Alkermes Plc (ALKS) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Alkermes conference call to discuss the companies third quarter of fiscal year 2005.

[Operator Instructions].

At this time, I would like to introduce your host for today's call Mr. James Frates, Vice President and Chief Financial Officer at Alkermes. Please go ahead.

Thank you, Matt. Good afternoon, everybody and welcome to the Alkermes conference call to discuss our results for the third quarter of fiscal 2005. With me this afternoon is Richard Pops, our Chief Executive Officer.

During today's call, I will discuss our third quarter of fiscal 2005 financial results, provide details on the financing transaction announced today, and give you an update on our guidance for the full year. Rich will review the pipeline programs and provide an update on Risperdal Consta, and Vivitrex, as well as an overview of upcoming milestones. We will then take your questions.

Before we begin, let me remind you that during the call, certain matters we will discuss today consist of forward-looking statements relating to among other things. The continued growth in Risperdal Consta sales and reimbursement, our ability to increase the production capacity for Risperdal Consta and the timing of such increase, the signing of a partnership for Vivitrex.

Our expectations concerning the successful completion of development activities for our programs including clinical, regulatory and manufacturing development of AIR Insulin, Exenatide LAR and Vivitrex. The filing of our NDA for Vivitrex and the subsequent launch, and our future financial and business performance, operating plans and goals and objectives of management.

Listeners are cautioned that these statements are neither promises nor guarantees, but are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements.

In particular, the risks and uncertainties include, among other things, risks related to launch, pricing and marketing acceptance of Risperdal Consta and our other products, whether we can manufacture Risperdal Consta and all other products at commercial scale or economically, the timing and acceptance of our anticipated NDA filing for Vivitrex, whether regulatory approvals will be received for our products in development.

Whether we can enter into a collaboration to fund and market Vivitrex, and whether the terms of such collaboration meet our expectations, and those other risks contained in our press release announcing our most recent results and in our periodic filings filed with the Securities and Exchange Commission including but not limited to, our annual report on Form 10-K for the year ended March 31, 2004 and subsequent Forms 10-Q. We undertake no obligation to update or revise the information provided in this call.

Now let me turn to my discussion of our business activities. This is a strong quarter for Alkermes, both from the point of view of our clinical progress and our financial position, and we're very pleased with the progress we've made across a number of fronts. Risperdal Consta remains the key to our near-term financial performance. J&J reported worldwide sales of $106 million for their fourth quarter and $310 million for the calendar year 2004, only the first full year for Risperdal Consta in the U.S. marketplace.

We are very excited by these results, as this revenue ramp is just beginning, it's just the beginning of the success J& J expects to see from Consta, and they anticipate continued growth in the years to come. As a clear sign of that anticipated growth for Consta in the future, J& J recently made a commitment to increase our production capacity for Risperdal Consta agreeing to fund the third bulk line for Consta at our plant in Wilmington, Ohio. Rich will touch on additional details about Consta later.

Overall, we're very proud to be associated with a product that is such an important therapeutic option for patients. On the financial front, we have leveraged the strength of the Risperdal Consta franchise to strengthen our balance sheet while retaining all the upside in the product and using a fixed rate of interest, all without the requirement to issue equity.

We're very pleased to have taken advantage of the market's interest in Risperdal Consta franchise, and I think the transaction announced today significantly strengthens Alkermes' financial profile. I would like to provide you with a little more detail on the financing before I review the quarter's financial results.

Please review our Form 8-K filed this afternoon for a more detailed overview of the transaction. This transaction represents a novel structure which monotizes a portion of the anticipated manufacturing in royalty revenues paid to Alkermes for the manufacture and sales of Risperdal Consta.

This structure has been used once before by a biotechnology company recently, but our deal has certain key differences including a fixed rate of return to note holders, and the ability to continue to receive royalty and manufacturing payments while the debt is outstanding. The deal also allows us to retain all the upside in Risperdal Consta.

Importantly, the structure allows us to raise capital in a relatively low cost way compared to equity or an equity linked security. We have raised $170 million of notes at a discount, resulting in $140 million of proceeds after transaction costs, with a 7% interest rate. Because of the discount features, the bonds' yield to maturity is fixed to 9.75%. Importantly, the return to note holders does not increase no matter how well Risperdal Consta performs.

