Alkermes Plc (ALKS) 2007 Q2 法說會逐字稿

Welcome to the Alkermes conference call to discuss the Company's second-quarter fiscal 2007 financial results. (Operator Instructions). 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 second-quarter fiscal 2007, which ended on September 30, 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, the therapeutic value of our product candidates to patients; plans for clinical trials; the commercialization of RISPERDAL CONSTA and VIVITROL; reimbursement of VIVITROL by third-party payers; 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 these forward-looking statements. In particular, the risks and uncertainties include, among other things, whether we will be able to achieve the financial expectations provided; whether the Company can successfully manufacture RISPERDAL CONSTA, VIVITROL and our product candidates; whether RISPERDAL CONSTA will continue to be commercialized successfully by our partner Janssen; and whether VIVITROL will be commercialized successfully by Cephalon and Alkermes; whether clinical results for our products and product candidates are predictive of product approvability or success; whether RISPERDAL CONSTA and VIVITROL in commercial use may have unintended side effects, adverse reactions or incidents of misuse that could cause the FDA to require post-approval studies or removal of our products from the market; whether sales of VIVITROL will meet forecast estimates; whether third-party payers will cover or reimburse VIVITROL; whether advancement of our partnered product candidates will be delayed; and the outcome of clinical and preclinical work we're pursuing, both on our own and with our partners; our ability to transfer manufacturing technology to Amylin; the timelines relating to the construction and the successful operation of the exenatide LAR facility; decisions by the FDA or foreign regulatory authorities regarding our product candidates; and those other risk factors contained in our press release announcing our most recent results and in our periodic reports filed with the SEC commission, including but not limited to our Annual Report on Form 10-KA for the year ended March 31, 2006 and quarterly reports on Form 10-Qs.

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

This afternoon, Rich Pops will present an update our pipeline and an outlook on our business, including the VIVITROL launch. Jim Frates will then discuss our financial results for the second quarter of fiscal 2007 and provide an update on our financial expectations for the fiscal year. We will then open up the call for Q&A.

Now, I will turn the call over to Rich.

Hello, everybody. So I will begin with an update on VIVITROL, which as most of you will know is our recently-launched product for the treatment of alcohol dependence. Cephalon is our commercialization partner for this product, and our two companies have been and continue to be extremely excited about the potential to build VIVITROL into an important product in the new market and we're just getting started.

The product was approved in the spring and was launched at the end of June. So, the September quarter was the first full quarter of experience for the product.

Gross sales of VIVITROL for the quarter totaled approximately $1.1 million. This number is lower than we had predicted before the launch when we first modeled the introduction of the product. That said, we do not believe that the gross sales during that quarter are necessarily indicative of either the market potential of VIVITROL or the ultimate shape of the adoption curve for the product for the following few reasons, which I will summarize first and then I will give you a little bit more of detail.

So in summary, number one, the feedback from physicians prescribing the drug is very positive. Number two -- and I will give you these numbers in a second -- the gross sales have been steadily increasing each month since the introduction of VIVITROL in June. Number three, the reimbursement, both in terms of private payer and Medicare/Medicaid coverage, has been favorable with the majority of patients receiving reimbursement with no restrictions and the whole reimbursement environment looking forward getting more and more accommodating of VIVITROL. And fourth, several of the most important and renowned treatment centers in the field after a fair amount of analysis have begun utilizing VIVITROL. So, let me give you a little bit of color on each of those.

First, we're hearing these moving anecdotes from physicians and patients that are encouraging and indicative of the experience that they're having. The feedback leads us to believe that the efficacy similar to what we observed in our Phase III trial is being seen in actual physician practice.

While we have been for the last several years, pleased to be at the forefront of developing innovative therapies in a new market of alcohol dependence, the challenge ahead is a pragmatic one. That is moving from a generalized interest in VIVITROL and a recognition among thought leaders of the importance of medication to getting physicians to actually change their practices to accommodate giving VIVITROL injections on a regular basis. This is a new thing for them, and it requires a change in the way they practice medicine. That will take some time.

Second, gross sales are increasing and the beginning of a ramp is clear, taking gross sales month by month -- and I won't do this every quarter, but I just think it's important for you to see where we're coming from on this. In June, which was the first month of launch, Cephalon's gross sales of VIVITROL were approximately $6000. In July, gross sales were $126,000. That moved to $398,000 in August, $575,000 in September, and for the month just ended in October, $784,000 for an estimated total of $1.1 million for the second fiscal quarter and $1.9 million in cumulative gross sales.

So, we sold $1.1 million in the September quarter, and we sold almost $800,000 in the month of October. So, if you string those dots together in sequence, you can begin to see the beginning of a ramp for the product.

Third, in terms of reimbursement, working through coverage for any injectable specialty product generally takes time. However, the success level we have had with reimbursement for VIVITROL thus far has been very favorable. The information that we have access to suggests that approximately 90% of patients have received insurance coverage with no restrictions. And we're very pleased with that statistic this early in the launch.

