Alkermes Plc (ALKS) 2003 Q4 法說會逐字稿

Welcome to the Alkermes fiscal 2003 year end 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 now like to introduce your host for today's conference call, Rebecca Peterson, Director of Corporate Communications, please go ahead.

Thanks Jonathan.

Good afternoon and welcome to Alkermes conference call to discuss the results for fiscal year 2003, which ended on March 31st. I am Rebecca Peterson, Director of Corporate Communications here at Alkermes and with me today is Richard Pops, our CEO and Jim Frates, our CFO.

Before we begin, let me please remind you that during the call today we will make forward-looking statements within the meaning of the private Securities Litigation Reform Act of 1995. Although we believe that such statements are based on reasonable assumptions, various factors may cause our actual results to differ materially from our expectations. These include whether additional regulatory approvals will be received for Risperdal Consta, particularly in the U.S. after the receipt of the non-approvable letter from the FDA.

Whether additional commercial losses of Risperdal Consta will occur. Whether sales of Risperdal Consta or our other products will meet expectations. Whether we enter into any collaboration with a third party to market or fund a proprietary product candidate and whether terms of such a collaboration meet our expectations.

Whether we will get a return on our investment in Reliant and whether advancement in our pipeline will be delayed due to actions or decisions by our partner with regard to development and regulatory strategy, timing and funding, which are out of our control, the outcome of clinical and preclinical work we are pursuing, decisions by the FDA our foreign regulatory authorities regarding our product candidates, potential changes in costs, scope, and duration of clinical trials and our ability to manufacture our commercial products and scale up our product candidates.

For further information with respect to factors that could cause our actual results to differ from our expectations, please see our reports filed with the S.E.C. We disclaim any intention or responsibility for updating predictions or financial guidance.

During today's call, Jim will review our financial results for fiscal year 2003 and comment on expectations for fiscal year 2004. Rich will then review progress with our pipeline, including Risperdal Consta and Vivitrex®. We will then open up the call for Q&A.

Now I'd like to turn the call over to Jim to review our key financial results.

Thank you, Rebecca.

Fiscal year 2003 ended on a very strong note for us and I'm pleased to report results in line with our guidance that we reported after our restructuring in August. As we outlined at that time, our focus is on our key late stage programs. Rich will spend more time on these, but to quickly review, Risperdal Consta is launching outside the United States and J&J filed a complete response to the United States, resetting the clock on the approval process.

We are conducting two phase 3 clinical trials on what we believe are very important drugs, Vivitrex®, our proprietary drug for the treatment of alcohol dependence and Nutropin Depot® with our partners, Genentech, for the treatment of adult growth hormone deficiency. We also have a number of drugs moving through clinical development with partners and on our own.

Finally, we have expanded our manufacturing infrastructure, particularly for Risperdal Consta, Vivitrex® and our pulmonary programs. The critical milestone for us financially in the last year was the approval of Risperdal Consta in 24 countries and its launch thus far in seven. This begins our transition from a company entirely dependant on R&D funding to a commercial enterprise.

The launch of Risperdal Consta is going well, ahead of J&J's plan. Like J&J, we are excited about the potential for Risperdal Consta and believe that this product can drive us to profitability and support our growth in the coming years. Rich will discuss the progress with our pipeline and our near-term goals later during the call, but first, I'll share the results of the fiscal year 2003 and provide financial guidance for fiscal year 2004.

The net loss on a GAAP basis for the fiscal year ended March 31, 2003 was $106.9 million or $1.66 per share that is compared to a net loss of $61.4 million or 96 cents per share in the prior year. Included in the net loss for fiscal year 2003 is a $94.6 million noncash charge related to the equity investment Alkermes made in Reliant Pharmaceuticals LLC in December 2001, as well as an $80.8 million noncash gain in the exchange of our convertible notes in December 2002.

Because of the significant nature of these and other items, we felt it important to discuss pro forma results that we as a management team feel more accurately reflect our ongoing operations. So on a pro forma basis, net loss for fiscal year 2003 was 82.4 million or $1.28 per share, compared to a pro forma net loss of $56 million or 88 cents per share in fiscal 2002.

