PART 1. FINANCIAL INFORMATION
Item 1.Condensed Consolidated Financial Statements:
ALKERMES, INC. AND SUBSIDIARIES
(unaudited)
| | | | | | | | |
| | December 31,
| | | March 31,
| |
| | 2007 | | | 2007 | |
| | (In thousands, except share and per share amounts) | |
|
ASSETS |
CURRENT ASSETS: | | | | | | | | |
Cash and cash equivalents | | $ | 320,931 | | | $ | 80,500 | |
Investments | | | 190,535 | | | | 271,082 | |
Receivables | | | 40,256 | | | | 56,049 | |
Inventory | | | 23,054 | | | | 18,190 | |
Prepaid expenses and other current assets | | | 7,088 | | | | 7,054 | |
| | | | | | | | |
Total current assets | | | 581,864 | | | | 432,875 | |
| | | | | | | | |
PROPERTY, PLANT AND EQUIPMENT: | | | | | | | | |
Land | | | 301 | | | | 301 | |
Building and improvements | | | 32,602 | | | | 25,717 | |
Furniture, fixtures and equipment | | | 67,783 | | | | 64,203 | |
Equipment under capital lease | | | 463 | | | | 464 | |
Leasehold improvements | | | 33,349 | | | | 32,345 | |
Construction in progress | | | 47,705 | | | | 42,442 | |
| | | | | | | | |
| | | 182,203 | | | | 165,472 | |
Less: accumulated depreciation | | | (50,687 | ) | | | (41,877 | ) |
| | | | | | | | |
Total property, plant and equipment — net | | | 131,516 | | | | 123,595 | |
| | | | | | | | |
RESTRICTED INVESTMENTS | | | 5,146 | | | | 5,144 | |
OTHER ASSETS | | | 11,958 | | | | 7,007 | |
| | | | | | | | |
TOTAL ASSETS | | $ | 730,484 | | | $ | 568,621 | |
| | | | | | | | |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
CURRENT LIABILITIES: | | | | | | | | |
Accounts payable and accrued expenses | | $ | 29,958 | | | $ | 45,855 | |
Accrued interest | | | 2,975 | | | | 2,976 | |
Unearned milestone revenue — current portion | | | 5,820 | | | | 11,450 | |
Deferred revenue — current portion | | | — | | | | 200 | |
Long-term debt — current portion | | | 651 | | | | 1,579 | |
| | | | | | | | |
Total current liabilities | | | 39,404 | | | | 62,060 | |
| | | | | | | | |
NON-RECOURSE RISPERDAL CONSTA SECURED 7% NOTES | | | 159,430 | | | | 156,851 | |
UNEARNED MILESTONE REVENUE — LONG-TERM PORTION | | | 113,393 | | | | 117,300 | |
DEFERRED REVENUE — LONG-TERM PORTION | | | 27,837 | | | | 22,153 | |
OTHER LONG-TERM LIABILITIES | | | 5,774 | | | | 6,796 | |
| | | | | | | | |
TOTAL LIABILITIES | | | 345,838 | | | | 365,160 | |
| | | | | | | | |
COMMITMENTS AND CONTINGENCIES (Notes 9 and 10) | | | | | | | | |
SHAREHOLDERS’ EQUITY: | | | | | | | | |
Capital stock, par value, $0.01 per share; 4,550,000 shares authorized (includes 3,000,000 shares of preferred stock); none issued and outstanding | | | — | | | | — | |
Common stock, par value, $0.01 per share; 160,000,000 shares authorized; 102,797,809 and 101,550,673 shares issued; 99,969,036 and 100,726,996 shares outstanding at December 31, 2007 and March 31, 2007, respectively | | | 1,028 | | | | 1,015 | |
Non-voting common stock, par value, $0.01 per share; 450,000 shares authorized; 382,632 shares issued and outstanding at December 31, 2007 and March 31, 2007 | | | 4 | | | | 4 | |
Treasury stock, at cost (2,828,773 and 823,677 shares at December 31, 2007 and March 31, 2007, respectively) | | | (41,599 | ) | | | (12,492 | ) |
Additional paid-in capital | | | 864,362 | | | | 837,727 | |
Accumulated other comprehensive (loss) income | | | (929 | ) | | | 753 | |
Accumulated deficit | | | (438,220 | ) | | | (623,546 | ) |
| | | | | | | | |
TOTAL SHAREHOLDERS’ EQUITY | | | 384,646 | | | | 203,461 | |
| | | | | | | | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 730,484 | | | $ | 568,621 | |
| | | | | | | | |
| | | | | | | | |
| | September 30, | | | March 31, | |
| | 2008 | | | 2008 | |
| | (In thousands, except share | |
| | and per share amounts) | |
ASSETS | | | | | | | | |
CURRENT ASSETS: | | | | | | | | |
Cash and cash equivalents | | $ | 68,525 | | | $ | 101,241 | |
Investments — short-term | | | 263,913 | | | | 240,064 | |
Receivables | | | 36,047 | | | | 47,249 | |
Inventory | | | 15,721 | | | | 18,884 | |
Prepaid expenses and other current assets | | | 15,354 | | | | 5,720 | |
| | | | | | |
Total current assets | | | 399,560 | | | | 413,158 | |
| | | | | | |
PROPERTY, PLANT AND EQUIPMENT: | | | | | | | | |
Land | | | 301 | | | | 301 | |
Building and improvements | | | 36,371 | | | | 35,003 | |
Furniture, fixtures and equipment | | | 65,293 | | | | 63,364 | |
Equipment under capital lease | | | 464 | | | | 464 | |
Leasehold improvements | | | 33,614 | | | | 33,387 | |
Construction in progress | | | 40,686 | | | | 42,859 | |
| | | | | | |
| | | 176,729 | | | | 175,378 | |
Less: accumulated depreciation | | | ( 67,922 | ) | | | ( 62,839 | ) |
| | | | | | |
Total property, plant and equipment — net | | | 108,807 | | | | 112,539 | |
| | | | | | |
INVESTMENTS — LONG-TERM | | | 93,395 | | | | 119,056 | |
OTHER ASSETS | | | 3,256 | | | | 11,558 | |
| | | | | | |
TOTAL ASSETS | | $ | 605,018 | | | $ | 656,311 | |
| | | | | | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | |
Accounts payable and accrued expenses | | $ | 23,623 | | | $ | 36,046 | |
Unearned milestone revenue — current portion | | | 5,728 | | | | 5,927 | |
Deferred revenue — current portion | | | 298 | | | | — | |
Long-term debt — current portion | | | — | | | | 47 | |
Non-recourse RISPERDAL CONSTA secured 7% notes — current portion | | | 15,835 | | | | — | |
| | | | | | |
Total current liabilities | | | 45,484 | | | | 42,020 | |
| | | | | | |
NON-RECOURSE RISPERDAL CONSTA SECURED 7% NOTES | | | 76,054 | | | | 160,324 | |
UNEARNED MILESTONE REVENUE — LONG-TERM PORTION | | | 108,890 | | | | 111,730 | |
DEFERRED REVENUE — LONG-TERM PORTION | | | 28,397 | | | | 27,837 | |
OTHER LONG-TERM LIABILITIES | | | 7,228 | | | | 9,086 | |
| | | | | | |
TOTAL LIABILITIES | | | 266,053 | | | | 350,997 | |
| | | | | | |
COMMITMENTS AND CONTINGENCIES (Note 12) | | | | | | | | |
