Alkermes Plc (ALKS) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Alkermes plc conference call to discuss the Company's third-quarter fiscal 2013 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 recorded at Alkermes' request. At this time, I would like to introduce your host for today's call, Ms. Rebecca Peterson, Senior Vice President of Corporate Communications at Alkermes. Please go ahead.

Good morning. Welcome to the Alkermes plc conference call to discuss our financial results for the third quarter of fiscal year 2013, which ended on December 31, 2012. With me today are Richard Pops, our CEO; Shane Cooke, our President; and Jim Frates, our CFO. Before we begin today, let me remind you that we will make forward-looking statements relating to, among other things, our expectations concerning the commercialization of our products, our future financial expectations and business performance, and our expectations concerning the therapeutic value of our clinical development products.

Listeners are cautioned that these forward-looking statements are neither promises nor guarantee and are subject to a high degree of risk and uncertainty. Our press release issued today, our annual report on Form 10-K with the SEC, and our other filings with the SEC, identify risk factors that could cause our actual performance to differ materially from those projected or suggested in the forward-looking statements. We undertake no obligation to update or revise the information provided on this call as a result of new information or future results or developments. This morning, Jim Frates will discuss our third-quarter financial results, and Richard Pops will provide a brief update on the Company. After our remarks, we'll open up the call for Q&A.

Now I'd like to turn over the call to Jim.

Thanks, Rebecca. Good morning, everyone. We are pleased to report another quarter of strong financial results, driven by robust operational performance across the business. From a broader perspective, it has now been more than a year since the merger, and this is the first quarter where we can see the true organic growth that this business can generate. We are very optimistic about the future, and today we're improving our financial expectations for fiscal 2013.

First let me start with a review of the results for our fiscal third quarter. We recorded total revenues of $135.9 million, representing an increase of 8.2% over the third quarter of last fiscal year. This growth was driven primarily by our key commercial products, which together grew 33% year over year. The revenues from our key commercial products accounted for nearly 70% of total revenues during the quarter, compared to 55% during the third quarter of last year. This increasing percentage is exactly what we predicted as our key commercial products continue to ramp and the legacy product revenues diminish.

Now let me highlight the performance of the key products driving our growth. Our long acting atypical franchise, RISPERDAL CONSTA and INVEGA SUSTENNA continued to be the most significant contributor to our results during the quarter. End-market sales for RISPERDAL CONSTA and INVEGA SUSTENNA were approximately $586 million. Year over year, the combined franchise grew approximately 13% on a dollar basis, and, as Johnson & Johnson reported last week, achieved operational growth of nearly 15% due to an increase in combined market share. Alkermes reported manufacturing and royalty revenues of $52.5 million for the quarter for this product franchise, compared to $47.6 million of revenues in the third quarter of fiscal 2012.

For modeling purposes, I want to remind you that INVEGA SUSTENNA's royalty rate is tiered between 5% and 9%. On January 1, the royalties reset to 5%, and will tier up through the calendar year as certain sales levels are achieved. For AMPYRA and FAMPRYA manufacturing and royalty revenues were $18.4 million during our third quarter. In the United States, Acorda reported unaudited AMPYRA set sales of approximately $73 million and guided to AMPYRA US net sales of $285 million to $315 million for calendar 2013. Outside the United States, Biogen reported FAMPRYA quarterly net sales of approximately $10.5 million and total FAMPRYA revenues of $57.4 million for calendar 2012.

Turning to VIVITROL, net sales for the third quarter of fiscal 2013 were $15.9 million, marking the 14th consecutive quarter of growth for the product. VIVITROL continues to show momentum, with revenues that grew approximately 5% quarter over quarter. The actual growth is even better than that. If you recall, last quarter we changed our revenue recognition model to a sales-in model, which resulted in a one-time recognition of $1.7 million in sales. Excluding that, the net sales growth was 18% quarter over quarter. Year-over-year sales were up approximately 50%. VIVITROL is beginning to perform, and we're pleased to see it becoming a more meaningful part of our business.

