Alkermes Plc (ALKS) 2004 Q3 法說會逐字稿

Welcome to the Alkermes conference call to discuss third quarter 2004 financial results. 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 afternoon, and welcome to the Alkermes conference call to discuss the financial results for the third quarter of our fiscal 2004, which ended on December 31st, 2003. With me this afternoon is Richard Pops, our CEO, and Jim Frates, our CEO.

Before we begin today, let me remind you that during the call certain matters we will discuss today consist of forward-looking statements relating to, among other things -- our expectations concerning the commercialization of Risperdal Consta; our future financial and business performance; operating plans and goals; objectives of management; proposed partnering agreements and regulatory plans. Listeners are cautioned that these statements are neither promises nor guarantees, and are subject to risks and uncertainties that could cause actual results to differ materially from results contemplated by these forward-looking statements. In particular, the risks and uncertainties include, among other things -- risks related to launch, pricing and market acceptance of Risperdal Consta and our other products; whether we can manufacture Risperdal Consta and our other products on a commercial scale, or economically; and whether additional regulatory approvals will be received; and those risk factors contained in our press release announcing our most recent results in our periodic reports filed with the SEC, including but not limited to our annual report on Form 10-K for the year ended March 31st, 2003, and subsequent forms 10-Q. We undertake no obligation to update or revise the information provided in this call, whether as a result of new information, future events, or circumstances, or otherwise.

During the call today, Jim will review our financial results for the quarter, and then Rich will review progress with our products and pipeline. We'll then open it up for Q&A.

Now I will turn the call over to Jim to review our key financial results.

Thanks, Rebecca. Good afternoon. I'm pleased to report a quarter in which we achieved several important milestones at Alkermes. The financial results I will discuss today reflect our efforts over the past few months to set the stage for future growth here at Alkermes. It certainly has been an eventful quarter for us.

As many of you know, the highlight of the quarter with the FDA approval of Risperdal Consta for the treatment of schizophrenia, which was announced in October, and the subsequent launch of the product in the United States. We are the exclusive supplier of this product for J&J, and so we remain focused on manufacturing. J&J launched Risperdal Consta in the United States in early December, and we are pleased with the results to date. More importantly, J&J is pleased with the results, and remain ahead of their plan.

Risperdal Consta is currently also marketed in 25 other countries around the world, including the U.K., Germany and Spain. The U.S. approval and launch for Risperdal Consta is a key step as we continue to target our goal of achieving profitability in late calendar year 2005. We expect that this product will provide us with significant revenues in the coming years, allowing us to drive the development of our product pipeline while reducing our cash burn.

The other key event in the quarter was the successful completion of our Phase III clinical trial of Vivitrex. We are now preparing an NDA submission for Vivitrex, and we believe it has the potential to be the next major brand to emerge from our pipeline. We are also continuing the development efforts to advance other products in our pipeline, particularly inhaled insulin in collaboration with Eli Lilly, Exenatide LAR, in collaboration with Amelin (ph) and Lilly, and our proprietary product AIR epinephrine. We believe we are well-positioned as we enter 2004 with a major product with J&J in its launch phase, results from our Phase III Vivitrex trial in hand, and approximately $174 million in cash and investments.

Now let me move on to review the financial results. Our loss on a GAAP basis for the quarter ended December 31st, 2003, was 20.9 million, or 23 cents per share, as compared to net income of $41.2 million, or 64 cents per share for the three months ended December 31st, 2002. Included in the 2002 number was an $80.8 million gain on the convertible debt exchange which we did last year, as well as a $24.5 million non-cash charge related to our equity investment in Reliant Pharmaceuticals.

Because of the significant nature of certain non-cash items, we think it is important to discuss pro forma results that we feel more accurately reflect our ongoing operations. The pro forma net loss for the three months ended December 31st, 2003, was $20.8 million, or 23 cents per share, compared to a pro forma net loss of $12.8 million, or 20 cents per share in the same quarter of the previous year. The pro forma net loss for the three months ended December 31st, 2003 excludes $650,000 in non-cash income associated with the provisional call structure of our 2.5 percent notes, as well as 700,000 of other non-cash expense recognized on the net decrease in the fair value of certain warrants that we hold in other public companies. Pro forma net loss for the quarter ended December 31, 2002 excluded the $80.8 million gain related to the convertible debt exchange, 24.5 million in non-cash charges related to the Company's investment in Reliant, as well as $2.3 million in restructuring charges.

For a more detailed reconciliation of our pro forma net loss to GAAP, please review our press release, which can be found on our Website, Alkermes.com. I will now review specifics of our results.

Total revenues were 11.2 million for the quarter ended December 31, 2003, compared with 15.2 million for the same period in the prior year. Total manufacturing and royalty revenues were 8.6 million for the quarter ended December 31, 2003, including $8.2 million in manufacturing and royalty revenues for Risperdal Consta, which as I said before was launched in the United States in December.