The pro forma net loss for fiscal 2003 excludes four items: First, $80.8 million in the noncash gain related to the convertible note exchange, the 94.6 million noncash charge related to our investment in Reliant. Third, $6.5 million in restructuring charges and finally fourth, $4.3 million in noncash derivative charges associated with the provisional call structure of our 6.5% convertible senior subordinated notes that we issued in December 2002.

Essentially, FAS 133 requires us to place a value, again a noncash value on the interest component of the bond soft call provision and this is going to fluctuate, depending where the stock trades at the end of each quarter as we go forward. Pro forma net loss for the year ended March 31, 2002 excludes a $5.4 million noncash charge related to our investment in Reliant.

The increase in the pro forma net loss for fiscal 2003 versus 2002, was primarily the result of a reduction in revenues related to the way we are now funded by Eli Lilly for our pulmonary insulin and human growth hormone programs, as well as changes in revenues received from several other collaborative agreements, including the termination of our collaboration with GlaxoSmithKline. This information is available on tabular form as required by regulation G in our press release and our website at www.alkermes.com.

Now, I'll review the individual components of our results. First, total revenues for fiscal 2003 were $47.3 million, compared to $54.1 million for the prior year. For the first time, we're reporting our manufacturing and royalty revenues because commercial based revenues have grown to a level material to the financial picture of the company.

Our revenues during fiscal 2003 included $15.5 million in manufacturing and royalty revenues of which 13.4 was related to manufacturing and royalty revenues for Risperdal Consta. This was earned primarily from manufacturing revenues for Risperdal Consta, as our partner Janssen purchased product to build inventory to support the commercial launch outside the United States.

Research and development revenues under collaborative arrangements for fiscal 2003 were $31.8 million as compared to $54.1 million in the prior year. The decrease was primarily the result of the transition of Risperdal Consta from a development stage program to a commercial product and the restructuring of our AIR® insulin and AIR® human growth hormone programs which changed the way Eli Lilly is funding these programs.

Beginning January 1, 2003, we no longer record R&D revenue for work performed on the Lilly programs. We use the proceeds from Lilly's purchase of $30 million of our preferred stock in December 2002 to pay for the development costs including clinical trials. In addition, the decrease in R&D revenues also related to a change in our corporate partners as well as a stage of development of several other programs.

Terms of cost of goods manufactured, we reported these separately from research and development expenses for the first time as well to match our revenues. For fiscal 2003, cost of goods manufactured totals $10.9 million, $5.5 million attributable to Risperdal Consta and $5.4 million attributable to Nutropin Depot®.

In terms of R&D expense, research and development expenses for fiscal 2003 were $85.4 million compared to last year's $92.1 million reflecting Risperdal Consta's transition from a development stage program to a commercial project and, as I noted, the fact that we're now separately reporting cost of goods for all of our products.

We also note that this decrease was partially offset by an increase in external research expenses as we advance our proprietary product candidates and our collaborative product candidates through development and clinical trials. There was also an increase in occupancy cost and depreciation expense related to the expansion of our facilities in both Massachusetts and Ohio.

General and administrative expenses were $26.7 million for fiscal year 2003 compared to $24.4 million for fiscal year 2002. The increase was related primarily to $2.6 million in merger costs that were expensed as a result of the mutual termination of our merger agreement with Reliant in August of 2002.

The increase also related to an increase in professional fees, insurance costs, and consulting costs, partially offset by a decrease in personnel and related costs as a result of our August 2002 restructuring. There was also an increase in depreciation expense related to the expansion of our facilities.

Interest income and expense for the year are as follows: Interest income for the year was $3.8 million, lower than the $15.3 million reported in fiscal 2002 due to lower average costs, cash and investment balances as well as a decline in interest rates. Interest expense for fiscal 2003 was 10.4 million versus 8.9 million in fiscal 2002. The increase resulted from interest charges related to our 6.5% senior notes.

On March 31, 2003, Alkermes had cash and total investments of $145 million as compared to $161 million at March 31, 2002. These results demonstrate our commitment to managing our expenses and ensuring we have the resources necessary to drive the development of our most high-valued product opportunities.