During the third quarter, Alkermes recognized BYDUREON royalty revenues of $5.3 million, based on estimated worldwide end-market sales of approximately $65 million, which is a 41% increase compared to estimated end-market sales of BYDUREON during the prior quarter. Our third quarter was the first full quarter following Amlyn's acquisition by Bristol-Meyers, and their worldwide commercial efforts in partnership with AstraZeneca are still only just beginning. In addition to the strong contribution from our key commercial product portfolio during the quarter, Alkermes earned revenues from legacy products, the most significant of which were $9.8 million from the combined RITALIN LA/FOCALIN XR franchise and $6.8 million from TRICOR 145. As expected and planned for during the third quarter, there was a generic entrant for TRICOR 145. Going forward, we continue to expect revenues from the legacy product portfolio to decline. For the rest of this fiscal year you should expect to see this revenue transition continue, with growth from our key commercial products offsetting these legacy product declines.

Now turning to expenses, operating expenses were $110.6 million for the quarter. This compared to total operating expenses of $130.6 million for the same period in fiscal 2012. This reduction was due primarily to the timing of clinical trial expenses and the inclusion of certain merger-related expenses in fiscal 2012. In addition, following the debt financing we completed in September, net interest expense during the third quarter was reduced by approximately $5.6 million to $4.5 million, compared to the same period last fiscal year. With strong performances across the business, we achieved non-GAAP net income of $46.5 million for the quarter, a significant increase compared to non-GAAP net income of $12.8 million for the same period last year. For a reconciliation of our non-GAAP earnings to GAAP, I refer you to our press release issued earlier today. We ended the third quarter with $239 million of cash and total investments, compared to $208 million at September 30, 2012.

Now, let me turn to our financial expectations. As we enter the final quarter of our fiscal year and gain more precision around VIVITROL sales and R&D expenditures, we are improving our financial expectations for fiscal 2013. The following line items are changing. We are increasing VIVITROL net sales guidance to a range of $55 million to $60 million and, consequently, we are increasing total revenue guidance to a range of $520 million to $545 million. We are reducing R&D expense to a range of $140 million to $150 million, and we are reducing our capital expenditures expectation to $20 million. As a result of these changes, we are increasing our non-GAAP net income guidance to a range of $135 million to $155 million, or approximately $0.99 to $1.13 per diluted share. We are also increasing our expectations for GAAP net income to a range of breakeven to $15 million.

Finally, we expect free cash flow will increase to a range of $115 million to $135 million for fiscal 2013. To generate this much cash while investing in an exciting pipeline, shows us that the business model is working. This was yet another strong quarter for Alkermes. The Company's financial strength and the benefits of the Company's portfolio business model continue to play out, enabling us to improve our fiscal 2013 expectations again. With more than a year of solid results behind us, as Alkermes plc, we are pleased with the Company's performance, and look forward to delivering on our newly revised fiscal 2013 financial expectations provided today. With that, I will turn the call over to Richard.

Thanks, great, thank you, Jim. Good morning, everyone. So, we're on a path to build Alkermes into one of the next big biotechnology companies. And to fully appreciate what we've created is to recognize that the Company is characterized by two distinct portfolios -- one is our commercial portfolio; and the other, is our emerging pipeline. The commercial portfolio, as Jim just discussed, is comprised of key products that are approved by the FDA and other regulatory authorities outside the US. They have long patent lives, and they're launching, or in the midst of growing, around the world. This revenue-generating commercial portfolio has been what most investors have focused on for the last 12 months.

But, at the same time that we've been building the commercial portfolio, we've been building the development portfolio. And what's so gratifying as we move into 2013 is how exciting this late-stage pipeline is beginning to look and how populated it is with a number of important new medicines with blockbuster potential. I'll spend some more time on the pipeline in a second, but I wanted to take a minute to reflect on the here and now, which is the commercial portfolio. If you look at this group of products, it's quite remarkable because of its diversity and the lack of co-variance between the products and their importance to our strategic partners. We have good reasons to believe in the future growth of these products.

