Alkermes Plc (ALKS) 2007 Q3 法說會逐字稿

Welcome to the Alkermes Conference Call to discuss Company's Third Quarter Fiscal 2007 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 hose for today's call, Miss Rebecca Peterson, Vice President, Corporate Communications at Alkermes.

Good afternoon, and welcome to the Alkermes conference call to discuss the financial results for our third quarter fiscal 2007, which ended December 31, 2006. With me this afternoon are Richard Pops, our CEO, and Jim Frates, our CFO.

Before we begin, let me remind you during the call today certain matters we will discuss 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, the manufacture of AIR insulin on a commercial scale if approved, reimbursement of VIVITROL by third party payors, our future financial and business performance, and our regulatory expectations. Listeners are cautioned that these statements are neither promises nor guarantees, but are subject to risk and uncertainties that could cause our actual results to differ materially from the results contemplated by these forward-looking statements. In particular, the risk and uncertainties include, among other things, whether we will achieve the financial expectations provided, whether the Company can successfully manufacturer RISPERDAL CONSTA, VIVITROL, and our other 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 results from contemplated and future clinical studies of our products and product candidates are predictive of product approvability or success, whether RISPERDAL CONSTA and VIVITROL in commercial use 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 forecasted estimates. Whether third party payors will cover or reimburse VIVITROL. Whether advancement of our proprietary and partnered products candidates will be delayed, and the outcome of clinical and preclinical work we are pursuing, both on our own and with our partners. Our ability to transfer manufacturing technology to Amylin, the timelines related 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, including but not limited to our annual report on form 10KA for the year ended March 31, 2006, and quarterly reports on form 10Qs. We undertake no obligation to update or revise the information provided in this call, whether as a result of new information, future events, circumstances, or otherwise.

This afternoon, Jim will discuss our financial results for the third quarter of fiscal '07 and provide an update on our financial expectations for the fiscal year. Rich will then present an update on our pipeline and an outlook on our business. We'll then open up the call for Q&A. Now I'll turn over the call to Jim.

Good afternoon everybody. I'm pleased to report another profitable quarter driven by revenues from RISPERDAL CONSTA and strong R&D revenues from our partner programs.

Total revenues for the quarter were 62.4 million, a 51% increase over the same time period last year. For the first nine months of fiscal 2007, we recognize more than $175 million in total revenues, a 55% increase over the same time period last year. We continue to expect to sustain profitability on a GAAP basis in fiscal 2007 and our cash position remains strong, having ended the quarter with more than $356 million in total cash and investments. Overall we're very pleased with the advancements we've made across our business during calendar 2006. We have four commercial or late stage products, based on our proprietary technologies, all of which have attractive economics to Alkermes.

RISPERDAL CONSTA provides a solid growing financial foundation for the company. In fact, we expect J&J to sell over $1 billion of RISPERDAL CONSTA in calendar 2007 and we anticipate total manufacturing and royal revenues from RISPERDAL CONSTA to contribute over $100 million to our top line in calendar 2007. The VIVITROL launch is ongoing and we and Cephalon have a number of efforts underway to increase VIVITROL's sales growth. Finally, our AIR insulin and EXENATIDE LAR development programs are progressing well and are funded by our partners, Ely Lily and Amylin.

We also recently entered into a manufacturing agreement with Ely Lily under which Alkermes will be the exclusive commercial manufacturer of AIR insulin powder. The agreement also provides for an investment by Lily, expected to exceed $30 million, to fund the construction of a second manufacturing line for AIR insulin, expanding our capacity threefold as we prepare for future anticipated demand. The agreement underscores Lily's commitment to the AIR insulin program, and our collective belief that AIR insulin will be a important product in the marketplace. This is also a significant agreement for Alkermes economically. We will sell commercial product to Lily at a cost plus basis, as well as earn a favorable low double digit royalty on net AIR insulin sales.

Finally we're planning for future growth by investing in new product opportunities, both proprietary and partnered. Rich will touch on these later. I'll now turn to our financial results for the third fiscal quarter ended in December 13th, 2006.

Our net income on a GAAP basis was $2.9 million for a basic and diluted earnings per share of $0.03 for the quarter ended December 31st, 2006, as compared to a GAAP net income of 1.4 million or basic earnings per share of $0.02 and a diluted earnings per share of $0.01 for the same period last year.