Before I move on to our projections, I just wanted to spend some time discussing our strategic alliance with Reliant and how this affects our financial picture. As many of you know, as part of our December 2001 deal with Reliant, we took an approximately 19% ownership position in Reliant through an offering of its series C convertible preferred units for a purchase price of $100 million.

However, because Reliant is organized as a limited liability company and because the company hadn't accumulated deficit from operations in a deficit numbers capital, our share of Reliant's losses from the date of our investment is recognized in proportion to a percentage participation in the financing, which was 63%, instead of our 19% equity ownership position. As I mentioned, our equity losses in Reliant for the year ended as of March 31, were $94.6 million and $5.4 million during fiscal 2002. Thus the $100 million investment is now reflected as zero on our balance sheet.

We certainly feel that this accounting based valuation, while conservative and appropriate does not capture the value that has been created at Reliant over the last year. Reliant has executed well on its sales efforts with Lescol® and DynaCirc CR® family of products, they have received FDA approval for their first internally developed product, InnoPran XL, they have done an outstanding job in their co-marketing arrangements with [BioVel] and recently announced that Ernie Mario Ph.D., formerly the CEO of Alza, has joined the company as Chairman and CEO.

While it's hard to put a value on a private company, it is certainly an asset that is not now reflected on our books. To the extent that Reliant would have net income in the future, Alkermes will record its proportional share of Reliant's net income on its books through its investment account and through revenues. Of course, there could be no assurance that Reliant will have that income in the future as -- all of these companies look forward, it's hard to make guidance.

So with that, let me move on and provide you with financial guidance for Alkermes in fiscal 2004. As I do so, please keep in mind the risk factors that were summarized at the start of this call. We're providing guidance to help you model our business.

As you know, there are a number of factors that could impact our business that are outside of our control. What our partners do, what the FDA does, with that said, here's how we're managing the business going forward.

For revenue, we expect our total revenue projections for Alkermes for the upcoming fiscal year to be in the range of $70 to $85 million and I'll touch on the manufacturing royalty revenues as well as the research and development revenues. Specifically, we expect total manufacturing and royalty revenues to range from $30 to $35 million , primarily as a result of the expected growth and manufacturing shipments and royalty revenues for Risperdal Consta.

This guidance assumes U.S. approval for Risperdal Consta at the end of calendar year 2003 and that further approvals and launches continue as predicted in the rest of the world. The revenues for Risperdal Consta are based on estimates for our partner, who of course has the right to change the timing and amount of their purchases.

They're also significantly driven by the timing of shipments of completed batches to our partners and the timing of sales. So, as always, our quarter-to-quarter revenues will fluctuate.

In terms of research and development revenue, we're projecting that these will range from $40 million to $50 million. This estimate assumes that certain milestones and other assumptions related to our ongoing partner programs will be achieved and that Alkermes will complete a collaboration for at least one of our proprietary products.

It is important to note that research and development revenues are received from our corporate partners and our partners can change the scope or timing or terminate these programs at any time.

Our projections for costs of goods manufactured for fiscal 2004 range from $15 to $20 million. These costs are estimated base on projected orders from our partners for Risperdal Consta and Nutropin Depot®. Our plans for research and development expenses for fiscal 2004 range from $95 to$105 million.

We plan to continue our efforts to advance our proprietary products through commercialization, specifically our phase 3 Vivitrex® program. Based on our restructuring of our collaboration with Lilly for AIR® insulin and AIR® human growth hormone, we will use the proceeds of Lilly's $30 million investment in our preferred stock to pay for the development costs of these programs in the coming year.

We also expect an increase in occupancy and depreciation cost as our new and expanded manufacturing facilities in Ohio and Massachusetts come on line in fiscal 2004.

We expect to report general and administrative expenses for fiscal 2004 in the range of $24 to $26 million. The increase is mainly the result of the $2.6 million -- excuse me. The decrease is mainly the result of the $2.6 million nonrecurring merger cost included in the prior year's numbers, offset by an expected increase in personnel and associated costs, insurance costs, depreciation and consultant costs in fiscal 2004.

So for projecting net operating loss, we anticipate that to come in the range of $70 to $80 million in 2004 or approximately $1.07 to $1.22 per share. The net loss per share calculations assumes an estimated 65.5 million shares of our common stock to be outstanding on a weighted average basis. This excludes the potential conversion of our 6.52% senior notes.