SHAREHOLDERS’ EQUITY: | | | | | | | | |
Capital stock, par value, $0.01 per share; 4,550,000 shares authorized (includes 3,000,000 shares of preferred stock); none issued and outstanding | | | — | | | | — | |
Common stock, par value, $0.01 per share; 160,000,000 shares authorized; 103,912,534 and 102,977,348 shares issued; 94,912,489 and 95,099,166 shares outstanding at September 30, 2008 and March 31, 2008, respectively | | | 1,039 | | | | 1,030 | |
Non-voting common stock, par value, $0.01 per share; 450,000 shares authorized; 382,632 shares issued and outstanding at September 30, 2008 and March 31, 2008 | | | 4 | | | | 4 | |
Treasury stock, at cost (9,000,045 and 7,878,182 shares at September 30, 2008 and March 31, 2008, respectively) | | | ( 120,970 | ) | | | ( 107,322 | ) |
Additional paid-in capital | | | 885,259 | | | | 869,695 | |
Accumulated other comprehensive loss | | | ( 1,185 | ) | | | ( 1,526 | ) |
Accumulated deficit | | | ( 425,182 | ) | | | ( 456,567 | ) |
| | | | | | |
TOTAL SHAREHOLDERS’ EQUITY | | | 338,965 | | | | 305,314 | |
| | | | | | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 605,018 | | | $ | 656,311 | |
| | | | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
ALKERMES, INC. AND SUBSIDIARIES
(unaudited)
| | | | | | | | | | | | | | | | |
| | Three Months Ended
| | | Nine Months Ended
| |
| | December 31, | | | December 31, | |
| | 2007 | | | 2006 | | | 2007 | | | 2006 | |
| | (In thousands, except per share amounts) | |
|
REVENUES: | | | | | | | | | | | | | | | | |
Manufacturing revenues | | $ | 14,275 | | | $ | 28,763 | | | $ | 69,929 | | | $ | 77,078 | |
Royalty revenues | | | 7,384 | | | | 5,673 | | | | 21,714 | | | | 16,625 | |
Research and development revenue under collaborative arrangements | | | 23,985 | | | | 19,532 | | | | 68,641 | | | | 51,620 | |
Net collaborative profit | | | 5,127 | | | | 8,445 | | | | 18,025 | | | | 29,798 | |
| | | | | | | | | | | | | | | | |
Total revenues | | | 50,771 | | | | 62,413 | | | | 178,309 | | | | 175,121 | |
| | | | | | | | | | | | | | | | |
EXPENSES: | | | | | | | | | | | | | | | | |
Cost of goods manufactured | | | 7,499 | | | | 12,989 | | | | 26,862 | | | | 34,149 | |
Research and development | | | 30,395 | | | | 29,908 | | | | 91,331 | | | | 85,588 | |
Selling, general and administrative | | | 15,249 | | | | 16,365 | | | | 45,136 | | | | 48,572 | |
| | | | | | | | | | | | | | | | |
Total expenses | | | 53,143 | | | | 59,262 | | | | 163,329 | | | | 168,309 | |
| | | | | | | | | | | | | | | | |
OPERATING (LOSS) INCOME | | | (2,372 | ) | | | 3,151 | | | | 14,980 | | | | 6,812 | |
| | | | | | | | | | | | | | | | |
OTHER INCOME (EXPENSE): | | | | | | | | | | | | | | | | |
Gain on sale of investment in Reliant Pharmaceuticals, Inc. | | | 174,631 | | | | — | | | | 174,631 | | | | — | |
Interest income | | | 4,292 | | | | 4,260 | | | | 12,940 | | | | 13,329 | |
Interest expense | | | (4,088 | ) | | | (4,141 | ) | | | (12,238 | ) | | | (13,648 | ) |
Other (expense) income, net | | | (393 | ) | | | 89 | | | | 784 | | | | 212 | |
| | | | | | | | | | | | | | | | |
Total other income (expense) | | | 174,442 | | | | 208 | | | | 176,117 | | | | (107 | ) |
| | | | | | | | | | | | | | | | |
INCOME BEFORE INCOME TAXES | | | 172,070 | | | | 3,359 | | | | 191,097 | | | | 6,705 | |
INCOME TAXES | | | 3,189 | | | | 426 | | | | 5,771 | | | | 761 | |
| | | | | | | | | | | | | | | | |
NET INCOME | | $ | 168,881 | | | $ | 2,933 | | | $ | 185,326 | | | $ | 5,944 | |
| | | | | | | | | | | | | | | | |
EARNINGS PER COMMON SHARE: | | | | | | | | | | | | | | | | |
BASIC | | $ | 1.66 | | | $ | 0.03 | | | $ | 1.82 | | | $ | 0.06 | |
| | | | | | | | | | | | | | | | |
DILUTED | | $ | 1.63 | | | $ | 0.03 | | | $ | 1.78 | | | $ | 0.06 | |
| | | | | | | | | | | | | | | | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: | | | | | | | | | | | | | | | | |
BASIC | | | 101,703 | | | | 100,896 | | | | 101,676 | | | | 98,690 | |
| | | | | | | | | | | | | | | | |
DILUTED | | | 103,914 | | | | 104,746 | | | | 104,097 | | | | 103,156 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
| | September 30, | | | September 30, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | (In thousands, except per share amounts) | |
REVENUES: | | | | | | | | | | | | | | | | |
Manufacturing revenues | | $ | 33,039 | | | $ | 24,137 | | | $ | 71,649 | | | $ | 55,654 | |
Royalty revenues | | | 8,439 | | | | 7,348 | | | | 17,020 | | | | 14,330 | |
Research and development revenue under collaborative arrangements | | | 5,252 | | | | 21,206 | | | | 36,702 | | | | 44,656 | |
Net collaborative profit | | | 581 | | | | 5,909 | | | | 1,932 | | | | 12,898 | |
| | | | | | | | | | | | |
Total revenues | | | 47,311 | | | | 58,600 | | | | 127,303 | | | | 127,538 | |
| | | | | | | | | | | | |
EXPENSES: | | | | | | | | | | | | | | | | |
Cost of goods manufactured | | | 12,071 | | | | 9,218 | | | | 26,385 | | | | 19,363 | |
Research and development | | | 19,710 | | | | 28,317 | | | | 41,971 | | | | 60,936 | |
Selling, general and administrative | | | 11,679 | | | | 14,487 | | | | 23,605 | | | | 29,887 | |
| | | | | | | | | | | | |
Total expenses | | | 43,460 | | | | 52,022 | | | | 91,961 | | | | 110,186 | |
| | | | | | | | | | | | |
OPERATING INCOME | | | 3,851 | | | | 6,578 | | | | 35,342 | | | | 17,352 | |
| | | | | | | | | | | | |
OTHER (EXPENSE) INCOME: | | | | | | | | | | | | | | | | |
Interest income | | | 2,693 | | | | 4,246 | | | | 6,309 | | | | 8,648 | |
Interest expense | | | (4,243 | ) | | | (4,077 | ) | | | (8,469 | ) | | | (8,150 | ) |
Other (expense) income | | | (666 | ) | | | 1,151 | | | | (830 | ) | | | 1,177 | |
| | | | | | | | | | | | |
Total other (expense) income | | | (2,216 | ) | | | 1,320 | | | | (2,990 | ) | | | 1,675 | |
| | | | | | | | | | | | |
INCOME BEFORE INCOME TAXES | | | 1,635 | | | | 7,898 | | | | 32,352 | | | | 19,027 | |
