Alkermes Plc (ALKS) 2006 Q4 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 fiscal year 2006 fiscal -- 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, Vice President of Corporate Communications at Alkermes. Please go ahead.

Good afternoon, and welcome to Alkermes conference call to discuss the financial results for our fiscal year 2006, which ended on March 31st, 2006. 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 successful commercialization of Risperdal Consta and Vivitrol, our future financial and business performance, and regulatory expectations. 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 differ materially from the results contemplated by the forward-looking statements. In particular, the risks and uncertainties include, among other things, whether we will achieve the financial expectations provided, whether the Company can successfully manufacture Vivitrol at a commercial scale or economically or in sufficient quantities to supply the market, whether Vivitrol will be launched and commercialized successfully by Alkermes and our partner Cephalon, whether sales of Vivitrol will meet forecasted estimates, whether third party payers will cover or reimburse Vivitrol, whether we can continue to manufacture Risperdal Consta on a commercial scale or economically or in sufficient quantities to supply the market, whether Risperdal Consta will continue to be commercialized successfully by our partner Janssen, whether we are able to successfully and efficiently scale up and manufacture our product candidates, whether advancement of our partner and product candidates will be delayed, and the outcome of clinical and preclinical work we and our partners are pursuing, our ability to transfer manufacturing technology to Amylin, the timelines relating to the construction of the exenatide LAR facility, and Amylin's ability to successfully operate the manufacturing facility for LAR. Decisions by the FDA or foreign regulatory authorities regarding our product candidates and those other risks and -- factors contained in our press release announcing our most recent results and in our periodic reports filed with the Securities and Exchange Commission, including but not limited to, our annual report on Form 10-K for the year ended March 31st, 2005, and subsequent Form 10-Qs. 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 Frates will discuss our 2006 financial results, and then provide our financial expectations for fiscal 2007. Rich Pops will then present an outlook on our business and an update on our pipeline. We'll then open up the call for Q&A. Now, I'd like to turn over the call to Jim to review our financial results.

Thanks, Rebecca. Good afternoon, everyone.

I'm very pleased to report our first profitable year. Fiscal 2006 was a transformational year for Alkermes on a number of fronts. From a financial perspective, turning the corner to profitability and setting the stage for growth beyond that represents an important milestone for any company. We reported 166.6 million in total revenues, driven by revenues from net collaborative profit related to our Vivitrol program, and increased revenues from Risperdal Consta. In addition, we ended the fiscal year with more than $300 million in cash and total investments, now further enhanced by the $110 million milestone payment received from Cephalon following the FDA approval of Vivitrol in April. Looking forward to fiscal 2007, we're continuing to move the Company forward and plan for continued profitability and growth. We expect to continue to invest in our pipeline while sustaining our operating profitability in fiscal 2007, excluding the impact of FAS 123-R, which refers to the noncash charges related to stock compensation expense. It's important, I think, to note that our profitability is directly related to the execution of our long term business model. Our business is evolving just as we planned. Risperdal Consta is a highly profitable growing asset, Vivitrol has a launch that is fully funded by our partnership with Cephalon, and we also retained 50% of the future profits. Furthermore, we have two partnered fully-funded innovative late-stage diabetes programs with attractive royalty rates for Alkermes. We are very excited as we work to leverage our business model in the next few years.

I'll now turn to our financial results for fiscal 2006. Our net income on a GAAP basis for fiscal 2006 was $3.8 million, or a basic and diluted earnings per share of $0.04 as compared to a net loss of $73.9 million, or $0.82 in the prior year. Because of the significant nature of certain noncash or nonrecurring items, we feel it's important to discuss pro forma results that we feel more accurately reflect our ongoing operations. Pro forma net income for fiscal 2006 was $3.5 million, or a basic and diluted earnings per share of $0.04, compared to a pro forma net loss of 64.8, or $0.72 per share in fiscal 2005. For a reconciliation of our pro forma net loss to GAAP, please see our press release, which can be found on our Web site, www.Alkermes.com.

