Alkermes Plc (ALKS) 2018 Q4 法說會逐字稿

Greetings, and welcome to the Alkermes plc Fourth Quarter 2018 Financial Results Conference Call. My name is Donna, and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Sandra Coombs, Senior Director of Investor Relations. Sandy, you may begin.

Thanks, Donna. Good morning. Welcome to the Alkermes plc conference call to discuss our financial results and business update for the quarter and year ended December 31, 2018. With me today are Richard Pops, our CEO; Jim Robinson, our President and Chief Operating Officer; and Jim Frates, our Chief Financial Officer.

Before we begin, I encourage everyone to go to the Investors section of alkermes.com to find our press release and related financial tables, including a reconciliation of the GAAP to non-GAAP financial measures that we'll discuss today. We believe the non-GAAP financial results in conjunction with the GAAP results are useful in understanding the ongoing economics of our business.

Our discussions during this conference call will include forward-looking statements. Actual results could differ materially from these forward-looking statements. Please see Slide 2 of the accompanying presentation and our most recent annual and quarterly reports for important risk factors that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements. We undertake no obligation to update or revise the information provided on this call or in the accompanying presentation as a result of new information or future results or developments.

After our prepared remarks, we'll open the call for Q&A.

And now I'll turn the call over to Richard for opening remarks.

Thank you, Sandy. Good morning. I wanted to start with just some brief comments about Alkermes and where we stand as we enter 2019.

2018 was a year of significant progress for us. The financial results we released today reflect our transition from a science and manufacturing-based drug delivery company to a leading CNS-focused organization with our own products and sophisticated commercial operations.

For the first time, we crossed a $1 billion in revenues, driven by the growth of our proprietary products, VIVITROL and ARISTADA. We also successfully completed the Phase III registration studies for what we expect to be our next major growth driver, ALKS 3831, expanding our presence in schizophrenia.

Alkermes has become an important company in the fields of addiction and serious mental illness. The people of this organization are motivated by the opportunity to help this large population of patients. These are people known to all of us that often neglected by others. This is noble work, and it's different than other therapeutic areas.

Our medicines are often used in large resource-constrained systems. A necessary prerequisite for being able to access our medicines, we need to work to improve broken treatment systems around the country. We collaborate with states and the federal government with policymakers and patient advocates to improve care and to help patients and their families, and we're having an impact. Our proprietary science has been used in millions of patients now. Hundreds of thousands of patients have been dosed with VIVITROL and ARISTADA alone, with many more expected to come.

What's becoming clear to us is that more impact requires more scale and sophistication. So today, we'll talk a bit about our commercial infrastructure and a unique approach to navigating today's evolving and complex treatment systems. We believe this will serve as a platform for future growth, particularly in the field of schizophrenia. These capabilities provide a unique launching pad for ALKS 3831.

Our scientific expertise and our development capabilities have grown and they'll shape our portfolio for the future. The only way to position a company for ongoing success is to have multiple innovative and independent programs, sharing our common foundation of scientific excellence. Developing and commercializing medicines in this space is challenging. That also presents opportunity. We're proud of the multifaceted business that we built, and we're very optimistic about the opportunities ahead to help patients and to create long-term value.

Today, Jim Frates, our CFO, will outline our financial results and guidance for 2019. Jim Robinson, our President and COO, will provide an overview of the progress we've made since he joined the company, almost a year ago.

And with that, I'll turn it over to Jim to take you through the financials.

Thank you, Richard. We finished 2018 with a strong financial performance, crossing a $1 billion in revenue for the first time in our history, driving growth in our proprietary products and setting the stage for ALKS 3831 to fuel our emerging leadership in schizophrenia. The progress we made during the year to develop our commercial capabilities, pipeline candidates and discovery efforts provides a solid foundation for long-term growth as we began 2019.

I'll start with our key financial highlights. For the full year 2018, total revenue grew 21% year-over-year to $1.09 billion, and we recorded non-GAAP net income of $97.8 million, both ahead of our expectations.

For the fourth quarter, we recorded total revenues of $315.8 million and non-GAAP net income of $54.8 million. These results were driven by 24% growth of our proprietary product sales year-over-year and the continued strength of our base royalty and manufacturing business, including higher-than-expected AMPYRA revenues.

VIVITROL net sales in the first quarter -- fourth quarter increased 11% year-over-year to $83.8 million, driven by a 11% unit growth. On a sequential quarterly basis, net sales increased 5%, driven primarily by underlying unit growth. Gross to net adjustments of 46% during the fourth quarter were flat sequentially and is compared to the fourth quarter of 2017.

As in previous years, due to the impact of year-end inventory build to just over 3 weeks and the reset of commercial plan deductibles, we expect our first quarter 2019 net sales will be down sequentially to approximately $70 million, with the growth resuming in the second quarter. For the full year of 2018, VIVITROL net sales increased 12% year-over-year to $302.6 million, driven by unit growth of 16%.

For 2019, we expect VIVITROL net sales in the range of $330 million to $350 million. We expect to see gross to net adjustments of approximately 50% in 2019, slightly higher than the prior year, due to shifts in the payer mix. As always, our guidance for VIVITROL reflects an extrapolation of current growth trends and we'll update you throughout the year if market dynamics evolve.

Turning to ARISTADA, which refers to both ARISTADA and ARISTADA INITIO. Our fourth quarter was also strong, as net sales increased approximately 70% -- 72%, excuse me, year-over-year to $48.8 million and grew approximately 35% sequentially. Gross to net adjustments for ARISTADA were 43.5% for the quarter. For the full year 2018, ARISTADA net sales increased 58% year-over-year to $147.7 million, driven by solid volume growth.

Looking ahead to 2019, we expect strong growth of approximately 50% for ARISTADA with net sales in the range of $210 million to $230 million. These expectations include a modest increase in our gross to net adjustments to approximately 47.5% as volumes with certain large Medicaid plans continue to accelerate.

Similar to VIVITROL, we expect Q1 2019 ARISTADA net sales to decrease sequentially to approximately $40 million thereafter increasing for the remaining 3 quarters of the year.