Importantly, we're also seeing the need for medical treatment for alcohol dependence being recognized at the national level. In an important development, in September, Medicare and Medicaid -- CMS -- added two new reimbursement J-Codes for insurance claims -- one for addiction screening and the second for brief intervention services. By adding these codes, CMS is helping to make screening and brief intervention a routine part of medical care with the goal of increasing the number of people who are diagnosed and treated for addiction.

In addition, VIVITROL will receive its own unique J-Code, and this should expedite the reimbursement process by enabling more efficient processing of claims. All three of these new codes will become effective on January 1, 2007. We are encouraged to see that payers are willing to cover alcohol dependence screening and treatment. While CMS codes do not directly impact private insurance, CMS historically paves the way for policy changes in the private sector. In fact, several groups, including the Center for Substance Abuse and -- Treatment and the Office of National Drug Control Policy have asked the AMA, or the American Medical Association, to add screening and brief intervention to its current procedural terminology codes, which further help clear the way for reimbursement by private insurance.

Finally, we are seeing interests from Centers of Excellence within the addiction community. The National Association of Addiction Treatment Providers, which represents approximately 400 private treatment centers across the US, recognizes the potential benefits of medication and has expressed interest in VIVITROL. Very recently, some of the top treatment centers, including the Karen Treatment Centers and the Hazelden Foundation, have begun using VIVITROL.

In addition, physicians at the MGH, the Mass General Hospital, here and the Mayo Clinic are just now beginning to use VIVITROL in their facilities. We believe that recognition and use by these leading organizations sets the stage for this gradual [c] change in the way alcoholism will be treated in the future.

So, moving ahead, we and Cephalon are working to drive increased VIVITROL sales over time. Cephalon has repeatedly demonstrated success in building new brands in new markets, and we're confident that their dedicated field force of 120 people will be able to increase demand in the coming quarters. Their field force continues to call on 2,000 to 3,000 psychiatrists and addiction medicine specialists, spending time with these physicians on a one-on-one basis to encourage the first use of VIVITROL and to help ensure that both the patient and the prescriber have a positive experience.

In addition to Cephalon's penetration with the core prescribing audience, our MMDs, our managers of market development who work for Alkermes, are broadening the reach and just recently have assumed responsibility for calling on government accounts. So, that means that they're going to target local, regional and national decision makers at the Department of Veterans Affairs -- the VA -- and the Department of Defense -- or DOD -- facilities across the US. We're pleased already with the inroads we've made in these important audiences and already four VA/DOD facilities have made VIVITROL available to patients.

So, I apologize for the long-winded introduction. But in summary, we believe that VIVITROL has the potential to be an important therapy in this market and we're quite excited about the opportunity ahead. The launch is obviously still extremely early. There's plenty of risk. We will look forward to giving you more details and greater visibility on the actual trajectory of this launch as we move forward in the fiscal year.

I will move to CONSTA and a couple of other things real quickly. We're extremely pleased with the performance of CONSTA in the marketplace. It is clear to us that the continued growth of this product is a direct result of its unique dosing regiment and its strong efficacy. In October, data presented at the APA's 58th Institute of Psychiatric Services showed that patients who switch from other antipsychotics to CONSTA were observed to have fewer psychiatric-related hospitalizations, improved medication compliance and lower total monthly medical costs as compared to when they start -- the period of time before they started RISPERDAL CONSTA treatment.

This is the kind of pharmacoeconomic data and outcomes data that really drive utilization in the real world. RISPERDAL CONSTA remains the first and only long-acting medication for schizophrenia with this kind of demonstrated success in improving therapeutic outcomes for patients. And we expect to see continued strong sales growth going forward.

On the diabetes front, both the AIR insulin and exenatide LAR clinical programs are progressing well. The Phase III program for AIR insulin is on track. While we're not providing details at this time on each clinical study planned, we and Lilly have developed a very robust Phase III program with the goal of generating data that cannot just get approved but can form the basis of competitive label with the potential to address a very broad patient population.

With respect to exenatide LAR, we are pleased with the progress that we and our partners, Amylin and Lilly, are making. Amylin recently reported that a long-term comparative clinical study of LAR in patients with Type 2 diabetes is on track, and we continue to expect results in the second half of '07.

Construction at Amylin's manufacturing facility in Ohio is ongoing, with process development and scale of activities under way. The prevalence of diabetes, as you know, is already staggering and it continues to grow. Both exenatide LAR and AIR insulin are important new therapies that may better fit into the way patients live their lives. We are extremely happy with where we fit in this field -- to be innovators in diabetes care and obviously there are tremendous medical and commercial opportunities here for these types of products.

So, while our commercial and late-stage products represent the foundation and near-term future of the Company, we have got other things going on. We're continuing to leverage our product development and therapeutic area expertise to uncover new opportunities.