INCOME TAX (BENEFIT) PROVISION | | | (63 | ) | | | 200 | | | | 967 | | | | 2,582 | |
| | | | | | | | | | | | |
NET INCOME | | $ | 1,698 | | | $ | 7,698 | | | $ | 31,385 | | | $ | 16,445 | |
| | | | | | | | | | | | |
EARNINGS PER COMMON SHARE: | | | | | | | | | | | | | | | | |
BASIC | | $ | 0.02 | | | $ | 0.08 | | | $ | 0.33 | | | $ | 0.16 | |
| | | | | | | | | | | | |
DILUTED | | $ | 0.02 | | | $ | 0.07 | | | $ | 0.32 | | | $ | 0.16 | |
| | | | | | | | | | | | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: | | | | | | | | | | | | | | | | |
BASIC | | | 95,637 | | | | 101,595 | | | | 95,211 | | | | 101,663 | |
| | | | | | | | | | | | |
DILUTED | | | 97,356 | | | | 104,315 | | | | 96,729 | | | | 104,446 | |
| | | | | | | | | | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
ALKERMES, INC. AND SUBSIDIARIES
(unaudited)
| | | | | | | | |
| | Nine Months Ended
| |
| | December 31, | |
| | 2007 | | | 2006 | |
| | (In thousands) | |
|
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
Net income | | $ | 185,326 | | | $ | 5,944 | |
Adjustments to reconcile net income to cash flows from operating activities: | | | | | | | | |
Share-based compensation | | | 15,477 | | | | 22,218 | |
Depreciation | | | 9,380 | | | | 8,838 | |
Other non-cash charges | | | 3,580 | | | | 2,645 | |
Change in fair value of warrants | | | (1,425 | ) | | | 510 | |
Gain on sale of investment in Reliant Pharmaceuticals, Inc. | | | (174,631 | ) | | | — | |
Loss on disposal of equipment | | | 645 | | | | — | |
Changes in assets and liabilities: | | | | | | | | |
Receivables | | | 14,368 | | | | (11,079 | ) |
Inventory, prepaid expenses and other assets | | | (7,904 | ) | | | (10,040 | ) |
Accounts payable, accrued expenses and accrued interest | | | (14,004 | ) | | | (11,598 | ) |
Unearned milestone revenue | | | (9,537 | ) | | | 58,760 | |
Deferred revenue | | | 6,909 | | | | 18,516 | |
Other liabilities | | | (180 | ) | | | 202 | |
| | | | | | | | |
Cash flows from operating activities | | | 28,004 | | | | 84,916 | |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Additions to property, plant and equipment | | | (17,618 | ) | | | (24,728 | ) |
Proceeds from the sale of equipment | | | — | | | | 159 | |
Purchases of investments | | | (371,342 | ) | | | (217,453 | ) |
Sales and maturities of investments | | | 453,403 | | | | 214,193 | |
Proceeds from the sale of investment in Reliant Pharmaceuticals, Inc. | | | 166,865 | | | | — | |
| | | | | | | | |
Cash flows from investing activities | | | 231,308 | | | | (27,829 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Proceeds from issuance of common stock | | | 9,510 | | | | 5,868 | |
Excess tax benefit from stock options | | | 211 | | | | — | |
Payment of debt | | | (975 | ) | | | (817 | ) |
Purchase of treasury stock | | | (27,627 | ) | | | (12,492 | ) |
| | | | | | | | |
Cash flows from financing activities | | | (18,881 | ) | | | (7,441 | ) |
| | | | | | | | |
NET INCREASE IN CASH AND CASH EQUIVALENTS | | | 240,431 | | | | 49,646 | |
CASH AND CASH EQUIVALENTS — Beginning of period | | | 80,500 | | | | 33,578 | |
| | | | | | | | |
CASH AND CASH EQUIVALENTS — End of period | | $ | 320,931 | | | $ | 83,224 | |
| | | | | | | | |
SUPPLEMENTAL CASH FLOW DISCLOSURE: | | | | | | | | |
Cash paid for interest | | $ | 9,004 | | | $ | 10,647 | |
Cash paid for income taxes | | $ | 980 | | | $ | 896 | |
Non-cash investing and financing activities: | | | | | | | | |
Conversion of 2.5% convertible subordinated notes into common stock | | $ | — | | | $ | 125,000 | |
Redemption of redeemable convertible preferred stock | | $ | — | | | $ | 15,000 | |
Purchased capital expenditures included in accounts payable and accrued expenses | | $ | 328 | | | $ | — | |
Net share exercise of warrants into common stock of the issuer | | $ | 2,994 | | | $ | — | |
Receipt of Alkermes shares for the purchase of stock options or as payment to satisfy minimum withholding tax obligations related to employee stock awards | | $ | 1,480 | | | $ | — | |
Funds held in escrow from the sale of investment in Reliant Pharmaceuticals, Inc. | | $ | 7,766 | | | $ | — | |
| | | | | | | | |
| | Six Months Ended | |
| | September 30, | |
| | 2008 | | | 2007 | |
| | (In thousands) | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
Net income | | $ | 31,385 | | | $ | 16,445 | |
Adjustments to reconcile net income to cash flows from operating activities: | | | | | | | | |
Share-based compensation | | | 8,309 | | | | 10,295 | |
Depreciation | | | 4,901 | | | | 6,114 | |
Other non-cash charges | | | 2,564 | | | | 2,187 | |
Loss on the purchase of the 7% Notes | | | 1,989 | | | | — | |
Change in fair value of warrants | | | — | | | | (1,426 | ) |
Changes in assets and liabilities: | | | | | | | | |
Receivables | | | 2,251 | | | | 10,939 | |
Inventory, prepaid expenses and other assets | | | 890 | | | | (8,116 | ) |
Accounts payable and accrued expenses | | | (10,785 | ) | | | (20,707 | ) |
Unearned milestone revenue | | | (3,039 | ) | | | (8,101 | ) |
Deferred revenue | | | 2,092 | | | | 2,086 | |
Other liabilities | | | (1,363 | ) | | | (155 | ) |
| | | | | | |
Cash flows from operating activities | | | 39,194 | | | | 9,561 | |
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Purchases of property, plant and equipment | | | (3,567 | ) | | | (14,609 | ) |
Sales of property, plant and equipment | | | 7,717 | | | | — | |
Purchases of investments | | | (462,412 | ) | | | (291,480 | ) |
Sales and maturities of investments | | | 463,959 | | | | 293,861 | |
| | | | | | |
Cash flows from investing activities | | | 5,697 | | | | (12,228 | ) |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Proceeds from issuance of common stock | | | 7,221 | | | | 9,122 | |
Excess tax benefit from stock options | | | 74 | | | | 108 | |
Payment of debt | | | (47 | ) | | | (644 | ) |