Research and development revenue under collaborative arrangements for the three months ended December 31, 2003 was 2.6 million, compared to 15.2 million for the quarter ended December 31, 2002. The decrease was mainly a result of the restructuring of our AIR insulin and AIR hGH programs with Lilly, changes in the Company's partners, as well as changes in the stage of several other collaborative programs. As of January 1st, 2003, we no longer record R&D revenue for work performed on our Lilly programs, but instead used the proceeds from the sale of $30 million of our preferred stock to Lilly in December 2002 to pay for the development cost during calendar year 2003, and into calendar year 2004. At December 31, 2003, approximately $18.8 million of the proceeds from the sale to Lilly of the $30 million of our convertible preferred stock had been spent.

In December 2003, Lilly also made a payment to Alkermes totaling approximately $7 million in order to fund an increase in the scope of our collaborative development programs. This funding has been recorded as deferred revenue on the consolidated balance sheets, and we expect to recognize the $7 million as revenue after the proceeds from the sale of the $30 million of our convertible preferred stock has been spent. We are pleased to have this additional commitment from Lilly as the project teams work toward a product decision concerning pulmonary insulin by Lilly in the third quarter of calendar year 2004.

For the three months ended December 31, 2003, the cost of goods manufactured was $4.1 million, consisting of approximately $2.7 million for Risperdal Consta and approximately $1.4 million for Nutropin Depot.

Research and development expenses for the quarter ended December 31, 2003, were 21.1 million, slightly lower than last year's $21.2 million expense, primarily because we are now separately reporting cost of goods manufactured for our commercial products, Risperdal Consta and Nutropin Depot. This decrease was partially offset by an increase in occupancy costs in depreciation expense related to the expansion of the Company's facilities in both Massachusetts and Ohio, as well as an increase in personnel and related costs and external research expenses related to the continuing development of our proprietary products and our collaborative products -- product candidates.

General and administrative expenses were 6.5 million for the quarter, higher than the 5.4 million in G&A expenses for the same period in 2003, primarily as a result of increased personnel and related costs, as well as increases in consulting and insurance costs. Interest income for the three months ended December 31, 2003 was $1 million, as compared with 0.6 million for the period last year. The increase was primarily the result of higher cash and investment balances held during the quarter, partially offset by declines in interest rates. Interest expense was $1.2 million for the three months ended December 31, 2003, as compared to $2.1 million for the same period in the prior year. The decrease was primarily the result of a decrease in the outstanding average debt balance, as well as lower interest rates payable on our convertible debt.

At December 31, 2003, Alkermes had cash and investments of $174 million as compared to $145 million at March 31, 2003. The increase in cash and total investments during the nine months ended December 31, 2003 was primarily a result of the issuance of $125 million of 2.5 percent subordinated notes in August and September 2003, partially offset by cash used to fund operations, to acquire fixed assets, and to make interest and principal payments on indebtedness.

Let me now take a moment to review our previously stated financial guidance for the remainder of fiscal year 2004. Our guidance remains 30 to $35 million in manufacturing and royalty revenues for the fiscal year 2004. Through the first nine months of the fiscal year, we have recorded $15.5 million in manufacturing and royalty revenues. We expect to record shipments in the fourth fiscal quarter that will bring us within this guidance for the year, albeit it at the lower end of the range.

We are also maintaining our expectations of 40 to $50 million in R&D revenues, based on our goal of entering into a strategic partnership for Vivitrex. While we are currently in discussions with potential partners, there can be no guarantee that such a partnership will ultimately happen during the quarter. Rich will discuss Vivitrex and where we stand in more detail in a moment.

Our cost of goods manufactured guidance is still expected to be in the range of 15 to $24 million. R&D expenses will be slightly lower than previously forecasted. We now expect R&D to be in the range of 90 to $95 million for the full fiscal year. Our SG&A projection remains in the range of 24 to $26 million.

This would leave our forecast for our net operating loss for fiscal 2004 at 70 to $80 million, which again, is unchanged from the beginning of the fiscal year, and contingent on a potential Vivitrex partnership.

In summary, the financial picture at Alkermes is strong. Our manufacturing and royalty revenues is beginning to grow, and we believe we have the financial resources to develop our exciting and maturing product pipeline, while bringing the Company to profitability. I will now turn the call over to Rich for an update on our portfolio.

Thank you, Jim. Hello, everybody. I think as you have heard Jim begin to outline, the fourth quarter of calendar 2003, I think, will be remembered as one of the most important in the history of this company. We enter 2004 a far stronger company than we entered 2003, and perhaps than we have ever been. And certainly entering a new phase of growth for the Company. Let me just spend a couple of minutes on what happened in 2003, particularly in the final quarter of the calendar year.