Specifically, you've seen evidence that we're committed to building a franchise in the area of addiction. The knowledge we've gained through the development of VIVITROL enables us to bring forward new product candidates in the area of addiction.

Last month, we announced the start of a Phase I/II clinical study of a product candidate we call ALKS 29, an oral compound for the treatment of alcohol dependence. This is an eight-week multi-center randomized double-blind placebo-controlled study designed to assess the efficacy and safety of ALKS 29 in about 150 alcohol-dependent patients. And we expect to have top-line results in the first half of calendar 2007.

We also recently entered into a license agreement with Rensselaer Polytechnic Institute, which grants us exclusive rights to a family of novel opioid receptor compounds discovered at Rensselaer. This is a promising family of compounds with potential applications in a broad range of diseases, including addiction. A lead oral compound within this family has already been identified and preclinical work is ongoing.

We're pleased to have these new product candidates in development and the opportunity they provide us to build a portfolio of proprietary product candidates in areas of our own expertise. So, as we near the end of calendar 2006, we are optimistic about where we stand today and the direction of the Company as we move into calendar '07.

We're one of the few profitable biotech companies in the industry. The promise of our technology is evident now in two innovative commercial products, one of which is approaching $1 billion in sales. We have important diabetes product candidates that offer the potential for growth, and we have some proprietary programs that we think of as the ability to grow and sustain this value into the future.

So we are proud of what we are doing. We look forward to updating you on the programs in the months ahead.

With that, I will turn the call over to Jim who will take you through the financial highlights.

Good afternoon, everybody. This is a strong quarter for Alkermes financially. It marks our fifth consecutive profitable quarter if we exclude the impact of non-cash share-based compensation expense and underscores our commitment to achieving sustained operating profitability.

If we leave out our $9 million milestones that we received from Lilly last year, we reported a 62% increase in total revenues compared to the quarter ended September 30, 2005, driven mainly by growth in manufacturing and royalty revenues. RISPERDAL CONSTA continues to perform exceedingly well in the marketplace. J&J recently reported RISPERDAL CONSTA sales of $232 million for their third quarter, a 13% increase sequentially and a 44% increase over the third quarter of 2005. For the first nine months of calendar 2006, RISPERDAL CONSTA reached $622 million in worldwide sales, a 47% increase over the same period in 2005.

Beyond RISPERDAL CONSTA, we are in the launch phase of VIVITROL. Our diabetes products are fully funded and in late-stage clinical studies, and we're continuing to invest in our future by expanding our proprietary pipeline.

Our financial profile is a strong one. We expect to sustain operating profitability throughout fiscal 2007, excluding the impact of share-based compensation expense. And we ended the quarter with more than $325 million in cash and total investments.

So, I will now turn to our financial results for the second fiscal quarter September 30, 2006. Our net income on a GAAP basis was $3.7 million or basic and diluted earnings per share of $0.04 for the quarter ended September 30, 2006, as compared to a net income of $11.8 million or a basic earnings per share of $0.13 and diluted earnings per share of $0.12 for the same period of last year.

Now as a reminder, I mentioned earlier, the net income for this period last year included a $9 million milestone payment from Eli Lilly in conjunction with the start of our Phase III program for AIR insulin and did not include any FAS 123R share-based compensation expense.

For the quarter ended September 30, 2006, the total share-based compensation charge was $6.4 million. We recognized $0.9 million within cost of goods manufactured, $2.2 million within R&D expense, $3.3 million within SG&A and we capitalized $0.6 million within inventory. The impact of FAS 123R in our financial results for this quarter was a total expense of $0.06 per share.

Because of the significant nature of certain non-cash or non-recurring items, including employee share-based compensation expense, we feel it's important to discuss our non-GAAP results that we feel more accurately reflect our ongoing operations and allow comparisons to last year. Non-GAAP net income for the quarter ended September 30, 2006 was $10.8 million or basic earnings per share of $0.11 and diluted earnings per share of $0.10. This compares to a non-GAAP net income of $11.7 million or basic earnings per share of $0.13 and diluted earnings per share of $0.12 for the same period of last year, again including that $9 million milestone from Lilly. For a reconciliation of our GAAP and non-GAAP net income and loss, please see our press release, which can be found on our website, www.Alkermes.com.

So now, I will move on to the specific line items from last quarter. And to be clear, I will compare Q2 fiscal '07 results, excluding share based compensation with Q2 fiscal '06 GAAP results because they didn't include any share based compensation. And then, I will allow you to more clearly see the operating trends in our business.