Over the long term, we believe the addition of ARISTADA INITIO to the product family and our expanded hospital and field commercial teams will drive ARISTADA's market share in the long-acting atypical market as the overall market continues to grow at double-digit rates year-over-year.

Moving on to our manufacturing and royalty business. We saw revenues of $526.7 million in 2018 compared to $505.3 million in the prior year, driven by revenues of $312.5 million from RISPERDAL CONSTA, INVEGA SUSTENNA and INVEGA TRINZA and higher-than-expected AMPYRA revenues.

Revenues from AMPYRA and FAMPYRA came in above expectations in the fourth quarter, due to the delay in generic market entry for AMPYRA, resulting in total revenues of $107.1 million in 2018. Due to the launch of generic competition in the U.S., we do not expect meaningful revenues relating to AMPYRA in 2019. We do expect to continue to receive revenues related to FAMPYRA outside the U.S., resulting in a combined expected range of $25 million to $30 million in 2019.

In addition, in the fourth quarter, manufacturing and royalty revenues included $26.7 million from Alkermes' share of proceeds from the sale of certain royalty streams by Zealand Pharma A/S, related to products using Alkermes' technology, to Royalty Pharma. This is a onetime payment in lieu of future royalty payments.

Taking a step back on the royalty and manufacturing business, the cash flows from this platform have enabled the company's self-funded development of our proprietary portfolio of commercial and pipeline medicines. While the royalty and manufacturing business will become a less prominent element of the company's growth drivers in the future, our expectation is that it will continue to provide an important foundation of financial resources for the next several years.

Turning to expenses. Overall, our expenses for 2018 were in line with our expectations. Our R&D expenses for 2018 were $425.4 million compared to $412.9 million from the prior year, driven by our spend on our pivotal programs for ALKS 3831 and diroximel fumarate as well as ALKS 5461 and the expansion of the ALKS 4230 program.

Our 2018 SG&A expenses of $526.4 million compared to $421.6 million in the prior year, reflecting investments in our commercial organization in support of both ARISTADA and VIVITROL. Q4 sales and marketing expenses increased mainly related to the addition of field sales personnel and the expansion of our hospital sales team focused on ARISTADA. Looking ahead, our overall financial expectations for 2019 reflect a number of important dynamics as we position the company for long-term growth.

On the top line, we expect total revenues to be in the range of $1.14 billion to $1.19 billion as the growth of VIVITROL and ARISTADA offsets the loss of AMPYRA. Our guidance also reflects a $150 million milestone payment from Biogen related to the anticipated approval of diroximel fumarate in the fourth quarter of 2019.

On the operating expense side, R&D revenues are expected to be in the range of $450 million to $480 million -- excuse me, R&D expenses, $450 million to $480 million. This expectation is driven primarily by 3 areas of investments. The first relates to activity surrounding our commercial and late-stage assets, including ongoing studies related to ARISTADA, ALKS 3831 and diroximel fumarate that are carryover from 2018 as well as the preparation of the ALKS 3831 NDA submission and life cycle management initiatives related to ARISTADA and ALKS 3831 that will primarily impact the second half of 2019.

The second element of our R&D investment is intensified activity for the clinical development program for ALKS 4230 as we enroll our monotherapy, combination and subcutaneous studies. The third element is focused on expanding our internal research and discovery efforts. While these activities are less visible externally, they're generating interesting data and representing important aspects of our growth strategy.

SG&A expenses are expected to be in the range of $590 million to $620 million, which may be higher than previously expected for some of you. This range is driven by the full year impact of the expansion of the ARISTADA commercial team that took place at the end of 2018 and other important investments in our infrastructure that we believe create a platform for long-term growth. With this infrastructure now in place, we're well positioned to capture efficiencies as our commercial portfolio grows, particularly as we prepare for the launch of ALKS 3831 in schizophrenia.

Our top line growth and investments in our business are expected to drive a GAAP net loss in the range of $135 million to $165 million, and our non-GAAP net income in the range of $40 million to $70 million for 2019. We expect that our quarterly results will generate a net loss for the first 3 quarters of the year and a return to profitability in the fourth quarter with the anticipated recognition of the $150 million milestone from Biogen as well as the increase in our proprietary sales throughout the year.

Turning to our balance sheet, we're well positioned and ended 2018 with approximately $620 million in cash and total investments compared to approximately $590 million at the end of 2017. The company's total debt outstanding was approximately $280 million at the end of 2018.

Overall, we're pleased with our 2018 results and our healthy financial position as we enter 2019. Given the growth opportunities for our proprietary products and pipeline candidates, we believe the increased investments in 2019 establishes an important platform to drive long-term revenue growth, pipeline expansion and profitability. And I look forward to updating you as we deliver on our strategy throughout the year.

With that, I'll turn the call over to Jim Robinson for additional updates on VIVITROL and ARISTADA.

Thank you, Jim, and good morning, everyone. As Richard stated, the progress we've made in the last year has been significant. We have 2 valuable medicines; VIVITROL and ARISTADA. And following a comprehensive analysis of our commercial plan and capabilities, we implemented a number of important initiatives to drive growth over the long term. One key element you'll hear us talk about in addiction and schizophrenia is continuity of care.

Continuity of care is particularly important to physicians and the patients suffering from serious mental illness and substance use disorder. These patients may receive treatment for their disease in multiple settings of care or access to the prescribed treatment across settings is often difficult to maintain, it remains central to their effective treatment. This is just one element of the complex treatment systems, which VIVITROL and ARISTADA operate. And we've adapted by assembling a set of capabilities that provides a unique approach to navigate these treatment systems, positioning us well for long-term growth.

And with that, let me turn to our progress. Starting with VIVITROL, in 2018, net sales increased approximately 12% year-over-year to $302.6 million, driven by underlying unit growth of 16%. And in 2018, we made significant progress in evolving our commercial organization and developing capabilities in order to be best positioned for future growth.

