Alkermes Plc (ALKS) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Alkermes conference call to discuss the company's third quarter of fiscal 2006 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 conference is being taped by Alkermes' request. At this time I would like to introduce your host for your call today, Miss Rebecca -- I'm sorry, Miss Rebecca Peterson, Vice President of Corporate Communications at Alkermes. Please go ahead.

Good afternoon, and welcome to the Alkermes conference call to discuss the financial results for our third quarter of fiscal 2006, which ended on December 31, 2005. With me this afternoon are Richard Pops, our CEO, and Jim Frates, our CFO.

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, our expectations concerning the timing of the submission of our complete response to the FTA for Vivitrol, and of the FTA's response to such a submission, regulatory approval for and the timing of the launch of vivitrol, the timing of the recognition of manufacturing revenue, net collaborative profit, and milestone revenue related Vivitrol. Reimbursement for and the successful commercialization and manufacture of Risperdal Consta and Vivitrol, development of Risperdal Consta for new indications, the successful continuation of development activities for our program, including the commencement and success of long-term safety and efficacy studies for [[Exenatide]] LAR and AIR insulin.

Potential therapeutic benefits of our diabetes products, the manufacture of [[Exenatide]] LAR by Amylin, and our future financial and business performance, including our revenue expense, capital spending expectations, operating plans, operating profitability, break even, sustain profitability, 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 our actual results to defer materially from our results contemplated by the forward-looking statements. In particular, the risks and uncertainties include, among other things, whether we can continue to manufacturer Risperdal Consta on a commercial scale, economically or in sufficient quantities to supply the market, and whether Risperdal Consta will continue to be commercialized successfully.

Whether we can successfully scale up and manufacture Vivtrol at a commercial scale or economically, whether Vivitrol will ultimately receive marketing approval in the U.S., and, if approved, whether it will be launch commercialized successfully by our partner Cephalon.

Whether we are successful in continuing the collaborative development of AIR insulin, [[Exenatide]] LAR, and AIR PTH programs, our abilities to transfer manufacturing technology to Amilyn and Amilyn's ability to successfully operate the manufacturing facility for [[Exenatide]] LAR, the likelihood of the conversion of our 2.5% convertible notes, the impact of the adoption of FAZ 123R, relating to the accounting treatment for stock options that may have in our ability to sustain profitability, and those other risk factors contained in our press release announcing our recent results and our periodic reports filed with the SEC, including but not limited to our annual report on form 10 K for the year ended March 31, 2005.

We undertake no obligation to update or revise the information provided in this call, whether as a result of new information, future events, circumstances, or otherwise.

This afternoon, Jim will discuss our third-quarter fiscal 2006 financial results and provide an update on our financial expectations for the fiscal year. Richard will then provide an update on our pipeline and our outlook on our business. We'll then open it up for Q&A. Now I'll turn it over to Jim.

Thanks, Rebecca. Good afternoon, everybody.

I'm pleased to report a strong third fiscal quarter, and a second consecutive profitable quarter driven by revenues from Risperdal Consta and net collaborative profit related to the Vivitrol program. With the recognition of more than $112 million in total revenues for the first three quarters of fiscal 2006, we've reached an important milestone for the company as we plan for sustained profitability and earnings growth. In addition, we ended the quarter with more than $319 million in cash and total investments, which will be further enhanced by the $110 million payment to be received by Cephalon should the FDA approve Vivitrol.

I'll now turn to our financial results for the fiscal third quarter. Our net income on a GAAP basis for the third quarter ended December 31, 2005, was $1.4 million or $0.02 a share, as compared to a net loss of $9 million or $0.10 a share for the quarter ended December 31, 2004. The specific line items are as follows. Total revenues, comprised of manufacturing revenue, royalty revenue, R&D revenue, and net collaborative profit were $41.4 million for the quarter ended December 31, 2005, compared to $23.6 million for the same period one year ago. This growth involves increases in each of the revenue categories.

Total manufacturing revenues were $14.7 million, and $13.9 million for the quarters ended December 31, 2005, and 2004 respectively. The increase in manufacturing revenues was due to increased shipments of Risperdal Consta to our partner Jansen to satisfy increased market demand. Total royalty revenues were 4.2 million for the quarter ended December 31, 2005, as compared to $2.7 million for the same period one year ago. Of which 4.2 million and 2.6 million, respectively, related to Risperdal Consta. The increase in royalty revenues was due to an increase in global sales of Risperdal Consta by Jansen.