Purchase of non-recourse RISPERDAL CONSTA secured 7% notes | | | (71,775 | ) | | | — | |
Purchase of treasury stock | | | (13,080 | ) | | | — | |
| | | | | | |
Cash flows from financing activities | | | (77,607 | ) | | | 8,586 | |
| | | | | | |
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | | (32,716 | ) | | | 5,919 | |
CASH AND CASH EQUIVALENTS — Beginning of period | | | 101,241 | | | | 80,500 | |
| | | | | | |
CASH AND CASH EQUIVALENTS — End of period | | $ | 68,525 | | | $ | 86,419 | |
| | | | | | |
SUPPLEMENTAL CASH FLOW DISCLOSURE: | | | | | | | | |
Cash paid for interest | | $ | 6,662 | | | $ | 5,999 | |
Cash paid for income taxes | | $ | 435 | | | $ | 980 | |
Non-cash investing and financing activities: | | | | | | | | |
Purchased capital expenditures included in accounts payable and accrued expenses | | $ | 233 | | | $ | 246 | |
Net share exercise of warrants into common stock of the issuer | | $ | — | | | $ | 2,994 | |
Receipt of Alkermes shares for the purchase of stock options or as payment to satisfy minimum withholding tax obligations related to stock based awards | | $ | 568 | | | $ | 924 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
ALKERMES, INC. AND SUBSIDIARIES
| |
1. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The accompanying condensed consolidated financial statements of Alkermes, Inc. (the “Company” or “Alkermes”) for the three and ninesix months ended December 31,September 30, 2008 and 2007 and 2006 are unaudited and have been prepared on a basis substantially consistent with the audited financial statements for the year ended March 31, 2007.2008. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (commonly referred to as “GAAP”). In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, that are necessary to present fairly the results of operations for the reported periods.
These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto which are contained in the Company’s Annual Report onForm 10-K for the year ended March 31, 2007,2008, as filed with the Securities and Exchange Commission (“SEC”).
The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year.
Principles of Consolidation— The condensed consolidated financial statements include the accounts of Alkermes, Inc. and its wholly-owned subsidiaries: Alkermes Controlled Therapeutics, Inc.; Alkermes Europe, Ltd. and RC Royalty Sub LLC (“Royalty Sub”). The assets of Royalty Sub are not available to satisfy obligations of Alkermes and its subsidiaries, other than the obligations of Royalty Sub, including Royalty Sub’s non-recourse RISPERDAL® CONSTA® secured 7% notes (the “Non-Recourse 7%“7% Notes”). Intercompany accounts and transactions have been eliminated.
Use of Estimates— The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP necessarily requires management to make estimates and assumptions that affect the following: (1) reported amounts of assets and liabilities; (2) disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements; and (3) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Income TaxesNew Accounting Pronouncements
Effective April 1,In November 2007, the Company adoptedEmerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) Interpretationreached a final consensus on EITF Issue No. 48,07-1,“Accounting for Uncertainty in Income Taxes”Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property”(“FINEITF No. 48”07-1”). FINEITF No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109,“Accounting for Income Taxes”.FIN No. 48 also prescribes a recognition threshold and measurement attribute07-1 is effective for the financial statement recognition and measurementCompany’s fiscal year beginning April 1, 2009. Adoption is on a retrospective basis to all prior periods presented for all collaborative arrangements existing as of each tax position taken or expected to be taken in a tax return, and provides guidancethe effective date. The Company is currently evaluating the impact of the adoption of EITF No. 07-1 on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. See Note 9, Income Taxes, to the condensedits consolidated financial statements for a discussion of the Company’s accounting for uncertain tax positions.statements.
New Accounting Pronouncements
In September 2006,March 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157,161,“Fair Value Measurements”Disclosures about Derivative Instruments and Hedging Activities”(“SFAS No. 157”161”), which establishes a framework for measuring fair value in GAAP and expands disclosures about the use of fair value to measure assets and liabilities in interim and annual reporting periods subsequent to initial recognition. Prior to. SFAS No. 157, which emphasizes that fair value161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for the Company’s fiscal year beginning April 1, 2009, and the Company does not expect the adoption of this standard to have a market-based measurement and not an entity-specific measurement, there were different definitionsmaterial impact on its consolidated financial statements.
6
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2. COMPREHENSIVE INCOME
of fair value and limited guidance for applying those definitions in GAAP. SFAS No. 157 is effective for the Company for the reporting period beginning April 1, 2008. The Company is in the process of evaluating the impact of the adoption of SFAS No. 157 on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115”(“SFAS No. 159”). SFAS No. 159 permits entities to elect to measure selected financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are recognized in earnings in each reporting period. SFAS No. 159 is effective for the Company for the reporting period beginning April 1, 2008. The Company is in the process of evaluating the impact of the adoption of SFAS No. 159 on its consolidated financial statements.