You heard Jim talk about RISPERDAL CONSTA and INVEGA SUSTENNA, our long-acting antipsychotic franchise; it's growing and providing benefits to payers and patients around the world. This is J&J's second largest pharmaceutical franchise, and they are continuing to expand the product line with a three-month INVEGA SUSTENNA now in phase 3. VIVITROL is gaining momentum, with a variety of new initiatives happening around the country. Acorda is guiding to increasing net sales for AMPYRA and expects data from studies in post-stroke deficit and cerebral palsy this year. Lastly, BYDUREON is just getting going, with strong partners dedicated to a successful introduction around the world and with a submission for the first line extension expected this year.

This commercial portfolio by itself would represent a very exciting biotechnology company. But we're using it as a foundation to build something much bigger. Superimposed on top of our commercial products is an exciting development portfolio with the potential to yield blockbuster medicines. Each one of our pipeline candidates has its own risks and potential liabilities, but the probability of one or more of these drugs achieving breakout success is good. I'll start with ALKS 3831, which we first disclosed at the beginning of the month. ALKS 3831 is our oral antipsychotic, new molecular entity that is designed to compete with the best-in-class oral antipsychotic agents. The rationale is to create a novel drug with the efficacy of Zyprexa without the metabolic side effects.

Zyprexa, or olanzapine, is one of the most efficacious antipsychotics, but its efficacy comes at a high price -- and that is, a significant amount of weight gain. Over 50% of patients gain more than 7% of their body weight on olanzapine within the first year. Weight gain of this magnitude has serious clinical consequences, including increased risk for type 2 diabetes. So, for many years, the neuroscience community has sought to determine whether olanzapine's efficacy could be achieved without the associated metabolic side effects. We had a hypothesis that opioid modulators -- something we're quite familiar with -- could play a role in attenuating weight gain in patients receiving olanzapine. So far, our hypothesis is proving to be correct.

We saw clear signals in pre-clinical studies that led us to a human proof of concept study in 106 healthy volunteers. Data from the study showed that subjects receiving ALKS 3831 experienced significantly less weight gain compared to subjects taking olanzapine. With this positive result in hand, we're moving to a phase 2 study, in mid calendar 2013, in patients with schizophrenia. This study will help us to determine the actual medical and commercial potential of ALKS 3831 as we will be measuring its safety, tolerability, and efficacy, as determined by its antipsychotic activity and its effect on weight gain in the patient population of interest.

Moving onto aripiprazole lauroxil, our phase 3 long acting antipsychotic. Previously referred to as ALKS 9070, aripiprazole lauroxil is our proprietary prodrug of aripiprazole, which is a $7 billion drug sold around the world in an oral form as Abilify. Aripiprazole lauroxil is a new molecular entity designed specifically to be administered via injection into a muscle and provides therapeutic effect for a month. Our drug is designed to build on the established clinical benefits of aripiprazole with a once monthly injection. In addition to its expected safety and efficacy profile, we also expect to have competitive advantages based on two important attributes.

First, the product presentation itself, its storage and its handling. It's a pre-filled syringe of a stable suspension that is stored at room temperature and is ready for injection in the clinic. The second is the range of doses that we expect to be able to cover, meaning that, for patients taking oral aripiprazole, we expect to have injectable depot doses that cover any of those oral doses, giving physicians flexibility in administering and choosing aripiprazole lauroxil over directly competitive products. The phase 3, 690-patient registration study is underway both in the US and overseas. As we move ahead in 2013, we're focused on completing this study, which, if successful, will provide the basis for our US NDA submission. And we're preparing for the marketing of this drug with a commercial plan to launch it ourselves in the US and partner for markets outside the US. Enrollment is underway, and we expect to have data in hand in late calendar 2013.

Turning to the third key development program, ALKS 5461 is in development for treatment-resistant depression. The question we're seeking to answer with this candidate is, can we decouple the antidepressive properties of an opioid from its addictive properties? Again, our expertise in opioid modulation positioned us for innovation. And, so far, in animals and in our early human work, the theory has been confirmed. In December, we completed enrollment in our 130-patient phase 2 study, comparing treatment with ALKS 5461 to placebo in patients with treatment-resistant depression.