If Alkermes stock trades at or above $11.53 for any 20 trading days out of the 30-day trading period, Alkermes has the right to automatically convert the outstanding $174 million of the 6.5% senior note into Alkermes common stock.

With roughly $15 million in noncash expenses included in the projected net loss, this translates to an expected operating cash bum between $55 and $65 million in fiscal 2004. This projected net loss excludes any noncash gain or loss relating to the derivative associated with our 6.5% senior note, as I mentioned earlier, as that cannot be estimated as it will fluctuate based on a number of factors, including our common stock price at the end of each quarter and obviously if our notes convert, that charge will no longer occur as well.

We anticipate that our capital expenditures for fiscal 2004 will be approximately $14 million, a substantial reduction from the $46 million we spent during fiscal 2003 as we complete the expansion of our facilities in Massachusetts and Ohio.

It's important to note that over the past several years, we've built the substantial asset for the company with an investment of approximately $70 million in our facilities to support Risperdal Consta, Vivitrex® and our pulmonary products. As we model the plant capacity today, with all the assumptions about clinical success, pricing, approval, et cetera, we can support over $2 billion in end sales and user sales with these plants.

Finally, as our pipeline continues to expand and mature and with the anticipated demand of Risperdal Consta, we remain focused on our goal of breaking into profitability in calendar year 2005.

With that, I'll turn the call over to Richard who will review our major programs and update you on our goals for the coming year.

Thank you, Jim. Hello, everybody.

Thanks, Jim. That was an exceptionally interesting presentation, the most complicated financial results, I think we've had to date. But I think indicative of the growing complexity of our business and growing maturity of our business as well.

The year, fiscal 2003, was a critical one for us in the history of this company. As Jim mentioned, over the past year, we really focused on setting the stage for success over the longer term, while at the same time dealing with the tremendous volatility associated with the setback in the U.S. approval for Risperdal Consta, which happened last summer.

I think this Alkermes team has done an excellent job in refining our strategy and focusing on our highest value proprietary programs and pursuing only our most productive collaborations. What will become increasingly clear over time, I believe, is the significant commitment we have made to our proprietary product development programs, advancing Vivitrex® into a major phase 3 program, advancing our AIR-Epinephrine program into multiple clinical trials as well.

In a year that was dominated with speculation about the fate of Risperdal Consta in the U.S., in the background, steadily and quietly, we have been building this business. We've advanced an incredibly interesting and potentially valuable pipeline of product candidates.

We have strengthened our manufacturing capabilities through an expansion of our Wilmington and Chelsea, Massachusetts facilities and we've started to achieve a critical mass with our manufacturing and royalty revenues through sales of Risperdal Consta outside the U.S.

Today, the company is really on the cusp now of achieving our overall goal of building a profitable and fully integrated bio-pharmaceutical company. There are several late stage programs, that if successful will fuel and accelerate our movement toward this objective. We expect significant news flow from these programs will occur this year and will provide more clarity on the potential for these products and our ability to achieve our goal of profitability.

First, we expect, as Jim mentioned, and we're modeling a U.S. approval for Risperdal Consta this year and of course we're looking forward to additional approvals and launches around the world.

Second, we expect to complete our phase 3 clinical trial for our first proprietary product, Vivitrex®. And third we expect to complete a phase 3 clinical trial for Nutropin Depot® in a new indication of growth hormone deficiency in adults.

So now, what I'd like to do is give you an update on the product portfolio, and I'll focus in particular on those products that have the potential to be important contributors to our revenue growth over the next few years, particularly Risperdal Consta and Vivitrex®.

So I'll start with Consta. Of course, Risperdal Consta is our sustained release formulation of Risperdal, which is the number one prescribed atypical anti-psychotic product in the world. This is obviously a key product for us at Alkermes. We believe, based on the projections given to us by J&J, that the commercial potential for Risperdal Consta in the U.S. and worldwide will take this company to profitability.