Total revenues comprised of manufacturing revenues, royalty revenues, R&D revenue and net collaborative profit were a record $61.2 million for the quarter ended September 30, 2006, driven mainly by growth in manufacturing and royalty revenues from RISPERDAL CONSTA and VIVITROL. For the quarter ended September 30, 2006, total manufacturing revenues were $26.2 million, of which $21 million related to RISPERDAL CONSTA and $5.2 million related to VIVITROL. This compares to $13.6 million for the same period in 2005, all of which related to RISPERDAL CONSTA. The increase in manufacturing revenues related to RISPERDAL CONSTA was due to increased shipments to our partner Janssen to meet increased demand.

Since we sell VIVITROL to Cephalon at cost, we recognized $4.7 million as manufacturing revenue and $0.5 million as manufacturing profit during the quarter. The manufacturing profit is recognized out of the milestones we received from Cephalon earlier and which we carry as deferred revenue in our balance sheet.

Royalty revenues related to RISPERDAL CONSTA were $5.8 million for the quarter ended September 30, 2006, based on worldwide sales for CONSTA of $232 million in the quarter compared to $4 million on worldwide sales of $161 million for the same period last year.

Research and development revenue under collaborative arrangements for the quarter ended September 30, 2006 was $17.6 million compared to $16.7 million for the same period last year or $7.7 million excluding the milestone payment from Lilly. The increase in R&D revenues from last year was primarily due to the work we performed on the AIR insulin and exenatide LAR programs as they advanced through clinical trials.

Net collaborative profit related to the VIVITROL collaboration with Cephalon was $11.6 million for the quarter ended September 30, 2006 compared to $12.4 million for the same period last year. This consisted of three elements. First, $16.2 million of milestone revenue recognized to offset expenses incurred on the product by Alkermes of $10.2 million and by Cephalon of $6 million. Second, $1.4 million of milestone revenue recognized with respect to the license we provided Cephalon to sell VIVITROL. And third, we deduct or net off the payments to Cephalon made by Alkermes of $6 million to reimburse Cephalon's product-related expenses.

Under our amended agreement, which we recently signed, Alkermes reimburse Cephalon expenses for the month of July 2006 only, as Cephalon has agreed to be responsible for its own VIVITROL-related expenses during the period of August 1, 2006 through December 31, 2006. Beginning January 1, 2007, Alkermes will resume its reimbursements to Cephalon, as Alkermes continues to be responsible for the first $120 million of net product losses incurred on VIVITROL.

These three line items net to the $11.6 million net collaborative profit we recognized as revenue in the quarter. And through September 30, 2006, we have incurred $84.3 million of the cumulative net product losses.

For the quarter ended September 30, 2006, cost of goods manufactured on a non-GAAP basis was $10.9 million, of which $6.5 million related to RISPERDAL CONSTA and $4.4 million related to VIVITROL. The cost of goods manufactured for the same period in 2005 was $4.4 million, all of which related to RISPERDAL CONSTA. The increase in cost of goods manufactured was due to increased shipments of RISPERDAL CONSTA to Janssen to meet increased demand and for the shipments of VIVITROL to Cephalon.

Research and development expenses on a non-GAAP basis for the quarter ended September 30, 2006 were $27.6 million compared to $19.4 million for the same period last year, reflecting an increase in expenses related to new personnel and the work performed on partnered and certain early-stage proprietary pipeline products.

Selling, general and administrative expenses on a non-GAAP basis were $12.4 million for the quarter ended September 30, 2006 compared to $9.1 million for the same period last year, reflecting an increase in sales and marketing costs related in part to increased commercial activities including the addition of Alkermes field personnel.

Interest income was $4.7 million for the quarter ended September 30, 2006 compared to $3 million for the same period last year, reflecting higher average cash balances held by the Company and higher interest rates. Interest expense for the quarter ended September 30 was $4 million compared to $5.2 million for the same period last year. As I mentioned at September 30, we had total cash and investments of $325.6 million.

Now, I would like to conclude with a brief 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.

When we provided financial expectations for the fiscal 2007 year last May before VIVITROL entered the marketplace, we estimated VIVITROL sales in the range of $35 to $45 million. And as we said at the time, as with any new product, forecasting sales early in the product lifecycle is inherently difficult.

As Rich noted, however, the initial launch phase for VIVITROL has been longer than previously anticipated. At this time, we are updating our financial expectations for fiscal 2007 VIVITROL sales based on performance to date to a range of $5 to $10 million. This updated expectation for VIVITROL sales, as Rich said earlier, is not indicative of either the market potential of VIVITROL or the ultimate shape of the adoption curve of the product.

In addition to assumptions about VIVITROL sales, there are several other specific assumptions underlying our financial expectations which I should point out, including continued success of RISPERDAL CONSTA, continued success in our R&D programs, our ongoing business operations and our assumptions about full-year gross margins. For further information with respect to those factors and others that could cause 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 website and also 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-KA for the year ended March 31, 2006.