As we told you in the past, data from this study will be important in confirming the results seen in the first study, and we're on track for data in the second quarter of this calendar year. The opportunity for a new agent for treatment-resistant depression is huge, because of the large number of patients. Nearly 10 million people receive treatment for major depressive disorder in the US, and over 6 million people require a second medication. And, of those, 4 million require a third medication, and their treatment alternatives are very limited. Most antidepressants are based on conventional serotonin and norepinephrine-based mechanisms. When these approaches fail, there is a real treatment gap, and therein lies the opportunity for a safe, well-tolerated oral medicine with an alternative mechanism.

So, 2013 is a going to be an exciting year for the pipeline. We have very important drug candidates advancing, based on a strong foundation of data. With that said, our standards are high. We will advance only those programs that meet our criteria, both medical and commercial. We've shown this discipline in the past, and we will continue to do so. By the end of the year, we will have a much better sense of what our next generation proprietary commercial portfolio will look like.

So, in summary, this is a company defined by its two portfolios. The development pipeline is advancing, with key data read outs in 2013. The commercial portfolio is strong and growing. It is going to be an important year for us. We're right where we want to be, and we couldn't be more excited for it. So with that, I'll finish and turn it back to Rebecca for questions.

Thanks, Richard. We'll now open up the call for Q&A. Operator?

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Cory Kasimov, JPMorgan.

Thank you for taking the questions. I have one on the pipeline and one on the commercial portfolio. So, first, on the pipeline with regards to 5461, do you anticipate that the upcoming Phase II data in depression would be enough to enable you to make a go/no-go decision for Phase III? Or do you -- are you anticipating you'll have to do additional Phase II work first, if warranted?

And then the commercial questions for Jim, I guess, just wondering, with the tiered SUSTENNA royalty, can you tell us what the blended average turned out to be for calendar 2012? Thanks.

Hey, Cory, it's Rich. I'll take the first question, and the answer will be, we'll wait and see what the 130-patient study tells us, so it's too early to predict. What we hope is that we see a very clear signal like we saw in the first study. But we have a lot more data to work with in this study compared to the first one, and we'll make a call on our next steps when we see those data. So, I don't mean to be evasive about it, it's just literately the way we're approaching it as we move into unblinding the study.

Okay. Fair enough.

Yes, sure, Cory. The blended rate, as you know, it tiers from 5% to 7% to 9%, and the blended rate for the year was around 6.5%.

Okay. Good. Thanks, that's helpful.

Steve Byrne, Bank of America.

With just one quarter left in the fiscal year, Jim, what would you say are the key drivers to the range that remains in your forecast? Is it the RITALIN TRICOR decline that is still quite uncertain?

Hey, Steve, good question. I think we've driven our revenue forecast increase for our new expectations this morning really focused on VIVITROL, and the VIVITROL increase, so that's what's providing the increase for us. And as you look at the sales for the year coming in around $44 million, we clearly think $55 million to $60 million is a logical range for VIVITROL.

The rest of the spread really is going to come through in the portfolio around the 20-plus products that we have, so I wouldn't say there's any specific one, and we are -- just to be clear, too, we haven't seen generic competition for FOCALIN yet. We did see generic competition for TRICOR start in November.

David Risinger, Morgan Stanley.

Thanks very much. I have a question for Richard, and then a few for Jim. Richard, could you just provide a little bit more color on the 5461 Phase II trial design, including the unique aspects of it? And also comment on the criteria that you'll be assessing in Phase II, ie, the efficacy in depression, but also the combined mechanism and how you'll be assessing the combined mechanism.

Sure. Good morning, David. The 5461 Phase II design is a 130-patient study that's randomized between doses of 5461 and placebo. And it's a sequential design that I won't go into here, but essentially gives us a number of different ways of looking at efficacy of the drug as patients are randomized and then re-randomized throughout the course of the study. The statistical power of the study will actually -- we'll see post-hoc based on the response rates that we have, but the idea was to try to minimize the placebo effect in the clinical trial so we can see the true effect of the drug. In many ways, I think the primary comparison is just going to be that principal comparison between the treated group and the placebo group, and we're using standard measures in that regard using HAMD, as well as MADRS scores.