For the quarter ended December 31, 2006, the total share based compensation charge was $7.5 million. We recognized $.9 million within costs of goods manufactured, $1.9 million within R&D expense $4.7 million within SG&A expenses, and we capitalized $.4 million within inventory. I'll remind you those are all non-cash expenses. The impact of FAS 123R in our financial results for the quarter was a total expense of $0.07 per share.

Because of the significant nature of certain non-cash or nonrecurring items, including employee share based compensation expense, we feel it's important to discuss non-GAAP results that we believe more accurately reflect our ongoing operations. So non-GAAP net income for the quarter ended December 31, 2006 was $11.1 million, or basic and diluted earnings per share of $0.11. This compares to a non-GAAP net income of 1.6 million or basic and diluted earnings per share of $0.02 for the same period last year. We're very pleased with our earnings growth as we achieved a nearly six fold increase in non-GAAP net income over the course of the year. For a reconciliation of 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'll move on to the specific line items and to be clear, I will compare third quarter fiscal 2000 expenses excluding share based compensation with third quarter fiscal 2006 GAAP expenses that did not include any share based compensation so you can more clearly see the operating trends in our business.

Total revenues were a record $62.4 million for the quarter ended December 31, 2006 driven mainly by growth in manufacturing and R&D revenues. For the quarter ended December 31, 2006, total manufacturing revenues were $28.8 million, of which a record 23.6 million related to RISPERDAL CONSTA, and 5.2 million related to VIVITROL. This compares to 14.7 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 to meet increased demand around the world. The 5.2 million of manufacturing revenue related to VIVITROL includes the 10% manufacturing profit which we recognized out of the milestones we received from Cephalon, the start of our arrangement, and which we carry as deferred revenue on our balance sheet.

Royalty revenues related to RISPERDAL CONSTA were 5.7 million for the quarter ended December 31, 2006, based on worldwide sales for RISPERDAL CONSTA of $226 million, compared to 4.2 million on a worldwide -- based on worldwide sales of 169 million for the same period last year.

Research and development revenue under collaborative arrangements for the quarter ended December 31st, 2006 was 19.5 million, compared to 10 million for the same period last year. The increase in R&D revenues from last year was primarily due to the work we performed on the AIR insulin and EXENATIDE LAR program, in addition to the amounts invoiced to Cephalon related to the ongoing construction of two VIVITROL manufacturing lines.

Net collaborative profit related to the VIVITROL collaboration with Cephalon was $8.4 million for the quarter ended December 31st 2006, compared to 12.5 million for the same period last year. This consisted of 7.2 million of milestone revenue, recognized to offset expenses incurred on the product by Alkermes and 1.2 of milestone revenue related to the license we provided to Cephalon to sell VIVITROL.

For the quarter ended December 31st, 2006, we did not make payments to Cephalon to reimburse Cephalon's product related expenses. Under the amended agreement, Cephalon agreed to be responsible for its own VIVITROL related costs during the period of August 1st, 2006, through December 31st, 2006. Beginning on January 1st, 2007, Alkermes resumed its reimbursements to Cephalon. As you remember, Alkermes is responsible for the first $124.6 million of net product losses incurred on VIVITROL, and through December 31st, 2006, we have incurred $91.5 million of cumulative net product losses against this cap.

For the quarter ended December 31st, 2006, the cost of goods manufactured on a non-GAAP basis was $12.1 million, of which 7.6 million related to RISPERDAL CONSTA and 4.5 million related to VIVITROL. The cost of goods manufactured for the same period 2005 was 6.1 million, all of which related to RISPERDAL CONSTA. The increase in costs of good manufactured was due to increased shipments of RISPERDAL CONSTA to Janssen to meet increased demands and to shipments of VIVITROL to Cephalon. Cost of goods sold for VIVITROL included a $1.5 million charge for idle capacity as we slowed manufacturing to avoid a build up in inventory.

Research and Development expenses on a non-GAAP basis for the quarter ended December 31st, 2006, were $28 million, compared to 22.5 million for the same period last year, reflecting an increase in expenses related to new personnel and to work performed on both partner and early stage proprietary pipeline products.

Selling General and Administrative expenses on a non-GAAP basis were 11.7 million for quarter ended December 31st, 2006, compared to 9.3 million for the same period last year, primarily due to an increase in personnel costs related to continued commercial activities in support of VIVITROL.

Interest income was 4.3 million for the quarter ended December 31st, 2006, compared to 3.3 million for the same period last year, reflecting higher average cash and investment balances held by the Company and higher interest rates. Interest expense for the quarter was 4.1 million compared to 5.2 million for the prior year, reflecting the conversion of our 2.5% notes in June of 2006.