Research and development revenue under collaborative arrangements for the quarter ended December 31, 2005, was $10 million, compared to $7 million one year ago. The increase was primarily due to an increase in revenues related to work performed on the AIR insulin and [[Exenatide]] LAR programs. Net collaborative profit related to the Vivitrol collaboration with Cephalon was $12.5 million for the quarter ended December 31, 2005. This consists of $17.9 million of milestone revenue, recognized to offset expenses incurred on the product by both Alkermes and Cephalon, less the $5.4 million of payments made to Cephalon to reimburse its expenses relating to the product. Alkermes did not record any net collaborative profit in the quarter ended December 31, 2004.

Cost of goods manufactured for the quarter ended December 31, 2005, was $6.1 million, as compared to $4.9 million in the same period in 2004. All of which related to Risperdal Consta. The increase of cost of goods related to Risperdal Consta was due to increase shipments to meet increased demand for the product. Research and development expenses this quarter were $22.5 million, compared to $20.1 million for the same period in 2004, reflecting an increase in headcount and associated work on key development programs, in addition to a one-time lease charge related to a loss on a sublease agreement signed in November, 2005.

Selling general and administrative expenses were $9.3 million in the quarter ended December 31, 2005. Compared to $6.9 million for the same quarter one year ago. This mainly reflects an increase in selling and marketing costs as we prepare for the commercial launch of Vivitrol.

Interest income for the quarter was $3.3 million, compared to $.6 million for the same period one year ago, reflecting higher average cash and investment balances held and higher interest rates during the quarter, as compared to the same period one year ago. Interest expense was $5.2 million, compared to $1.2 million for the same period last year. The increase in interest expense was primarily the result of the nonrecourse Risperdal Consta secured 7% notes.

At December 31, 2005, as I mentioned, Alkermes had cash in total investments of $319 million. We achieved another important milestone during the quarter, resulting from the strong stock price we have experienced. As we met the auto conversion criteria for a 2.5% convertible notes. You may recall that Alkermes secured the option to convert this $125 million issue into common stock. Once our stock traded above $20.78 for 20 out of 30 trading days. We reached that threshold last week, and we now have the option to eliminate the this debt from our balance sheet at any time by exchanging it for our stock. This early conversion is exactly what we anticipated when we issued the convert subordinated notes in 2003.

We have not yet exercised this right, but we are able to do so, and we are pleased to have the ability to further strengthen our financial profile here at Alkermes. From a financial perspective, the notes would convert into approximately 9 million shares of common stock. Keep in mind that the addition of these shares will impact the basic and diluted EPS on a weighted average basis once the convert is actually converted. The potential impact or income statement, if we choose to convert the notes before March 31, would be an additional one-time net interest expense of approximately $800,000. Of course, going forward, we would eliminate and we will eliminate $3.1 million of annual interest on the bond once it's converted.

I'll now conclude with an update on our financial expectations for the fiscal year. Please note that I will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For information with respect to the factors that could cause our actual results to differ materially from our expectations, please see the risk factors at the end of our press release, which is available on the Alkermes web site or in more detail in reports filed by us with the Securities and Exchange Commission under the Securities Exchange Act of 1934 as amended, including our annual report on form 10 K for the year ended March 31, 2005.

The changes we are making to our fiscal 2006 expectations resulted in improvement of our proforma net loss, which we now expect to range from break even to a net loss of $10 million. That's revised from an earlier expectation of a proforma net loss of 13 to $23 million.

I'll quickly review the major line items now. And they're also found in our press release. We're adjusting our expectation for total revenue to a range of 145 to $165 million, revised from an earlier expectation of 150 to $170 million. We expect manufacturing and royalty revenue to range from 75 to $85 million, revised from an earlier expectation of 85 to $95 million. Due to timing of shipments of Vivitrol to Cephalon, more specifically, we're making this adjustment based on our expectation that we will begin recognizing manufacturing revenue related to Vivitrol in the first quarter of fiscal 2007, which begins on April 1, 2006, rather than the fourth fiscal quarter of fiscal 2006, the quarter ending in March.

We expect R&D revenue under collaborative arrangement to remain in the range of 35 to $40 million. We expect net collaborative profit to range from 35 to $40 million, revised from an earlier expectation of 30 to $35 million, reflecting higher spending on Vivitrol than originally anticipated. We're reducing our expectation for costs of goods manufactured to a range of 20 to $25 million, revised from earlier expectations of 33 to 38. Of this reduction, $10 million relates to the fact that we now expect to begin recording costs of goods manufactured relating to Vivitrol in the first quarter of fiscal 2007, as I just mentioned, to match the shipment and the recognition of revenue with those batches. And $3 million of the reduction in Cogs comes from a shift in the timing of shipments of Risperdal Consta.