In June 2007, the Emerging Issues Task Force (“EITF”) of the FASB reached a consensus on IssueNo. 07-03,“Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities,” (“EITFNo. 07-03”), which addresses the diversity that exists with respect to the accounting for the non-refundable portion of a payment made by a research and development entity for future research and development activities. Under EITFNo. 07-03, an entity would defer and capitalize non-refundable advance payments made for research and development activities until the related goods are delivered or the related services are performed. EITFNo. 07-03 is effective for the Company for the reporting period beginning April 1, 2008. The Company does not expect the adoption of EITFNo. 07-03 to have a significant impact on its consolidated financial statements.
In November 2007, the EITF of the FASB reached a consensus on IssueNo. 07-01,“Accounting for Collaborative Arrangements,”(“EITFNo. 07-01”). EITFNo. 07-01 defines a collaborative arrangement as a contractual arrangement in which the parties are: (1) active participants to the arrangement; and (2) exposed to significant risks and rewards that depend upon the commercial success of the endeavor. The issue also addresses the appropriate income statement presentation for activities and payments between the participants in a collaborative arrangement as well as for costs incurred and revenue generated from transactions with third parties. EITFNo. 07-01 is effective for the Company for the reporting period beginning April 1, 2009. The Company is in the process of evaluating the impact of the adoption of EITFNo. 07-01 on its consolidated financial statements.
Comprehensive income for the three and ninesix months ended December 31,September 30, 2008 and 2007 and 2006 is as follows:
| | | | | | | | | | | | | | | | |
| | Three Months
| | | Nine Months
| |
| | Ended
| | | Ended
| |
| | December 31, | | | December 31, | |
(In thousands) | | 2007 | | | 2006 | | | 2007 | | | 2006 | |
|
Net income | | $ | 168,881 | | | $ | 2,933 | | | $ | 185,326 | | | $ | 5,944 | |
Unrealized losses on available for sale securities: | | | | | | | | | | | | | | | | |
Holding losses | | | (1,469 | ) | | | (1,152 | ) | | | (2,019 | ) | | | (699 | ) |
Reclassification of unrealized loss to realized loss on available for sale securities during the period | | | 337 | | | | — | | | | 337 | | | | — | |
| | | | | | | | | | | | | | | | |
Unrealized losses on available for sale securities | | | (1,132 | ) | | | (1,152 | ) | | | (1,682 | ) | | | (699 | ) |
| | | | | | | | | | | | | | | | |
Comprehensive income | | $ | 167,749 | | | $ | 1,781 | | | $ | 183,644 | | | $ | 5,245 | |
| | | | | | | | | | | | | | | | |
7
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
| | September 30, | | | September 30, | |
(In thousands) | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
Net income | | $ | 1,698 | | | $ | 7,698 | | | $ | 31,385 | | | $ | 16,445 | |
Unrealized gains (losses) on available-for-sale securities: | | | | | | | | | | | | | | | | |
Holding losses | | | (61 | ) | | | (25 | ) | | | (266 | ) | | | (550 | ) |
Reclassification of unrealized losses to realized losses on available-for-sale securities | | | 559 | | | | — | | | | 607 | | | | — | |
| | | | | | | | | | | | |
Unrealized gains (losses) on available-for-sale securities | | | 498 | | | | (25 | ) | | | 341 | | | | (550 | ) |
| | | | | | | | | | | | |
Comprehensive income | | $ | 2,196 | | | $ | 7,673 | | | $ | 31,726 | | | $ | 15,895 | |
| | | | | | | | | | | | |
ALKERMES, INC. AND SUBSIDIARIES
3. EARNINGS PER COMMON SHARE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
3. | EARNINGS PER COMMON SHARE |
Basic earnings per common share is calculated based upon net income available to holders of common shares divided by the weighted average number of shares outstanding. For the calculation of diluted earnings per common share, the Company uses the weighted average number of common shares outstanding, as adjusted for the effect of potential outstanding shares, including stock options and stock awards, redeemable convertible preferred stock and convertible debt.awards.
Basic and diluted earnings per common share are calculated as follows:
| | | | | | | | | | | | | | | | | |
| | Three Months
| | Nine Months
| | | | | | | | | | | | | | | | | |
| | Ended
| | Ended
| | | Three Months Ended | | Six Months Ended | |
| | December 31, | | December 31, | | | September 30, | | September 30, | |
(In thousands) | | 2007 | | 2006 | | 2007 | | 2006 | | | 2008 | | 2007 | | 2008 | | 2007 | |
| |
Numerator: | | | | | | | | | | | | | | | | | |
Net income | | $ | 168,881 | | | $ | 2,933 | | | $ | 185,326 | | | $ | 5,944 | | | $ | 1,698 | | $ | 7,698 | | $ | 31,385 | | $ | 16,445 | |
| | | | | | | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | | | |
Weighted average number of common shares outstanding | | | 101,703 | | | | 100,896 | | | | 101,676 | | | | 98,690 | | | 95,637 | | 101,595 | | 95,211 | | 101,663 | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | | |
Stock options | | | 2,159 | | | | 2,723 | | | | 2,354 | | | | 3,633 | | | 1,479 | | 2,371 | | 1,329 | | 2,451 | |
Restricted stock awards | | | 52 | | | | 291 | | | | 67 | | | | 244 | | | 240 | | 349 | | 189 | | 332 | |
Redeemable convertible preferred stock | | | — | | | | 836 | | | | — | | | | 589 | | |
| | | | | | | | | | | | | | | | | | |
Dilutive common share equivalents | | | 2,211 | | | | 3,850 | | | | 2,421 | | | | 4,466 | | | 1,719 | | 2,720 | | 1,518 | | 2,783 | |
| | | | | | | | | | | | | | | | | | |
Shares used in calculating diluted earnings per common share | | | 103,914 | | | | 104,746 | | | | 104,097 | | | | 103,156 | | | 97,356 | | 104,315 | | 96,729 | | 104,446 | |
| | | | | | | | | | | | | | | | | | |
The following amounts areStock options of 13.4 million and 10.3 million for the three months ended September 30, 2008 and 2007, respectively, and 13.9 million and 11.8 million for the six months ended September 30, 2008 and 2007, respectively, were not included in the calculation of net income per common share because their effects are anti-dilutive:anti-dilutive. There were 0.1 million and no restricted stock units excluded from the calculation of net income per common share for the three and months ended September 30, 2008 and 2007, respectively, and none for the six months ended September 30, 2008 and 2007 because their effects are anti-dilutive.