Now I'll move on to the specific line items. Total revenues comprised of manufacturing revenues, royalty revenues, R&D revenues, and net collaborative profit were a record $166.6 million for fiscal 2006, compared with $76.1 million for fiscal 2005. Total revenues increased 119% over fiscal 2005, driven by significant growth in each of the revenue categories. Total manufacturing revenues for fiscal 2006 relating to Risperdal Consta were $64.9 million, compared to $40.5 million for the same period in 2005. The increase in manufacturing revenues was due primarily to increased shipments of Risperdal Consta to our partner Janssen to meet the continued increasing demand of the product around the the world. For fiscal 2006, total royalty revenues were 16.5 million, all of which related to Risperdal Consta. In fiscal 2005, total royalty revenues were $9.6 million, of which $9.5 million related to Risperdal Consta. The increase in royalty revenues was due to increases in global sales, by Risperdal Consta, by Janssen. World wide sales for Risperdal Consta were approximately $660 million in our 2006 fiscal year. Research and development revenue under collaborative arrangements for fiscal 2006 was $45.9 million, compared to $26 million for fiscal 2005. The increase was primarily due to an increase in revenues related to work performed on our AIR insulin program, including a $9 million milestone payment received from Lilly, the start of Phase III, as well as an additional work -- excuse me, as well as additional work relating to our exenatide LAR program with Amylin. Net collaborative profit related to the Vivitrol collaboration with Cephalon was $39.3 million for fiscal 2006. This consists of $60.5 million of milestone revenue recognized to offset the expenses incurred by Alkermes and Cephalon on the product, less payments made to Cephalon by Alkermes of $21.2 million to reimburse Cephalon's product-related expenses. Alkermes's reimburses Cephalon's expenses since under the terms of our collaboration agreement, Alkermes is responsible for the first $120 million of product losses incurred on Vivitrol. Alkermes did not record any net collaborative profit in fiscal 2005. Please refer to the net collaborative profit table provided with our press release for further details.

For fiscal 2006, the cost of goods manufactured was $23.5 million, all of which related to Risperdal Consta. In fiscal 2005, the cost of goods manufactured was $16.8 million, of which 14.5 million related to Risperdal Consta. The increase in the cost of goods was due to increased shipments of Risperdal Consta to Janssen to meet the increased demand. Research and development expenses for fiscal 2006 were $89.1 million. R&D expenses for fiscal 2005 were $91.1 million. Our expenses for fiscal 2006 reflect a decrease in expenses related to the clinical program for Vivitrol, partially offset by an increase in expenses related to certain early stage proprietary pipeline products. Selling, general, and administrative expenses were $40.4 million for fiscal '06 compared to 28.8 million for fiscal '05, reflecting an increase in sales and marketing costs related in part to an increased commercial activity, including the addition of Alkermes's field personnel as the Company prepares for the commercialization of Vivitrol with Cephalon. Interest income was $11.6 million in fiscal '06 compared to $3 million for the prior year, reflecting higher average cash and investment balances held by the Company and higher interest rates. Interest expense increased to 20.7 million in fiscal 2006, compared to 7.4 million for the prior year, due to the interest on the nonrecourse Risperdal Consta secured 7% notes. At March 31, 2006, Alkermes had total cash and investments of $303.1 million, as compared to $207.5 million at March 31st, 2005. This increase is due to the initial signing milestone of $160 million received from Cephalon relating to Vivitrol. Please note the $303 million excludes the 110 million milestone payment we received from Cephalon this April, relating to the approval of Vivitrol.

Now, I'll take a moment to review our financial expectations for fiscal 2007. Please note 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 at 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 31st, 2005.

Before I begin, let me outline some specific assumptions that underlie these projections. These assumptions include a Vivitrol launch in June, sales performance in line with our current estimates, and continued success in our R&D programs. We encourage you to review the specific assumptions underlying our fiscal 2007 expectations described in today's press release. Total revenue expectations for fiscal 2007 range from 200 to $222 million. For Risperdal Consta, we expect manufacturing revenues to range from 75 to $80 million. We expect royalty revenues for Risperdal Consta to range from 20 to $22 million. Turning to Vivitrol, we know this product is of significant interest to many of you, and we do want to set forth expectations for the product for fiscal 2007. That's again through March 31st, 2007. Estimates relating to Vivitrol are based on assumption of sales ranging from 35 to $45 million. Of course, another key variable is our price. We and Cephalon have set the wholesale acquisition cost of $695 for each 380-milligram monthly dose. I will note that we are launching the first injectable medication for the treatment of alcohol dependence, and as with any new product in the pre-launch phase, forecasting is inherently difficult.