Research and development expenses are expected to remain in the range of 80 to $90 million. We're adjusting our expectation for selling general and administrative expenses to range a of 40 to $45 million, revised from an earlier expectation of 45 to $50 million due to the timing of hiring the Alkermes commercialization team and the transition of certain expenses to Cephalon.

As a result of the changes I just reviewed, we expect operating income, that is income before net interest expense, other income/expense, and derivative loss or income relating to our convertible sported in notes to be in the range of a positive 5 to $10 million revised from an earlier expectation of an operating loss of 3 to $8 million. We expect net interest expense to remain in the range of 10 to $15 million, and finally, our fiscal year 2006 net loss expectation on a proforma basis is now expected to range from break even to a net loss of $10 million or approximately $0.00 per share to a net loss of $0.11 per share revised from an earlier expectation of a net loss of 13 to $23 million or approximately $0.14 to $0.25 per share.

As a reminder, the basic proforma net profit or loss per share calculation is based on an estimated 92 million shares outstanding of the company's common stock on a weighted average basis. This excludes the impact of the potential conversion of our 2.5% convertible supported ended notes into common stock, which would increase the number of shares outstanding by just over nine million shares, as I previously mentioned. We expect capital expenditures to remain at approximately $35 million for the year.

In summary, in many ways our calendar 2005 was a transformational year for Alkermes. We now have two consecutive profitable quarters, and if our key programs perform according to our expectations, we expect that we can sustain this operating profitability, excluding any impact of our adoption of FAZ 123R, which is the non-cash charges associated with stock option expensing. We're excited about the profile of the company, and we're continuing to work hard to achieve the goals we've set for calendar 2006.

I'll now turn the call over to Richard.

Great, thank you, Jim.

The synergistic, complexity and progress of the business is evident just in Jim's summary of the financial performance. We've had a goal here that you're familiar with, our goal has been to leverage these technologies to build a multi-product company. And 2005 was our strongest year yet in terms of execution here toward that goal. With Consta on the market, Vivitrol nearing approval, and AIR insulin and [[Exenatide]] LAR in late-stage development.

The financial profile of the company and, in particular, the financial expectations for the current fiscal year that Jim outlined today, demonstrate in a concrete way that we're moving toward break even, which obviously is a significant achievement for any biotechnology company. From our perspective though, it's more an achievement to project earnings growth beyond that driven by innovative products to treat major diseases. Products that have the potential to meaningfully enhance health-end outcomes for patients. Having said that, I'll comment now specifically on progress we're making with some of the major programs that you all are following.

First, let's talk about Consta. We developed Risperdal Consta out of the strong conviction that administration of a long-acting medication is a better way to treat patients with schizophrenia, and we're seeing this hold true, this promise come true in clinical practice. J&J, our partner, continues to build on the clinical foundation for Risperdal Consta. Data presented at the AC&P meeting in December demonstrated that stable patients treated with Consta showed low rates of relapse and rehospitalization. In addition, J&J presented preliminary data from a study of Consta in patients with bipolar disorder. Data which supported the development of Consta for this new indication.

Both we, and I think it's fair to say J&J, view Risperdal Consta as a growth driver for our companies. J&J recently reported Risperdal Consta sales of our approximately $170 million in their fourth quarter, which accounted for more than 19% of the Risperdal franchise. We expect continued sales growth as J&J finalizes reimbursement for the product. Risperdal Consta is now covered by New York Medicaid and by most Medicare part D formularies. On the manufacturing front, we are shipping product from two commercial lines in Ohio, and we're continuing our work on our third bulk production line for Risperdal Consta.

I'll shift to Vivitrol, which, as you know, that's the next product we expect to reach the marketplace for Alkermes. The FDA's approvable letter for Vivitrol was a significant milestone for the company. As you know, the FDA's letter stated that Vivitrol was approvable contingent on two conditions. The first was the finalization of the product label. And second was the satisfaction of a request by the FDA for pre-clinical [pharmacokinetic] data. We're happy to report that just today, just several hours ago actually, we've come to an agreement with the FDA on the second condition, which enables Alkermes to submit a complete response without conducting additional pre-clinical [pharmacokinetic] studies. We expect to file the complete response with the FDA by the end this month.

At this time we're anticipating that our response will be characterized as a class-one resubmission, under which the FDA has 60 days from the time of the resubmission to complete their review. We of course will let you know when we file the complete response so you can mark your calendars then.

At the facility in Ohio, we have an enormous manufacturing effort in place for Vivitrol. We will launch from our first 20-kilogram production line, which is the same scale that we built for Risperdal Consta. We are building our second 20 keg production line. And following the signing of our collaboration with Cephalon, we accelerated the construction of our third line. We've learned a great deal from our experience with Risperdal Consta. We took some extra time in this past quarter to implement process changes in the lines, with the goal of improving operational efficiencies as we move into continuous production following approval and launch. With the final process validation set to begin, we're on track for our planned launch of Vivitrol in the second quarter of calendar 2006.