4. INVESTMENTS
At September 30, 2008 and March 31, 2008, the Company held investments of $352.6 million and $354.5 million, respectively, of which $88.7 million and $114.4 million are long-term, respectively, which were classified as available-for-sale and are carried at fair value in the Company’s condensed consolidated balance sheets. These investments include United States (“U.S.”) government debt securities, U.S. agency debt securities, municipal debt securities, investment grade corporate debt securities, including asset backed debt securities, student loan backed auction rate securities and strategic equity investments.
| | | | | | | | | | | | | | | | |
| | Three Months
| | | Nine Months
| |
| | Ended
| | | Ended
| |
| | December 31, | | | December 31, | |
(In thousands) | | 2007 | | | 2006 | | | 2007 | | | 2006 | |
|
Stock options | | | 11,899 | | | | 12,053 | | | | 11,919 | | | | 9,540 | |
2.5% convertible subordinated notes | | | — | | | | — | | | | — | | | | 2,461 | |
3.75% convertible subordinated notes | | | — | | | | 10 | | | | — | | | | 10 | |
| | | | | | | | | | | | | | | | |
Total | | | 11,899 | | | | 12,063 | | | | 11,919 | | | | 12,011 | |
| | | | | | | | | | | | | | | | |
At September 30, 2008 and March 31, 2008, the Company held investments of $4.7 million, which were classified as long-term, held-to-maturity securities and were carried at amortized cost. These investments include
87
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
4. | SHARE-BASED COMPENSATION |
Share-based compensation expense for the three and nine months ended December 31, 2007 and 2006 is as follows:
| | | | | | | | | | | | | | | | |
| | Three Months
| | | Nine Months
| |
| | Ended
| | | Ended
| |
| | December 31, | | | December 31, | |
(In thousands) | | 2007 | | | 2006 | | | 2007 | | | 2006 | |
|
Cost of goods manufactured | | $ | 319 | | | $ | 931 | | | $ | 1,279 | | | $ | 2,094 | |
Research and development | | | 2,055 | | | | 1,897 | | | | 5,691 | | | | 6,965 | |
Selling, general and administrative | | | 2,808 | | | | 4,672 | | | | 8,507 | | | | 13,159 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 5,182 | | | $ | 7,500 | | | $ | 15,477 | | | $ | 22,218 | |
| | | | | | | | | | | | | | | | |
As of December 31, 2007 and March 31, 2007, $0.5 million and $0.6 million, respectively, of share-based compensation cost was capitalized and recorded under the caption “Inventory” in the condensed consolidated balance sheets.
As of December 31, 2007 and March 31, 2007, Investments of $190.5 million and $271.1 million, respectively, consist of investments in U.S. government obligations,debt securities and corporate debt obligationssecurities that are restricted and marketable equity securitiesheld as collateral under certain letters of publicly traded companies thatcredit related to certain of the Company’s lease agreements.
At September 30, 2008, the Company collaborates with that are classified as available-for-sale and recorded at fair value. Fair value is generally based on quoted market prices. If quoted market prices are not available, fair values are estimated based on dealer quotes or quoted prices for instruments with similar characteristics. As of December 31, 2007,had gross unrealized gains and losses on the investments were $1.0of $2.3 million and $1.9gross unrealized losses of $3.5 million respectively.on its available-for-sale investments. The Company believes that the gross unrealized losses on these investments are temporary, and the Company has the intent and ability to hold these securities to recovery, which may be at maturity. For the six months ended September 30, 2008, the Company recognized $0.6 million in charges for other-than-temporary losses on its strategic equity investments.
At September 30, 2008, the Company had $10.0 million in investments in auction rate securities with an unrealized loss of $0.7 million. The securities represent the Company’s investment in taxable student loan revenue bonds issued by state higher education authorities which service student loans under the Federal Family Education Loan Program. The bonds were triple A rated at the date of purchase and are collateralized by student loans purchased by the authorities, which are guaranteed by state sponsored agencies and reinsured by the U.S. Department of Education. Liquidity for these securities is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals. Each of these securities had been subject to auction processes for which there had been insufficient bidders on the scheduled auction dates and the auctions subsequently failed. The Company is not able to liquidate its investments in auction rate securities until future auctions are successful, a buyer is found outside of the auction process or the bonds are redeemed by the issuer. The securities continue to pay interest at predetermined interest rates during the periods in which the auctions have failed. At September 30, 2008, the Company determined that the securities were temporarily impaired due to the length of time each security was in an unrealized loss position, the extent to which fair value was less than cost, the financial condition and near term prospects of the issuers and the guarantee agencies, and the Company’s intent and ability to hold each security for a period of time sufficient to allow for any anticipated recovery in fair value.
As At September 30, 2008, the Company had $8.2 million in investments in asset backed debt securities with an unrealized loss of December 31, 2007$0.9 million. The securities represent the Company’s investment in investment grade medium term floating rate notes (“MTN”) of Aleutian Investments, LLC (“Aleutian”) and Meridian Funding Company, LLC (“Meridian”), which are qualified special purpose entities (“QSPE’s”) of Ambac Financial Group, Inc. (“Ambac”) and MBIA, Inc. (“MBIA”), respectively. Ambac and MBIA are guarantors of financial obligations and are referred to as monoline financial guarantee insurance companies. The QSPE’s, which purchase pools of assets or securities and fund the purchase through the issuance of MTN’s, have been established to provide a vehicle to access the capital markets for asset backed debt securities and corporate borrowers. The MTN’s include sinking fund redemption features which match-fund the terms of redemptions to the maturity dates of the underlying pools of assets or securities in order to mitigate potential liquidity risk to the QSPE’s. At September 30, 2008, a substantial portion of the Company’s initial investment in the Meridian MTN’s had been redeemed by MBIA though scheduled sinking fund redemptions at par value, and the first sinking fund redemption on the Aleutian MTN is scheduled for June 2009.
The liquidity and fair value of these securities has been negatively impacted by the uncertainty in the credit markets, and the exposure of these securities to the financial condition of monoline financial guarantee insurance companies, including Ambac and MBIA. In June 2008, Ambac had its triple A rating reduced to Aa3 by Moody’s and double A by Standard and Poor’s (“S&P”), and MBIA was downgraded from triple A to A2 by Moody’s and double A by S&P. Both downgrades were due to Ambac’s and MBIA’s inability to maintain triple A capital levels. In August 2008, S&P affirmed its double A ratings of Ambac and MBIA with negative outlook. In September 2008, Moody’s placed Ambac and MBIA on review for possible downgrade. In November 2008, Moody’s announced that it had downgraded Ambac’s rating to Baa1 with a developing outlook.