First, we and our partners at J&J received regulatory approval in the U.S. for Risperdal Consta. This is the first long-acting atypical antipsychotic available for patients, incorporating J&J's successful product (indiscernible), or Risperdal, into our Medisorb long acting drug delivery platform. Second, we reported positive results from our Phase III clinic trial for Vivitrex, our proprietary product for the treatment of alcohol dependence. So we are now moving towards NDA submission for our first proprietary product.

Several products in our pipeline also advanced during 2003, most notably our diabetes products (indiscernible) include pulmonary insulin with Lilly, and Exenatide LAR with Amelin and Lilly, and our pulmonary epinephrine product, which is our proprietary product. In addition, we completed our manufacturing expansions for our Ohio and our Massachusetts facilities.

We said at the beginning of 2003 that it was going to be a breakthrough year for us, and it really turned out to be that way.

Our perspective, then, on 2004 is that it really requires one to take a fresh look at the Company and what we have become and what we are becoming. My own view is that we have to ask people to step back from the specific milestone focus of 2003, and again look at the entirety of the Company we have been building over the past several years.

This is a true multiproduct company, based on these advanced formulation and delivery technologies. These technologies are no longer speculative, they are increasingly proven, with commercial products in the marketplace, and we have real commercial opportunities now for own proprietary products based on (indiscernible) for Alkermes. The drugs that we are developing, the products we're developing, are based on drugs with proven safety and efficacy, and we have 8 products at the clinical stage or beyond.

Given all that though, the metrics for 2004 are rather simple. First, we enter 2004 with our first major U.S. pharmaceutical brand, Risperdal Consta, just now beginning its ramp. We believe that it is the most important new product approved for schizophrenia in years. It's now approved in more than 50 countries and launched in 26, including the U.S. The ramp is just starting now, and believe you will continue to see this ramp over the coming years.

J&J has initiated a strong marketing effort to ensure that the product gets to physicians and patients as easily and as timely as possible. As you know, an estimated 75 percent of patients are noncompliant, and Risperdal Consta is the first long-acting atypical that offers the possibility for improved quality of life for these patients.

Compliance or adherence is not the whole story. There is increasing clinical evidence for actual improved therapeutic outcomes for the use of Consta in schizophrenia. For example, we learned just yesterday at the 12th Biennial Winter Workshop on Schizophrenia in Davos (ph), Switzerland, positive findings were released by J&J from a European study of schizophrenic young adults aged between 18 and 30, who were switched from Risperidon (ph) oral to Risperdal Consta. The study found that these patients experienced improved symptom control, reduced side effects, and improved compliance after just a single month of treatment, and continued to improve over the six month treatment period. These data support the notion that earlier intervention can help prevent the progression of schizophrenia and lead to better long-term outcomes.

A second study, a Swedish study presented at the same conference, found that schizophrenia patients treated with Risperdal Consta were significantly less likely to be admitted to the hospital. And that those patients who were hospitalized had significantly shorter hospital stays than before treatment. The reduction in both the number and duration of hospitalizations associated with the use of Consta resulted in a substantial cost savings for the Swedish health care system.

The principal investigator for this study noted that it was important not to underestimate the negative impact that each hospital admission exerts on the lives of patients affected with schizophrenia, indicating not just an exacerbation of symptoms, but also the deleterious effects on their independence, their socialization, and their financial status. We believe this is further evidence that Consta will continue to play a key role to help many patients with this obviously very difficult disease. Those are new data, those (indiscernible) have not heard, or those that would like to get more information on those, please contact Rebecca Peterson here at the Company, and she will put you in touch with it.

Given the continued success of Risperdal Consta abroad, you can see why we have such high expectations for the product in the US. J&J has assembled a large sales force to market the product, and their goal, we believe, is to build this into first-line therapy for schizophrenia. Reimbursement for the drug is already going extremely well, with over 3/4 of the states reimbursing Risperdal Consta as an unrestricted product under Medicaid, which is very, very important and very good progress in the launch of the product.

We are prepared for significant product demand for Consta on the manufacturing front. Our existing facility, as you know, has been up and running, supplying commercial product to J&J during 2003. We estimate that we can supply material to meet the initial demand for Consta; beyond that, we have completed an expansion of the facility to increase our capacity to meet increased expected demand for the next few years. This expansion is undergoing validation now, and will be brought online in the summertime.

So next I will move to Vivitrex. As I mentioned, we now have positive and clinically significant Phase III data and a path to NDA for this product. Vivitrex is a long-acting formulation of maltrexin (ph) for the treatment of alcohol dependence. Alcohol dependence, we believe strongly, is an untapped pharmaceutical market, with a clear medical need and a clear patient benefit and a clear societal benefit.