But it's important to understand that this is a group of patients that are treatment-resistant, so they would have had a non-sufficient or insufficient clinical response to SSRIs or SNRIs, but they'll maintain that background therapy in the course of the study. So, it's an injunctive study, if you will, in this Phase II study. So, we think we'll have a fair amount of [n] to work with and be able to look, and we'll do all kinds of looks to try to convince ourselves of the true signal that we're seeing with 5461.

Catherine Arnold, Credit Suisse.

Thanks very much. I have two questions. One is related to your revenue guidance, and the other is sort of a more longer-term pipeline question. On the revenue guidance, could you just clarify what it now assumes in regards to generic entry for FOCALIN XR?

And then on the pipeline, obviously if you step back and think about positive surprise from your Phase I data for ALKS 3831. I think it increases the market's curiosity about what else you guys have cooking from a platform or therapeutic perspective. I'm wondering if you could give us a little bit of a peek behind the curtain on some of the programs that you may have on a platform basis or therapeutic basis. I'm not sure we know the status of the EDT work in nanotechnology, for instance, or some of the other long-acting applications that you might be doing that you think are particularly interesting.

I know you have a lot. I know it's early stuff, but can you just give us a little bit of a peek of some kinds of things that we might wake up and be pleasantly surprised at in the future?

Sure, Catherine. I'll start on the FOCALIN side. We certainly are keeping our eye on FOCALIN, and generic competition may come at any time. Given our manufacturing relationship, though, with NOVARTIS, it won't effect us this fiscal year from a revenue perspective, since we only have two or three months left, and we haven't seen it yet. So, we have a long enough lead time there to cover us from a revenue perspective this year. But going forward, that's one of the benefits of the portfolio, as well. And that's why we give a range of guidance is because we think we can hit those numbers no matter what happens with FOCALIN for the rest of this fiscal year.

So, Rich, you probably should take the portfolio question.

Good morning, Catherine. So, probably the most important thing we need to do this year is get some value in this Company for the current pipeline that we have. So, I probably won't use today as a platform to announce other things that are simmering in the background, other than to let you know that, of course, we do. We have a company now that's developed 20 commercial products, and we've got five key products that are growing. And we have a technical capability and a manufacturing capability, and certain insights that we continue to deploy in new development programs.

Our strength, of course, is working in areas of precedented biology. We're not doing a lot of blue sky research here. But we see often really important opportunities to improve the efficacy, safety, pharmaco-economics, utilization of drugs or building on known pharmacology.

One thing that I didn't talk about that I probably should as it relates to things in the pipeline, are that we do have some important things going on in our collaborations, namely the three-month INVEGA SUSTENNA in Phase III, the BYDUREON line extensions that are in development. It's been nice to see AstraZeneca and Bristol-Myers pick up the baton on those, and see those as an important part of the future for the BYDUREON franchise, as well as the clinical work that Amylin has ongoing with AMPYRA, which is obviously an interesting molecule that may have applications outside of simply walking in MS.

So, it's quite lively here on the R&D side, but we're going to keep investors focused on ones that are late enough that they should be worried about them.

Jon Eckard, Citi.

My first question has to do with the Phase III design for 9070. Could you outline any similarities or differences in the patient enrollment criteria between your trial and Lundbeck and Otsuka's Phase III trial for their depot Abilify product? The main reason for this is to try to identify any potential risks for a higher placebo effect in your trial, which wasn't -- didn't appear to be a problem in the Lundbeck trial.

Yes. It's Richard, I won't go into the whole detail. I'd be happy to take you through it offline, but fundamentally it's a completely different study than the one Otsuka ran. They ran a study in maintenance, so stable patients being maintained in schizophrenia. We're running an acute study versus placebo. So, they're quite different, and we're going to kind of extraordinary measures to make sure that we minimize the placebo effect, and enroll the right patients, which is why we're being so deliberate in the way that we choose sites and the way we monitor those sites and the way we enroll patients. So, that's why -- we chose that route because we -- a single study will suffice for NDA submission in the US, and we really want this study to work.

Right. And then, with regards to the SUSTENNA, I'm not sure if you're able to comment on any kind of trends or updates for regional or country guidance regarding the use of long-acting agents. Have you seen a steady uptick in the use in ex-US regions in the European launch?