On the commercial side, much work is ongoing in anticipation of that. We, as we plan for, anticipate the launch of Vivitrol in the second quarter, our work has focussed on our commercialization team, which will augment the Cephalon sales force, which is now fully hired and trained. Our team is an experienced team of 28 individuals, averaging over 10 years of biotechnology and pharmaceutical experience. Particularly in the marketing and distribution of injectable or specialty products. These individuals we refer to now as MMD's or managers of marketable development rather than PSS', which we called them originally to more accurately reflect the work they'll be doing in the field, which includes coordinating the rollout of Vivitrol in the key metropolitan areas.

Cephalon has hired nearly all of the sales reps who will be dedicated to the marketing and sale of Vivitrol, and sales training is underway. We and and Cephalon are continuing to plan for launch activities in efforts to secure the use of Vivitrol among a core group of receptive, influential, and high volume prescribers of medication to treat alcohol dependence. Cephalon's target list includes approximately 8,500 psychiatrists and addiction specialists who treat alcohol dependence, and who will provide a solid foundation for the market expansion in the years ahead.

Although we have a number of milestones still to achieve, we are excited about the opportunity before us and the progress we're making to date. And we look forward to providing you with more details on this exciting product in the coming months.

I'll turn now to the diabetes pipeline. We continue to make great progress in our AIR insulin and our [[Exenatide]] LAR program. The prevalence of diabetes, I probably don't need to say to you, is reaching epidemic proportions, with more than 20 million people in the U.S. with diabetes. Clinical reports suggest that type-two diabetes is being increasingly diagnosed in children and adolescents. Now more than ever, new treatment options that help patients manage their blood sugar are needed.

Recent results from the Epidemiology of Diabetes Interventions and Complications Study, or EDIC, underscore the need for tight blood sugar control. This landmark study showed the type-one diabetics who tightly controlled their blood sugar lower their risk of cardiovascular disease by 42%, and the risk of a serious event, such as heart attack or stroke by 58%. Although the study included only type-one patients, mounting evidence suggested everyone with diabetes benefits from tighter glucose control. Yet the majority of patients are still unable to achieve their A1C targets. With our partners Amylin and Eli Lilly, we're focused on advancing product candidates that could transform the diabetes treatment landscape by providing these simpler dosing regimes, thereby potential increasing adherence and leading to better health outcomes for the patients over time.

The attention surrounding the recent approval of expect Exubera in both the U.S. and in Europe is a testament to the interest and the need for inhaled insulin. Perhaps more importantly from our own point of view is that there's now a clear, proven regulatory pathway to approval in both the United States and in Europe for inhaled insulin. Our next generation inhaled insulin product, AIR insulin, continued to advance in the clinic. We and Lilly now have two long-term safety nets to get these studies underway, which include a 24-month study and 400 type-one patients, and a 12-month study in 600 type-one and type-two patients with mild to moderate asthma or mild to moderate chronic, obstructive lung disease. Additional phase-three studies are planned for 2006, and we'll continue to update you over the course of the year with our progress.

Our other product candidate for the treatment of diabetes is [[Exenatide]] LAR. Also holding a similar promise of providing patients with a new treatment option to give them better opportunity to control their blood glucose levels over time. In January, we and our partners, Amylin and Lilly announced the successful completion of the phase two multi-dose study of LAR. Plans are now underway to initiate a long-term study of LAR during the first half of calendar '06. The stude will evaluate the safety and efficacy of [[Exenatide]] LAR and will include a [bieta] arm for reference.

In terms of manufacturing, Amylin has assumed responsibility for funding a manufacturing facility and for manufacturing the commercial product, with Alkermes overseeing the construction and transferring certain required technology to Amylin. In December, Amylin purchased a facility in Ohio. Discussions with the FDA regarding the clinical program and pass the registration for [[Exenatide]] LAR are ongoing and disclosure on the next steps in the clinical program will be, as usual, made by our partners at Amylin and Eli Lilly. We'll leave that to them.

Beyond these later stage candidates I've just described, we're clearly now planning for the future by applying our technical expertise, proprietary technologies to other new, innovative opportunities. Last month we announced another collaboration with Lilly to develop inhaled parathyroid hormone, or PTH, for the treatment of osteoporosis, a major health threat for people over the age of 50.