In terms of our P&L, we will continue to recognize revenues related to Vivitrol on two lines on the income statement. Manufacturing revenues, and net collaborative profit. We expect manufacturing revenues to range from 10 to $15 million this coming fiscal year, and we expect net collaborative profit to range from 45 to $50 million. Our expectation for net collaborative profit includes milestone revenues that will be recognized to offset anticipated spending by Alkermes on Vivitrol as well as milestone revenue related to the license that we granted to Cephalon last year, now that the product's approved. Spending on the Vivitrol program is approved jointly by Cephalon and Alkermes. For the first quarter of fiscal 2007, we expect total manufacturing revenues, that is, manufacturing revenues for both Risperdal Consta and Vivitrol, to range from 15 to $20 million. That's in the first quarter of fiscal '07.

Now I'll move on to our expectations for research and development revenues for fiscal 2007. We expect they will range from 50 to $55 million. We expect cost of goods manufactured for fiscal '07 to range from 35 to $45 million. For Risperdal Consta, we expect cost of goods manufactured to range from 27 to 32 million. And for Vivitrol, we expect cost of goods manufactured to range from 8 to $12 million. We expect research and development expenses for fiscal 2007 to range from 105 to $110 million. This includes 15 to $20 million of R&D expenses related to early stage proprietary pipeline products for Alkermes.

We expect selling, general, and administrative expenses for fiscal 2007 in the range of 45 to $50 million. The increase will mainly be a result of increased activity by the Company's field personnel. We anticipate pro forma operating income, or income before interest, taxes, and other noncash gains and losses, of 15 to $20 million. We expect net interest expense for fiscal 2007 to range from 5 to $10 million. This expectation reflects the interest expense on the Risperdal Consta secured notes of approximately $4 million a quarter, in addition to interest expense through August, 2006, on the Company's convertible subordinated notes, partially offset by interest income on our cash and investment balances. We anticipate pro forma net income of 5 to $10 million for fiscal 2007, or approximately $0.05 to $0.10 per basic share. For a share count assumption, we've used a weighted average of 100 million shares outstanding for the year. This includes the impact of our intended conversion of our 2.5% convertible notes. The pro forma net income assumes no noncash derivative income or losses associated with the call structure on those notes, no other noncash income or expense recognized on the net increase or decrease in the fair value of warrants the Company holds, and no restructuring charges or recoveries. In addition, our pro forma net income expectation does not include the impact of the adoption of FAS 123-R, the new stock option and compensation expense. We expect the impact of FAS 123-R to be in the range of 30 to $35 million, or $0.30 to $0.35 per share in fiscal 2007. We expect to recognize those expenses within the cost of goods manufactured, R&D expenses, and SG&A expenses, in the approximate ratio of 15%, 30%, and 55%, respectively. That's important. That'll be in addition to the guidance I just gave you for the individual line items.

So in conclusion, we had a very strong year financially. And I want to thank all our employees who worked so hard to deliver our first profitable year. Looking forward, we're very excited to launch Vivitrol and to continue to execute on our business plan. With that, I'll turn the call over to Rich.

Thanks, Jim. Good job. Good afternoon, everybody.

So fiscal 2006, as you can see, was a great year for us. From our standpoint today, we're not going to spend too much time celebrating the accomplishments of the year. They are what they are, and we're extremely proud of our work. The best thing about fiscal 2006 is what it allows us to do in fiscal 2007 and beyond. The accomplishments now lay the groundwork for the next phase of the growth of the Company, and this is what we've been talking about for the past year or so. And this is the message for the years ahead. Our job now is to move Alkermes into an entirely new peer group of companies. A group that's evolved beyond the promise of their technologies to a position of increasing profitability based on the commercial performance of important products. So you can think about it this way, what are the key characteristics of the most highly valued biotechnology companies? Well, they're exactly the same characteristics of the most highly valued companies in other industries. Profitability with the expectation of exciting near-term growth, coupled with opportunities that provide the potential to sustain the growth into the future. Very few biotech companies have reached this state. And we're now on the threshold. With Risperdal Consta already providing the financial foundation of the Company and continuing to grow, if Vivitrol builds into the product that we believe it has the potential to become, we expect accelerating profitability over the next few years. But that's not the whole story. We have very real product candidates late in the pipeline with the potential to generate further growth on top of this base. So at the core, the thesis for Alkermes now begins to shift from the promise of the technology to the reality of the financial performance and the prospects for continuing growth.