As we discussed in the past, Risperdal Consta is a perfect illustration of the power of coupling an advanced regulatory system with the leading medication to maximize the therapeutic value of a product. With this long-acting formulation of Risperdal, we can address head on the number one reason that schizophrenia patients relapse, and that's compliance.

Patients on Risperdal Consta receive the required medication once every two weeks, eliminating the need for daily dosing and because this therapy is administered in the doctor's office, the health care professional can easily monitor the patient's adherence to therapy so they can rapidly address noncompliance if it arises. There is a growing body of evidence that shows how important compliance is in the treatment of schizophrenia.

At the APA meeting, The American Psychiatry Association, last week in San Francisco, there were more than a dozen abstracts on Risperdal Consta and on noncompliance in schizophrenic patients.

J&J also had an exhibit with extensive information about the prevalence of noncompliance, the difficulty in accurately assessing patients who use this treatment and the consequences associated with noncompliance. This information attracted significant interest from the medical community who attended the meeting and reflect just one element of the benefits of Risperdal Consta and the medical needs that it is attempting to address.

The J&J team is enjoying successes in countries outside the U.S. As Jim outlined for you earlier, sales of this product outside the U.S. are exceeding our partners' expectations for this product. And to provide you with an update then on the approvals and launches worldwide, to date J&J has filed for approval for Risperdal Consta in 53 countries and has received approval in 24.

Janssen is currently marketing the drug in the following countries, Austria, Denmark, Germany, Ireland, Mexico, Switzerland and the UK. The product has received approval but has not yet been launched in Argentina, Australia, Colombia, Czech Republic, Estonia, Finland, Hong Kong, Hungary, Iceland, Israel, Korea, Latvia, Lithuania, Netherlands, New Zealand, Norway and Spain.

Now, while the worldwide regulatory efforts continue to prove successful, regulatory efforts in the U.S. were delayed when J&J received a non approvable letter last June. Immediately following this event, we initiated an intense and active collaboration with J&J to produce a comprehensive and appropriate response to the FDA with the strongest possible case for approval.

A few weeks ago, we announced that J&J has submitted the completed response to the FDA and as I said before, this was an important and impressive filing containing preclinical data as well as information on the issue of compliance and how noncompliance can easily lead to relapse in this patient population.

Based on [PEDUFA] guidelines, we expect a response from the FDA within six months. We are confident in the strength of this filing and we have assumed an approval in our guidance for fiscal 2004. But, of course, the final decision, as always, rests with the FDA.

An important focus of the company during the last 12 months has been to augment our manufacturing capabilities for the product. Over the last year, we've expanded our GNP manufacturing facility in Wilmington, in order to meet J&J's projected worldwide demand for Risperdal Consta. This expansion included the construction of a large scale GNP facility on the same site, designed to enable us to significantly expand our production capacity and support sales of Consta over the long term.

We've recently completed construction of this expansion and it's now in the process of being validated and brought on line. With this expansion, we will have more than doubled our manufacturing capacity for the product. We will then have production capacity sufficient to supply J&J with quantities of Consta that would generate peak revenues to Alkermes well in excess of $100 million per year if that capacity is fully utilized. This assumes that our plan is validated, of course and functioning as expected and that sales meet J&J's forecasted sales.

Let's move on to Vivitrex®. Vivitrex® is really the first product candidate developed for our own account based on these drug delivery technologies we have been developing with our partners.

Vivitrex® is an injectable sustained release formulation of Naltrexone which is an approve treatment for alcohol and opiate dependence. While studies have shown that oral Naltrexone is effective, its daily dosing requirement is a substantial challenge to patients in recovery. We expect Vivitrex®, administered once a month combined with psycho-social support to decrease the incidents and percentage of heavy drinking days, thus reducing the risk of relapse and significantly improving patient adherence or compliance.

Over the last year, we have made tremendous progress with this program on both the clinical and commercial front. One of the highlights for the year was the completion of enrollment in our phase 3 trial in alcohol dependence at the end of March. This trial has enrolled more than 600 patients across 24 centers in the United States.

Following the six-month treatment period, patients may enter into an extension study which will collect long term safety data for an additional 12 months. The extension study now is well under way as well with well more than 225 patients entered to date. Given the time line for the trial and the data analysis, we expect to announce top line results for this key program around the end of the year.