Lilly markets an injectable formulation of parathyroid hormone for the treatment of osteoporosis, known as Forteo, which has performed well in the marketplace with worldwide sales of $390 million in 2005. A 63% increase over 2004. There are approximately 10 million Americans suffering from osteoporosis, which is responsible for about 1.5 million fractures each year. Adherence to drug therapy is a problem with many current treatment options as they require patients to administer injections or stand for a period of time following administration. We're very pleased to be developing inhaled formulations of PTH, which could offer patients a more acceptable, simple treatment option for osteoporosis.

So I'll finish. To conclude, we are very pleased with the achievements over the past year. We're building a company that's positioned to deliver shareholder value and earnings growth as we move forward. And one, we've designed to withstand the challenges and risks inherent in the pharmaceutical business. We've set a number of goals to achieve for calendar '06, and you can expect us to update you on the following over the next few months.

Number one, obviously, a complete response to the FDA relating the approvable letter for Vivitrol and the ultimate approval of that product this year. Two, updates on our commercial strategy as we and Cephalon prepare for the launch of Vivitrol in the second quarter of calendar 2006. Three, continued progress in our diabetes pipeline, including the initiation of a long-term study of [[Exenatide]] LAR into the first half of '06 and the presentation of new, clinical data. And four, the continued expansion of this exciting product pipeline.

So we think it's going to be a big year for us, an exciting year for us. We're enthusiastic about what lies ahead of us, and we look forward on reporting our progress during the future calls.

With that, I'll turn it back over to Rebecca.

Thank you. Operator, we'll now open it up for Q&A.

[OPERATOR INSTRUCTIONS]. One moment, ma'am, I'm waiting for the participants to queue up.

Our first question comes from Dave Windley.

Hi, thanks for taking the question. A couple -- Jim, a couple of questions on accounting mechanics with the Cephalon deal to reaffirm my understanding here. In the current quarter, the cost of goods was light of what we were looking for, and we think primarily because of the lack of supplying Vivitrol to Cephalon, that is correct. You pushed that out to first quarter of fiscal '07, correct?

Yeah, that's correct.

Okay. And had it not been for that, revenue would have also been higher by a similar amount? amount?

Yeah, that's correct, as we ship product to Cephalon we'll essentially get paid by them at cost. Plus, we'll have roughly a 10% markup on that, as I'm sure you're aware, will come out of our up-front payment that we received from them.

You impute that out of the milestone?

Exactly.

Now, as I look then at your guidance, as you are talking about increasing spending around Vivitrol, roughly speaking, in anticipation of launch and programs in education and so forth, and raise your net collaborative profit guidance, I don't also see increase -- I see your SG&A guidance actually going down. And I would think that either it would be Cephalon spending, which would net out of your net collaborative profit number, or it would be your spending that would show up on your income statement. So if you could help me to understand that component, I'd appreciate it.

Yeah, that's correct. The other thing, though, Dave, is we've not spent as much in the first couple of quarters. So the increase in -- even though we're increasing SG&A in the fourth fiscal quarter, given what we've spent in the first two quarters, that's why we're lowering our guidance if that makes sense. The full year is coming down even though spending's going up. I see. So it's -- all right. All right. I understand. So it's the full year, but lumping into the fourth quarter? Right.

Okay. In terms -- this gets to yet another, more technical question. But if -- as you work toward the end of this two-year period where you're responsible for the losses in the collaboration and paying Cephalon for those losses, if you get to a point where -- or is there a possibility that you get to a point where the balance of spending on promotion between you and Cephalon and they're booking the sales sees them in a profitable position in the quarter and you in a loss position, would they have to pay you for your loss?

Yes.

Okay. All right. I'll jump out and come back. Thanks.

Okay.

Our next question comes from Jim Neighbor. Your line is open.

Thank you. It's Larry Neighbor, Robert W Baird.

My question concerns Risperdal Consta. Your growth and manufacturing revenues seems to be much less than the growth in Risperdal Consta sales, and you are reducing your guidance for the March quarter for shipments. So why is that occurring? Is Johnson & Johnson reducing inventories, or is there some seasonality? And secondly, it appears as if the gross margin on your Consta manufacturing is declining. Could you please comment on that?

Yeah. Larry, actually we're not reducing the Consta manufacturing revenue that we're expecting for the year. We're actually simply shifting the timing of some of those shipments on cost of goods. So it's really just the timing question as opposed to changing of Risperdal Consta's expectations at all. So the issue there is really, I think you're seeing just a -- our margins are essentially continuing around the same spot that they used to be, and it's really got to do with the timing of shipments of Consta. And remind me the second part of your question.

Your cost of goods manufactured the quarter was up much faster than your recognition of manufacturing revenues. Was there a reason for that?