So for an update on the pipeline, I'll tick through some of the high points on the major programs. Let's start with Vivitrol. As you know, the FDA approved Vivitrol last month for the treatment of alcohol dependence. Vivitrol is potentially a major advance for physicians and patients, and we're very proud to be on the leading edge of a major shift in how alcohol dependence is both conceptualized and treated in the U.S. Earlier this month, JAMA published the results from the government-sponsored COMBINE study, which further support the use of medication and psychosocial support to treat alcohol dependence. Commercial preparations for next month's launch are well under way, and we've made great progress across a number of fronts. Last week, for example, the entire Vivitrol sales team, almost 200 fully dedicated people, gathered for the national sales and launch meeting, which was an exciting event, as the team is tremendously enthusiastic about the opportunity to bring Vivitrol now to patient care. Also last week, we requested a unique J-code for Vivitrol at a meeting with the centers for Medicare and Medicaid services, or CMS. CMS made a preliminary decision to grant a unique J-code for our product which would go into effect January 1, 2007. We're very pleased that this is happening quickly as having a unique J-code enables health care insurers to process claims more efficiently. As Jim mentioned, the wholesale acquisition cost of Vivitrol will be $695. We believe Vivitrol represents a high value treatment option and is appropriately priced.

Vivitrol is a unique product, using advanced technology that can address unmet needs for the treatment of alcohol dependence. Furthermore, we think based on Cephalon's ongoing discussions with each of the major insurers, the payers recognize the benefits of treating patients suffering from alcohol dependence with Vivitrol. The economic burden of alcoholism on society is high, with the overall cost of alcohol-related problems in the U.S., estimated by the government to be on the order of $185 billion annually. Health care insurers are aware of the high cost of alcohol dependence. Untreated alcoholics incur general health care costs at least twice as high as people who do not suffer from alcoholism. And alcohol dependence is causally related to more than 60 medical diseases, many of which are life-threatening. Employers are also aware of this high cost. As lost earnings, absenteeism and decreased productivity account for the majority of the disease's cost to society. When you take into account all of the key factors, including the efficacy seen in clinical trials, the impact on the health care system and on employers, and the impact on patients and their loved ones' lives, and the limited prescribing of and lack of compliance with existing oral medications for this devastating disease, we believe the use of Vivitrol to treat alcohol dependence will offer an important treatment option for patients and will be cost effective. Our view is that the unique value proposition of Vivitrol will help managed care plans to make Vivitrol available to their customers. Because Vivitrol will be administered in a health care provider setting, we and Cephalon expect it to be classified as a medical benefit rather than a pharmacy benefit in most cases. Cephalon is implementing the VIP3 program, which I think you've heard about, with the goal of making administration and payment easy for health care providers and payments. VIP3 will integrate support services addressing each step in distribution, reimbursement, and administration of Vivitrol, all through a single point of contact. This is truly a first in class program that we feel will free physicians and patients from the burden of coordinating many logistics, such as benefit verification, prior authorization, referrals to injection sites, and coordination with specialty pharmacies.