In other words, there is no yield enhancement or upside participation involved in this security. This is a key component of the transaction from our point of view. The 7% interest rate is payable on a quarterly basis between now and January 1, 2009, if the revenues from Risperdal Consta exceed certain interest coverage ratios, Alkermes will receive all the revenues in excess of the interest payments.

Beginning April 1, 2009, the excess revenues above the interest payments will be used to make principal payments on the bonds. Those principal payments are scheduled to occur equally over 12 quarters, ending in January 2012. Alkermes has the option, but not the obligation to redeem the notes earlier.

It's important to note that the notes are non re-coursed to Alkermes and non-convertible, all interest and principal will be paid back from revenues associated with Risperdal Consta. The notes are not convertible into Alkermes' equity, and the notes have no warrants or other equity like features.

The investors in this transaction are some of the most sophisticated firms in the world. They scrutinize the product up to and including an independent consultant's views of Risperdal Consta's sales potential and the completion of a detailed patent review. They're putting their capital at risk on Risperdal Consta, and Risperdal Consta alone. It's nice to have their endorsement, in addition to J& J's. Risperdal Consta is on its way to becoming a major product.

I would like to review how this financing may impact the Alkermes' path to profitability. The notes will appear on our consolidated balance sheet as debt for accounting purposes. We will continue to book manufacturer and royalties as revenue as we always have. In addition, we will book interest expense created by the note, which will be about $4 million per quarter.

Thus, our net loss going forward will be affected by interest expense, but we believe the overall impact and the timing of profitability will be minimal. Importantly, we have avoided the negative impact of other fund raising alternatives because no equity has been or will be issued in association with this transaction.

In summary, this transaction enhances our financial profile and provides greater flexibility as we advance our business. We now have over $200 million in cash on our balance sheet at a time when it is critical to lay the ground work for the marketing, sales, and manufacturing capabilities for Vivitrex, as well as to advance our other product candidates.

This strengthens our position to negotiate a deal for Vivitrex, while retaining an interest in the long-term sales of the product. Though it is contingent on a partnership for Vivitrex, we remain committed to our goal of profitability at the end of calendar year 2005. Now I will turn to our financial results for last quarter.

The net loss on a GAAP basis for the quarter ended December 31, 2004, was $9 million, or $0.10 per share as compared to a loss of $20.9 million or $0.23 a share for the same period in 2003. The decrease in the net loss for the third fiscal quarter of 2004 compared to the same period in 2003, was the result of an increase in revenues related to Risperdal Consta, as well as an increase in revenues related to our AIR insulin and AIR human growth hormone development programs.

Total revenues for the quarter were $23.6 million, compared to 11.2 million for the same period in 2003. Manufacturing revenues were 13.9 million, all related to Risperdal Consta. Compared to 7.5 million for the same period in 2003. Of which 7.3 million related to Risperdal Consta.

The increase in manufacturing revenues was primarily due to increased shipments of Risperdal Consta to our partner Janssen. Total royalty revenues were $2.7 million for the quarter ended December 31, 2004, as compared to $1.1 million for the same period in 2003. Including 2.6 million and 0.9 million respectively of royalty revenues for Risperdal Consta. This increase in royalty revenues was also due to increased global sales of Risperdal Consta by Janssen.

Research and development revenue under collaborative arrangements for the quarter was $7 million as compared to $2.6 million for the same period in 2003. The increase was primarily due to an increase in revenues related to work performed in the AIR insulin and AIR human growth hormone programs. Cost of goods manufactured was $4.9 million , all of which related to Risperdal Consta, as compared to 4.1 million in the same period in 2003, consisting of approximately $2.7 million for Risperdal Consta and $1.4 million for Nutropin Depot, which we no longer manufacture.

The decrease in Consta goods manufacture was primarily the result of increased manufacturing volumes of Risperdal Consta. We had gross margins for Risperdal Consta of 70% this quarter. For the fiscal year, we expect our total gross margins to be in the range of 60 to 65%. Those margins for the full year are brought down mainly by the inclusion of cogs for Nutropin Depot from the June quarter. Research and development expenses this quarter were 20.1 million compared to 21.1 million for the same period in 2003.

Sales in general administrative expenses this quarter were 6.9 million compared to 6.5 million for the same period in 2003. At December 31, 2004, we had cash in total investments of $83 million, as compared to $102.8 million at September 30, 2004. The decrease in cash in total investments during the quarter was primarily the result of cash used to fund Alkermes' operations, and to acquire fixed assets. In addition, as I mentioned, we raised net proceeds of $145 million from the placement of manufacturing and royalty secured notes bringing our pro forma cash balance to over $200 million.