Actually, in general -- actually specifically for Consta, our unit costs are actually down in comparison to last year. And it really has to do with a mix in shipment. We actually get paid a lot more on shipments that are sold in the United States as opposed to those in Europe. And we shipped a lot of European product this past quarter. That was the main driver for the changing Cogs from a year ago.

Great. Thank you.

You're welcome.

Our next question comes from Ian Sanderson. Your line is open.

Great. Thanks for taking the questions. Hi, how are you? Rich mentioned in the closing remarks just further expansion of the pipeline to look forward to in 2006. And can you elaborate on that, whether that's just bringing existing development stage products along, or are you actually out there looking for other pipeline programs?

It's Rich. We've had a stable of additional product candidates that have been incubated here over the past couple of years. And because we've been so focused on financial performance moving to break even coupled with wanting to see the experience with Consta growth and Vivitrol regulatory experience, we're kind of feeling confident now that we're going to be expanding the pipeline again. The first step obviously was the announcement of the PTH deal, which has completed a long feasibility program.

We think that you'll continue to see us continue the pipeline with partnered product and with proprietary product. But we'll do it in a deliberate way. Kind of running an internal betting process here. We're working on these programs now and are waiting to see which ones really bubble to the top. But our goal is to have our next Vivitrol and our next inhaled insulin and our next Consta and so on.

Great. And could you also repeat for me the two trials that you have ongoing in AIR insulin, the 24-month and the 12-month trial, and you gave some details on that that I missed.

Right. What we have right now are two long-term safety efficacies underway. One is focussed on type-ones only. The two-year study in 400 type-ones. That's the one we started in July, I believe. And then we've got a 12-month study that combines type-ones and type-twos. And that we're looking at in the population of patients who have some lung impairment, either mild to moderate asthma, or mild to moderate COPD.

So is it no longer a requirement that you have to do a 24-month study in type-twos, as well?

Correct. We believe -- again, we have others here that will answer that question more specifically. But for registration, with Eli Lilly, the 24-month type-one study is the key rate limiter for submission.

Great. Thank you.

You're very welcome.

Our next question comes from Rachel McMinn. Your line is open.

Thanks very much. I wanted to ask Rich, you mentioned about Vivitrol. Congratulations on your agreement with the FDA on the second point that you mentioned, the pre-clinical data. I was curious where you stand with label negotiations and how she should think about that going forward.

First of all, thank you for acknowledging that. We're actually quite pleased with that development. What that allows us to do really is to move now into the full label negotiations in earnest. We wanted to get clarity on the PK requirement because at the end of the day, that's a labeling issue, as well, as it relates to bridging to the oral Risperdal -- the study. The way you can think about it is now we'll move into the full label negotiations in earnest.

So at this point you haven't really had those conversations. You've just been focussed on wrapping up the free clinical side of things?

Correct. We'll go into the label, quote, unquote, label negotiations now.

Okay. That's very helpful. And then I have -- Jim, I have a couple of accounting questions. Maybe you can help me out. So the $17.9 million worth of milestone payment that you recognized less the 5.4 million, where is that $12.5 million worth of Alkermes cost being recognized? Is that a balance sheet item? It's not actually coming through your P&L, is it?

No. That would be actually offset essentially, Rachel, by the expenses in G&A and R&D. And it's roughly half and half.

So I guess what I'm confused by is when I look at my model here, the R&D numbers in the third quarter were very -- and G&A numbers were similar between the second and third quarters. So how can there all of a sudden be just -- it's embedded in that line and then everything else that you had been spending prior to that in the first quarter when you had none of that, it's -- there was zero net collaborative profit from the first quarter, and the expense items looked the same. So, we should just expect that $12.5 million worth of other expenses on a quarterly basis have just been shelved.

Well, actually, you know, let's take a further step back. Before we signed our partnership with Cephalon, which is essentially the quarter that you're comparing it to, whether you're talking about the first quarter or the fourth quarter -- the third fiscal quarter of last year, we were spending all the marketing, all the R&D expenses, all the development expenses for Vivitrol ourselves. And the beauty of our transaction with Cephalon is that we've actually gotten a partner that's willing to -- that's essentially paid us up-front for those costs going forward.

So we're recognizing it against the up-front payment that we've received. And essentially prepaid for the work that we plan to do together. And we get to receive 50% of the profits at the end of the day. So that's why this is such a powerful transaction for us. So what you're seeing is, we've put up on our balance sheet the deferred revenue. It was that prepayment from Cephalon. And now we're taking down from the balance sheet those costs that we're recognizing in our income statement each quarter as we go forward.

And I think I understand the way the mechanics work. I was just -- I guess I'm just puzzled that the SG&A line, the fact that you've hired all these people, it doesn't seem to be moving very much.