Regarding manufacturing, we've moved into continuous production now from our first 20 kilogram line. I'm pleased to report that we have recently begun shipping our product for final packaging. We expect to manufacture sufficient material for the launch forecast provided by the joint Alkermes and Cephalon commercialization team. Our current capacity for our 20-kilogram manufacturing line is between 150 and $200 million of sales per year. And as you know, we have two more lines already under construction in Wilmington. As we've said before, our goal is to establish a steady ramp in sales over time, and our marketing strategy will focus initially on a core group of 2 to 3,000 receptive, influential, potentially high-volume prescribers of medication to treat alcohol dependence, which establishes a solid foundation for further expansion of the calling pattern. Along those lines, we're continuing to present clinical data that supports the use of Vivitrol and we'll be presenting two posters next week at the annual American Psychiatric Association meeting, the APA. The data we'll present will include a pool of safety analysis from the Phase III and the 12-month safety study, as well as post hoc analysis from the Phase III study on intra-week differences in drinking behaviors. We received a lot of positive feedback from leaders in the field. We think there's great enthusiasm out there for this new and effective medication. There is a great deal of momentum and enthusiasm here and at Cephalon, and we look forward to getting this product out in the marketplace and sharing details with you when we launch Vivitrol next month.

I'll turn briefly now to Consta which performed extremely well in just its second full year of availability worldwide. We believe the success of Consta is driven by its established efficacy and its unique administration. J & J is continuing to build on the clinical foundation which remains -- for the product, which almost surprisingly remains the only long acting atypical antipsychotic available on the marketplace today. And next week's APA meeting there'll be more than a dozen presentations on Consta, including data supporting the use of Risperdal Consta as a first line treatment for schizophrenia, and preliminary data that supports the continued development of Risperdal Consta to treat frequently relapsing bipolar disorder. Both we and J & J view Risperdal Consta as a very important product, and we expect continued sales growth this year.

Turning to the diabetes product candidates, we're seeing great progress in our AIR insulin and exenatide LAR programs. We're excited about the potential of both of these products because they really have a potential to shape the treatment landscape and help diabetes patients better manage their blood sugar. Last month, we and Lilly announced the start of a Phase III efficacy study for AIR insulin and this study is part of an overall comprehensive Phase III program that is required for registration. The two-year Phase III safety study, which began in July, 2005, is nearing the completion of its enrollment. We expect Lilly to complete enrollment by mid 2006. The AIR insulin program is an extensive, robust clinical trial program designed with the goal of generating data that can provide us not just with approval, but with a competitive label. Some of this data will be presented in two posters at the American Thoracic Society, or ATS, which begins tomorrow in San Diego. One presentation focuses on positive data from a Phase I study in subjects with upper respiratory infections. The second presentation describes data from a study assessing a quality assurance program for pulmonary function tests, underscoring the commitment we and Lilly have to implementing uniform standards for conducting pulmonary function tests that ensure valid results for measuring the safety of the AIR system in clinical trials. With respect to exenatide LAR, we and our partners Amylin and Lilly initiated a long- term efficacy study of exenatide LAR in March. This study is designed to generate the type of data that would form the basis of a new drug application. Manufacturing, process development, and scale up activities are under way in parallel with the clinical program. The materials being used in the long-term comparative study are being manufactured at development scale. We're working together to determine the overall manufacturing strategy to support the regulatory submission and commercial introduction over time.

To conclude, we've made great progress toward realizing our goal of becoming a profitable, multiproduct biotech company. Consta is performing well and Vivitrol is poised to launch, but we believe this just marks the beginning of what we can achieve. We've made considerable progress against our calendar 2006 goals already, and we have a number of milestones still to achieve. Looking forward you can expect and look for the following. Number one, clinical data on Vivitrol and Risperdal Consta at the APA next week; two, clinical data on AIR insulin at the ATS as well as clinical data on both AIR insulin and LAR at the ADA; three, the launch of Vivitrol in June; four, clinical trial updates for our AIR insulin program; and five, the announcement of additional product development program to our pipeline in the fiscal year. It's an exciting time here at Alkermes. From both a financial and program perspective, the profile of the Company has never been stronger. We always take risks, we always ask you to be mindful of them. We look forward to updating you on our progress in the months ahead.

And with that, I'll finish and turn it back to Rebecca.

Thanks very much, Rich. Operator, we'll now open it up for Q&A.

[OPERATOR INSTRUCTIONS]. Jamie Ruben, Morgan Stanley.

Hi, can you hear me? This is actually [Frank Soon] for Jamie Ruben.

Hey, Frank.

Hi. So, guys, congratulations for another good quarter. And just two quick questions. For the Vivitrol COGS guidance in 2007, does that include any pre-launch sales -- [inventory sales], or this is all based on COGS for end market sales of 35 to 45 million? And then second question, is can you be more specific on when can we hear some programs and details about your pipeline? Thanks.