At December 31st, 2006, Alkermes had cash and total investments of 356.2 million as compared to 325.6 million at September 30th, 2006. This increase reflects our collections from our partners, including moneys received from Cephalon related to work performed by Alkermes on the two VIVITROL manufacturing lines under construction.

I'll now conclude with some comments on our financial expectations for the remainder of our fiscal year. With one quarter remaining, we are updating our financial expectations for fiscal 2007. We are improving our financial expectations due predominantly to higher manufacturing fees than originally anticipated in addition to higher revenues from our partnered R&D programs. Details on each line item within our guidance may be found in today's press release. To sum up, we expect non-GAAP net income to range from $30 to $35 million or basic EPS of approximately $0.30 to $0.35 cents, revised from an earlier expectation, of $25 to $30 million, or basic EPS of approximately $0.25 to $0.30.

To conclude, we achieved a number of important critical and commercial milestones in calendar 2006. Our financial profile is strong and our business is positioned for long term profitability and growth. We are very excited about the direction of Alkermes and we continue to work hard to achieve the goals we've set for calendar 2007. For an update on our programs, I'll now turn the call over to Rich.

That's great. Thank you, Jim.

So from a financial and from a commercial and a clinical perspective, '06 was a remarkable year for this Company, with as you just heard continued strong performance from RISPERDAL CONSTA. The approval and launch of VIVITROL and substantial progress in the pipeline, particularly with our diabetes product candidates. So the Company today is now a profitable, multi-product company, and these proprietary technologies of ours provide a very novel engine for innovation which allow us to develop new products with clear medical benefits and advantages over existing therapies that can change the way major diseases are treated.

Take for example, RISPERDAL CONSTA. RISPERDAL CONSTA is based on our Medisorb technology, but its clinical and commercial success stems from its ability to improve therapeutic outcomes. We think we have the same opportunity with VIVITROL, and those two are just the beginning. Behind these two commercial products we have two more important product candidates for diabetes, as well as other early stage development programs that you have seen more of over the last year that have the potential to generate additional significant long term value. So we're quite pleased with where the Company stands at this moment.

I'll give you some highlights of the various programs. First we'll start with RISPERDAL CONSTA. As you know, it's our long acting treatment for schizophrenia based on this Medisorb sustained release technology. It's on the threshold of becoming a true capital "B" blockbuster product, with more than $1 billion in sales expected in calendar 2007. With this milestone, RISPERDAL CONSTA [if it achieves that] will join a very elite list of pharmaceutical products. It's a tremendous achievement that few biotechnology companies attain. We believe the success of CONSTA is directly attributable to its unique dosing regimen, its safety profile, and its ability to improve outcomes for patients across a number of parameters, including improving symptoms, preventing relapse, and decreasing hospital admissions.

As we enter 2007, the competitive environment for RISPERDAL CONSTA continues to be very favorable for us. More than four years following the first European approval, CONSTA remains the first and only long acting atypical anti-psychotic commercially available. There's a large and growing body of data to support the clinical and cost benefits of RISPERDAL CONSTA. With patent protection for CONTSA extending into 2020, there's room for continued growth in a CNS market that exceeds $12 billion in annual worldwide sales. If other long acting injectionables reach the market, they will not do so, from what we can [now] see, any time in 2007 and they will be competing against a billion dollar brand with years of real world and payor experience behind it and extensive patent life ahead of it.

J&J is building on the success of CONSTA. They are focusing on additional indications and new geographic markets. Phase three studies of CONSTA in bipolar disorder are ongoing. Last December, J&J filed for marketing approval of CONSTA in Japan. In addition, J&J continues to focus on schizophrenia, and is conducting Phase 4 studies designed to further establish the efficacy of CONSTA at different points along the treatment continuum, including as first sign therapy, as treatment for patients in remission, and as a treatment option for patients switching from orals.

Turning to VIVITROL, our long acting treatment for alcohol dependence, we and our commercial partner Cephalon are continuing to develop this new market. Cephalon's gross sales of VIVITROL were approximately 2.3 million for our third fiscal quarter and 3.4 million in total for calendar 2006.

Last call, we gave you monthly data and we'll continue that so you can see how the product is rolling out. If you take the gross sales month by month for the quarter, the sales were approximately 784,000 in October, 691,000 in November, and 785,000 in December. In January, VIVITROL sales were over 1.1 million, for an estimated total of 4.5 million in cumulative gross sales since the launch last June.