Throughout the year, we saw positive activity in federal funding and state policy changes, which we believe will continue to increase access to medications for patients suffering from substance use disorder. VIVITROL sales continue to be concentrated, with the top 5 states representing 45% of VIVITROL volume overall. And in states like Ohio and Massachusetts were the -- which were the primary drivers of VIVITROL's progress in 2015 and '16, growth rates have slowed over the last 2 years, and because of that, we're implementing new strategies and resources to reinvigorate growth, and we're also seeing broader base growth. And in 2018, 28 states demonstrated more than 25% growth year-over-year.

We're also encouraged by recent policy trends in states like Michigan, where new legislation is being implemented to encourage patient-centered care for those of opioid dependence. This is the first state to fully embrace the provisions of the Comprehensive Addiction Recovery Act mandating that opioid treatment programs offer all 3 FDA-approved forms of medication.

There's also action on the alcohol-dependence side, with recent legislation in Michigan that requires courts to order an assessment for alcohol use disorder and possible medication-assisted treatment for people convicted of 2 or more DUIs. And Michigan is just one example of the forward progress we're seeing across the country. We're also encouraged by new trends and initiatives in a number of important states like Pennsylvania, California, Florida and Kentucky. These bellwether states with a variety of policies and funding sources serve as an important example for other states as they design strategies to ensure that patients in need of treatment are provided with options that best fit their recovery journey and treatment objectives.

And looking ahead, our 2019 expectations for VIVITROL are based on a linear extrapolation of current trends. However, to support the continued and long-term growth of VIVITROL, we've implemented new commercial capabilities to support continuity of care, including the launch of field reimbursement and key accounting, which are designed to improve patient access to treatment. Additionally, in the second half of the year, our ARISTADA sales force will promote VIVITROL in community mental health centers and other adjacent settings of care in which opioid dependence is treated.

Now VIVITROL is the only treatment indicated for the prevention of relapsed opioid dependence, and while VIVITROL operates in a fragmented and idiosyncratic market where timing and trends are difficult to predict, there's also many reasons to be optimistic about the outlook for VIVITROL and its role in our nation's response to the opioid crisis.

So now turning to ARISTADA. In 2018, we recorded net sales of $147.7 million, driven by unit growth of 52% year-over-year. 2018 was highlighted by the launch of ARISTADA INITIO, part of the new approach to treatment initiation that gives physicians the unique ability to fully dose a patient on day 1 for up to 2 months. This is critically important to help support continuity of care for this patient population when there's often only span of 2 or 3 days to stabilize and initiate a patient on treatment prior to discharge from a hospital or crisis stabilization unit.

On the access and reimbursement side, we've seen the addition of ARISTADA INITIO to formularies that appeared in ARISTADA, including adoption by the largest PBMs and health plans. Within a hospital setting, we continue to be encouraged by the positive receptivity to ARISTADA INITIO, with the addition of both ARISTADA and ARISTADA INITIO to GPO and hospital formularies. We expect that ARISTADA INITIO coverage will continue to expand and that awareness will deepen as we expand our reach into more hospitals in 2019.

ARISTADA sales grew 58% year-over-year in 2018 and represent a substantial opportunity for Alkermes. In terms of market share, ARISTADA's market share overall for new prescriptions in terms of months of therapy in the long-acting aripiprazole market was 29% in December 2018. And as I mentioned in our last earnings call, during the fourth quarter, we've expanded our field and hospital-based sales force for ARISTADA by approximately 60 sales reps based on the opportunities and encouraging trends that we're seeing.

In looking ahead, we expect to see approximately 50% growth in ARISTADA in 2019, driven by the uptick of ARISTADA INITIO and our expanded commercial presence. To maximize impact and efficiency, our newly-created field reimbursement and key account teams will also support continuity of care for ARISTADA patients and engage with large multi-site providers.

Our commercial infrastructure and expertise are unique and highly leverageable assets, designed this for additional commercial opportunities, including ALKS 3831. So let's spend a moment on that.

We see ALKS 3831 as a major commercial opportunity. With a planned NDA submission in mid-2019, we'll be using the time we have now to prepare for this potential launch. This begins with the presentation of additional data at spring medical meetings in scientific education initiatives. We'll also initiate appropriate engagement with payers later this year. As we prepare to compete in a largely generic market, we plan to share clinical and pharmacoeconomic data to support ALKS 3831's value proposition and its place in the treatment paradigm for payers.

We believe a significant opportunity exists for medicines like ALKS 3831 that provide robust efficacy with an attractive tolerability profile. Our existing ARISTADA field and hospital teams will be the core of the commercial efforts for ALKS 3831. And as we get closer to launch, we'll evaluate the need for additional reps. But we have significant synergies to leverage particularly within the treatment settings where our patients are seen. Now we have substantial work ahead of us, but I'm confident that we have the right resources in place to successfully execute on our commercial strategy and drive growth.

And with that, I'll turn the call over to Richard.

That was great. Thank you. Let's move to what's next, the pipeline. The last few months were highlighted by important developments across the late-stage portfolio. We reported positive top line results for the second Phase III study of ALKS 3831, an important milestone for the program, which moves us now into NDA preparation.

For diroximel fumarate, the registration program culminated in the submission of the new drug application to FDA in December. I'll make a brief comment on ALKS 5461. As expected, we've received a complete response letter from FDA at the end of January. We disagree with the conclusions reached by FDA and its review. But we'll need additional interactions with the agency to know whether there's a reasonable path forward for 5461. It's not clear to us at this point that there is. In the meantime, we'll continue to enroll in the ongoing study 217 until we determine where we stand.

So with that said, let's shift back to ALKS 3831 for schizophrenia. The news here is really encouraging. We designed 3831 with a specific intention to capture the robust antipsychotic efficacy of olanzapine, but with a favorable weight profile. Late last year, we successfully completed the second Phase III study in our registration program called the ENLIGHTEN-2. This was the definitive head-to-head study versus olanzapine and I want to take a moment to share some of the key details.