So, with that preamble, our current financial expectations are as follows -- and these, as I said, are outlined in our press release. We are increasing our expectation for total revenue to a range of $206 to $228 million, revised from an earlier expectation of $200 to $222 million. We expect total manufacturing revenues to remain in the range of $85 to $95 million. More specifically -- again, we've broken these out before -- we expect manufacturing revenues for RISPERDAL CONSTA to remain in the range of $75 million to $85 million and we expect manufacturing revenues for VIVITROL to remain in the range of $10 million to $15 million.

We're increasing our expectations for royalty revenues for RISPERDAL CONSTA to a range of $21 to $23 million, revised from our earlier expectations of $20 million to $22 million. We're increasing our expectation for R&D revenue under collaborative arrangements to a range of $60 million to $65 million, revised from an earlier range of $50 million to $55 million due to additional time being spent on partnered programs as well as future recognition of R&D revenue with respect to time being spent by Alkermes employees on the construction and validation of two additional manufacturing lines for VIVITROL, for which Cephalon is now responsible following the amendment to our license and collaboration agreement with Cephalon.

We are adjusting our expectation for net collaborative profit to a range of $40 to $45 million, down slightly from an earlier $45 to $50 million, primarily due to the amendment of our agreement with Cephalon, which I just mentioned. So, under the agreement -- the new agreement, the amended agreement, time spent by Alkermes employees on the construction and validation of the two new lines we're building for VIVITROL will be reimbursed directly by Cephalon and recognized as R&D revenue, rather than being charged into the collaboration.

We expect cost of goods manufactured to remain in the range of $35 to $44 million. For RISPERDAL CONSTA, we expect cost of goods to remain in the range of $27 to $32 million. For VIVITROL, we expect cost of goods to remain in the range of $8 to $12 million.

We expect R&D revenues to remain in the ranges $105 -- we expect R&D expenses to remain in the range of $105 to $110 million. We are adjusting our expectation for selling, general and administrative expenses to a range of $40 to $45 million revised from an earlier expectation of $45 to $50 million based on our SG&A spending -- SG&A spending for the first half of the fiscal year. As a result of these changes, we expect operating income or income before interest, taxes and other non-cash gains and losses to be in the range of $25 to $30 million, revised from an earlier expectation of $15 to $20 million.

We are improving our expectation for net interest income and expense to a range of $0 to $5 million of net interest income, revised from an earlier expectation of $5 to $10 million of net interest expense. We expect income tax expense to range from $1 to $2 million. The tax expense related to the US alternative minimum tax, or AMT, and the utilization of our loss carryforwards is limited against the US AMT, as it is with all companies, resulting in a small federal tax obligation in fiscal 2007.

Our fiscal 2007 net income expectation on a non-GAAP basis is now expected to range from $25 to $30 million of net income or approximately $0.25 to $0.30 per basic share, revised from an earlier expectation of $5 to $10 million or $0.05 to $0.10 per basic share.

As a reminder, the basic non-GAAP net income per share calculation is based on an estimated 100 million shares of the Company's common stock outstanding on a weighted average basis for the year. The non-GAAP net income assumes no other non-cash income or expense recognized under the net increase or decrease respectively in the fair value of warrants that the Company holds or restructuring charges or recoveries.

In addition, the non-GAAP net income expectation does not include the impact of FAS 123R, accounting for stock-based compensation expense. We expect the impact of FAS 123R to be in the range of $25 to $30 million or $0.25 to $0.30 a share, revised down slightly from an earlier expectation of $30 to $35 million or $0.30 to $0.35 a share for our fiscal year. We expect to recognize these expenses within cost of goods manufactured, R&D expenses and SG&A expenses in the approximate ratio of 15%, 30%, and 45% respectively.

So, in conclusion, we had another strong financial quarter. We're very pleased with the progress we've made in our business this year, and we're very excited about the strategic direction of the Company. Throughout the remainder of calendar year 2006, we will be focused on achieving our clinical and commercial objectives for the year, including supplying RISPERDAL CONSTA to meet market demand, continuing to support the launch of VIVITROL both on the commercial and manufacturing front, and continuing to invest in our proprietary pipeline.

So, with that, I will turn the call back to Rebecca. And I think --

Great. Thanks, Jim. We'll now open it up for Q&A. Operator, if you could queue up the first call?

(Operator Instructions). Elliot Wilbur, CIBC World Markets.

Just a quick point of clarification for Richard or Jim. The numbers you gave us in terms of the monthly Cephalon sales, those are gross in-market sales?

Exactly. Those are gross sales.

Their gross-to-net basis has no bearing on your numbers whatsoever, correct?

That's right.

Can you just maybe give us a better sense of what is not happening with VIVITROL that you expected would happen in terms of why we're seeing the downward revision to full-year guidance?

I think it's the key question, right? It's the one we've been monitoring ourselves as Cephalon's been out there selling the product. I think it's less a question of what's not happening as just how long it takes for things to start to happen. This is a field that's not had a major therapeutic advance, aside from the introduction of Campral for a couple decades.