The launch is gaining traction, however it's still too early to predict the ultimate shape of the adoption curve. So without speculating, let's just focus in on some of the key areas we're focusing on as we continue to build the market. First, in mid-December Cephalon implemented a starter program. The starter program will enable physicians who are familiar with, but have not yet prescribed VIVITROL, to try the drug and will provide immediate access to VIVITROL for first time patients while they work through the logistics of shipping and reimbursement. To date, samples have been distributed to over 1100 physicians. Based on the data we have access to, approximately 75% of the samples we believe are being shipped to new prescribers, and we're obviously pleased to see such a strong interest in the starter program. Because we're quite confident in the clinical profile of VIVITROL, we believe that giving patients and physicians hands on experience with the product will generate future demand.

Our MMDs, the Alkermes MMDs, are also making progress in the field and are continuing to call on local, regional, and national decision makers at the Department of Veterans Affairs and Department of Defense, or DOD facilities across the U.S. We're happy with the inroads we're making with these important audiences. To date, more than a dozen VA or DOD facilities have purchased VIVITROL. The MMDs are also uncovering new opportunities to educate audiences about VIVITROL, reaching out to physician health program and drug courts in particular. Both of these groups interact with patients motivated to recover. And as an interesting anecdote, just recently, a Pennsylvania drug court mandated treatment with VIVITROL, a signal that drug courts may be open to new treatment paradigms, particularly for repeat offenders. Although we're just beginning to build relationships with physician health programs and drug courts, we're happy with the progress we're making with these audiences.

On a reimbursement front, coverage for VIVITROL continues to be favorable. Information that we have access to suggest most plans provide coverage for VIVITROL, albeit with some restrictions. In addition, the U.S. centers for Medicare and Medicaid services, or CMS, a J-code for VIVITROL became effective on January 1st, 2007, which can expedite the reimbursement process by enabling more efficient processing of claims. We and Cephalon believe that given the clinical profile of the drug, and encouraging anecdotes that we're hearing from the field, that VIVITROL has the potential to change the lives of patients and their families and we are as committed as ever to establishing VIVITROL as a first line treatment option for alcohol dependence.

In addition, Alkermes is planning to submit our first European regulatory filings in the first half of calendar 2007. We learned from our partnership with Johnson and Johnson around RISPERDAL CONSTA that markets outside the U.S. for these long acting injectable products can provide an important source of growth. Alkermes retains all rights to VIVITROL outside the U.S. and we're excited about the opportunity to apply our experience in addiction and learnings from the U.S. launch to new markets.

Turning to the rest of the product pipeline, both the AIR insulin and the EXENATIDE LAR programs are progressing well. AIR insulin is in a comprehensive development program and we have many activities now ongoing in preparation for commercialization. In '06, we supplied the program with clinical trial material for studies involving approximately 4000 patients in more than 20 countries. We initiated production of registration stability batches and expanded to a second manufacturing shift, and just last month we signed an important manufacturing agreement with Lily that establishes the terms for the manufacture and supply of AIR insulin powders and also includes the construction of a second manufacturing line. When the second line is completed, we expect to have the capacity to produce insulin powder to meet the anticipated market demand.

On the clinical side, the Phase 3 program is progressing well, with seven clinical trials currently underway. Insulin remains the gold standard of treatment and based on guidelines jointly issued last summer by the American and European Diabetes Association, patients should begin a treatment algorithm that includes insulin therapy much sooner than what has been historically prescribed. We obviously believe that AIR insulin could help encourage more patients to begin this type of insulin regimen earlier in the disease progression. Our clinical programs include studies designed to support the use of AIR insulin with or without basal insulin, in combination with orals, or as an addition to basal insulin therapy. Our partners at Lily have been leaders in diabetes care for over 80 years. We're happy with the progress we're making together, and with the opportunities that lie ahead in this marketplace.

EXENATIDE LAR, which is the once weekly formulation of BYETTA also has the potential to make a profound difference in the way diabetic patients are treated. Based on the success of BYETTA, and the clinical results we've seen with LAR to date, we believe this product candidate could be the next standard of care for Type Two patients. We partner this with Amylin and Lilly and we continue to make strong progress across the entire program. We expect a complete enrollment in the pivotal 300 patient study this quarter, with top line study results anticipated in the second half of this year.

Process development scale of work is also progressing well. Manufacturing scale up to the intermediate batch size has been completed and this material is being used in the current clinical study.

Completion of Amylin's commercial facility is a top priority for the alliance. Construction of the facility is proceeding rapidly, and Amylin recently stated that they continue to be on track to finalize the commercial manufacturing process in the second half of 2008.