Well, I think on a going forward basis, you'll see it moving. It's really just the timing. We began hiring the MMD's in the fourth quarter. And the other thing is, I think there's some savings on the G&A side, not on the S side, which are being offset by the growth in the S side, if that makes sense.

Okay, okay.

And we combined G&A and sales and marketing.

And then do I have this right that the JV lost about 31.5 million in this quarter, just based off of your payment to Cephalon and what was thrown off the balance sheet. Is that correct?

No. So it was actually the -- it would be the total. It would be the cumulative one was roughly 12.5 that we recognized. And we also recognized about $12.5 million this quarter, as well as expense.

Oh, okay. Okay. Okay. And then the last question I have is, do you have any guidance for when you expect to be cash flow positive? We've talked about -- from a P&L standpoint?

Sure. And I think that relates pretty much directly to how Vivitrol does during its launch phase. You know, when we get the drug approved and we have an appropriate label, we'll give you all sorts of guidance about our expectations for the up coming year.

Okay.

When Vivitrol breaks even from the cash flow basis will be the key driver for us here at Alkermes.

Okay, alright. Thanks very much.

You're welcome.

Our next question comes from Jim Malloy. Your line is open.

Thank you. This is actually Scott Henry. I did have two questions. The first with regards to reaching a final approval. I'm curious what the lag would be to getting product, to getting the label printed and out the door. What kind of time lag there would be there.

And the second question is with regard to, it's related somewhat to the prior question, but what it really gets to is, you said there's 17.9 million that goes towards the Vivitrol program, 5.4 million by Cephalon, 12.5 million that flows through. Now within that 12.5 million, if I recall, there are two baskets. The baskets being the recoverable, and then the basket that is Alkermes alone cost, the development costs. And I'm wondering if you could put a number on those Alkermes alone development costs. Thank you.

Our next question --

Whoa, whoa. We didn't answer that one.

I'm sorry.

Let me start with the financial piece. $6.4million roughly of that 12.5 is Alkermes alone, essentially. So it's our development cost to get the product approved. And that will be outlined, we're going to file our queue probably Wednesday. And, you know, for those of you who want to see it, it will be outlined there, as well, in print. Rich, I don't know if you want to talk about the time --

Yes, you asked the question about timing and print labels. We're sticking with the timing and we'll launch the product in the second quarter. And we'll leave it at that. Don't try to engineer any more precision into that based on label print.

Thank you for taking the questions.

You're welcome.

Next question, operator.

Okay, thank you, sir. Our next question comes from Jim Reddoch. Your line is open.

Hi, this is David Amsil in for Jim Reddoch. A couple of questions. First on LAR, what do you think are the prospects for a line extension strategy since you've had success using the 505 B-2 route for Vivitrol, and the second question is just on AIR insulin, do you expect Lilly to apply for pediatric labeling? Thanks.

This is Rich. I'll take the first one. On the LAR question be we'll leave the regulatory strategy stuff to Amylin and to Lilly. But I will say, recall that we used the 505-B2 strategy for Vivitrol because it enabled us to reference clinical trial data and pre-clinical data that was conducted by somebody else. That gave us to be able to bridge into data that we didn't do. In the case of [Biata] of course, Lilly and Amylin ran those studies. So the real question is not so much which regulatory strategy do you apply, it's how do you get the product to market as quickly as possible. And so I just wanted to make that one comment on that.

And I'll take the second question. We haven't commented specifically on what we're targeting for our labels. I think it is important to note that we've watched the Pfizer Nextar program and we are developing a comprehensive strategy to get what we consider a robust label.

Are you planning -- do you know if Lilly has planned pediatric studies? Is that been in the works?

Not that we've publicly commented on.

Okay, thanks.

You're welcome.

[OPERATOR INSTRUCTIONS].

Our next question comes from Dave Wendley. Your line is open.

Alright. Thanks for taking a follow-up. I wanted to get back at the SG&A question, the previous question got at it a little bit more directly. I guess, Jim, if you're saying that the 12.5 million is approximately equally split between R&D and SG&A, and I understand that roughly so, it doesn't leave much after you back that out, there's not much SG&A left being spent on anything else. Is the deal with Cephalon so advantageous that they're actually kind of picking up essentially, call it corporate overhead?

No, not at all, Dave. Let's just be clear. We've, with all the funding going to Cephalon, remember, we paid almost $5.4 million of their bills for the year. Or for the -- excuse me, for the quarter. And a large part of that is going to be SG&A for them. So as you're looking at the total of the 17.9, it's going to cost for recovery this quarter, 5.4 is going to Cephalon. That leaves 12.5 for Alkermes.

Right.