ENLIGHTEN-2 evaluated the differential weight profile of 3831 versus olanzapine over 6 months in patients with schizophrenia. We agreed in advance with FDA on 2 co-primary endpoints. The difference in the average or mean weight gain between the 2 groups. And the difference in the proportion of patients in each group gaining 10% or more of their baseline body weight. These 2 endpoints serve different purposes. The mean is a continuous variable that captures all the information across all of the patients in the study from those who lose a lot of weight to those who gain a lot. The 10% endpoint is a categorical endpoint, focused on the severe weight gainers, which were frequently seen with olanzapine.

Taken together, the 2 endpoints are useful in characterizing the complete weight distribution curves of the 2 medicines across the entire population of patients in the study. In addition to the formal study endpoints, we also wanted to show that 3831's weight gain profile was flat after initial period of time. In contrast to olanzapine, which we know has an ascending profile for a long period of time. We've seen this clearly in Phase II, and we wanted to see if that profile will be replicated in Phase III.

The study was a success. We hit both of the co-primary endpoints with a high degree of statistical significance. And consistent with our previous experience, the weight profile of 3831 became flat. We believe that this shift in the entire weight distribution profile has profound implications for patients, who will be prescribed this medicine.

73% of the patients on ALKS 3831 did not gain clinically significant amounts of weight. Compared to ALKS 3831, patients on olanzapine experienced 57% higher mean weight gain and also had twice the risk of gaining more than 7% of their body weight, a threshold that's commonly considered to be clinically meaningful. And these data just represent the top line results of the study. We're planning data presentations at spring medical meetings to provide a more comprehensive overview of the profile of 3831. The presentations will focus on the pivotal data, but will also include data from a long-term extension study in addition to elaborating the metabolic profile of ALKS 3831.

So with the completion of the ENLIGHTEN pivotal program, we'll request a meeting with FDA to review the key regulatory requirements for 3831, including antipsychotic efficacy, weight, safety, metabolic profile, and we plan to submit the NDA in mid-2019.

We believe that 3831 has the potential to play an important role in the treatment paradigm for schizophrenia. The field would benefit from a new medicine with a proven efficacy of olanzapine, coupled with a comparatively favorable weight profile. From a commercial standpoint, it's the ideal next move for us. 3831 builds on our experience and infrastructure for ARISTADA and positioned Alkermes with 2 important new offerings in schizophrenia. One, a long-acting injectable and the other an oral.

I'll talk next about diroximel fumarate, or BIIB098, our novel oral fumarate being developed in collaboration with Biogen for relapsing forms of multiple sclerosis. In December, we submitted the NDA, positioning Biogen for a potential commercial launch in early 2020. Biogen recently announced, they intend to commercialize diroximel fumarate under the brand name VUMERITY, which has been conditionally accepted by FDA.

Diroximel fumarate is intended to provide a differentiated gastrointestinal tolerability profile. So in addition to the required clinical elements of the registration package, we're expecting data from EVOLVE-MS-2, which is an elective head-to-head GI tolerability study versus TECFIDERA, and we'll get those results in mid-2019.

I'll finish with a brief update on 4230, our novel immuno-oncology candidate. We're now in a position where the critical studies are progressing in 3 different domains. The first is monotherapy. Our hypothesis is that if we achieve or surpass the immunostimulatory cell expansion seen with high-dose IL-2, there is a potential for monotherapy efficacy of 4230 in tumor types for IL-2 has shown efficacy. We're continuing through dose escalation. And once we've identified the optimal dose, we'll expand to the next stage, evaluating 4230 as monotherapy in patients with renal cell carcinoma or melanoma.

The second domain is the evaluation of 4230 in combination with a checkpoint inhibitor, pembrolizumab. Last fall, we accelerated our plan to initiate a combination study and that study is well underway, now enrolling patients with a variety of tumor types. And the third is the subcutaneous dosing Phase I study, which we expect to initiate in the next few weeks.

Now that we're getting a sense of the pharmacodynamic profile of 4230 via the IV root, this study will evaluate simpler and less frequent dosing regimens that could provide similar immunostimulatory effects with greater flexibility for patients. So 2019 will be an important year for the 4230 program, with expanded clinical activity and the potential to generate initial indication of ALKS 4230's anti-tumor activity in a range of tumor types.

With our late-stage assets now in the final stages of pivotal development and a number of studies for ALKS 4230 now enrolling, expanding our pipeline will also be an important focus for us in 2019. While that's very visible externally, for the past 2 years, we've invested in our internal research and discovery efforts and building our teams and running programs in the areas of pain, addiction and expanding our capabilities in biologics and oncology.

We'll discuss some of these programs when it's appropriate, and we look forward to sharing more about these efforts as they mature. In addition to our internal efforts, we're also continuing to evaluate external opportunities that may be a complementary fit for our commercial or our development capabilities.

So I'll end there. The high-profile regulatory activity and pivotal data readouts that characterize 2018 clarify the next phase of growth of the company. 2019 presents different opportunities for value creation and has the potential to be equally transformative with the growth of our proprietary products, the planned NDA submission for 3831, the regulatory review of the NDA for diroximel fumarate and the increasing momentum surrounding our ALKS 4230 immuno-oncology program. This is an unusual company, doing important work potentially affecting the lives of millions of patients. We look forward to updating you on our progress throughout the year.

And with that, I'll turn it back to Sandy to run the questions.

All right. Thanks, Richard. Donna, we'll now open the call for Q&A, please.

(Operator Instructions) Our first question is coming from Cory Kasimov of JP Morgan.

I have 2 of them for you. First one is on ARISTADA. With regards to the head-to-head Phase IIIb study against INVEGA SUSTENNA, I'm wondering what kind of difference in placebo adjusted response rates would be considered clinically meaningful. I guess, in the end, I'm wondering what makes this study a win for ARISTADA? And then I have 1 follow-up on 3831.

Cory, it's Rich. I'll start and then I'll ask Jim Robinson, perhaps, for his point of view. The study is actually achieving a number of different objectives. We got ARISTADA INITIO approved on PK data, rather than clinical data. So it's actually the first clinical trial that's demonstrating this distinctive offering that we have in the marketplace, which is ARISTADA INITIO plus 2 months ARISTADA. So the study is actually showing its primary statistical analysis is that individual treatment arms changed from baseline, so patients coming to the study with a certain PANSS baseline, they'll get INITIO plus 2-month and we'll measure their antipsychotic efficacy at time points beyond that. In parallel, we're enrolling a match group of patients into the market-leading arm, which is INVEGA SUSTENNA. So allow us to provide simultaneous indications of efficacy of what we think of the 2 most important and leading long-acting injectable antipsychotics.