In addition to these products I've just talked about, we're planning for the future. Because we have this productive drug delivery platform, it makes sense for us to continue to apply it to novel product candidates, particularly with our therapeutic area expertise in CNS. Consistent with the strategy we have both partnered and proprietary programs that use both well characterized molecules and new chemical entities.

Last month we and Indevus announced a joint development program for ALKS 27, a new product candidate being developed for the treatment of chronic obstructive pulmonary disease, or COPD. ALKS 27 leverages our AIR technology with Indevus' compound, Trospium Chloride, the active ingredient in SANCTURA, which is an FDA approved treatment for overactive bladder. We've already a completed a Phase 1 clinical trial on healthy volunteers, and now is the basis of our announcing the collaboration of those results. The study showed that 27 was well tolerated over a wide dose range, with no dose limiting side effects observed. We're now planning to initiate a Phase 2-A study, to evaluate the efficacy of ALKS 27 administered once a day in COPD patients. And we expect that study to begin in the first half of calendar '07.

Our pipeline also includes product candidates that leverage our experience in CNS and addiction, including ALKS 29, which is our oral compound for the treatment of alcohol dependence. An eight week Phase 1-2 study of ALKS 29 in patients with alcohol dependence is ongoing. The study is fully enrolled and we expect to report results in the first half of calendar '07. Behind ALKS 27, and ALKS 29, are a number of other preclinical candidates, including a family of novel opioid receptor modulators, as well as certain other undisclosed programs.

As we begin '07 we're very pleased with where we stand and about the opportunities ahead of us. You can expect, among others, the following milestones over the next few months. The publication of AIR insulin patient training data in a peer review journal. The first ex-U.S. regulatory submissions for VIVITROL. Completion of enrollment for the EXENATIDE LAR pivotal study. The results from the ALKS 29 Phase 1-2 study. The initiation of the Phase 2A study for ALKS 27, and the program we didn't talk about in this call, but the initiation of the Phase 1 study for AIR parathyroid hormone, which is a collaboration with Ely Lilly. From a product, partner, and financial perspective, we look today to be as strong as we've ever been and we're excited and confident about the direction the Company going ahead. With that, I will turn it back over to Rebecca and we'll take your questions.

Operator, we'll take the first question.

[OPERATOR INSTRUCTIONS] Our first question comes from Jim Reddoch from FBR, your line is open.

A question on sampling, VIVITROL. Can you say again when it started and how comprehensive of a program it is, and what type of doctors you were sampling to, and also how you think January was able to increase in the face of sampling since I assume that it would have fallen off a little bit.

We weren't quite sure what would happen in the marketplace as we began the starter program. It started in mid-December and as we said, it looks like it's hit about 1100 physicians by now.

This is really consistent with the calling patterns the Cephalon reps have already established. But it was really an attempt to remove any logistical barriers from doctors getting patients going. We'll see how this translates into pull through in the months ahead. But obviously it's early days, but we're pleased to see a record month in January notwithstanding the fact that we're hitting over a 1000 doctors with sample product.

Can you say how many are actually in doctor's hands, or better yet patient hands?

We can't. Because we don't have a lot of precision on it yet. Give us some time, we'll give you hopefully more precision on that in the future.

Thanks.

You're welcome.

Thank you. Our next question comes from Jami Rubin from Morgan Stanley.

Your line is open.

Richard, just curious to know of your target physician audience for VIVITROL, how many physicians are fully equipped to administer VIVITROL? In other words, do they have the refrigeration, do they have the ability to administer the shot, et cetera? And also just curious to know what your thoughts are on the initial impact of the implementation of the J-code. Could that also be reflected in the January numbers?

It's so hard to know just with a few weeks of experience. Obviously J-code doesn't hurt. It's nice to have that there. With respect to the first part of your question, the target calling universe that Cephalon originally launched to was expanded in the fall. And it continues to be a somewhat bigger footprint than when they first launched the product. Most of the doctors who are writing are fully equipped to do so. In fact the impediment -- we don't hear from doctors that the impediment to using VIVITROL is that they don't have a refrigerator or they are not equipped to do it. The people who are going to be writing VIVITROL figured out the way to use VIVITROL.

So what do you think the biggest impediment is at this point? Is it reimbursement? Is it just education? What's the bottleneck, then?