Thanks, Frank. It's Jim Frates. I'll take the first question and leave the second one to Rich. In terms of Vivitrol COGS. Yes, it's very important that you note that what we recognize as COGS is actually everything we ship to Cephalon, so we're going to manufacture the product, we're going to ship it to Cephalon. They'll hold the finished goods as inventory, and then they will book it through their income statement when they have a sale. So we will -- that 10 to 15 million really relates to the shipments that we're going to make to Cephalon and in many ways is unrelated to the end sales. But that's why we gave you the 35 to $45 million of end sales so you know what we're expecting.

Thanks.

And for the pipeline?

Yes, Frank, with respect to pipeline updates, look for those in the second half of the year most likely.

Thanks.

Adnan Butt, ThinkEquity Partners.

Thanks for taking the question. A couple of questions on Vivitrol. First of all, how deep in discussions are you with third party payers? What gives you confidence that pricing it at a premium is an advantage, unlike the previous strategies by Cephalon where they've priced it cheaper and then gone with price increases every year? And secondly, are there any plans for Vivitrol in Europe for [opiate] addiction at this time?

Yes, this is Rich. I think that because Cephalon is taking the lead on the reimbursement side, we can give you the kind of summary view that we gave you in our earlier remarks, and then you should direct the specific questions to them. But this is something that the pre-launch activities have been very focused on. This is what the pricing determination, and the testing of these, with the various paying groups, patients and physicians has been the object of an enormous amount of scrutiny over the last several weeks so we feel like that's going quite well. The second question was --

Europe and label expansion.

Europe, yes. It's interesting, now that we got through the FDA with the label that we're quite pleased with, and an indication that we're quite pleased with, and so we're very focused now in this fiscal year in finalizing our European -- and not just European, but our complete ex-U.S. strategy, both on the partnering side and on the regulatory side. So we will give you more update on that as we go. The way it looks right now is that based on our forecast with Cephalon, and our team, it looks like the vast majority of our commercial supply is going to be dedicated to meeting the needs of the U.S. market. So from a practical point of view, we -- we're going to see how this -- how the product launches in the U.S., but we absolutely believe in the utility of the product in markets outside the U.S., and we're going to be focused on that.

And then finally, just label expansion? I think you have a Phase 1, Phase II trial in opiate opioid addiction? Am I correct?

Yes, Adnan, we had data in the opiate opioid indication, and we're currently in discussions internally and with Cephalon to discuss expanding the label and what indications we want to go into.

I'll get back in queue. Thanks.

Great. Thanks, Adnan.

Scott Henry, Oppenheimer.

Thank you. I just had a couple of questions. Starting with Vivitrol, you've given guidance for '07. I was curious if you would care to characterize how much, if any, of that is stocking, and along those lines, I want to know, given that it's a bit more expensive than a lot of drugs the alcohol clinics may have, is there sort of financing you provide to these clinics? Just to get an idea how that purchasing process would take place.

Yes, I think that there's a distinction here with this product as a medical benefit versus as a pharmacy benefit. If you're comparing it to Consta for example, where as Consta was -- the primary root of reimbursement was through Medicaid and there were a number of physicians who were required to buy and bill,. oOur expectation at this time is that as a medical benefit, the need for financing won't be nearly as acute as it was in the launch phase for Risperdal Consta. With respect to the stocking in fbit, I'll let Jim answer that.

Yes. This is a product that in our view is mostly going to be shipping directly to patients, . Ppatients and physicians who are already established and through the reimbursement system. It's one of the reasons why we have the VIP3 program. And so while there will be some stocking in physician's offices, or very big clinics, the way we've built our models is by individual patients being built up over time with a monthly injection.

Okay. And if I could just ask a follow-up, because your guidance is, I believe, 35 to 45 million in fiscal '07, and your one line can do as much as 200 million per year, you've mentioned you're working on two additional lines. That seems like a lot of capacity. Is there flexibility in these lines? Or what kind of time line is it? It just seems like a big number given your expectations for '07.