Okay. And then the follow-up on 3831, as I'm curious if you've discussed the results in this program with regulators outside of the U.S. and kind of what the strategy is there? And how you ultimately view that market relative to the U.S.?

I'll answer the question a little bit more broadly because we're beginning to share the results with some of the study investigators and key opinion leaders. And we're really encouraged by the feedback we're getting. As this dataset matures, remember in December, we simply gave you the top line analysis -- of the primary analysis and into a rich dataset. And I think you're going to be impressed when you see the full dataset presented in the meetings in April and May. OUS, we're going to seek scientific advice because I think now that we have a much better sense of what the drug's true profile is, we think we have a chance to differentiate this drug, even with strict regulators and payment systems OUS based on its favorable weight metabolic profile and its profile. So we'll go seek scientific advice and then make a decision about Europe.

Our next question is coming from Jason Gerberry of Bank of America.

This is Chi on for Jason. Two, if I may. First on VIVITROL. Thanks for providing comment in your -- how you're thinking about fiscal '19 guidance. On your comment that the expectation about 2019 is a linear extrapolation of current trends, can you maybe provide a little more colors on the growth drivers for VIVITROL as we look into 2019? And your expectation for the federal grant proceeds to work their way through treatment system in a manner that may accelerate uptick? And just a follow-up on that. Does the guidance factor in any negative impact from some of the competitive dynamics in the buprenorphine segment, either on net pricing or volume?

Sure. Chi, I'll start with that and then maybe Jim Robinson can provide some color as well. So you know, I think, as we've done for the past few years with VIVITROL, we have taken the most recent quarter and projected that forward for growth rates, and that's what we've done for 2019. I think the key part about the VIVITROL market of course is, it really is a state-by-state market with each of the reimbursement systems, each of the ecosystems in states being very, very different. You know Jim touched on the broader growth that we're seeing. In years past, we've talked about 50% of our sales coming from the top 5 states, that's moved down into the 45% range. And as I think, we continue to broaden the growth of VIVITROL, we see that as a very positive trend for us. But again, having nearly half the sales come from 5 states, gives us what we see as a lot of upside moving forward.

In terms of the competition, we certainly have taken into account what we see as the evolving landscape on buprenorphine, but since VIVITROL is such a different approach to treatment, we believe very firmly and have talked about it for a long time, patients need to have all 3 options available for treatment shared with them. And the different choices that patients are going to make, we think will favor VIVITROL in the long run because with our very little market share right now, when patients are giving -- or given active and fully educated choices, we see many, many more patients looking to lead a nonnarcotic life, and therefore, that choice would be VIVITROL.

Then what I would add is more to the question you raised on funding in the catalyst or funding for VIVITROL. Clearly, the federal government continues to provide federal grants to the states. We're going to continue to partner as appropriate with the states in terms of educating what's -- what those grants are available for, and supporting the states as they look to be able to potentially build treatment systems that include all 3 medications and also have examples of where VIVITROL has provided a value for patients within that particular state. So our continued partnership at the state level is going to be very important. As I've said in the past, we're going to continuing to drive growth where we've had success and we're going to expand from there. So continue to grow in some of the inpatient settings of care that we have been successful and then expand further out on the outpatient. The goal for VIVITROL in '19 is continued pull-through. So it's pull through of federal funding at the state level, it's pull-through of our new commercial infrastructure to ensure that we're fully collaborating across the settings of care as necessary and that we're looking to support the continued rollout of new models that we are learning in each state to make sure that those models are well understood throughout the country.

Our next question is coming from Chris Shibutani of Cowen.

Chris, are you there?

I'm sorry. I was on mute. Can I follow-up on the VIVITROL question, particularly for the guidance for 2019. The assumed range lower end implies about 9% growth, which is a little bit of slowing versus this year and up to 16%, which would be kind of maintained, but a little bit of acceleration. Can you talk to what the components of that range are? From a bigger picture, is it -- this question of duration that you've talked about in the past? Is it patient numbers? Is it mix in terms of the inpatient or Medicaid population? What are the components of that range?

Well, Chris, it's Jim. Thanks for the question. I think the components contain all that range. I mean, we are -- we guided to a little bit of an increase to a 3- or 4-point increase in gross to net next year. We continue to see some of our largest growth in Medicaid expansion states and that mix of business more toward Medicaid versus commercial. We'll continue in that dynamic. But this is really -- we do our models on a state-by-state basis really looking at patient expansion. So it's mainly focused on an increased number of patients, therefore, an increased number of vials used. And if we can make inroads in terms of length of therapy or duration of therapy that will obviously help us enhance that growth so.

And again, you're right to point out the ends of the guidance, but if you look at the midpoint, which is the midpoint for a reason, it's right -- it's right around the growth that we saw in 2018.

And then it strikes to me that when we think about the bigger picture scenario about using medication-assisted treatment that's always been a bit of a puzzle in terms of why we're not seeing more penetration or growth, broadly speaking, whether it's VIVITROL or other forms of treatment. You talk about having a strategy commercially that really embraces patients being able to have access to all forms. Is there a point of view that you have about why Alkermes wouldn't perhaps expand your portfolio of treatment option? Why that focus singularly on VIVITROL as opposed to the other options to address medication-assisted treatment of addiction -- opioid addiction, specifically?

Chris, it's Richard. It's a good question and the MAT big picture question, I think, is at the core of it. It's interesting. The way that Jim and Jim described the way we structure our guidance, and our communications with you all is really based on a conservative estimate of where we are exiting the year in a complex fragmented market with some ups and some downs and some states coming in, some states coming out, against the backdrop of increased federal funding moving into the system and progressively worsening opioid epidemic. So we also have to provide in all terms for that surge capacity for when certain things flip over. So for example, in 2016, we grew at a nonlinear rate driven by 2 states, by Ohio and Massachusetts alone. And we see that potential happening in the future as well, we just can't model it. So we don't know whether we have it in 2019 or 2020. But there is no question that there is more and more impetus for the use of MAT.