I think the way to think about it is not that there's a bottleneck, that when you remove that, and all of a sudden, the bottle opens. It's a build. It's a new market. So we're changing the way physicians practice medicine. And every month we're going to recruit and teach and train and get positive feedback from an additional cohort of doctors, is the way we see it. So everybody wants to hope there's a single boulder in the road, that you move that out of the way, then everything goes. I just think we're going to keep building and we're going to be in this for a long time and it's one of the reasons why we chose Cephalon as a partner. They've been there before, with Actiq and Providial.

And the beacon that attracts people, last time you and I talked I think we talked about it, is we just continue to hear these patient anecdotes that are so moving. And they're not trivial. It's not that "I feel marginally better." It's "I've gotten my life back."

And when the efficacy signal is so strong, that's a very compelling argument which underlies the confidence underneath the starter program for example. We really do believe that if patients get on this drug, they and their doctors will see a difference and that's the kind of groundswell of momentum that builds over time. So there's not a single bottleneck issue.

Thank you.

Our next question comes from Ian Sanderson from Cowen and Company.

First on VIVITROL, can you update us on the trial and [opioid] addiction patients, when we might see some data on that. It sounds like you're already seeing quite a bit of use even sort of official pushing in that direction and could you comment on of the prescribing that you have so far what percentage might be in the opioid addicted patients? Secondly, can you [square] for us the increase in the guidance for the VIVITROL manufacturing revenues with the charge in the quarter for writing down some VIVITROL inventory?

Jim why don't you take care of the second part first, then we'll go back.

I mentioned that we have that charge for idle capacity which is reflected in revenue that we recognize essentially because that capacity that we have built up for VIVITROL and the manufacturing that we do gets charged into the partnership. So essentially it's a straight pass through in that way through the partnership as it were.

Okay.

Now on the opiate side for those of you who don't understand the nature of the question, obviously VIVITROL is an opiate receptor antagonist. So it has a logical potential utility in the treatment of the opioid dependent. Our first label, our initial approval label, does not include opioid dependence, we filed for approval on alcohol dependence, so we do not promote the product, nor does Cephalon promote the product for use in opioid dependent patients. That said, physicians can use it as they see fit. One of our top priorities as we hear feedback from the marketplace is to build the labeled indication to include opioid dependence. I think the most recent guidance we give on that is we are in our discussions with regulatory authorities on that. We've not given our specific plan on that. We will do so in this calendar year. We have published some data, we've run clinical trials looking at opiate receptor blockade with VIVITROL, most recently data were presented in January at the ATMP meetings, and we've also included opioid and mixed dependency patients in our safety databases, so we're laying the ground work for expanded labeling in opioids.

Any rough feeling in what percent is currently being prescribed?

I don't. I don't.

Thanks.

You're welcome.

Thank you. Our next question comes from Jeff Goater from Cowen and Company. Your line is open.

My question has been answered. Thank you.

Thank you, sir. Our next question from Rachel McMinn from Piper Jaffray.

Thank you very much. A couple of questions. Richard, before you had mentioned that maybe there were a couple of doctors who were actually very broadly adopting VIVITROL. Can you comment on, of the approximately 1600 patients that were on in January, on VIVITROL, how that broke down, how many doctors were actually prescribing, on average, how many docs have how many patients and how many docs actually have more than a hundred patients?

I won't because I don't have those figures immediately at hand. I'm not sure we even have it calculated that way. Your point -- it's an important one because we do believe that there are certain doctors and there's an increasing number we hope over time that are adopting VIVITROL in kind of a wholesale way into their practice in total. So you don't see small numbers of prescriptions from them, you see large numbers. And it stands to reason because if you really do believe that this pharmaco-therapy combination with psycho-social counseling is the gold standard way to treat your patients. We've heard from many physicians, they don't really make a question about which patients should they prescribe VIVITROL to, the presumption is that they're going to be using it in essentially all of their patients unless they are contra-indicated. So part of the experience curve for these people has just been getting comfortable with the drug, trying it out on a few patients, seeing whether it's working for them and then we expect them to adopt it more broadly into their practice. Then on the other end of the curve we'll have physicians who experiment with it, write a few prescriptions, but never fully integrate it into their practice. They will end up, over time in my view of the world, being less important in the calling universe than these doctors who decided to change their practice with VIVITROL.

Just like us doing some math. You had said at one point that 75% of the 1100 docs with samples hadn't prescribed, so is it reasonable to assume that approximately 275 have prescribed?

We've got more than a 1000 doctors who have prescribed the product

Okay. But I guess I'm just trying to match that with the 1600 patients that are on drug right now.

Good luck.