I would now like to conclude with an update on where we stand on the guidance for the fiscal year. Our key financial drivers are proceeding as anticipated. Risperdal Consta revenues are growing. Lilly is moving forward with a development of pulmonary insulin, and Amylin has initiated a multidose study for exenatide LAR.

Back in November 2004, we provided guidance for research and development revenues in the range of 40 to $60 million for the fiscal year ended March 31 2005. Actually, excuse me, that was May 2004 we provided that guidance. Which included anticipated revenue of between 15 and $30 million for a partnering transaction with respect to Vivitrex. This guidance represented our best projection at the time. We're currently in discussions with interested parties.

We continue to be focused on signing a deal that will create long-term value for shareholders, but the timing and successful conclusion of such discussions may not result in the closing of such an alliance by the end of march. As a result, we're removing revenue from a Vivitrex partnership from our guidance for research and development revenues. This will decrease our R&D revenue guidance by 15 to $30 million, from a range of 40 to $60 million to a range of 25 to $30 million.

With this adjustment, our total revenues are now expected to be in the range of 72 to $80 million, revised from early expectations of 85 to $115 million. With only two months left in the fiscal year, we're also tightening our financial expectations for our manufacturing royalty revenues, as well as cost of goods sold. I'll quickly review those major line items now. We're tightening our expectation for Risperdal Consta manufacturing revenues from a range of 38 to $46 million to a range of 38 to $40 million.

The major driver for this change is the current timeline for shipments from our second bulk line, which are now targeted for April. We expect manufacturing revenues to be in the range of 10 to $12 million for the quarter ended March 31. We're raising our expectation for royalty revenues from a range of 7 to $9 million, to a range of 9 to $10 million based on higher than anticipated sales of Risperdal Consta.

We're reducing our expectation for cost of goods manufactured for fiscal 2005 from a range of 19 to $23 million to a range of 16 to $18 million based on our tighter expectations concerning production volumes. Research and development expenses are still expected to range from 84 to $94 million, and our expectations for sales general and administrative expenses remain in the range of 29 to $33 million.

To conclude, our fiscal 2005 net loss on a pro forma basis, excluding any restructuring charges and non-cashed derivative items, is now expected to be in the range of 60 to $70 million or approximately 67 to $0.78 per share. This change again is driven by a reduction in the anticipated research and development revenues as I discussed. As a reminder, the net loss per share calculation is based on an estimated 90 million shares of our common stock outstanding on a weighted average basis.

In summary, we've had an important quarter financially. Risperdal Consta sales levels continue to ramp and we've delivered a solid manufacturing performance during the quarter. Expenses remain in line with our expectations and our losses narrowed. Finally we've closed the novel non-equity linked financing for Alkermes, that allows us to take advantage of the great prospects for Risperdal Consta to fund our business today while retaining the upside in the product.

A lot of people at Alkermes have been working very hard to execute on these goals, and we intend to continue those efforts and look forward to keeping you up to date with our financial progress. I'll now turn the call over to Rich to review our pipeline progress and upcoming milestones.

Thank you, Jim. Congratulations on getting that financing done. I hope you all take the time to understand the structure of that financing. It's quite unusual and I think it speaks to the specific circumstances, and the strong circumstances we find ourselves in with Risperdal Consta today.

So where do we stand? As we go through fiscal 2005, we've been focused on advancing our business, ramping up the production of Risperdal Consta and applying these increasingly proven technologies and manufacturing techniques to our next generation of product candidates.

Looking forward, our perspective is that all the elements integral to advancing us toward the pharmaceutical company that we expect to become are now in place, and we have a number of potential catalysts for significant growth during calendar 2005. First, let's talk about Vivitrex. Our overall perspective is that we are in extremely attractive situation for Vivitrex, based on three factors.

First, the significant market opportunity that we see in alcohol dependence. Second is the imminent NDA filing for the product, and third is the stronger financial profile that we have today, which provides the resources needed to lay the ground work for a successful target launch and stronger interactions with the potential pharmaceutical company partners.