In tandem with the clinical efforts, we have been formalizing and intensifying our commercialization strategy for Vivitrex®. As our first proprietary program, we are quite interested in developing a comprehensive marketing plan that will maximize the product's value on a global basis. We will outline more details of this for you at our analysts day on June 19th in New York.

But in a nutshell, our base plan is to market Vivitrex® to addiction and alcohol abuse centers throughout the U.S., using a specialty sales force. We believe this provides us with an opportunity to establish Vivitrex® as the standard of care in alcohol dependence.

Beyond this initial effort or this core effort, we are definitely considering the benefits of partnering with a major pharmaceutical company to broaden the reach of the sales effort for the product including the markets outside the U.S.

I'll just briefly tick on the highlight incentive on some of the other product candidates in the pipeline and not all of them, just ones that probably have the most news associated with them.

First, let me mention AIR® insulin. The AIR® insulin program continues to move forward with a very strong committment from both the clinical and manufacturing point of view. We continue to be very active in the clinic, and we're preparing our Chelsea, Massachusetts manufacturing facility for advanced clinical trial supply and commercialization.

Many of you have seen the photographs in our presentation, where we show the installation of our large scale size four spray dryer and the large scale product filters. These are now installed and operational and we're in the midst of validation and scale of work in the plant.

This project team is comprised of engineers, scientists and development specialists from both Eli Lilly and Alkermes and the group is a superb group. It's achieved a number of important milestones and is operating extremely effectively. We expect to hear more about this program in months ahead.

Epinephrine, AIR®-Epinephrine. This past year, or in this past fiscal year, we disclosed that we are working on an inhaled formulation of epinephrine using our AIR® technology. This is our second proprietary product and shares features of the Vivitrex® program in that it allows us to capture for our own account the extensive amount of work that we've done to advance a particular delivery system in collaboration with a pharma company partner.

For Vivitrex®, it was born from our work with J&J and Medisorb®. For epinephrine, it's AIR® or pulmonary technology and our work on insulin and human growth hormones with Lilly and our other partners.

Actually, this particular product concept is actually quite a simple one. Our idea is to provide patients with a simple, convenient way to self administer epinephrine without the need for intramuscular injection.

Epi-pens save lives. We want to add another layer of protection for patients at risk of anaphylaxis reaction to insect stings, food allergies, et cetera. We have completed two phase one clinical studies, looking at the [pharma-co-kinetics] and the [pharma-co-dynamics] of administering epinephrine through our powders through the lung, and we are running additional studies throughout the course of the calendar year 2003.

We are confident that we can deliver therapeutic concentrations of epinephrine via the lung. We are now testing various doses and regimens in order to pick our commercial configuration.

The patient numbers are quite interesting. It is recognized that the incidents of anaphylaxis is increasing and millions of Americans are at risk of experiencing an episode of anaphylaxis during their lives, but patients, it's clear, can be reluctant to self inject, particularly intramuscularly. In fact, our market research has shown that patients frequently arrive in the emergency room with an epi-pen not deployed because they were reluctant to inject themselves or their children. So, we see a clear commercial opportunity for an inhaled formulation, a less invasive form of epinephrine.

FSH, we have a collaboration ongoing with Serono for the development of a long acting injectable form of follicle stimulating hormone, or FSH, for the treatment for use in the context of infertility.

We are currently conducting a phase 1-B study with Serono in which we can evaluate not only safety in [pharma-co-kinetics] but also follicle development by ultrasound. This study is ongoing, and we expect to have results from the studies by the fall. From there, Serono will make the decision whether to move the product into an expanded phase 2, phase 3 program.

Exenatide LAR. We continue to work with Amylin Pharmaceuticals and Eli Lilly on a long acting formulation of Exenatide LAR . As you may know, Amylin is currently conducting a phase three clinical trial of Exenatide administered by twice daily injections in patients with type 2 diabetes. Our collaboration for LAR is focused on creating a less frequent dosing schedule to the development of a sustained release subcutaneous injection for the treatment of people with type 2 diabetes based on our Medisorb® and ProLease® technologies.