Now within the MATs, the place is becoming very clear that Alkermes and VIVITROL are most comfortable is in that post-detox patients. I mean, there are literally millions of people, 3 million of people or so in the U.S. undergo detox each year and understands the guidelines. Post detoxification, initiation on long-acting naltrexone is indicated, that's detox without long-acting naltrexone is not medically indicated. So that's a place where we're not competing against SUBOXONE or methadone. It's for a different patient, who has different treatment objectives.

So to your final part of your question is, we're interested in some of these other new addiction treatments as well because obviously they would fit into our commercial infrastructure, and I think that we have the unique perspective on the injectable side of the market as well as the non-agonist part of the market. We like the features of some of the long-acting buprenorphines because they address the principal national liability of buprenorphine, which is its potential for diversion in the community. But we don't have any immediate plan to move in that direction, but we're always looking to see what new things are arising.

Our next question is coming from Umer Raffat of Evercore ISI.

I had a few, maybe I'll just go one at a time. Perhaps, first, Richard, could we see Alkermes do something a bit more aggressive on the M&A side? I guess, what I'm really trying to get at is, maybe if you could give us color on whether a top line number isn't -- you have like top line number in mind when you think about capital deployment or a certain type of assets. I'm just trying to get a sense for sort of the ultimate target. Do you have a EPS number or certain profitability target in mind as you think about these acquisitions you're looking at? And I had a couple of follow-ups.

So I think the 2 major areas of our acquisition hunting has been -- historically, it has been complementary R&D development capabilities in therapeutic areas where we have competitive advantage or expertise. So that's historically been psychiatry and addiction and anything that has adjacencies to those. The new component that you're hearing us say is that the commercial platform that we've been building by necessity and by opportunity with now VIVITROL and ARISTADA is distinctive. It's unique. It's calling on providers in complex treatment systems, where you need a lot of additional capabilities in order to service and even enter the market.

So now for the first time, we're also looking at adjacencies that leverage the commercial platform rather than the scientific platform. And I'd say, if I had to pick a financial metric that we were most motivated by at this moment, it's top line revenue growth with high-quality products. We're not really interested in bulk for its own sake. We might continue the pedigree that we're building in the community of having a very differentiated high value-added medicine.

Got it. So on that commercial platform then perhaps turning to Jim for my second one, and I did have an R&D one after that. Jim, so here's sort of my long-winded question. In 2016, the commercial performance was very good. VIVITROL grew 45%, ARISTADA put up $50 million in the first full year of launch and it all happened on a GAAP SG&A of $374 million, which was already up from $300 million in 2015. The guidance on GAAP SG&A this year is $600 million. So maybe just in broad-strokes and I understand the therapeutic area focus is still the same as 2016. My question is, what explains the 63% GAAP SG&A increase versus 2016 levels as per 2019 guidance?

Well, Umer, I'll start. I think the key here is building out in a competitive space both in schizophrenia and in addiction, building out a fully capable sales organization. And as we've grown, I think to continue to show that long-term gap in growth that Rich talked about that we're looking for in the top line, making sure we have the right infrastructure in place. Again to match the competitive nature in the antipsychotic market, but also to make sure that we have those field reimbursement managers and key account managers in VIVITROL, as Jim Robinson mentioned before.

So yes, we absolutely have been investing in SG&A, but I think we're going to see that long-term growth accelerate as we really match the market with the opportunity that we have because again these are -- these have the opportunity to show that long linear growth again in both ARISTADA and VIVITROL, I believe.

Got it. And then the last one was, maybe just to clarify EVOLVE-MS-2's primary endpoint a little better. So it's my understanding that the trials comparing the number of days with the GI event. I guess, my question really is, what exactly has to happen either on the criteria or the cutoff on the IGISIS scale that makes a certain day qualify as a GI AE day or not?

Umer, it's Rich. I wish I knew the answer to it, but I don't. We'll get back to you on that. Umer, on the question, I just wanted to say one more thing on the thing that, that Jim answered. I think, in 2016, we were underpowered on the commercial side. And I think it would have been a mistake. We were -- we enjoyed incredible growth in VIVITROL as I mentioned because Massachusetts and Ohio turned on big time. And if we had sat back and just relied on that happening and continuing year-after-year, we would have been sorely disappointed because those were anomalies. So what we learned is that what does it take to try to replicate that across states around the country on the addiction side, and that's what we've built to be able to provide for that as we will have a more of a 50-state strategy.

On ARISTADA, we were just getting going. And it's a competitive marketplace. And we think, we have the most competitive product. But we are -- we're the most recent one to market, and we're going up against J&J with INVEGA SUSTENNA and another competitor in the ARISTADA space. So I think when -- particularly when Jim Robinson got here, we looked around and said, okay, instead of just competing, how do we compete to win. And I think that we're sizing ourselves now. That's what you're hearing our messaging is that we really start positioning ourselves to win now. We can take the next question now.

Our next question is coming from Paul Matteis of Stifel.

This is Neil on for Paul. Maybe just going back to Umer's first question. As you're thinking about kind of the pursuit of top line revenue growth, how are you prioritizing that you achieve that? And then are you seeing any attractive opportunities out there?

I don't think I'm going to give you a whole lot of specificity here, Neil. We're -- I think the concentric circles of prioritization are ones that you could predict. I mean, ones that sits squarely in our addiction and psychiatry field force and national account's capability, pricing, reimbursement, those obviously make a lot of sense. But there are adjacencies that aren't immediately self-evident. And I'd say the other area of emerging interest is oncology because 4230 is really quite interesting in terms of the number of potential combinations and the 4230 aspect of the combinations can actually provide the IP differentiation. So we're actually being pretty expansive and we're looking at now.

Our next question is coming from Biren Amin of Jefferies.

Maybe on 3831. Have you had the pre-NDA meeting with FDA? And are there any key takeaways that you can share with us from that meeting?