Vivitrex is a major medical and commercial opportunity for this company. As the program matures, our confidence and our enthusiasm keep growing. Why? Why is that happening? I would say it's because of two main reasons. First, we've gotten more sophisticated in our understanding of the inherent value of Vivitrex, as evidenced to date in our safety and efficacy studies, more fully recognizing the potential medical benefits that we can provide to alcohol dependent patients and how Vivitrex can be integrated into treatment protocols.

Second, on our own and through this extensive diligence process that we've been through with potential commercial partners, we're obtaining extensive market research, re-enforcing our thesis that alcohol dependence is a significant unmet medical need, that there are identifiable patients and physicians engaged in active treatment protocols, and that these patients and these physicians can be accessed by a specialty pharmaceutical sales and marketing effort.

The more we learn about alcohol dependence, the more confident we become that a long-acting injectable such as Vivitrex could provide an important treatment option for patients struggling with this disease. Now with respect to our partner activities, let me be extremely clear. We're still very interested in a partnership that could expand the commercial opportunity for Vivitrex. As I just mentioned, our partnering discussions have confirmed in our minds the opportunity we see in the medical and commercial marketplace.

And we continue to see significant interest from potential partners, interested in forming an alliance to commercialize Vivitrex to better target this large pool of alcohol dependent individuals whom we may help. It's an interesting situation because it's both a specialty opportunity through a targeted specialty sales force, but there is also a very large potential population of addressable patients and this is the logic of collaboration.

Most importantly, in terms of the development activities here within the company, we remain on track to file the NDA for Vivitrex during the first half of this year. The 12-month safety study expected to be completed in April, and we've already obtained favorable preliminary 6-month data. On the manufacturing side, validation and CMC activities necessary for MBA submission are progressing.

From a commercial perspective, we're continuing to develop our strategy for launching Vivitrex to the core market, comprised of psychiatrists and addiction treatment specialists. Net net our planning case is that we will be filing this product in the first half 2005 and launching this product in 2006, and that's an incredibly invigorating set of circumstances for the company. Turning to Consta, we continue to see strong sales growth as Jim mentioned. With J&J reporting sales of $106 million in their fourth quarter.

With recent launches in Russia and in China, Consta is now launched in more than 45 countries worldwide and approved in over 65 countries. Here in the U.S., reimbursement was recently secured in Texas, which I believe was the 49th state and J&J is continuing to work with Medicaid officials in New York.

Beyond their sales efforts, J&J continues to invest in Consta's future growth. On the clinical side, J&J continues to report on encouraging data on the efficacy and quality of life from phase four studies with Consta, most recently presented at the AC&P meeting in December. In these recent phase four studies, patients who were stable on oral therapy benefited by switching to maintenance therapy with Risperdal Consta, and showed improvement in measures of functioning and maintenance of quality of life.

In addition, as they reported in their recent year-end conference call, J&J is beginning a phase three clinical program with Risperdal Consta with a goal of expanding the label, to include maintenance therapy for bipolar disorder, an important part of the market for all atypical antipsychotics. The success of Risperdal Consta is derived from its ability to improve outcomes for patients with schizophrenia. And we and J&J believe, that it is a potentially important drug for treating these other diseases as well.

Finally, as Jim mentioned earlier, J&J has also made take commitment to increase that production capacity for Consta and has agreed to fund a third bulk line for Consta at our plant in Wilmington, Ohio. J&J's goal is to have the third production line ready to produce product in the 2007 timeframe. So, clearly J&J and we continue to have a strong commitment to Consta, and we're planning now for the continued growth of Consta into 2007 and beyond. That is why we tend to refer to it in our conversations with you all as the financial foundation of the company going forward.

Turning to the diabetes franchise, we achieved important milestones during this past fiscal year. We secured a positive product decision from Eli Lilly for AIR insulin, and together with Amylin and Eli Lilly concluded the successful phase II single dose study of exenatide LAR. Despite the advent of oral therapies for diabetes, the majority of patients are unable to control their blood sugars, new alternatives are needed and we're excited to be working on two product candidates with the potential to provide new treatment options for diabetes patients.

With Amylin, they've recently announced the initiation of a Phase II multidose study of exenatide LAR in patients with type 2 diabetes. This decision was supported by positive data from the recently concluded single dose study in approximately 60 subjects with type 2 diabetes, who were failing to achieve adequate glucose control using diet and exercise with or without metformin.