The next steps, as we have been saying since (indiscernible) in December, are the completion of the analysis of the Phase III three data, complete the ongoing safety and extension studies for the product. We currently have a long term extension of the Phase III study and a large open label safety study ongoing. The first data presentation of the Phase III data will be at the American Society of Addiction Medicine Meeting, and we plan to (indiscernible) the complete data set for publication in the first half of this year. We will also be completing the scale up and validation of the commercial production line for Vivitrex in our Wilmington, Ohio plant. And we (indiscernible) as we said earlier, to file the NDA in the first half of 2005.

The marketing strategy is well along in its development. Alcohol dependency is a devastating disease with significant societal, personal and financial costs. We will be targeting the 2.5 million individuals in the US who are actively seeking treatment for this disease, and positioning Vivitrex, in conjunction with psycho-social intervention, as the current standard of care -- as the gold standard of care. We intend to launch this product with a specialty sales force targeted at (indiscernible) alcohol treatment centers. But as you know, we are in discussions with several companies as potential marketing partners for this drug. Our plan is to enter into one or more pharmaceutical partnerships to expand the sales and marketing effort around this important drug.

Let me comment for a second on the status of these discussions. Since the completion of the Phase III study, the scope and the pace of these discussions has progressed significantly. Everything changes with the receipt of positive Phase III data. We believe, now more than ever, that we have a valuable, late stage program of significant interest to multiple parties.

That said, we have thought long and hard about changing our financial guidance to be conservative, recognizing that we are not assured of completing a transaction this quarter -- and further, that we will not enter into a collaboration until we're satisfied with all of the terms, financial and other, and feel that it is in the best interest of the company and our shareholders. In the end, we decided not to change guidance because of the clear possibility that we enter into a relationship this quarter. But as you can tell from the preceding comments, however, there is risk around this assumption. Jim mentioned it, I just want to make sure you're all aware of it.

Finally, let me close with a discussion, quickly, of the pipeline. Although 2003 was a year in which our late stage projects obtained significant milestone and were the focus of investor interest, I think in the context of taking a fresh look at the Company, it is useful to revisit the advances in the product pipeline overall.

It's worth noting, I think, at the outset -- even the earlier stage products in our pipeline are based on these increasingly proven technologies, including Medisorb, which is used in Risperdal Consta and in Vivitrex; and our ProLease technology, which is used in Nutropin Depot. Our AIR platform, our pulmonary delivery platform, is used in AIR insulin and human growth hormone, as well as epinephrine, and has been scaled up and tested successfully through Phase II clinical trials with both epinephrine and with insulin.

Our extensive clinical history with these platforms makes us extremely confident in the probability of successful outcome of many of these product development programs. Every product development program has risks, and you all know that, but the fundamental point is that the technology platform here is increasingly vetted over time, and we are applying it in a serial fashion to multiple product candidates.

So quickly on AIR insulin. As you know, we're developing this inhaled insulin product with Lilly, and it is making very, very good progress. It's currently in a multicenter, Phase II, crossover trial in patients with type 1 diabetes. In December, as Jim mentioned, Lilly made a $7 million payment to Alkermes to fund an increase in the scope of their development programs with us. And (indiscernible) Lilly is working toward the key product decision point in the third quarter of 2004.

We believe their decision will be based on three things -- one, the finalization of the commercial device; two, the commercial scale up of our Chelsea facility; and three, the results of this Phase II trial. The device has been finalized and the commercial scale up of the insulin manufacturing lines has been completed, with validation currently ongoing. Now we're waiting for the completion of the Phase II study. This is an open label study, so we have a sense of the status on an ongoing basis and we are optimistic that its results will continue to be positive.

We're also quite excited about our AIR epinephrine product. This inhalable alternative to the epipen for the treatment of anaphylaxis. Anaphylaxis is a growing problem, particularly resulting from food allergies in children. It is an issue that has received much attention in the recent press. Just as an indication of the potential market, U.S. sales of epipen were in excess of $100 million last year, growing at more than 25 percent a year for the last five years.

Alkermes' AIR Epinephrine has completed 2 Phase I clinical trials, shown systemic bioavailability in pharmacodynamic (ph) activity, and we believe an epinephrine product delivered directly to the central circulation via the respiratory tract, will be a very attractive product for this market, as it will avoid the need for a painful injection. We will present data this year at the American Academy of Allergy, Asthma and Immunology annual meeting at the end of March in San Francisco, and we expect to finalize our registration strategy with the FDA this year.

Next in line for our Medisorb (indiscernible) product candidates, after Risperdal Consta, Vivitrex, is Exenatide LAR, a long-acting version of Amelin's exenatize (ph) for the treatment of type 2 diabetes. Our formulation is currently dose ranging in Phase II clinical trials. This has become a focused program here at Alkermes. It's receiving a tremendous amount of attention and a significant amount of resource. We expect to have data on this product candidate, continue to have data on this product candidate in the second half of this year.