The Company may not be able to liquidate its investment in these securities before the scheduled redemptions or until trading in the securities resumes in the credit markets, which may not occur. At September 30, 2008, the Company determined that the securities had been temporarily impaired due to the length of time each security was in an unrealized loss position, the extent to which fair value was less than cost, the financial condition and near term prospects of the issuers, current redemptions made by one of the issuers and the Company’s intent and ability to hold each security for a period of time sufficient to allow for any anticipated recovery in fair value or until scheduled redemption.
The Company also has warrants to purchase securities of certain publicly held companies included in its portfolio of strategic equity investments. These warrants are considered to be derivative instruments and at September 30, 2008 and March 31, 2007, Restricted Investments2008, the warrants had carrying values of $5.1 million consistsless than $0.1 million.
8
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. FAIR VALUE MEASUREMENTS
Effective April 1, 2008, the Company implemented SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period. The adoption of SFAS No. 157 did not have a material impact on the Company’s financial position and results of operations. In accordance with the provisions of FASB Staff Position FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”) the Company has elected to defer implementation of SFAS No. 157 as it relates to non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis until April 1, 2009. The Company is evaluating the impact, if any, this standard will have on its non-financial assets and liabilities.
SFAS No. 157 provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, SFAS No. 157 permits the use of various valuation approaches, including market, income and cost approaches. SFAS No. 157 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. In October 2008, the FASB issued FASB Staff Position FAS 157-3“Determining the Fair Value of a Financial Asset When the Market for that Asset is not Active”(“FSP FAS 157-3”). FSP FAS 157-3 clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 is effective for the Company’s condensed consolidated financial statements for the three and six months ended September 30, 2008. The adoption of this standard did not have a material impact on the consolidated financial statements.
The fair value hierarchy is broken down into three levels based on the reliability of inputs. The Company has categorized its cash, cash equivalents and investments within the hierarchy as follows:
Level 1— These valuations are based on a market approach using quoted prices in active markets for identical assets. Valuations of these products do not require a significant degree of judgment. Assets utilizing Level 1 inputs include investments in money market funds, U.S. government debt securities, U.S. agency debt securities, municipal debt securities, bank deposits and exchange-traded equity securities of certain publicly held companies;
Level 2— These valuations are based on a market approach using quoted prices obtained from brokers or dealers for similar securities or for securities for which we have limited visibility into their trading volumes. Valuations of these products do not require a significant degree of judgment. Assets utilizing Level 2 inputs consist of investments in corporate debt securities;
Level 3— These valuations are based on an income approach using certain inputs that are unobservable and are significant to the overall fair value measurement. Valuations of these products require a significant degree of judgment. Assets utilizing Level 3 inputs consist of investments in auction rate securities and asset backed debt securities that are not currently trading. In addition, the Company holds warrants in certain publicly held companies that are classified using Level 3 inputs. The carrying balance of these warrants was immaterial at September 30, 2008 and March 31, 2008.
9
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2008, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | Significant | | | | |
| | | | | | | | | | Other | | | Significant | |
| | | | | | Quoted Prices in | | | Observable | | | Unobservable | |
| | September 30, | | | Active Markets | | | Inputs | | | Inputs | |
(In thousands) | | 2008 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
Assets: | | | | | | | | | | | | | | | | |
Cash equivalents | | $ | 7,025 | | | $ | 7,025 | | | $ | — | | | $ | — | |
U.S. government and agency and municipal debt securities | | | 250,231 | | | | 250,231 | | | | — | | | | — | |
Corporate debt securities | | | 89,107 | | | | 4,240 | | | | 84,867 | | | | — | |
Asset backed debt securities | | | 7,283 | | | | — | | | | — | | | | 7,283 | |
Auction rate securities | | | 9,272 | | | | — | | | | — | | | | 9,272 | |
Strategic equity investments | | | 1,414 | | | | 1,414 | | | | — | | | | — | |
| | | | | | | | | | | | |
Total | | $ | 364,332 | | | $ | 262,910 | | | $ | 84,867 | | | $ | 16,555 | |
| | | | | | | | | | | | |
The fair values of the Company’s cash equivalents and investments in U.S. government obligationsand agency and municipal debt securities, and corporate debt obligations thatsecurities are restricted and classified as long-term held-to-maturity securities and are recorded at amortized cost.determined through observable market sources. The Company’s strategic equity investments are held as collateral underinvestments in certain letters of credit related to the Company’s lease agreements.
As of December 31, 2007 and March 31, 2007, the Company held investments of $0.2 million and $0.7 million, respectively, in marketable equity securities of publicly traded companies whose fair value is readily determinable.
The fair values of the Company’s investments in asset backed debt securities and auction rate securities are determined using certain inputs that are unobservable and significant to the overall fair value measurement. Typically, auction rate securities trade at their par value due to the short interest rate reset period and the availability of buyers or sellers of the securities at recurring auctions. However, since the security auctions have failed and fair value cannot be derived from quoted prices, the Company collaboratesused a discounted cash flow model to determine the estimated fair value of its investments in auction rate securities at September 30, 2008. The Company also used a discounted cash flow model to determine the estimated fair value of its investments in asset backed debt securities at September 30, 2008, as the asset backed debt securities are not actively trading. The assumptions used in the discounted cash flow models used to determine the estimated fair value of these securities include estimates for interest rates, timing of cash flows, expected holding periods and risk adjusted discount rates, which include a provision for default and liquidity risk. The Company’s valuation analyses consider, among other items, assumptions that market participants would use in their estimates of fair value, such as the collateral underlying the security, the inability to sell the investment in an active market, the creditworthiness of the issuer and any associated guarantees, the timing of expected future cash flows, and the expectation of the next time the security will have a successful auction or when callability features may be exercised by the issuer. These securities were also compared, where possible, to other observable market data with that are classified as long-term available-for-salesimilar characteristics.
The following table is a rollforward of the fair value of the Company’s investments in asset backed debt securities and are recordedauction rate securities whose fair value is determined using Level 3 inputs:
| | | | |
| | Fair Value | |
(In thousands) | | | | |
Balance, April 1, 2008 | | $ | 18,612 | |
Total unrealized losses included in earnings | | | — | |
Total unrealized losses included in comprehensive income | | | (468 | ) |
Redemptions | | | (1,589 | ) |
| | | |
Balance, September 30, 2008 | | $ | 16,555 | |
| | | |
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits, but does not require, entities to elect to measure selected financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value under “Other Assets”option has been elected are recognized in earnings at each reporting period. The Company adopted the provisions of SFAS No. 159 on April 1, 2008 and did not elect to
10
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
measure any new assets or liabilities at their respective fair values and, therefore, the adoption of SFAS No. 159 did not have an impact on its results of operations and financial position.