Subjects were randomized to receive a single subQ injection of exenatide LAR at one of four doses or placebo and the intended multi week release profile for LAR was observed over 90 days. Data from the single dose study showed that exenatide LAR is generally well tolerated with limited incidents of nausea.

In the multidose study, now underway, subjects will be randomized to receive once-a-week injections of LAR or placebo for 15 weeks and will be followed for another 12 weeks after the last LAR dose. The primary objective of the study is to assess its safety, tolerability, and the pharmacokinetics of the exenatide LAR, when administered weekly over this time period. Amylin anticipates the study will be completed by late 2005 or early 2006.

On the inhaled insulin side, together with Lilly we're continuing to ramp up development activities for AIR insulin. The development program as many of you know is extensive and it's designed to provide a robust data set that will ultimately support an NDA submission. Clinical studies in patients with type two diabetes and in special populations are currently ongoing, and Lilly expects to begin the key two-year safety study this year.

On the manufacturing side, our Chelsea facility is now producing inhaled insulin at a commercial scale, and already it has the capacity to meet the demand for the initial commercial launch. So, to wrap up the progress we've made so far during the fiscal year sets the stage for a number of achievements to come.

Looking forward, you should be watching for the following things, obviously, our ongoing work toward this announcement of a partnership for Vivitrex, the filing of an NDA for Vivitrex in the first half of the year, the presentation and publication of Vivitrex clinical data, the start of the two-year safety study for AIR insulin in 2005, production of Risperdal Consta on line two our new manufacturing line in Ohio, and the initiation of expansion of line three, and continuation on our path to profitability by the end of 2005 driven by continued revenue growth in Risperdal Consta, additional approvals, launches worldwide and our partnering on Vivitrex.

We're very excited about these milestones and the potential value we see creating in this relatively compressed time frame. We look forward to updating you on these developments on our future calls. So, with that, we'll take your questions. Jim and I are both here. Operator, go ahead.

[Operator Instructions].

Our first question comes from Ian Sanderson from S.G. Cowen.

Good afternoon. Thanks for taking the question. A couple of questions. First, on the financing, and maybe you can actually -- this may be a better question to be addressed of J& J, but you can give your perspectives. Given that they are working on Paliperidone, what is the risk that the -- several years out, the royalties and manufacturing fees on Risperdal Consta, if they replace it with Paliperidone sometime in the future, don't meet the debt service requirements to what I realize this is non recourse to Alkermes, but what would be the recourse of the holders at that point?

Number two, you mentioned additional Vivitrex data presentations. Will this just be the safety data or are there additional efficacy data that have not yet been presented? And then Exenatide LAR or AIR insulin, might we see some of those phase two data at the ADA meetings?

Let me start and I'll let Jim give you the key bits on the financing, but, Ian, I just want to make sure to -- you understand something about paliperidone palmitate and Risperdal Consta. Just to be clear, Risperdal Consta is a very significant brand growing significantly, with a lot of patent life ahead of it.

I don't think -- I don't foresee any potential for any pharmaceutical company to swap a large product with long patent life for another product that makes it through the FDA sometime in the future. So, I think we and the investors in this type of deal understand that what we're building is a very large franchise in Consta which we expect to exist over time.

Actually, just as a follow up, can you address the patent life relative to the 2012 term of the debt?

Yes, the patent life on Risperdal Consta actually runs out to 2018, which is the ultimate final maturity if you look at the debt, what the 2012 is just the expectation based on, you know, the model essentially that the independent consultants did, that's the expectation that this debt will all be paid off by then.

Okay.

It could be paid off at a different schedule depending on what the actual cash flows are.

Okay.

Yes, we see Risperdal Consta is going to continue to ramp based on J&J's projections for many years ahead of us, and to the extent of paliperidone palmitate makes it into the market sometime later in the decade, it will have its own growth trajectory but it's not going to be something where your going to see a wholesale switch of thousands of patients from one efficacious drug to a brand-new approved drug. So I wouldn't model it that way, I think that's incorrect. With respect to the Vivitrex, one of the key milestones for the 2005 year will be the publication of the efficacy results.

You've seen those presented in scientific meetings but not seen it published in peer review journals. We have safety data we'll be able to present and also just as we continue to look at analysis of our efficacy results, other than those originally contemplated in the first presentation, you'll be going to see that as well. So, there should be a fair amount of discussion about--about Vivitrex looking ahead. With respect to LAR, I'm not sure what they've disclosed publicly on their timing of LAR. (Indiscernible) you should direct towards Lilly and Amylin

And then AIR insulin, I believe there was originally planned to be something in phase two data at ADA, is that correct?