So, I will finish. Looking forward, we are clearly moving to the next level in our development of the Company. With Risperdal Consta approval and Phase III positive results with Vivitrex, we're now focusing on strengthening our downstream capabilities, development, commercialization, manufacturing, as the product pipeline continues to mature. So it is a great time for the Company as we make this new progress forward.

With that, we'll finish up, and I thank you for your patience, and open up for questions.

(OPERATOR INSTRUCTIONS). Bob Jackson, Deerfield Management. He must have stepped away from the phone.

William Slattery of Deerfield Partners.

Maybe we are one in the same.

Are you standing in for Bob today?

I guess I am, guys. Just two quick questions on the Exenatide LAR. Are we exploring single-dose -- single-dose ranging studies or are we looking at serial-dose ranging studies right now, or at least with data coming out by the end of '04? And I have a question on AIR insulin after that.

I think what the Amelin folks said at the H&Q (ph) conference, when they announced they were making positive progress in the program, was that it looks like we have a dosage form now that can either be administered Q 1 week or Q 4 weeks. And what we're doing now in the clinic is confirming that in a Phase II study before we move on to a multi-dose steady state study, which (indiscernible) start back in the beginning of '05. Is that right? So as I have said to many people, and I think probably you guys as well, a lot of the work in these programs is front-end loaded. Because we want to make sure -- if we're right about the safety and efficacy of Exenatide, if we're able to dial into the right plasma concentration at steady state, then we're quite confident that we have a dosage formula that will be successful. So you'll see us really focus here in the Phase II stage to make sure we have a dosage formula that looks robust.

Thanks, Rich. Clarification on the AIR insulin program -- what types of characteristics -- efficacy characteristics do you believe that you and Lilly are going to find most critical in the decision of moving forward with the program?

It's interesting, from my point of view -- I really encourage you to (indiscernible) Lilly on this as well -- but I think that it is interesting, when you focus your developments in type 1 diabetics, the clinical setting is actually rather straightforward, because these patients are -- and you know this quite well, Bill -- if the patients are not doing well, they drop out. Because glucose control is so critical in the type 1 patient. So that's why on an open label basis with a crossover design, we're able to monitor (indiscernible) hemoglobin, and people's ability to control their glucose on both treatment and control arms. So I feel like that is moving along quite well. I think that we just want to finish the study. We want to make sure we're looking at safety all the way through. We have not seen any adverse safety (indiscernible) that I know of now, and we just want to make sure we see it all the way through, the full (indiscernible) analyze the data in total, and then go to product decision.

Robert Hazlett of SunTrust.

In terms of Exenatide LAR, are any alternative delivery devices being considered like pins or needle free technologies? And I have another one on AIR insulin.

I think that the product is sufficiently exciting. If you look at the projections that Amelin and Lilly have shared with us, (indiscernible) economically important product that we will look at every advanced way of administering the dose we can. The critical thing for us to determine right now though -- and not putting the cart before the horse -- is we want to understand dose and regiment. Because obviously, a one week injection is very different from a one month injection, in terms of injection volume and the product presentation. So I think the goal of this Phase II work is to really get a good handle on that, and then move to the subsequent stages of analysis.

In terms of AIR insulin, again, we are in Phase II. You are moving along, it sounds like pretty nicely. When do you actually expect the data to be presented? I think we have only seen one Phase I study. Again, we would love to see more data on the program. When do you expect that?

I think that it's definitely in Lilly's control. I know that there is going to be some data presented at ABA (ph) this year, but I am not sure whether it's going to be data that will be clinical data of the size that you want to see. It's really up to Lilly. But I do now, and we stated this publicly beginning in January, the key feature of the program in 2004 calendar is Lilly's product decision in the third quarter. So those three streams that I mentioned before, of commercial scale manufacturing, device finalization, and Phase II data, lead to essentially a formal determination in the Lilly system to move to the full development towards NDA. When that happens, I think that you'll see a lot more transparency with respect to data coming out of the program.

Just a quick one on Vivitrex. Have your expectations regarding the terms of the deal changed at all since the data has come out?

Absolutely. Absolutely. We think that we have a very robust finding in those Phase III clinical trials. (indiscernible) really quantitative and qualitative. Pre the Phase III data, our discussions, there was risk -- what if the study didn't work? What if this, what if that? Now, there is data, it's positive, we are moving to NDA. The (indiscernible) value of 2005 NDA products in the pharma world is very, very high. So I think we're seeing a lot of interest in the program, and we'll just let these discussions mature and ripen. But I have no doubt that over time -- I shouldn't say no doubt -- but I am very confident that over time we will find a really nice set of terms. And we are happy.

Ken Kachitori (ph) of SG Cowen.