Okay. And then another question just point of confusion for me. You've lowered your VIVITROL guidance previously for the year in terms -- and [user] sales expectations but then you're raising the revenue expectations for VIVITROL that you're shipping to Cephalon. I'm just confused by how that works.

I'll try and answer that again. We have -- under FAS 151 which describes idle capacity, we actually have excess capacity. We're not running our VIVITROL manufacturing at full capacity right now, because of the sales curve and the accounting rules say you need to take that charge then, not when you ship product, but in the period where you have that cost. That's simply what we're doing. We're more accurately reflecting in our guidance now as we get closer to the end of the year, our best understanding of what it's going to cost us overall to make all the VIVITROL that we're making this year.

So even though it's coming through on the revenue side?

It's matching expenses as we've always said that we're doing with VIVITROL do far.

I see. Okay. And then just curious on the EU side, that's the first time we've seen that type of a guidance. How -- what are you thinking of? What's the plan? Are you in partnership discussions or are you actually planning on building and selling this yourself in Europe?

We're just mapping out those strategies right now. We're meeting with regulatory authorities we're quite comfortable with where we stand from a regulatory point of view, so we feel comfortable guiding you all to filings in the first half of this year. And we'll be much more clear about our commercial strategy. We're being approached on partnering opportunities, and we're really trying to get first a sense of the commercial lay of the land before we solve the problem with a specific solution. We want to know exactly what our strategy is for the various countries.

So from that we should take it that both options are on the table. You're potentially considering partnership, but is there -- is it on the table at all that you would consider doing this on your own?

I don't think you'd see us put together a denovo sales and marketing force in Europe with an Alkermes sticker on it by itself.

That's helpful. Thank you.

Thank you. Our next question comes from Dave Windley from Jefferies.

Just to restate and make sure I understand. You're taking this idle capacity charge through cost of goods sold and then pulling down milestone related amortized revenue to match that. Yes? No?

What happened is actually the [cogs]. We get paid for it directly from Cephalon. It's all part of the overall alliance that goes against $120 million of losses what we're working against. It's the cost of what it requires -- all the costs that go into making VIVITROL vials, essentially are shared by the alliance and we get paid for Cephalon.

So important distinction, that cost is reimbursed to you by Cephalon. Therefore docks against the 120 million doesn't come out of monies already paid to you by Cephalon.

That is correct. And essentially, again, just think about it as this is what it costs to make the vials that we're making -- all the vials we make of VIVITROL, just a matter of we're taking some additional charge because we're not at full capacity. We weren't at full capacity in the December quarter.

So, slightly different question around the numbers on this. As you are progressing through the early part of the launch on VIVITROL, the portion of the revenue recognized, or the manufacturing profit position I think you call it on VIVITROL sold to Cephalon, the portion I'm talking about is the imputed profit that you do pull down out of the milestone. How is that calculation changing?

It doesn't change, it actually stays at 10%. We've got -- it's a long range model that we have and we essentially look at cost plus 10%, and that's how we bring the milestone revenue into our P&L.

My understanding was that imputed profit was influenced by your long run expectation of volume to be sold during the life of the agreement. Is that correct?

That is correct.

So that [home]-run forecast has actually not changed?

That is correct.

Final question, how does the sampling -- how does that factor into the numbers? And then does that also, perhaps for Richard -- is that factoring into VIP3, is VIP3 still basically in place as it has been, or how is that morphing to adapt to the launch? First on the numbers and second on the execution.

Whether we sell a vial commercially or whether we sample it, essentially, it costs us the same to make a vial, so we treat that cost of goods as we discussed earlier. From the perspective of VIP3, the sample program is actually run through the Cephalon sales force. They have a separate well established legal framework for handing out samples to doctors, for keeping track of those. And the follow-up, obviously each rep is following up with those physicians to make sure that if they do want to continue prescribing VIVITROL, that they can get it reimbursed appropriately and use VIP3 if they prefer, use their specialty pharmacy if they prefer, or get help directly from other various people at Cephalon. Does that make sense?

Yes, yes. Thank you.

You bet.

Thank you. Our next question comes from Tom Russo, from Baird. Your line is open.

Another question for Jim. Of the 120 million you originally had on your balance sheet to amortize in a cost recovery fashion, can you remind us how much of that remains and what the current burn rate for that account was in the most recent quarter?