It is interesting for insulin, this will be the first year where you really start to hear the drum beat with data presentations at ADA on pulmonary insulin, from Lilly.

Okay. Thank you.

Jim, you want to -- you got anything else?

No.

Okay. Good.

Thanks.

You're welcome.

Thank you. Our next question comes from Thomas Wei from Piper Jaffray.

Thanks very much. I also just wanted to follow up on the Consta monotization deal. You had said historically that you didn't see there being a need for additional financing following the last convertible then offering. What has changed here to cause you to choose to monotize this asset, and I'm trying to figure out what you're going to be investing that money in and how that would not change your guidance for profitability?

Sure, Thomas. I think that, when we looked at this offer from our friends at Morgan Stanley, that they could raise this kind of money for us at these terms, non recourse to Alkermes and still allow us to keep excess cash flows of Risperdal Consta, the ability to take advantage of some money today, it's just always nice to have extra money in the bank for a cushion.

Our expectations that Risperdal Consta is going to grow and I think we've seen the beginning of that, you know, we're beginning to see it unfold as we had expected and we expect it to continue too. So, I just think it's -- you know, if you look at our peers, they have 3, 4, $500 million in cash on the balance sheet, and this just gives us a manner of cushion as we move forward.

I think the investment also -- it allows us to continue to invest in Vivitrex and not be pressured to do a partnership at any time, given the -- as the passage of time, we think the Vivitrex story and we think the Vivitrex product and the Vivitrex opportunity just increase.

So -- and really, the target to profitability, I think you can look from the last quarter, the underlying base business that we have is going beautifully and just as we had expected. Our losses are narrowing, Risperdal Consta sales are growing and that's what's going to drive this to profitability. What would keep us off that scale is really launching a product like Vivitrex and spending the money on that launch, and we think a partnership is going to be able to offset the vast majority of those costs and keep us on the target for profitability by the end of this year.

And so it doesn't sound like the proceeds of this offering would go towards toying with going it alone on Vivitrex? That's not really in the cards?

This is Rich. I wouldn't make that connection. From my point of view, what it gives us the ability to do is, in these discussions with potential partners, is be less attractive to the up front cash , i.e., we have now the financial strength to sit back and say we're driving this deal based on the financial parameters that matter the most, which is long-term EPS accretion.

So as I said in my earlier remarks, we are quite convinced of the ability to launch this product and address a targeted specialty application for it. But we also are cognizant of the fact that a halo of a broader calling pattern around that specialty launch that we would do by ourselves should drive the expected value of the product for Alkermes. And now instead of -- we can -- we're motivated in (indiscernible) towards those type of ends as opposed to -- as a surrogate for financing, if that makes sense.

Thanks. I'll jump back in the cue.

Thanks.

Thank you. Our next question comes from Jim Reddoch from Friedman Billings.

Hello. You know, based on your comment to that last question, it sounds like it's probably good for you taking the $15 million out of this year and putting it into next year, to put it into simplistic terms, so would that be a fair way to look at the deal with the information that we now have in hand?

Jim, you broke up a little bit on that. Did you say is it basically a timing phenomena as opposed to a yes or no phenomena?

No, I was asking it doesn't sound like this $15 million that you've kind of guided -- 15 to $30 million that you've kind of guided to previously as the upfront, that that is necessarily what we should be thinking of is the upfront payment now, because you have the strength to make it more back end loaded.

You know, I wouldn't give you any precision over that number right now, just because there's a certain amount you're going to want to see out of somebody upfront just as an indication of seriousness of intent. Right?

So I think that we're still looking for the type of transaction where people are making a significant financial commitment to it, but the back end component of it is really important to us as we look at the cash on cash value of these deals over time.

Okay great. And over to AIR insulin, the two-year safety study, can you just talk about the safety end points, distributing, monitored there and if lung function is one of them, how that's being measured and will there be efficacy end points in that, is that a phase III or a phase II?

Well, because it's not an efficacy study, it is a really safety study, its formal designation I believe is phase II, but if you look at the project plan for pulmonary insulin, the over arching timeline issue that other programs fall underneath, or other clinical trials fall underneath is that two-year safety study.