A couple of questions. First on Risperdal Consta. I don't know if you'll provide this, but trying to get a flavor for the royalty versus the manufacturing fees, and if you are willing to give also U.S. (indiscernible) international? That is the first question. I will let you answer.

It's Jim. And before I answer that, I just want to -- I noticed when I was done, I misspoke on our cost of goods manufactured guidance. I said 15 to 24 million; I meant to say 15 to 20 million. Just for all you folks keeping track of that, that has not changed. So 15 to 20 on cost of goods sold.

On the Consta royalty, what we said is we get a majority of what -- we have told you to model it around 10 percent, so we get a majority that when we ship as a manufacturing fee, and a minority in terms of a royalty upon sale. And at this point we still have confidentiality obligations to J&J about specifics on the program, so we won't be able to talk a little bit more -- we won't be able to give you more specifics on that until we -- one, convince J&J to give more specifics; or two, that the ultimate results become material to us and our accountants deem it required that we begin to give those results. I think sometimes over the course of calendar year 2004 we're going to be in that situation.

Fair enough. On Vivitrex, just wondering as you guys work through the data, now that you have a little bit more time, is there any further update on why the women did not respond or have you had any discussions with the FDA maybe discussing potentially additional study requirements to tease out that effect or lack thereof in women?

I think that the first thing I would say is that the shorthand (indiscernible) not working in women is not accurate. I think what we didn't show, we did not show a difference from placebo in the women receiving (indiscernible) recognizing that all the patients, male and female in the clinical trial received active treatment in the form of psychosocial therapy. So if you actually look at the hazard reduction in man and women, it was extremely significant. You will see us elaborate on this in much greater detail as the data are presented and as the paper is written up as well. It's obviously a subject of tremendous interest from the investigators, and we've been meeting with key opinion leaders in the U.S. and in Europe on this topic. And we remain committed to the thesis that we will be filing for approval for this drug at both low and high dose for males and females. Obviously, there's no certainty in life about anything, but when you talk to clinicians who are using this drug, they have female patients that do very, very well on it. So recognizing that the clinical try is a model system, with a test statistic that is out (indiscernible) defined as your primary analysis, that was the result. But we believe this product is going to be useful in both genders.

If I could sneak one last question in on Nutropin Depot in adults. At any point are we going to be seeing the Phase III results soon? And also, wondering if there's any provision in your contract that would let you at some point, if we don't turn this product profitable, that would allow you to kind of get out of the manufacturing of the product? It seems like (indiscernible) continually taking losses on it.

A great question. I probably should have mentioned at the (indiscernible) -- those data will be presented by Genentech at the Endocrin (ph) Society meeting in June of this year. And we had a positive result on the primary (indiscernible) in that Phase III clinical trial. We are not happy with the financial status of losing money on Nutropin Depot, (indiscernible). So we are in active discussions with Genentech on this topic. So we hope (indiscernible) report more to you.

Mike Hearle of Leerink Swann.

A few questions, just follow-ups. On the Vivitrex, you said 2005 for filing -- is that correct, is that what you're targeting?

Yes. That is what we have been saying since December.

In terms of the timeline for the adult Nutropin Depot with Genentech -- the decision has been made to file, and when would that take place?

Suffice it to say that we are having -- with the positive results of the Phase III clinical trial and Genentech's go decision to expand the label to include adults, it has triggered now a series of discussions with Genentech. And we'll get that resolved with Genentech hopefully in the next couple of months. And we'll give you a fresh look at what the financial picture of that should be.

So meaning if you are going to go forward with the filing, there could be a situation where you are renegotiating the manufacturing, etc.?

Yes, we can't continue to lose money making Nutropin Depot for Genentech.

AIR insulin, if the product faces a go/no-go decision -- and it sounds like from a clinical standpoint everything is going fine -- in the third quarter, would that mean Phase III realistically beginning of '05? Or could you begin trials this year (indiscernible) Lilly?

Let's hold off on giving guidance on that until we agree with Lilly on that. But there is no doubt -- a couple of things are changing. You know this better than anybody, Mike. The whole pulmonary insulin space out there is changing as we speak. So the competitive dynamic is changing and everything is being reevaluated in the space, because people are beginning to realize again that this is a very, very significant medical and commercial opportunity. So for us, it's pretty clear where we are right now in terms of needing to complete these three elements to be able to reach product decision within the Lilly system. From there, I think it really becomes a sprint to the finish line, recognizing that -- we have got a lot of work to do yet. This is not something that is going to happen overnight. But I think the whole intensity of the program changes as you see what the competition does and as we receive the data from the trials we are in now.

And assuming a go ahead decision from Lilly, the program would then come back on the Lilly P&L -- is that correct?

Correct.

Back on both the Alkermes -- essentially Lilly would go back to funding, and we would be recognizing the revenue.