Yes, well, we need to make sure we get the appropriate milestones. We owe the partnership the first 120 million of losses. We also however have -- Cephalon paid us a total of $270 million of essentially up front payments upon the signing and the approvals for VIVITROL. So of the 120, we have run through approximately 90 million of that through December. We have almost $160 million of total milestones that we were paid that we're still recognizing over the future of the product as we pull in the license fee because as well as 120 we also have the value of the license fee that they paid us, which we recognize about 1.2 million of that per quarter.

Next question. The guidance for R&D revenues increased but R&D expenses did not. Can you just reconcile what you're getting reimbursed for that you don't have a cost for as well?

There are certain things that are pass throughs and there are certain things that for instance if we run a clinical study or we outsource some lab work to be done for Amylin or Lilly, we just pay those costs, they're a pass through. We recognize that expense and recognize the revenue. In addition we get FDEs, so one could argue that we have more people working more efficiently on those projects, where we see an increase in revenue and not an increase in expenses. And then in addition we have some additional work -- remember Cephalon agreed to pay for the work we're doing on line five and line six and that essentially got moved out of net collaborative profit and into partnered R&D. As we do work on our increased manufacturing capacity for VIVITROL, that is now essentially contracted out run at our FDE rate with Cephalon just like our partnership with Lilly and Amylin.

Last question if you can. Is there any data or percentage you can put around the VIVITROL patients in terms of who are repeat patients in January versus who are new patients?

I think it's a little early to comment on that since we're still in the early stage of the launch and it's hard to draw generalizations, but I will say we have patients who are receiving their sixth and seventh injections.

Thanks a lot.

Operator we have time for one more question.

Our final question comes from Scott Henry from Oppenheimer.

Thank you for taking the questions. Just a couple. First, with regards to the SG&A trend within the collaboration. I noticed throughout fiscal year '07, Alkermes costs went roughly 8 million, 10 million down to 7 million. Is 7 million probably a better go forward? Are we starting to see those costs normalize? And the other two questions, just with regards to RISPERDAL CONSTA in Japan, it looks like an interesting market. If you could give some color on the time line of with how that should play out with regards to pricing as well as how it will show up in your income statement? And the final question with regards to manufacturing of VIVITROL. I see you have idle capacity right now, and certainly the launch has trailed below expectations yet the Company is moving forward with two new lines. I'm wondering if at some point you reassess the needs for those two lines or at least the time line for the need for those two lines.

I think we'll continue on with the plan we had three years ago. I'm just kidding. I'll try and go backwards with each of those, with manufacturing, Japan, and SG&A.

With regards to the long term manufacturing capacity, I think as we sit here as a management team and work with Cephalon, we not only look at the U.S. opportunity, but the ex-U.S. opportunity. I remind you of the $850 million of sales that RISPERDAL CONSTA had, I would say almost two-thirds of those from a dollar volume were overseas. There's a big opportunity for VIVITROL overseas, that as Rich mentioned that we're beginning to strategize about and work on. Secondly, these lines take 2, 2.5 years to build and validate. I think what you see us doing, and Cephalon for that matter, is continuing to invest in the potential capacity for VIVITROL because we believe in the long term potential of the product. Notwithstanding the first two quarters that we've looked at and the fact that much of the street has perhaps changed their view on VIVITROL, we get more and more excited as we get more and more patient anecdotes about what's happening with this product. So I think it would be foolhardy in the long term not to plan for long term capacity for VIVITROL. We might be wrong but that's what we're doing.

In terms of Japan, I don't know particularly about the pricing for CONSTA, I think J&J has shown around the world that they've been very, very good at marketing this product overseas in particular. I think Japan is a very large opportunity. They are in the middle of what they expect to be an 18 month approval process which I think is standard in Japan. In terms of the impact on the income statement, I think that you'll see it really no different than you see other sales. We'll continue to report worldwide sales of CONSTA, we'll continue to receive our manufacturing fee and our royalty on CONSTA. So hopefully that will continue to grow the sales over time as we have another big market on board.

Finally the SG&A trend in the collaboration, you rightly pointed out the different quarters. I'd just remind you those numbers include both R&D and SG&A expenses just for Alkermes. So I think our SG&A expenses there have been fairly consistent over time and what you see moving up and down more is the R&D expenses. Particularly as we go through the normal time lines of validating and focusing on constructing lines and bringing lines up to date and running clinical studies and doing those kinds of things. You know, I think that the SG&A expense through the course of the year has been fairly steady.

Hopefully, that answered your questions.

It did, thank you.

Thank you, everyone, for dialing in this evening. If there are any remaining questions, please don't hesitate to contact either Jim or myself. Have a good night.

Take care. Thanks.

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