This program has evolved into quite an extensive one within Alkermes including scientists from our Cambridge and Ohio locations, given the fact that the breadth of the formulation options being considered are vast and the fact that the large scale manufacturing of Exenatide LAR is expected to take place in our facility in Wilmington, Ohio.

In March, we announced preliminary [pharma-co-kinetic] results from the first phase 2 study of Exenatide LAR, demonstrating that sustained levels of Exenatide are possible in human patients. We expect Amylin to initiate additional phase 2 studies in the second half of this calendar year, calendar 2003.

That's all I was going to say about the top line of the program. The events of the last year have been many and important ones for us, but they really provide us with a focus and the resources to move forward with these really important programs. This a pipeline that we are extremely committed to and extremely excited about. We are committed to executing our goals and look forward to updating you as to our progress on future earnings and other calls. With that, I will end and open the call for questions. Operator?

Thank you. Ladies and gentlemen, if you have a question at this time, please press the 1 key on your touch tone telephone. If your question has been answered and you wish to remove yourself from the queue, please press the pound key. And if you're on a speaker phone, please lift the handset before asking your question.

One moment for our first question. Our first question comes from Ken Catchetory from S G Cowen

Thanks for taking the question. This first question, Jim, just looking at the gross margins you laid out the cost of goods sold and if you do the quick calculations, about 50%. Where do you see that? How high could that get to as the royalties increase and as the sales increase? What would you encourage us to see as kind of a top on a gross margin line?

Well, Ken, yeah. I mean, obviously you can pull the math out. And I think it's important to pull out Risperdal Consta versus Nutropin Depot® obviously because they are at such different scales and are headed to such different scales at this point.

It's probably important to note, actually, that the major outcome of Nutropin Depot® is the phase 3 clinical trial that Rich referred to on the adult indication. But the real major focus is going to be on Risperdal Consta. And you know, as we've talked about earlier, I think we're comfortable with most analysts are today, which is balancing our royalty at 10% and our cost of goods really anywhere from 60 to 80%. Excuse me our gross margins, 60 to 80%.

Okay. And also on the R&D spending, would you encourage us, or is it fair to say that this would be the peak year of R&D spending upcoming in fiscal 2004 and start taking that down as we go forward, or would you assume this is a good run rate for the next couple of years?

I think, Ken, it depends entirely. It's kind of like a snake right now where we're digesting a number of big clinical trials with Vivitrex®. And it's not just the phase 3 that we are going on, Rich mentioned the extension studies and there are other studies in Vivitrex® as we prepare for the NDA filing.

There's the phase 3 with the growth hormone. And there is a great deal of clinical work with Lilly, which is now reflected on the expense side but not the revenue side. That's a big bullocks at work right now and as we look forward and manage it, we essentially are going to be keeping our eye on the revenue side to see how much room we have.

We are committed to our goal of profitability in the time lines that we have talked about and we will make decisions in terms of how many other programs we can move forward into clinical trials and with what type, whether we can do that alone or whether we are going to have to rely on partners to do that.

Okay. Great. Thank you very much.

Thank you. Our next question comes from Michael Hearle with Leerink Swan.

Good afternoon. Just a couple of questions on revenues going forward. Give us some idea of how we should think about the delta between your revenue guidance for fiscal '04 with or without Consta in the States. And secondarily, if you can talk about the expected manufacturing revenue run rate going forward? Your guidance is somewhere in the 30 to 35 million range. That's basically the run rate you're on for the previous quarter. Maybe just some thoughts there?

Yeah, sure, Mike. Thanks. I tell you, it's obviously early in the process to be talking about run rates. Because as you can see, there looks like there's a run rate in the fourth quarter but just imagine that some batches that were due in December were delayed because of Christmas time and they ended up being delivered because Europe closes down for the last two weeks of the year and they end up being delivered in the first part of the quarter. Things like that happen every quarter and so obviously, and that is what I talked about earlier, there will be some lumpiness here.

Now that being said, obviously, Consta is approved in 24 countries and only launched in seven and as we have talked about the U.S. launch is--or the U.S approval will require some inventory build which is included in these numbers, is taking place at the end of, in our view, the end of the calendar year 2003 for the approval.