Yes, Jon, you know, we're not really at liberty to disclose J&J's country-by-country performance. But as a broader conclusion, I think we have seen, and by looking at the IMS data around the world, and the last group that we've purchased is through September. But comparing that to a year ago, the worldwide market share in the antipsychotic market for INVEGA SUSTENNA and RISPERDAL CONSTA has grown to almost just under 10%. And that's up pretty significantly from the 6.5% to 6.7% range that we were looking at even just 1 year, 1.5 years ago.

So, we do see continued uptake in the products, and J&J reported the worldwide franchise grew 4% on a dollar basis, and as I said in my remarks, 15% year over year. So, I think they're very committed to that franchise as a whole. It is their second-largest pharmaceutical franchise for Johnson & Johnson, and we certainly believe that new entrance with a long-acting form of aripiprazole will help continue that growth.

That's great. Thank you very much. I'll get back in the queue.

Anant Padmanabhan, Cowen and Company.

I have a few, one on 9070. You briefly discussed the trials. Could you give us a sense of how the enrollment is going in the acute study, and then any update on ex-US partnering discussions?

And then on VIVITROL, it seems like some good underlying trends here. It seems like the product is still going through the criminal justice system, so could you talk about what is driving some of this near-term growth in VIVITROL? Thank you.

Anant, it's Rich, I'll take those. So, the enrollment -- 9070 is an international study that today is being enrolled in the US and in countries around the world. The enrollment is going fine, and we expect to have data at the end of this year. So, we've got a year ahead of us. We'll keep updating you guys along the year as we go. But the underlying directive for the folks within the Company, of course is, because we have such a strong belief that 9070 works, aripiprazole lauroxil works. It metabolizes into aripiprazole. It's really important we run the study carefully and make sure we get the right result, because we're going to file off of this one study.

Ex-US, we're in discussions with folks, but we're not in any urgent hurry to do that deal. But we do see, as Jim just mentioned in response to Jon's question, this is a global product, and we need to find a way to market for this on a global basis.

VIVITROL, it's interesting because the growth from VIVITROL is not coming from these criminal justice initiatives that you're hearing about. It's coming from really our directed personal promotion in the commercial business that we've been focused on for the last several years -- doing that better, and smarter and more efficiently. And as the winds begin to shift in favor of more use of VIVITROL, it's part the of the reason why we're so excited without a particular timeline associated with this criminal justice ground swell that's beginning to occur.

Now, with 21 programs happening in states around the country, it's not yet contributing a significant amount of direct carton sales of VIVITROL. But it's certainly laying the groundwork and providing the experience base that could lead to a significant growth in VIVITROL in the future. So, that's why we're so cautiously optimistic about letting those programs play out, and then seeing them translate into commercial sales.

Okay. Thank you.

Ami Fadia, UBS.

I think I've got three questions. Firstly, just to follow up on VIVITROL, could you give us some more color on when you expect some of these programs to conclude? And what would be the next step with respect to really getting that uptake in the criminal justice system, and maybe some color on the timeline around that.

The second question is -- what should we look for in the 5461 study when it reads out, and depending on kind of what that total is, I mean, what are you looking for in terms of the hurdle to start a Phase III study there?

And then thirdly, could you give us some more color around the decrease in the R&D guidance? Was it just timing of trials, or was it some sort of rationalization in the pipeline? Thank you.

Morning, Ami, I'll take those, it's Rich. In VIVITROL, it's really interesting on the timing of these programs because what we're learning is that it's very different than the world of biotech and science and completing randomized clinical trials and presenting data and having it peer reviewed. It's a completely different ecosystem there. So, these programs are completing kind of continuously now, as we go. And they also -- they're not blinded so they're pulling down data on a real-time basis in many of these jurisdictions. And what we find is that, it's very viral. So, a sheriff in Barnstable County, Massachusetts wound up talking to a sheriff in Middlesex County, and then they'll go ahead and start a pilot program as well. And these are n's of 10 people or 20 people or 30 people. That's why I say it's still so small, you're not seeing it in the numbers.