Well, remember that the -- this is our first year with the product, its first experience, so we'll be mindful of the shape of the curve as the product launches and builds. Also these are different manufacturing lines than many are accustomed to. These are large-scale aseptic processing lines. They take a couple of years to build. So we're looking at availability of these lines in the '08 time frame -- end '07, '08 time frame,. sSo if the forecasts are right, and if we -- particularly if we want to have optionality in the rest of the world, this is exactly the way to do it.

Okay. Great. And if I could just have one final, just modeling question, and then I'll jump back in, in terms of shares outstanding, all-in, through fiscal '05, and well into '06, there were these 29 million additional dilutive shares. It was mostly driven by options. In 2Q of fiscal '06, it dropped down to 9 million from 29 million. Ist stayed there for another quarter. I just wonder if you can give me some color on why that dropped down, and is that a definitive drop-down and in how that occurred.

No, and it is a good question. When you actually use the treasury stock method, which is outlined for the calculation of fully diluted shares, and it actually makes sense, because that's what we do here at Alkermes,. wWhen someone exercises an option, you may count that option as 29 million shares or 25 million shares outstanding, but we get the exercise price in, or we do a net share settlement, so that exercise price actually never hits the market. So you do need to do the treasury stock method when you calculate it, and that's outlined in our last Q, it'll be outlined in our current K, as where we stand with the treasury method.

Thank you for the clarification.

You're welcome.

Rachel McMinn, Piper Jaffray.

Yes. I think I'll throw in my couple of Vivitrol questions as well. I guess I'm curious how, even though you maybe can't talk about the specifics of reimbursement, can you provide any color over how this might be positioned on formularies versus oral naltrexone. You mentioned prior authorization. Do you expect that there will be a lot of formularies that require prior authorization, either failing oral naltrexone or having used oral naltrexone before Vivitrol?

Hi, Rachel. This is Rebecca. I'll take this one. So as you know, prior authorization is a formal process which requires providers to obtain approval prior to issuing or doing a procedure. Based on Cephalon's preliminary conversations with the top health care plans, we think a majority of plans are unlikely at this time to require prior auth. In cases where it is required, the VIP3 system that Cephalon has put in place will facilitate that process.

Okay. That's helpful. And then can you remind us again, in terms of the patients currently on oral naltrexone how that market breaks up, what proportion is cash versus private versus government pay?

Yes, Rachel. There's [inaudible]SAMHSA statistics on that, about 20% of the oral naltrexone patients pay with cash, most because they want to remain anonymous.

And then the rest, how it splits out between private and government?

About 40 to 50% is private, and the remaining percentage is government.

Okay. And do you expect there to be switching from oral naltrexone to Vivitrol, or do you expect the majority of your initial kind of first launch to be new patients?

I think it'll be a combination of both of those things.

Rachel, it is funny, with Consta, we predicted a lot of early switches from the older depots, and we were wrong. So it really depends on the specific tradition. The driving feature of the marketplace, it seems is that most patients aren't getting treated at all. So it's less -- think of it less as a mature market with a new entrant as a building as a new market.

Okay. I'm sorry?

Rachel, just along those same lines, I think it's important to look at the naltrexone scripts with respect to when Campral was introduced. Naltrexone scripts didn't go down at all with the introduction of a new product.

Yes. No, we're definitely aware of that. Okay. That's helpful. And then just a quick question on the guidance here. Your SG&A guidance for next year is not very high. Above -- if you kind of annualize your fourth quarter spend, and I guess there's two ways of interpreting it. One is that Cephalon's not going to be spending very much on marketing for Vivitrol, and the other way of interpreting it is that the JV's going to be profitable and we're not going to see as much of Cephalon's expense on your line item. Which is the correct way of looking at it?

Yes. Actually, unfortunately, Rachel, neither of those is the correct way of looking at it.

Okay. Good. Okay.

So what's reflected in our SG&A expense is our administrative expenses and our -- our 28-person, plus four or five people back here in the home office that are dedicated to Vivitrol, that will be the S part. And since we were fully staffed in October and November of last year, you're right, by annualizing the fourth quarter, the March quarter, you get to what our number is likely -- close to be for our fiscal year '07. All of the Cephalon expenses, the $21 million we sent to them last fiscal year, those -- that all gets netted out against the expense and net collaborative profits, so that's in the table in the back of the press release.