And the half and half is of the 17.9, not of the 12.5. I'm sorry if I misguided people there.

Okay. So you take 7.5 -- 17, sorry, divide --

Divide that in half, and that's roughly -- that's roughly half R&D and half, so nine and nine R&D and --

SG&A --

And SG&A.

And you're saying the 5.4 to Cephalon pretty purely comes out of the SG&A side of that?

Yeah. That's all purely. We're doing all the R&D. So --

Okay. All right.

Does that help?

That does help to explain it a little bit better. The general question, I'd say, still stands. And was asked pretty well before. That is that, as are you ramping costs related to Vivitrol, your total cost and -- figuratively and SG&A is not growing. So it certainly suggests that other activities in the company are declining in some fashion, or you're gaining efficiency somewhere. So I'm just curious what is allowing that to happen?

And you r you talking in R&D or SG&A?

Particularly in SG&A.

Well, I think we have a certain basic amount of SG&A going on here that Alkermes is paying for. You've got to remember last we're we were defending ourselves against a lawsuit. That's not inexpensive, that we ultimately got dismissed with prejudice. I have to add.

Okay.

So those are not costs that we're now incurring in SG&A.

Okay.

And as we build up, we hired the final -- I keep calling them PSS', but MMD's now, so we've hired our final 28 people, the total 28 people, and I think we had just over 20 hired the last time we had the conference call. So we've hired some more people through that. But those are really all the SG&A costs that we are burdened with right now. And what's happened is we were doing a lot of the marketing costs here at Alkermes in last quarter and the quarter before, and those have all been shifted to Cephalon. So the Cephalon sales and marketing, last quarter was 1.2 million, this quarter is 5.4. So the shift is going on over there, if that makes sense.

Yes, it does. That's helpful. A couple of other things. Rich, on the Consta and your statements about long-term growth drivers for J&J and Alkermes from that, how would you view over that longer term horizon Palaperidone and Consta co-existing in their portfolio?

I think you should ask them, but I think it's very clear from our point of view that the J&J business plan for Risperdal Consta has always contemplated a Palaperidone product in the marketplace in the '09-'10 time frame. And recall that at that time, Risperdal Consta, if it continues on growth rates anywhere near where it is now, it's going to be a very big product on patent, well into the teens. What we understand from our partners at J&J is they intend to have their cake and eat it, too. Which is to have two important products, you might see them focussed one or the other on schizophrenia versus bipolar or vice-versa. But remember, Palaperidone [Palminate], first of all Palaperidone is not an approved product. And Palaperidone [Palminate] does not have safety or efficacy data from clinical trials yet.

It's very difficult to just make an assumption that it's going to be a push with Risperdal Consta in the marketplace. Which by that point, we'll have another three or four years of data presentations, APA meetings, and clinical use behind it. A long-winded answer to a simple question. It would be unrealistic to assume that Risperdal Consta goes off a cliff when an NCE gets approved when you've got a big product on patent.

Right. Okay. Final question, you commented on the safety studies for AIR insulin that are ongoing. I missed it if you said how recruitment stands for those studies. Did you say anything on that front?

I'll leave that to Rebecca because she's been doing more of that than us.

We didn't comment specifically on that. But I can tell you Lilly is quite pleased with how the recruitment has gone. And I expect the company will be providing an additional update.

Okay. Great. Thank you.

Our next question comes from Elliot Wilbur. Your line is open.

Good afternoon. Thanks for taking the questions. Jim, I'm going to ask you to reclarify why you're trimming back your Cogs assumption by 3 million related to Risperdal Consta, yet there's no top-line impact. Then a second question on the recent Lilly deal. I'm assuming that the updated guidance given today does not reflect any impact from that transaction. Is that correct?

So we'll start with the second one first there. You mean with the PTH deal?

Correct.

Yeah. Given the fact that we'll be updating guidance for fiscal year '07, going forward, but that -- so no, it doesn't. We're sort of -- we have room in our current guidance. So and particularly you should be -- we should point out that any R&D that we're spending for Lilly will be reimbursed for them. So the net impact on the bottom line will be a net zero.

And then secondly, on the Consta, just to be clear, we've had -- we've guided from the very beginning of the year from manufacturing revenue from Consta between 61 and $68 million. And we are maintaining that guidance. And all we were doing simply is actually we've been running well under our Cogs guidance for the whole year, so we're bringing that number down because we don't expect Cogs to be that high. So there's not -- there's nothing more than that going on with our directions here. Does that make sense?

Yes, thank you.

Okay.

I'm showing no further questions in the queue. Great, thanks everyone for dialing in. If you have any additional questions that come up, please feel free to give us a call at the company. Have a good night.