Okay.

Does that make sense?

Yes, it's perfect. Lastly, on the manufacturing and royalty revenue line -- I believe when you restructured the deal with J&J about a year ago, there were some guaranteed payments based on X amount of sales that you would get over the course of your fiscal '04. I think it was in the range of 25 to 30 million. Have you been -- basically, have you been receiving payments based on the guaranteed schedule, and this will be -- during your fourth quarter you'll be made whole on the balance of the guarantee? Or do you feel that this is pull-through from manufacturing and what is actually happening in the field?

We are -- the revenue numbers that you see -- (indiscernible) Jim correct me if it's not -- the revenue numbers that you see on this product relate to those actual specific shipments and vials that we are giving to J&J at this time. So the minimums are not operative.

Essentially, they paid us the up-front payment, that went into deferred revenue. And nothing changed in the revenue and cost recognition from us; it's really just a cash transaction, and we are taking an even amount of the deferred revenues equally in every month, essentially. And anything above that -- and we have been well above that -- we get paid in cash from J&J as a make up as it were. So it's really had no impact on our revenue line whatsoever.

Was that just for the first year or is that basically over a 10 year period?

No, it was the first two years that they prepaid. So that would be calendar year 2003 and calendar year 2004.

And lastly on the 40 to 50 million R&D revenue guidance for the year, what would that be ex -- meaning just from ongoing work that you are doing -- ex the Vivitrex deal?

I think the best thing to do is to look at that as -- we have three quarters of experience. So you can look at that and make a judgment on what it might look like without a deal.

I guess my question is, anything new or different going on in the first calendar quarter versus what has happened over the balance of your fiscal --?

Nothing we want to guide you to. There's always -- in our business there's always opportunities for events, but nothing we'll guide you to.

For instance, we just got paid $7 million in cash by Eli Lilly. If we wanted to be aggressive on accounting we could have booked that as revenue; we instead decided to take a conservative route and say we're going to book that essentially at the end of the year when the $25 million has run through. So there are always things going on with our partners in each of the programs, and it depends on the specific outcome of each of the milestones that we may hit, etc. So again, I think we're going to stick to the conservative end of the guidance and say -- look at what happened in the previous 9 months.

So if a deal hits, even if you do sign a deal this next month or so, it would not necessarily lead to a revenue number that would fill that plug? It depends on how you end up booking that, is that correct?

That's correct, and what you do is you go would to EITF 0021, which is revenue recognition on multi-deliverables. And if it was a milestone payment we would amortize the milestones over the life of the contract. If it was reimbursement for R&D we would actually book that as revenue. So there's definitely an opportunity for us to make that number, which is why we have not changed guidance.

Jim Reddoch, Friedman Billings.

This is actually David Anselan (ph) standing in for Jim. A couple of questions on Consta. What portion -- if you can answer this -- what portion of the addressable patient population is accounted for by Medicaid patients? My second question is, is J&J and planning to or currently running any trials evaluating Consta in bipolar disorder?

Good questions. What we hear from J&J -- and again, I refer you to J&J, and I think they have been quite forthcoming in giving these types of data. So these are their numbers, not ours. About 60 percent of the patients are Medicaid patients. And I think there's absolutely a commercial opportunity for Risperdal Consta in the bipolar indication, and I think you'll be hearing more about that over time.

But currently there's not any trials being run?

I would not comment -- we are not at liberty to comment on that. I suggest you direct that to J&J.

One more quick question. How many patients are being evaluated in the AIR insulin trial run by Lilly?

We have not disclosed, but it's a healthy cohort, enough to make determinations about a go/no go type decision.

Mara Goldstein of CIBC.

I've got a question on the AIR insulin program and a question on Vivitrex. With respect to Lilly and the group that you're working with there, has there been any change in the Lilly project that team is evaluating the product? And should for whatever reason Lilly choose not to renew a license with you for that, are there any restrictions about what you can and cannot do in terms of looking for another commercial partner? And then on Vivitrex, you mentioned potential partners with relationships to the product. Are you just referring to geography? Are you looking at deals where you would split up different segments of the market?

With the first question, the insulin project team that we have worked with here at Alkermes and Lilly has been assembled over the last two years -- it's a really good team. It's a remarkable team, it's been working well together. It's one of the strongest project teams that we know. Rick (indiscernible) who runs it here is not in the room, so I can't ask him. But I don't think there has been any change, unless you know something that we don't know.

No.