So this very pragmatic, logistical issue of getting physicians to change the way they do business every day when they are very busy and they have busy lives, while as I said in the prepared remarks, kind of this notion of taking it from a diffused interest and belief in the idea to a pragmatic translation to how they do it every day. How do you give injections? How do you get reimbursement? What are J-Codes? How do we accommodate that?

And you can see from the numbers, we've gotten a few thousand examples of having it done right. But now, it's just a matter of scale, of getting it -- instead of a patient trying on one or two patients, how do they integrate it into their practice in general -- a? And then b, how do you just continue to expand the footprint through large institutions like the ones I mentioned, including the government, who have lots of patients but the inertia of rest is quite significant?

So, if I were to say to you -- in August, we might have said to you the time it takes for people to get through the VIP3 system is too long. We need to get that down. That type of thing is coming down very, very nicely now. Now, it's just more getting out to the doctors and helping them integrate the new treatment paradigm into their practices.

And then a follow-up question. How many doctors are in the VIP program now? And exactly how far has the lead-time come down?

Well, it's interesting because the whole metric that we set up originally in the summertime with VIP3 doctors enrolled as being as one of our key tracking metrics is less relevant now because of Cephalon opening up the distribution system in September. So, doctors can be in the VIP3 system or outside of the VIP3 system.

So, with more and more doctors outside of the VIP3 system who figure out their own logistical solutions to getting the drug, our numbers -- while we continue to track the VIP3 docs, it's not necessarily correlating with the experience in the marketplace now.

Based on conversations today with Cephalon, I'm assuming that it is much too early to change the overall game plan here but anything that you are aware of that they may do going forward?

Well, I think that the first real translation of input from the marketplace back to the commercial activities happened in October with the first sales force meeting, where you kind of integrate what's happened in the marketplace and pull everybody together and send them back out. So that will happen continuously over the next several quarters.

But no, I think the people -- what's so positive about this launch, even though the number for the September quarter is unremarkable, is these anecdotes and the feedback we're getting from the patients and the physicians who are actually getting through the logistical issues to get on the drug.

So, as I said to others, I call it a necessary but insufficient condition for an exciting launch of a drug. That by itself doesn't do it. But it's very gratifying to hear the evidence of efficacy coming through the experience in the patient population. So, we just need to play that out.

Ian Sanderson, Cowen.

On the amended agreement with Cephalon, does it extend the December 31, 2007 date at which you start to share the VIVITROL cost 50/50? And if I'm way off base, let me know.

Secondly, is the net effect of this to -- or how does this amendment change your amortization schedule of the upfront costs? And then, the last question is, should we see some AIR insulin data between now and next year's ADA?

It's Jim. I will take the first two, and I will leave the AIR insulin one to Rebecca. So, the endpoint -- ultimately, the deal with Cephalon really doesn't change our cash flow -- well, it doesn't change our P&L. We still are responsible for $120 million of losses.

And after December 31, 2007, so January 1, 2008, we will start to share those losses if we're still in a loss position then. And really what it is, is it changes our cash flow.

So, historically and up until August, we've been sending checks to Cephalon to cover their expenses. But, between now from August through December of this year, Cephalon will not be receiving those checks from us. They will be bearing those expenses themselves essentially. So really, it just changes the timing of the payments rather than the total payments.

It really won't impact our P&L either because the payments to Cephalon -- that's why I go through that net collaborative profit. The reason it is a net collaborative profit is because we don't recognize revenue or expense in our total P&L when we report our numbers. So it won't change our P&L until the end of '07. So hopefully, that made that clear. Rebecca, on the insulin?

On the insulin, you'll certainly expect to see Alkermes and Lilly have a presence with respect to AIR insulin at the ADA and the EASD, which are the two major diabetes meetings. You'll also note that we are in the middle of a very comprehensive -- many comprehensive pivotal studies. So those are ongoing. Some of them will be starting in the near-term. Many are ongoing currently. So you'll hear us talk about those as well.

And any top-line data we should be looking for prior to ADA?

I wouldn't say you should expect any top-line data, more the initiation of various trials. Lilly will also be hosting an Analyst Day in December.

Scott Henry.

I just had a couple of questions. First with regards to VIVITROL, the roughly $10 million that shows up as expense incurred by Alkermes, is that roughly a good go-forward number? Or should we start to see that trail off pretty soon?

Second question with regards to VIVITROL, where do you see kind of the breakeven on that in terms of revenues? Because it does seem like you're spending an awful lot on the product right now.

The $10 million in expenses for Alkermes I think should stay flat as we go forward. I think that's a good estimate for the product P&L in the near term.

I think in terms of the amount that we're spending, I don't think it's early for a launch phase. And I think it's fantastic that Cephalon is committed to spend that amount of money. I think that's what is necessary to build what we believe is going to be a very large market potential.

Then, I think with regards to a breakeven amount, I think it really is too early to say right now and it really depends on the ramp of the sales curve obviously when we're going to break even. So, we will leave it at that for now.