But these aren't folks that are waiting for randomized control data's with P values, alphas less than 0.05 and so on. So, it's very hard to ascribe a timeline to it like we all are used to working with, so we're just going to let it play out. On the macro trends, we see 7 states doing it a year ago, 21 states doing it now, and more coming to the table. We see press spontaneously generated about outcomes in communities with VIVITROL, where they interview judges or sheriffs or police officers or things, and patients. So, it's beginning to become much more of a viral phenomenon. But, again, don't misinterpret that as saying you're going to see a spike in VIVITROL sales next quarter. Because we'll know it when we see it, and we'll be the first to share it with you when we see it.

On 5461, we're really looking for, without giving a quantitative answer to the question, we're looking for clear repeat of the efficacy that we saw in the first study. The first study was 31 patients, and we saw a P value in terms of reducing depression scores in patients that were previously non-resistant to treatment. So, we would like to see that again. If we see it that it attenuates significantly.

What we don't want to do is chase a faint signal into larger studies. Our internal view right now is that we wouldn't launch a Phase III program unless we felt like we had the -- a drug that was sufficiently powerful and an analytical method for detecting that power that was sufficiently high resolution to make sure that we would be more likely to succeed in Phase III than to fail.

You saw another failed major depression study today, where I just read the top lines of it, but 40% of the placebo patients responded compared to 40% of the drug patients responded. That's the game we don't want to play. So, we're looking for a more enriched treatment set in patients that are already treatment resistant rather than frontline, and we're looking for a signal that we and you all can believe in.

And on the guidance, I'll answer the question for guidance, so Jim doesn't have to, which is just -- we've got $160 million R&D spend, and as we cone in at the end of the year here with more precision, we're just -- there's no one element that drives all that. Actually, Jim, you should probably answer the question.

Yes, Ami, it really does relate to the timing. We've got a number of clinical studies going on. As the study is 1 or 2 months out, it's a lot easier to predict than 12 months out, so it's really just precision around the timing.

Got it. Thank you.

Mario Corso, Mizuho USA.

A few financially oriented things. On CONSTA, were shipments a little bit below what you would normally expect in the quarter?

And on gross margin -- seems to bounce around a bit from quarter to quarter, but looked particularly strong in Q3. I'm wondering how we should best think about that in the near term, and even longer term from where you were thinking at the time of the merger. Are you still kind of thinking about a mid-70%s kind of longer-term goal?

And then Q3 to Q4, anything in particular we should be thinking about that stands out in spending trends either in SG&A or R&D? Thanks a lot.

Sure, Mario, no problem. Yes, so, on CONSTA, as you know, the manufacturing revenues are really based on J&J shipments. You know, you might say it's a little lighter than normal this quarter. They tend to take less in the month of December, because they don't want -- because of customs, they don't want shipments hanging around, getting cleared by customs around the world in the second half of December. But it's a pretty -- it's still on the trend, and we'll go up and down each quarter, as we've talked about in the past.

On the margin side, it's really a similar thing. It really depends on product mix -- US batches of AMPYRA versus ex-US batches of FAMPRYA. The same is true with CONSTA and other products around the world. As you look at the margins as a whole, I think this was a good quarter. I still think for the year, you should think of gross margins in the high-60%s area.

And over time, I think the key drivers for our margins there are going to be the contributions from pure royalty products like BYDUREON and SUSTENNA; the bigger they get, the better our overall Company gross margins are going to be. The more VIVITROL we sell, obviously, the better our gross margins are going to be. So, that's going to be a product mix change, which we will guide you year to year, but that should evolve and improve over time. And certainly as we get our own proprietary products in the future, if you're talking about an aripiprazole lauroxil or a 5461, those margins can improve quite dramatically as we go.

And then, in terms of guidance for the fourth quarter, I think there's a couple of things that you need to note on the revenue line. We talked about the resetting of the RISPERDAL -- excuse me, of the INVEGA SUSTENNA royalty back down to 5% until we have $250 million in sales, then it bounces up to 7%, and then to 9% after that at $500 million and beyond. So, that's important. The TRICOR generic entry will hurt us in revenues a little bit. Again, that's included in our guidance, but that occurred in November with the TRICOR generic entry.