This has been -- from the highest levels of Lilly on down, it's been quite consistent. So we are thrilled with that bit of it. On the Vivitrex, it's really interesting, because since the Phase III data, a couple of things have happened -- number one, as you might imagine, people within the Company here are even more convinced than ever that we have a major product that we could market ourselves. I think others of us within the Company agree with that, but also see that there's an even increasing logic for collaboration in order to maximize the economic opportunity. There's a number of interesting potential lines of demarcation in a deal. Obviously, one is geographic -- U.S. versus ex U.S. The other one relates to how you might in the U.S., for example, detail the product, with a specialty force versus a larger, wider-reaching sales force that could even eventually end up calling on the general practitioner. The other one is in the opioid indication versus the alcohol indication, because one thing we don't talk much about is that Naltrexone long action injection, like Vivitrex, will be very useful in the treatment of opioid dependence, as well, and possibly separately branded. So it's interesting. We're kind of generating this matrix of potential possibilities now, and we'll kind of make the decision based on a combination of pure financials, and also the quality (indiscernible) issues of control and the ability to actually collaborate efficaciously with somebody. On the insulin thing, I forgot to answer your last bit which is -- if for whatever reason Lilly decided not to go forward, that license -- we own the technology, and so we would go forward and re-partner that project. I do not want that to happen. If it does happen, then we will deal with it that. Bit I don't expect that to happen.

Do you own the data?

The data -- I don't know the specific answer to that question from the contract, but it almost doesn't matter so much because we would have to start with another person's insulin. So we would know that the product was safe and efficacious, and we would know what the issues were. If (indiscernible) Lilly (indiscernible) and if they were Lilly-specific issues, i.e., unrelated to the product, then we would move with great alacrity to put new insulin into the system and go.

Thomas Wey (ph), Piper Jaffray.

I had a question on reimbursement for Consta. How are the managed care organizations and other government payors tracking? Is it similar to the Medicaid experience?

I don't have that data specifically. Rebecca, I don't know if you do?

Things are tracking quite well, but I would ask you to call Helen Short (ph) at J&J to get the specifics. They have asked us to refer calls to them.

And where are we in terms of enrollment in the open label safety study for Vivitrex?

We are well along in that enrollment. That enrollment is going outstandingly. So we hope to update you guys -- we have been saying we expect to complete enrollment in Q2, and I hope to be able to give you good news on that in the next couple of months.

And the target patient size for that trial was what again?

300, if I recall.

(indiscernible) -- it's 100 at six months and 300 - 100 on the year, excuse me, and 300 at 6 months, I believe. It's ICH guidelines, Thomas.

We're moving really well on that.

And then on LAR, the once monthly dose of that, is that a single injection still? What exactly is the volume required?

To be determined. So yes, we expect it -- obviously from a marketing point of view, I think there is an explicit goal with a single injection (indiscernible) the product profile. The actual final product presentation -- first, we'll have to establish dose, then we'll have to establish diluent, diluent concentration, and so on. So there's a bit to do to know that answer definitively.

Ian Sanderson, SG Cowen.

A quick follow-up, Richard, on the -- you mentioned the Vivitrex in opioid dependence. Are you currently enrolling a Phase III study in opioid dependence, and if there's anything you can tell us about that regarding timing of data, that would interesting.

It's interesting. Naltrexone (indiscernible) was approved first in the context of the opioid setting, (technical difficulty) opioid receptor blockade studies. So (indiscernible) on the efficacy study. We have conducted studies in opiate dependent patients that were positive, and we also in this 300 that Thomas asked about -- the 300 person safety study -- we are enrolling opiate dependent patients, mixed dependencies, as well as alcohol. So that -- you should consider the opiate program to be alive and well.

And you're collecting, presumably, efficacy data as well in that 300 patient?

To a much lesser extent. It is not an efficacy study at all, it's really to get a larger cohort of patients at those doses from a safety standpoint. The notion -- in an opioid challenge study, for example, with Naltrexone on board, it's a very straightforward issue to measure opiate receptor blockade over time. (indiscernible) challenge with opioids. So the efficacy of the product by receptor occupancy, in our view, is quite straightforward.

So is this a program that you would run yourself like you did in alcoholism, or are you waiting to maybe sign a partner for that separate indication and have them run the pivotal studies?

Both. I think that there's also a strong argument that you would never need to run a pivotal study in opioid dependence with an approval in alcohol dependence. So in fact various partners have various points of view on that. So the actual partner will be an important part of the determination of that point of view.

A quick follow-up on AIR insulin. With all the talk lately of a European filing coming first, does Lilly have a European development plan for AIR insulin in place?

Sure. Sure. But all of that will become much more clear as we pass the product decision milestone.

Any news on AIR h human growth hormone?

We don't talk much about it, but it's actually one of our more exciting pulmonary programs. Lilly continues to apply budget to it, and it will take a little bit more time in the clinic just because the safety requirements are going to be high. We are looking at it for both adults and kids. But it keeps moving.

This is all the time we have for the question and answer session. Would you like to proceed with any further remarks, gentleman?

No, I think we are finished. Thank you all very much. And we're here at the Company if you have any further questions. Have a good evening.

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program.