And if I could just follow up, have you gotten any feedback? And it may be early with regards to patients returning for their second shot, and again it may be very early for that. I'm just curious if you have any feedback on that.

This is Rich. I think it is a great question and a key question. Obviously, if you look at those numbers that I just gave you with about 800,000 of sales happening in October and September being the biggest month before that, most of the patients are one or two months into this.

But that said with the small numbers that came in July and August, we're already pleased to see the return rate on these patients. So, too early to make a definitive call and to model off of that but so far so good.

Just my final question. There was a lot of mention of EPS profitability. Could you clarify -- I haven't had time to go through the numbers -- when you will be cash flow profitable?

That's going to relate very importantly on a sustained basis to VIVITROL obviously. And, it's really too early to tell on that front. We still do have some capital investments that we're making on RISPERDAL CONSTA and others. But obviously, our cash position is very strong and we will wait and continue to monitor that as we go forward.

Larry Neibor.

Could you give us some idea of how many physicians have actually written prescriptions for VIVITROL to date?

Sure, Larry. It's a little bit hard actually to tell you the specific number of physicians, but it's on the order of magnitude of 1000. But, keep in mind, physicians are now writing outside of VIP3. So it's hard to track those who are writing and just going through specialty pharmas.

If I remember correctly, the whole idea of the VIP3 program was to make logistics easy for these physicians. Where has been the failure in that program?

I wouldn't consider it a failure. I would consider that some doctors have the resources in their office and would prefer to go directly through specialty pharmas. Other doctors with very limited staff need the resources made available to them through VIP3. It's important that we have the flexibility to allow doctors to do what is best for their particular situations.

You mentioned that there are new J-Codes for screening and short-term intervention. And you reference your own J-Code. Have you actually received notification of a J-Codes for VIVITROL?

We've received notification that a J-Code has been recommended, and it will be implemented January 1. They all go into play January 1.

But you actually have the notification?

That's correct.

[Ma Xu], [Rastalgi].

It's actually Dave Windley at Jefferies -- has a couple of questions. Thanks for taking them. Jim, on sales, you kept the VIVITROL sales number constant in the guidance. And I was just thinking in terms of run rate of the flow-through of that product into the end-user market, your sales for this year would seem to supply an awful lot of end-user sales.

And, I'm wondering -- just kind of curious about why that volume of product flowing to Cephalon is staying at that higher level, despite the low uptake and the early going. I guess another way to say it is, your next fiscal year sales would be dampened by that, would they not?

You mentioned sales and I think you meant manufacturing revenues because I wouldn't keep sales flat, right?

Yes, I mean manufacturing revenue, yes.

Yes, that's fine. So we did keep manufacturing revenues between $10 million and $15 million. We are watching obviously the inventory pipeline very carefully and along with Cephalon managing that. The difference between $10 million and $15 million is a broad range.

I don't think that we are concerned right now with the levels of inventory because we expect that the sales will grow through the year and that we are going to be in a good position to do that. Obviously the last thing we want to do is make product that -- so what we're doing is we're modifying our manufacturing schedule to meet our anticipated demand. And we've given you expectations that we will meet that.

Right. But just to be clear, the actual sales levels that you quote in the press release that VIVITROL manufacturing revenue supplied to Cephalon would cover manifold that level of sales, right -- I mean like six, sevenfold that number?

Yes, obviously, we are shipping it to Cephalon at cost. And they are selling it at $695 in the market. So, yes, it is a larger amount that we could sell.

So moving on then, in the VIVITROL usage, Rich, is it possible to talk about what the typical patient is that is agreeing to try or is accepting the VIVITROL therapy? Is it a Naltrexone-experienced patient?

Dave, I think it's too early to say that there's a central tendency here. I think the focus has been as much on the physician as it is on the patient because a number of these physicians have a whole -- I'm going to give you an anecdote.

One of our large shareholders called around independently to various prescribing physicians and asked what they were doing, and they told us this anecdote. So I don't own it; I will just forward what they said to me. They talked to a doc, who had a de minimis number of patients on it at the beginning, and his expectation which he said he was going to put 500 people on it eventually. But they start with one, and then they take another couple and they get the reimbursement worked out and they begin to integrate it into their practice.

So it's really been more of a focus on how do you get the pump primed on the physician and their particular practice than on what's the specific patient. The common ground of all these patients will be these are motivated patients. These are patients who are motivated to stop drinking. They're not being coerced or induced by somebody else to get better. They're taking responsibility for their treatment.

Right. And then, just a clarification. So, looking at the sales numbers that you discussed, Rich, and then the number of docs that have prescribed in response to Larry's question, it would look like -- and granted this is rough -- but on average, you are talking about those doctors who have tried it have tried it about three times per on average.