No, we'll request that meeting in next few weeks and we expect to have that meeting later in the year.

Okay. And Richard, on the 2019 guide for ARISTADA, it kind of suggest 7% to 17% growth when you annualize Q4 and what you reported in Q4. So given ARISTADA grew in Q4 35% quarter-over-quarter, why shouldn't that carry through? And then I guess, another question on ARISTADA growth in 2018, do you think the share came from new patients? Or was it switches from other therapies that drove that?

Biren, it's Jim. I'll start. I think the growth rate trends, I think, we did mention, of course, that we're probably going to see that -- we expect to see that decrease in growth in the first quarter. That decrease in overall revenues in the first quarter we've seen it historically each year as the plans reset and a little bit of that year-end inventory washes through the system. So I think if you take into account that first quarter cyclicality that we see or seasonality that we see -- excuse me, the growth rates make more sense from a linear perspective. And we're looking at roughly 50% growth year-over-year, not just the fourth quarter. The fourth quarter typically tends to be quite strong in both of our products. And from a expected growth perspective, I'll let Jim Robinson to comment.

Yes. So we saw growth in both, in new patient starts as well patients switching from another long-acting injectable. It's not surprising. Obviously, this patient type will cycle through medications, a lot of medications. So we see it generally from both.

And then I guess with the 60 reps that you've expanded the ARISTADA sales force with, how many new prescribers are you targeting with those new sales reps? And where do you expect that they would have the greatest impact? Is it going to be on new patients or on switches?

It's going to be -- first of fall, in the hospital, we added an additional 10 representatives to augment our current hospital team. So that is really about starts. Since 30% of all starts for long-acting injectables happened in the hospitals, it's an opportunity for us to broaden our reach within the hospitals, both on a breadth and then on a depth perspective to make sure we have good coverage of the crisis stabilization units within those hospitals. So we predominantly see that at the new starts. And with the 50 new reps, it was a combination of white space in terms of filling white space. So that's an opportunity for us to be, in particular, geographies that we historically had not been in, so it's definitely new starts. And then in some cases where we have the higher concentrated metropolitan areas, it's about really augmenting our reach and frequency. So it's going to be a blend of new starts as well it's going to be a blend of refills as well.

We'll take the next question, please.

Our next question is coming from Brandon Folkes of Cantor Fitzgerald.

Just want to -- could you give some additional color around the VIVITROL detox and induction strategy data we may see later this year? And how incremental could this be to the sales effort around VIVITROL?

I'll start here. Without question that's an opportunity for us in 2019. We have resources available now for our field team to answer the questions that providers have on how to appropriately detox a patient. That's generally been the number one question on provider's mind. So when we sit with the prospective provider that was interested in treating patients with VIVITROL, the question they would normally ask was, how would I go about providing or detoxing the patient? So now we have the data to be able to explain how that's typically done. So that's one of the key components for us in 2019 has been able to explain that. And then when we explain that's about how do we support that office fully and that goes back to the discussion we had about the field reimbursement team. So much of what you see in this patient population is a lack of support or lack of continuity of care. So it's not only getting a patient initiated on therapy, but how do you help them stand therapy. So that's a big opportunity for us in 2019.

And maybe just 1 follow-up. How do you view VIVITROL's growth within alcohol dependence?

So today, it represents roughly 30% to 32% of our overall sales that's been fairly stable. But I do think we're continuing to evaluate every segment of the market to ensure that we're maximizing all of the opportunities, whether it's an opioid use disorder or whether it's an alcohol use disorder.

Our next question is coming from Marc Goodman of SVB Leerink.

Two questions. First on 3831 now that you've had a lot of payer discussions. I was wondering if could just remind us how you're thinking of positioning this product? Are you thinking that this is going to be for naive patients, this is going to be for Zyprexa patients to switch? Is there anything more that you've learned about that positioning strategy? And then second question is on 5461. Can you just help us with the 2 scenarios here with respect to the numbers, like you're running the 217 study? Can you give us an idea of how much you're spending on that in the guidance this year such that if we get a press release soon that 5461 and the whole program has been shut down? How much the expenses can we take out of the model? And vice versa, if you decide that there is an opportunity to push forward with 5461. Should we be assuming that there would be an increase in R&D spending? And can you give us a sense of what that would be for this year?

So I'll handle 3831 upfront. We have yet to engage payers fully. We have just begun to do ad boards with payers at this point and we'll have much more detailed information on the payer side within upcoming months. Once we have that detailed information, we'll then build our go-to-market strategy for the payers, and we'll be engaging the payers probably in the summertime this year. So a part of that though in terms of answering your question, the key in my mind is not only in terms of establishing the clinical benefit of 3831, but also the pharmacoeconomic benefit of 3831. I mean, look at the number of patients who drop off therapy from a burden of illness perspective that's a huge burden of illness in terms of overall medical costs related with treating these patients. If there is a benefit with patients staying on 3831 that's a quantifiable benefit and a value proposition to the payer. In addition to that, as we release and discuss more data, we'll also look at other elements of the 3831 clinical profile that will allow us to do more on the pharmacoecnomic modeling perspective. But our expectation is we'll have a well-balanced value proposition both with a strong pharmacoeconomic value proposition as well as a clinical value proposition. In terms of the other question in terms of new and switch patients, it will be both.

And Marc, on 5461, we've got approximately $15 million earmarked for that study through the course of 2019. And I think, depending on the timing and sort of obviously the advice we get and whether it's a -- in each of the scenarios you've talked about that would be the range, but we're planning for that study in our guidance to continue through the course of the year at this stage. And we'll know more after we meet with the agency as Rich talked about.

All right. Donna, we'll take the next question, please.

Our next question is coming from Danielle Brill of Piper Jaffray.

Two quick ones from me. First, I'm just wondering, which medical meetings you're considering for presentation on the 3831 data? And then can you provide an update on the VIVITROL IPR and potential implications this patent has been validated?