I think if you look to the Pfizer nectar type structure, you'll get a good sense that where lung function is absolutely being measured and the typical pulmonary function tests of FEV1 and the like along with the DLCO measurement that have become common in these studies will be employed, but we'll use the phase three studies which fall underneath that umbrella as the key efficacy study and the safety study will be the safety study.

Have patients -- are patients still being dosed from earlier trials with AIR insulin? Do you have a database of longer-term safety is being dealt now.

I think that we've run so many different clinical trials of pulmonary insulin right now, we're beginning to get a sense of its safety, but you really, the reason you do these well-controlled long-term studies is to really ask the question from a scientific point of view in a defensible way and answer it that way, so I wouldn't make any premature statements about pulmonary insulin safety, other than so far so good and we'll run the study and our expectations post prior decision are that the product profile looks really attractive.

Okay. Thanks.

Thank you. Our next question comes from Jeff Reich from Merrill Lynch.

Hi, Rich, it's actually Stu.

Hi, Stu.

Can you sort of drill down on some of the partnership issues on Vivitrex considering you've been promising a deal since last May? I think specifically can you give us some confidence that once you open up your component of potential partners that they just don't like what they see?

Yes, I think it's a fair question. Is the reason why you keep on slowing this announcement is because nobody loves you, and I think you just have to take my word for it, that that's not the case. We have a lot of interest in the product, and it's interesting to see the profile of the interaction changed over the course of the last six or eight months.

In May, for example, when we gave the financial guidance for the year with the expectation that we'd probably to do a partnership this year, the diligence questions, a lot of them were focused around phase three clinical trial results, safety, scale up, regulatory strategy and the like.

Now it's very much further along as we're pulling the NDA together, most of the diligence issues relate specifically to market, size, pricing, sales force configuration, strategy, brand, those type of things and those are really rich areas for discussion and disagreement with potential partners.

And that's really where the action is now. We are quite confident in our ability to file the NDA on time and while one never knows, our expected path through the FDA, at least in our minds it is quite clear. So what we're really doing now is just having a series of very focused discussions with pharmaceutical companies and biotech companies about how best to approach this product, with this idea that there's a specialty core to it and a broader calling pattern probably around it.

Can I ask a financial question as well?

Sure.

How did you weigh doing the deal that you did with the 7% interest rate versus doing a convert as a lot of other companies have done recently, where rates are now in the very low single digits, the 2 to 2.5%?

The problem we have with the current convert is twofold, and I'll let Jim give his point of view. Number one, the nominal interest rate is low, but you're selling stock at a premium today's price and we just have a hunch right or wrong that we're approaching a value a revaluation point for our equity. So we're quite stingy about the equity at this point knowing what we know.

Number two, is that as we've experienced before and you have personally, when you've put in converts, you've set up a hedging situation, which I think weakens these stocks for a certain period of time, and we just -- we've been through that before, we didn't see a need to do it again and this deal was sufficiently idiosyncratic and as you dig into it, you'll begin to see how it's remarkable that we have people who are willing to do essentially equity-like diligence on the Risperdal Consta prospect secured only by the future sales of Risperdal Consta with a capped upside and all the upside goes to us.

So we think from a Risperdal Consta capital point of view when you run the numbers, which we have done extensively the breakevens argue significantly that if you believe that your stock is going to be moving up, this is the deal to do.

Just as you look forward to -- over the longer term and if you believe J&J's projections for where Risperdal Consta is heading, then, you know, you become very stingy with your equity, and this is a very low risk financing from Alkermes' point of view, based on our expectation of Risperdal Consta, and we just felt it was a very good way to give us some extra cash on the balance sheet, enhance the value of Risperdal Consta, and not have to take dilution long-term that's going to affect Risperdal Consta, going to affect Vivitrex, and it is going to affect pulmonary insulin and all those things are going to look a whole lot better in the future because we haven't issued equity here.

I think about it this way, in a way Stu, is that the Delta between the, the 2% overnight deals that people are doing and the yield on our deal, is with that extra money you're essentially buying stock.

Okay.

All right.

Thank you. Our next question comes from Harry (inaudible).

Yes, thank you. Just one quick clarification on the transaction, in this financing transaction. As I understand it this will not convert to equity and this is non-recourse, type of transaction. In the event, say, for example, that, for whatever reason that Alkermes is unable to sort of make the principal interest payments, would you sort of explain to me how I mean, what happens to the debt in that particular situation? I mean, what recourse as the debt holder, have in that particular situation if there's no equity involved?