Oh, yes. Okay.

We talked about it in the K and the Q.

Okay. So there's -- I apologize. I know we've been through this. For some reason I was thinking that that comes through your -- so none of the Cephalon expenses at all are coming through your SG&A line?

No. None of our -- nor anywhere else in our P&L. They are netted off against those expenses and netted off against milestone revenue and net collaborative profits.

Okay.

That's very important. Because we're actually -- we have a dedicated amount of money to launch this product over the next 18 months, which I think is a great position for us and Cephalon.

And then one last question, on your R&D revenue guidance, does that include any milestone payments?

No major milestones like this year, no. It's really an increase in the partnered program, pulmonary insulin, exenatide and the new Lilly PTH program as well.

Okay. Thanks very much.

You're welcome.

Thomas Russo, Baird.

Good afternoon, guys. Congratulations on a great quarter. And looking forward to seeing how Vivitrol does. Just a couple of questions. Relative to June of '05, and looking at the guidance for '07, would you say anything has changed in terms of your expectations for revenues or the timing of break even to profitability?

Relative to June of '05, I'm afraid -- can you rephrase that, Tom? I don't understand.

I'm sorry. Relative to the initial guidance for Vivitrol, for break-even profitability, at 18 months or the end of '07.

I see.

Now that you've gotten closer to launch and you've got a price kind of in mind, has anything changed in terms of when we might expect the product to be -- to break even to profitability?

No, and thank you for clarifying specifically about the Vivitrol P&L. No, I think we're still planning with Cephalon for that -- that 18-month time frame after launch, the end of '07. Of course, we'd be happy to be surprised, and have that come early, but right now I think the prudent thing to do is stick to those expectations.

Okay. And last question, the COMBINE study that was referred to a couple of weeks back, can you comment on how you're planning on taking advantage of that in the marketplace? What will be the message that you bring from that to physicians?

Well, this -- one of the key things about that study, of course, is -- and maybe it's not self-evident, but that's a study that the field has been eagerly anticipating since it began enrollment in 2001. This was a $40 million government-sponsored study, so it was really -- it was a really a major feature of the landscape in the alcohol treatment community,. aAnd the key take-away from the study, of course, being that of the drugs that were tested, the one that worked was naltrexone, and it worked best in the context of medical management which is very analogous to the brand of psychosocial counseling that we use in our Phase III clinical trial. So I think that the very important highlight that people will be exposed to, are number one, that pharmaco therapy plus medical management is efficacious in this patient population. And number two, of the drugs that are available at your use, naltrexone is the most efficacious. And the other one is that people have described the study as kind of being the best care that money could buy within the context of the study. And so the idea of having a more compliant dosage form in the real world is a very simple message that people seem to understand.

Okay. Thank you very much.

You're welcome.

Andrew Forman, W.R. Hambrecht.

My question's been answered. Thanks.

Adnan Butt, ThinkEquity Partners.

A question on Vivitrol first. Can you just remind me if there are any special distribution requirements, or anything to do with refrigeration, et cetera, and how that would be addressed? And secondly, are you able to say anything about exenatide LAR as to what stage the manufacturing process is -- is at with your partner Amylin? And when manufacturing is expected to get online?

With respect to the Vivitrol, it's a refrigerated product, and it'll be the cold chain of distribution to the point of injection in the clinic. On LAR, we have given guidance and Amylin was has given guidance with which we've repeated here today, which is that we're under way in this longer term comparability efficacy type study. We're supplying materials from that at the development scale. There's a series of scale-up plans, and the commercial factory for commercial supply of LAR is under construction in Ohio now.

And I think your -- well, I think -- the timing of that, I think, if I'm remembering correctly, I just wanted to confirm this is, end of '08 or something?

You have to ask Rebecca because she's --

Amylin has said that they'll have commercial readiness in late '08.

Okay. Thanks.

No problem, Adnan. Thanks.

Thank you. There are no further questions in the queue at this time.

Great. Well, thanks, everyone for dialing in and if there are any additional questions, Jim and I will both be available to answer them. Have a good evening.

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