So, you know, I don't think it would be prudent for me at this time to break out specific numbers for rest of world versus U.S.. But, you know, just to say that we always take a conservative approach with how we model things and we'll keep you posted as we move forward.

I guess in relation to how we think about the roughly 30 million in your future drive for product sales, should we just extrapolate $300 million-ish for Consta number for this year for total end sales?

No. I think it's important again to not get too ahead of ourselves in terms of a run rate. Let's break it down, we always get a portion of our fee in a royalty, which takes place when a product is sold and we get a portion of our fee when we ship product, as a matter of fact, the majority of that comes in the manufacturing season when we ship product.

So, it would be inappropriate to say, gee, you reported $113 million in sales so therefore Risperdal Consta must have sold $130 million. Again, because that would say there is no inventory out there and that's not the case, obviously with any drug. So, we're early in the process here and I think we should wait to see how the next quarters roll out before we start talking about how much it's selling.

Okay. Thanks.

Sure.

Thank you. Our next question comes from Greg Sibonovich with CIBC World Markets. Please go ahead.

Thanks for taking my question. If I recall the original announcement of the Reliant transaction, there was mention of an expectation of Reliant becoming EBITDA positive at some point in time. Could you just please provide for us what your current thoughts are on this and whether any of your assumptions have changed regarding when Reliant might become EBITDA positive?

Sure. And, if fact that was an important rationale for the announcement in March 2002 because both companies, Alkermes and Reliant at the time were looking at breaking into profitability in calendar year 2004.

Now, obviously we've had the delay with Risperdal Consta to push us out a year and Reliant, you know, it would be inappropriate for me to speak about their financial results. But, as I mentioned, I think you can tell, we are quite excited about the way they are headed and we have not built anything in these projections about profits from Reliant.

Because, again, particularly with the arrival of Ernie Mario and their growth over the last year, one never knows how they're going to build their business but that business is going very well. And I think you could say that they're still probably focused on 2004.

Okay. Thank you very much.

Sure.

Thank you. Once again, ladies and gentlemen if you have a question at this time, please press the 1 key on your touch tone telephone. Our next question comes from Hari Sambasiviam from Merrill Lynch.

Yes, thank you, just a quick question for Jim. In terms of your shipments of product to J&J, could you just give us a sense of how you recognize revenues when you -- on the product, do you recognize revenues on inventory prior to the approvals? And could you sort of do a walk through of what you think, going forward. Just sort of to give me a recap on this?

Sure, Hari, no problem. Again, we have a royalty that takes place when they sell the product, essentially. But we also have a component that's based on a percentage of net selling price that we receive when we ship the products. We're manufacturing a batch.

It's probably important to note, too, that we're not really carrying much inventory at all other than the raw materials. And we get the Risperdal from J&J essentially at cost, we don't have to pay for that. We get the batch, manufacture the batch, and when we ship the batch after doing our release testing at Alkermes, that's when we get paid for the shipment of that batch.

So that actually goes to their distribution centers throughout the world eventually to Europe or eventually in the United States if the product gets approved, but we've booked that revenue based on an assumed average price for the upcoming year. And obviously we watch that quarter to quarter and settle up with J&J to make sure that the average prices are as we expected as we go.

Perhaps I was hoping to be a bit more specific, what I was curious about the U.S. component of it. Are you actually shipping inventory to J&J on the U.S. launch at this point in time? Or is the inventory primarily at this point for the non U.S. portion?

Now you know, Hari, I don't think it would be appropriate for us to talk about whether we have shipped U.S. batches or not. I think, again what we've tried to do is lay out, I think we've laid out our projection for next year based on our projection for this year.

I would say that the vast majority of that is obviously for sales overseas because there is no need to build inventory now prior to a clear view as to when the expected launch is going to occur for the U.S. And frankly, it's the same product, it just goes in different vials and is labeled differently. So it's the same product. So we can shift and make bulk batches without having to know whether it's going to Europe or the U.S.

That's great. Thank you.

Sure.

Thank you. There are no further questions in the queue at this time. I'd like to turn the program back to you.

If there's no further questions, I'll thank you all for listening and we're available for questions here at the company. Thank you.

Good night.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program, you may now disconnect, good day.