So, when they are selling, particularly in Europe we record our royalty revenues and when we ship product to them for manufacturing and inventory build essentially we record those shipments as well. So, we will do that on a quarterly basis as we go and to the extent that when will we break them out, that's really an accounting judgment as to when their material based on our overall revenue. So, in the quarter that they become material that's when we will begin to break out the cost of -- and revenues associated with Risperdal Consta. HGH question?

Will those be on a lag basis and I guess the question is, were there any royalty in manufacturing revenues booked in the Q2?

Yes there were. So, no, I don't expect they will be on a lag basis. We will be settling up with J&J at the end of each quarter based on what was manufactured and what was sold in those quarters.

Okay. Thank you.

Ian, the hGH, we have a Phase III program underway with Genentech enrolling adult growth hormone deficient patient. That enrollment is scheduled to be completed at the end of this year with a six-month end point that will also put it's top line results in the second half of '03.

Thank you.

Our next question comes from Hari Sambasivam from Merrill Lynch. Please proceed.

Yes, just a quick question on the R&D expense. The guided expense for the year does that take into account the two programs from GSK that you may reclaim by the end of the quarter? That's the first question -- or end of the month? That's the first question and the second question is the epinephrine program, is that currently part of the GSK effort or is that separate?

No. Hari, it's Jim. First -- second answer first. The epinephrine program is entirely controlled by Alkermes and that has never been associated with GSK or any other partner. And in terms of the GSK, the guidance on the R&D expense through the end of this fiscal year, we have -- we tend not to break out each individual program, so it's -- we have lots of program as we move forward on. So, we are not assuming any GSK revenues associated with those programs in fiscal '03 from here on out.

May, the question I was wondering was in your R&D expense for the year, are you -- if you reclaim those programs back from GSK will that R&D expense guidance still stand or is there going to be an additional amount that you would have to then factor into develop those programs on your own?

No, the guidance for this year would still stand.

Thank you.

One moment. [Gap In Audio] Our next question comes from Michael Hearle from Leerink Swann, please proceed.

Hi good morning.

Good morning Mike.

Rich, I know you said you can’t comment on timing from J&J standpoint. But could you remind us of a couple of different options or different paths you can take towards moving Risperdal Consta forward in the US? Thanks.

I had a bet Mike that you would be the first question and that will be the first question, so, you did not let me down. And -- it's interesting; we've had a series of back and forth with J&J on this absolute topic. You know that our, we would like to give you guys, the chapter and verse about what the various alternatives are because I think the facts are quite friendly here. J&J has strongly encouraged us to not make any comments that relate to how J&J is going to develop this important product for them. What I will say though is just a kind of, the way we view the world, the way we are modeling our business, is that we are making the assumption that the various tracks that they are pursuing, the planning scenario for us that is the most reasonable as to assume that the product is approved in the US at the end of '03.

So, without taking you through, each of the various lanes of alternatives that they are pursuing simultaneously recognizing that it is important not to run a file with the FDA, important not to run a file of our partners and let me just also reiterate to people who are on the call, who don't know the company as well because I was accused of this after our last call of being evasive on this. We are covered under confidentiality agreement with Johnson & Johnson. We do not have the ability to comment independently on their products separate from the consensus that we build with them. So, a long of way of saying, we can't give you any more specifics, but our plan is as I described.

Just to clarify, you said by end of calendar '03 - -?

Yes, that's our current financial plan because we have - - our obligation is to give you guys' guidance from a financial point of view and to operate our business based on certain assumptions that we think are reasonable. Those, the course can change, we could be wrong, but that's our operating assumption now.

And Rich, how do think we'll actually find out about what the next step is, will be it for a J&J release, will it just happen, I mean, can you speculate?

I think Rebecca is in fairly constant contact with the J&J, both from a PR, IR, and also from regulatory point of view and I would imagine that communication will most likely come from Alkermes is what I would guess. I don't think it would be a J&J press release, but I think that at some point, we will get the green light to be able to have a consensus statement about what is going on.

Thank you, that's helpful. Thanks.

At this time, there are no further questions.

Okay, fantastic. Thank you all very much for listening and we here at the company if you need us.

Ladies and gentlemen thank you for your participation. This concludes today's conference. You may all disconnect, thank you.