And then on the spending side, we do think that SG&A and COGS and R&D can be slightly higher in the fourth quarter, which leads us to our guidance for the full fiscal year. So, again, the business is going well. No one quarter is a great representation of the business because the mix can change. But I think if you look at a couple quarters, or certainly the whole year, we certainly feel like we're moving in the right direction with growth and margin expansion.

So, operator, I think we have time for two more questions.

Corey Davis, Jefferies.

A couple questions. First, on 9070, I think you referred to as an NME, but is that something you'd expect to get NCE status on, and hence, the five-year exclusivity?

Cory, it's Rich. Yes, we expect it to be an NCE, but we actually expect it to have such substantial patent protection -- the primary basis of exclusivity will be the patent protection. So, we expect the actual designation of the exclusivity will be a subset of the [overall] exclusivity, and I think we have patents on lauroxil now into the '30s.

But you do expect the five years of exclusivity?

We do.

Yes.

Okay. Secondly, putting all together all your comments about expenses and margins over the next five years, should we think of Alkermes as an operating margin expansions story, or would you manage your R&D especially to be more as a constant percentage of sales?

Yes, I think, Corey, you know, five years for sure. I mean, I think we're actually looking at both. We feel like we, and we've set out some R&D targets, you know, we said the $150 million to $180 million dollar range. We think we can get a lot of high quality, generally clinical trial-driven R&D because we don't have -- as Rich mentioned, we don't have buildings of scientists looking for new targets and new cures, which -- it's wonderful that people do that, but that's not the R&D that we do here at Alkermes. We try and do more purposeful clinical trial-related R&D.

So, I think we'll continue to keep R&D a focus of our spend. And, as I think as our product mix changes to products like BYDUREON and SUSTENNA that are pure royalties and our own proprietary products certainly over that five-year time we hope, if we're successful, then we do see margin expansion. More utilization of our manufacturing facilities as products grow is going to help, and more profitability from VIVITROL. VIVITROL is still right around break-even, and as we start to see some gross margin -- excuse me, some net margin gain from VIVITROL with sales growth, that's certainly going to help us as well. So, we think we're moving in the right direction.

Then last question on 3831, would it make sense to also pursue a bipolar claim on that one, or are you just going to stick with schizophrenia? And secondly, at some point do you do have to do one of those typical combination studies where you have to show the combination beats each individual component, because that would be kind of weird because each component does a different thing?

Yes, that's right. I think right now we're going to stay focused in a stepwise manner in the following way. We'll stay in the schizophrenia indication where the use of olanzapine has such high efficacy, and the weight gain can be so problematic, and we're going to try to determine the full extent of the metabolic profile of the combination of patient population of interest. And we'll meet with FDA this year on this product.

We don't expect to have to do a single agent 33 component of this in schizophrenia for the reasons you allude to. And also, we don't expect there to be single agent 33 available to patients. So, our current idea of the embodiment of this technology is a tablet co-formulated with 33 and olanzapine.

That's all I had, great, thanks.

Thanks, Corey. We'll take one more question.

Terence Flynn, Goldman Sachs.

Hi, thanks for taking my question, and congrats on all the progress. Just was wondering, in terms of the upcoming PDUFA decision for the long-acting depot from Otsuka and Lundbeck. I was just wondering how you think about the two potential outcomes of either approval or delay, and how that might impact 9070 from a commercial front? Thanks?

Hi, Terence. It's Rich. I'll -- we're big fans of the approval of the Otsuka Lundbeck product, because we really believe that long-acting injectable antipsychotics should deserve a larger share of the market, and that's going to require a larger share of voice. What we understand is that the delay in the first round of PDUFA dealt with something on the CMC side that was -- that looks to be easily dealt with -- sterile water for injection. So, we're hopeful that they get approval on that date, and they bring the promotional intensity and the educational intensity into the market.

We expect to compete against that product based on the merits of our product, which are the product presentation, as I mentioned, and the dose range. But I think more importantly is understanding not just individual doctors, but payment systems, like they do in Europe, understanding that long-acting injectables are both good medicine and also good economics.

All right, everyone, thanks for dialing in today, and if there's any additional questions, please don't hesitate to call us here at the Company. Take care.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.