Be careful of the averages. The numbers are so small. We're really just getting going here and particularly when you see so much of it back-end loaded on the quarter. If we'd had a quarterly call for a quarter ending August 30, it would have been a very, very different number. So, it's a little early to -- we're going to be selling this product for the next 40 or 50 quarters. So, number one is in the bag. But, let's just give it a little time.

Operator, we have time for two more questions.

Rachel McMinn.

Thanks so much for providing the monthly details on sales; it's actually very helpful. I guess when I back into that and just assume like you had mentioned 695 per month, it looks like you've added in the last couple of months around 300 patients. Do you have a sense of -- I guess is that the kind of math that you're getting? Do you have a sense that -- I guess are these new patients or you said you were pleased with the retention rate from the earlier quarters or earlier months. Can you talk a little bit about what is that retention rate from those early numbers?

Rachel, say again what your number was that you derived because I didn't track (multiple speakers) --

Oh, I am sorry. It looks like you are adding 300 patients per month.

Per month.

Per month -- I'm sorry. I might have said per quarter; that's not what I meant. I meant per month.

Okay.

Is that kind of what you guys get? And it looks like if I extend that out through March, I end up with somewhere right near your guidance range, somewhere in and around like $9 million if you assume 300 patients added per month with the base continuing on. I guess the question that I have is, it assumes that's kind of like a net patient add. And I'm wondering after six months or so, if we're going to start to see attrition from that original base.

I wouldn't expect the increment per month is going to remain static, particularly since the whole shape of this curve should be non-linear as more and more doctors get their first patients on and then they expand the number of patients. So, I wouldn't extrapolate from those data points at all.

If we do, you can probably figure out why we guided the way we guided because it's quite conservative to just guide straight out from where we are with data we have in hand. But let's see where we end up. We are still early in this, and the caveats that applied when we guided in May still apply here.

That is actually helpful. So, what I'm saying is kind of what you're saying here is that what you've done is really more of a linear extrapolation, even though you fundamentally believe that the curve will change. I guess what --

I knew you would figure that out.

What is it about -- I guess where do you see the inflection point? Is it after a couple of months anecdotally when you talk to physicians? Do you--?

We don't know. We don't know. I wish we knew. So we just decided to give you guys the data that we have on this monthly basis, and so you can kind of begin to see. It would have been a whole different scenario if the first month had been $500,000, in the second month it would have been $100,000, in the third month for 300,000.

But it's clearly getting going here. And so, we will just have to play it out. I am thrilled with the way that the Cephalon and Alkermes teams are accommodating the information they're learning in the marketplace and the non-quantitative things all sound good right now.

Are there patients backlogged at all? Is any of this just logistical like patients are just waiting for therapy or is this really about getting -- I mean as you said, getting physicians to change the way they think about depression?

I think if there are patients in the queue, it's not a huge factor. I think it's more the physicians saying, okay, I understand it. I've finally figured out how to get this thing reimbursed. It would've taken a long time to get it reimbursed in August. And it's lower now, so they've put a couple patients on. They let them run for a mother or two to see if they tolerate it well, if it's giving efficacy and then take it from there.

They're not nearly in the same kind of rush that we are and you are. But, I think that they are really interested in new treatment alternatives.

And then, could you just address the genesis of the amended agreement with Cephalon? I'm not exactly sure. I see the benefits for you, and it certainly helps you from a cash flow perspective. But how does it come about? Why was it changed?

Well, I think one of the key attributes of this agreement was to make sure that we could continue to invest in the manufacturing lines. So, we have one manufacturing line up and running for VIVITROL right now, and we have a second and third line going in and constructing that.

Always from the beginning, we at Alkermes have viewed this as a 50/50 deal. And that's how the deal has been set up from the very beginning. The timing of getting the capital deal worked out was not as important as getting the product launched and doing all the other work. So, I think that -- it also provides Cephalon some flexibility, and we were certainly happy to provide that as we continue to work and invest in this product.

And then just one last question. Rich, I think you mentioned somewhere in the call that VIP3 was not -- it not really correlated with the marketplace. Does that mean that physicians enrolled in VIP3 are not actually the ones driving the prescriptions and why would that be?

Well, think about it this way. From the end of June through the beginning of September, every physician that wanted to prescribe VIVITROL was in the VIP3 system. So we knew quantitatively who was doing what. Now, if it gets filled through an [SBP], we get a scrip number but we don't know how many physicians are driving that scrip -- those scrips. Do you see what I mean?

So there could be 50 cartons going to an SBP -- is that 1 doc, 50 orders or is it 50 docs? We just don't have that level of granularity yet. We think we will get more of that with the passage of time, but it's a little bit murkier at this moment.

Operator, we have time for one more question if there are any.

I'm showing no further questions in the queue, ma'am.

Excellent. Well, thank you, everyone, for your time and for dialing in. If you have any additional questions, we will be available here at the Company. Have a good evening.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day. You may now all disconnect.