Sure, Harry. It's James Frates. So what happens is that again we have this interest only period and as long as we can cover the interest payments, then the principal repayment is all the way out at the end of 2018.

Yes.

At that time if the cash flows from Risperdal Consta have not returned the interest and the principal, then the bond holders essentially take the rights that we have under Risperdal Consta as their own. So there are recourse essentially is the product but our view is --

So essentially they will essentially take all of the revenues from Risperdal Consta from you and that's it?

At that point, exactly, and very interestingly, after they get their principal and interest back, we get the residual rights to that product.

So, in other words the fully diluted share account here does not change at all?

That's correct. And that was, obviously, very important for us.

Okay now that's what I wanted to find out, thank you.

Thank you. Our next question is a follow-up from Ian Sanderson.

Thanks. It appears that the manufacturing fees on Risperdal Consta are running a little bit ahead of the end market sales over -- actually ever since you've been booking them so it appears you've been building inventory and explain to me if that's an incorrect assumption, but my question is when do you see that flattening out, i.e., when do you see the manufacturing fees matching up to the royalties in terms of implied end market sales? Would that be in the coming fiscal year or is that still a couple of years out?

Ian it's Jim. I think that, you know, one thing you do need to be cognizant now is that you go back and look at the historical manufacturing fees is that, you know, remember, we go back we go down at 7.5% on a going forward basis but historically, in the first year of launch it was as high as 7%, I think in last year fiscal year it was like 9.8.

Right.

So you do have to take that into account and you also have to take into account that there is, obviously, inventory in the system and we've sort of guided people to about three to six months of inventory. So with that being said, we're actually not running too far behind the sales growth curve as we stand today, and as I look forward and we're going to give more updates on this in May, I think there is, again, if J&J's expectations and projections are right, we see some period of time before we have to worry about the manufacturing revenues slowing their growth.

So is the delay in coming online, the second line coming on line a manufacturing issue or a demand issue with J& J?

Certainly not a demand issue, really just a timing issue of, you know, we have a lot of people doing a lot of work, producing almost three million vials of Risperdal Consta, getting the Vivitrex NDA filing done. It's really just it's happening in April instead of March, so you see they are little delayed. It's really just it's got nothing to do with the demand pull.

Okay. Thank you.

You're welcome.

Thank you. Our final question is a follow-up from Thomas Wei.

Thanks very much. I had wanted to ask once again about the profitability goal for calendar end 2005, which you mentioned would be contingent on doing that Vivitrex partnership. Should we think of that as profitability on a sustainable quarterly basis from that point or is that related to some one-time payments that you're assuming for Vivitrex?

No, I'm looking at it as a sustainable point. You know, with the caveat I'm not sure how the stock option expensing final rules will take place. But on an operating basis I'm looking at it as an ongoing target. Not just a one-time payment cause, and I think that that being said, it really all relates to what the Vivitrex deal looks like. I mean, the real question is, who is going to be paying those marketing fees as we start to launch the product, and really hire a sales force, because that's an expensive proposition.

If Alkermes is doing that, entirely by it and then profitability will probably be delayed a few quarters. Our expectation is that we'll be working with a partner to do that in a certain way and it's going to depend on the configuration of that deal, but I think the reason we keep mentioning it is because Richard and I and our board, and the rest of the management team here are very, very focused on that goal of profitability.

And it's something that we're going to keep foremost in our mind and aim to work towards, and as we said in the beginning, one can never really know what happens in the future with all the various challenges that companies like this face, I think it's very important for people to know that that's our goal on an operating basis.

Thanks.

Thomas, I'll just finish by saying, what I won't do, all by myself, and we'll have a vote around here on it, but I'm not willing to trade massive EPS dilution in the out years in order to make the profitability goal on a particular quarter at the end of 2005.

Now I'm not signaling that that's not what we're going to do, it's just that the tradeoffs are such that in structuring the deal as Jim referred to, you often make really tough decisions about up-front money and funded development money and funded market expense versus what you share on the back end and that's the tension, that's why the negotiations are so interesting.

Well, thank you, everybody for your attention. Both Rich and I will be here to answer questions if people have further ones, both tonight and tomorrow. And we look forward to seeing you soon.

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