Danielle, it's Rich. We're looking at 3 different meetings for the 3831 data. One is called SIRS, that's in Orlando, that's in April, and then there's APA in May and then there is the ASCP in late May. So somewhere in that mix we'll be able to give that more expanded presentation.

IPR.

And the IPR. So the IPR is expected to be resolved by next November, I believe. And I think just last week, we submitted the...

Patent owner response.

Public patent owner response, which you should take a look at. We feel very strongly about our IP position on this IPR, but you've heard me say many times before there is more than patents that protect us in our commercial position with VIVITROL. VIVITROL is extremely difficult to make. It requires large-scale consistent manufacturing. And we think that our, a, that we should prevail in this IPR. And to the extent that we don't, it's incumbent upon whoever comes in the market then to try to make -- manufacture VIVITROL at scale. If they can't make any AB substitutable product, then they have an NDA or a 505(b)(2) type submission and that requires new clinical information and we expect them to compete.

So as I've always said, there's -- many people have the ability to come in and create a long-acting naltrexone product. There are drug delivery technology that exist and naltrexone is off patent. No one has done it for a couple of reasons. It's hard and the market is incredibly difficult as we've shown. So as we build this commercial capacity and this policy capacity and this presence in the communities in the states and the federal government, we think that's a really important competitive advantage for VIVITROL as well. But first principle, we think the IP is strong and we expect to win.

All right. Next question, Donna?

Our next question is coming from Vamil Divan of Crédit Suisse.

So just a couple following upon some of the earlier questions as well. So one, there's a discussion on expenses in the growth from '16 to '19. Just wondering the expense assumption that you guys have in your guidance was a little more than we thought for this year. I don't want to get too far ahead of ourselves. But just as you look at our models, kind of, looking out further, do you think The Street is doing a proper job on modeling expense -- expenses over say 2020, 2021? Or is there going to be a lot more investment that were maybe not factoring in right now? And then second, kind of following up on the 3831 discussion. I appreciate your comments on the payer side. But just maybe as you see the profile more from a clinical perspective, is there sort of a sweet spot that you're seeing in terms of the patient types where you think 3831 will be best positioned as a frontline therapy obviously it's pretty diverse market of patients in schizophrenia. So just trying to get a sense of where you see maybe the best clinical impact and/or pharmacoeconomic impact could come from?

Yes. Vamil, it's Jim Frates. Just on the long-term modeling, you know, it's -- we typically don't guide obviously beyond 2019 and we're going to stick to that practice right now. There is a lot of disparity of models over time, and obviously, people don't -- a lot of people don't include certain revenues and a lot of people have very varied level of expenses though. I would say that this investment we're making now, we feel very comfortable with that we're right size now going into '19 on the ARISTADA and VIVITROL sides and it actually gives us a really nice platform on the health system side, on the hospital side and on the key account manager side for the potential growth in synergy with 3831. So I think, you'll see a lot of synergies with the opportunity in 3831 in schizophrenia along with ARISTADA. So maybe I'll leave it to that and we'll guide more closely as we go closer to those years.

And I'd just add on 3831, ultimately, if you look at the segments in terms of how olanzapine historically been used, the appreciation for olanzapine was the stability to rapidly control patient symptoms. So this rapid treatment was really a key element of the value proposition of olanzapine. But then those patients that were well controlled on it, there was this belief that it was the best medicine for treating patients that were suffering from schizophrenia. Obviously, the side effect, the weight gain was the issue in terms of why it was not used more widely over time. So I would see it not only for patients that are needed to be controlled or quickly, but also for patients that are well controlled over the long term, especially now that we're able to attenuate weight with 3831 or weight gain with 3831. So I see it's being used in all patients candidly. Now there's obviously a segmentation approach we'll be taking, given the fact we also have patients who have benefited from a long-acting injectable. So we'll clearly have the patient segmentation worked out. We'll be able to clearly articulate the patient segmentation and really be able to draw a very clear and compelling picture as to where 3831 would fit into as well as where ARISTADA would fit in, in terms of treating patients suffering from schizophrenia.

Our next question is coming from of Terence Flynn of Goldman Sachs.

This is Holly on for Terence. Just another one on your 2019 SG&A guidance. Can you provide any additional details on your assumptions regarding your build for 3831?

Sure, at this point, in 2019, there is no commercial field investment for 3831 inside of our guidance. There is a portion of dollars in that for education and the beginnings of the marketing work, but you could also almost feel, it's actually very similar to what we were spending on 5461 last year. So there's not a lot of growth in that area. And mainly the growth is coming from that field organization that we're building that's -- that we started to build in Q4, and obviously, that will be annualized into next year. But no investment in the field organization for 3831 beyond what we're using for ARISTADA and VIVITROL in '19.

Okay. We have time for 1 more question.

Our last question today is coming from Akash Tewari from Wolfe Research.

So in the event that TECFIDERA goes off patent earlier than expected, can you talk to us about the opportunity 8700 has in switching existing TECFIDERA patients on to the next-gen version? In the literature, it seems like most of the GI events, when they do occur happen within the first month of treatment initiation. And also -- there also seems to be a disconnect between what we hear in a real world setting about how many GI discontinuations happen and what's in the clinical data? So as you look at your head-to-head data, what type of treatment discontinuation rate are you looking at?

Akash, this is Rich. Obviously, the most important people to answer this question is Biogen because they're in charge of the commercial launch and conduct entirely. We file the NDA and then we pass the baton to their commercial expertise. The real world call it that in the large open level safety study we're running is quite remarkable and that's where we're seeing GI discontinuation rates below 1%. And I agree with you the real world discontinuation rates that you hear from TEC are substantially higher than what you see in the clinical trial information that would have been the summary basis of approval of TEC. So I think that we feel like we have a differentiated drug. And when patients are put on the drug that difference is, as you said, because of the GI discomfort is often experienced immediately within the first weeks of treatment, that's where we're going to separate very, very early in the real world, when VUMERITY is launched. But I really would encourage you to go to Biogen for the specifics of their plan.

All right. Everybody that concludes the Alkermes Q4 call for today. Thanks, everyone, for dialing in. If you have any follow-up questions, please don't hesitate to reach out to the company.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.