The carrying amounts reflected in the Company’s condensed consolidated balance sheets.sheets for cash and cash equivalents, receivables, other current assets, accounts payable and accrued expenses approximate fair value due to their short-term durations.
6. INVENTORY
Inventory is stated at the lower of cost or market value. Cost is determined using thefirst-in, first-out method. Inventory consists of the following:
| | | | | | | | |
| | December 31,
| | | March 31,
| |
(In thousands) | | 2007 | | | 2007 | |
|
Raw materials | | $ | 8,995 | | | $ | 7,238 | |
Work in process | | | 6,895 | | | | 4,291 | |
Finished goods | | | 7,164 | | | | 6,661 | |
| | | | | | | | |
Total | | $ | 23,054 | | | $ | 18,190 | |
| | | | | | | | |
9
| | | | | | | | |
| | September 30, | | | March 31, | |
(In thousands) | | 2008 | | | 2008 | |
Raw materials | | $ | 8,338 | | | $ | 8,373 | |
Work in process | | | 2,215 | | | | 3,060 | |
Finished goods | | | 5,168 | | | | 7,451 | |
| | | | | | |
Total | | $ | 15,721 | | | $ | 18,884 | |
| | | | | | |
ALKERMES, INC.7. ACCOUNTS PAYABLE AND SUBSIDIARIES
ACCRUED EXPENSES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
7. | ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
Accounts payable and accrued expenses consist of the following:
| | | | | | | | |
| | September 30, | | | March 31, | |
(In thousands) | | 2008 | | | 2008 | |
Accounts payable | | $ | 5,019 | | | $ | 7,042 | |
Accrued compensation | | | 8,255 | | | | 11,245 | |
Accrued interest | | | 1,750 | | | | 2,975 | |
Accrued restructuring — current portion | | | 804 | | | | 4,037 | |
Accrued other | | | 7,795 | | | | 10,747 | |
| | | | | | |
Total | | $ | 23,623 | | | $ | 36,046 | |
| | | | | | |
| | | | | | | | |
| | December 31,
| | | March 31,
| |
(In thousands) | | 2007 | | | 2007 | |
|
Accounts payable | | $ | 9,127 | | | $ | 12,097 | |
Accrued expenses related to collaborative arrangements | | | 747 | | | | 16,155 | |
Accrued compensation | | | 9,385 | | | | 10,917 | |
Accrued other | | | 10,699 | | | | 6,686 | |
| | | | | | | | |
Total | | $ | 29,958 | | | $ | 45,855 | |
| | | | | | | | |
8. RESTRUCTURING
In March 2008, the Company announced the decision by Eli Lilly and Company to discontinue the AIR® Insulin development program. As a result, the Company terminated approximately 150 employees and closed its commercial manufacturing facility in Chelsea, MA (the “2008 Restructuring”). In connection with the 2008 Restructuring, the Company recorded net restructuring charges of $6.9 million in the year ended March 31, 2008. At September 30, 2008, the Company had paid in cash approximately $3.5 million in connection with the 2008 Restructuring.
Restructuring activity during the six months ended September 30, 2008 for the 2008 Restructuring is as follows:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | Other | | | | |
| | Facility | | | | | | | Contract | | | | |
(In thousands) | | Closure | | | Severance | | | Losses | | | Total | |
Balance, April 1, 2008 | | $ | 4,930 | | | $ | 2,881 | | | $ | 37 | | | $ | 7,848 | |
Additions | | | — | | | | 78 | | | | 70 | | | | 148 | |
Payments | | | (490 | ) | | | (2,952 | ) | | | (107 | ) | | | (3,549 | ) |
Other adjustments | | | 99 | | | | — | | | | — | | | | 99 | |
| | | | | | | | | | | | |
Balance, September 30, 2008 (1) | | $ | 4,539 | | | $ | 7 | | | $ | — | | | $ | 4,546 | |
| | | | | | | | | | | | |
| | |
8. (1) | SALE OF INVESTMENT IN RELIANT PHARMACEUTICALS, INC. | The restructuring liability at September 30, 2008 consists of $0.8 million classified as current and $3.7 million classified as long-term in the accompanying condensed consolidated balance sheet. |
In June 2004, the Company and its former collaborative partner Genentech, Inc. announced the decision to discontinue commercialization of NUTROPIN DEPOT® (the “2004 Restructuring”). In connection with the 2004
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ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restructuring, the Company recorded charges of $11.5 million in the year ended March 31, 2005. During the six months ended September 30, 2008, the Company paid $0.1 million in facility closure costs and recorded an adjustment of $0.1 million to reduce the restructuring charges accrued in connection with the 2004 Restructuring to zero. As of September 30, 2008, the 2004 Restructuring was complete.
9. SHARE-BASED COMPENSATION
Share-based compensation expense for the three and six months ended September 30, 2008 and 2007 is as follows:
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
| | September 30, | | | September 30, | |
(In thousands) | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
Cost of goods manufactured | | $ | 428 | | | $ | 334 | | | $ | 857 | | | $ | 960 | |
Research and development | | | 1,282 | | | | 1,785 | | | | 2,870 | | | | 3,636 | |
Selling, general and administrative | | | 2,104 | | | | 2,429 | | | | 4,582 | | | | 5,699 | |
| | | | | | | | | | | | |
Total | | $ | 3,814 | | | $ | 4,548 | | | $ | 8,309 | | | $ | 10,295 | |
| | | | | | | | | | | | |
At September 30, 2008 and March 31, 2008, $0.5 million and $0.3 million, respectively, of share-based compensation cost was capitalized and recorded as Inventory in the condensed consolidated balance sheets.
10. EXTINGUISHMENT OF DEBT
During the six months ended September 30, 2008, the Company purchased, in three privately negotiated transactions, $75.0 million in original principal amount of its outstanding 7% Notes for $71.8 million. As a result of the purchases, $95.0 million principal amount of the 7% Notes remains outstanding at September 30, 2008. The Company recorded a loss on the extinguishment of the notes of $2.0 million during the six months ended September 30, 2008, which was recorded as interest expense.
11. INCOME TAXES
The Company records a deferred tax asset or liability based on the difference between the financial statement and tax bases of assets and liabilities, as measured by enacted tax rates assumed to be in effect when these differences reverse. At September 30, 2008, the Company determined that it is more likely than not that the deferred tax assets may not be realized and a full valuation allowance continues to be recorded.
The income tax benefit in the amount of $0.1 million and income tax provision of $1.0 million for the three and six months ended September 30, 2008, respectively, and the income tax provision of $0.2 million and $2.6 million for the three and six months ended September 30, 2007, respectively, related to the U.S. alternative minimum tax (“AMT”). Included in the $0.1 million benefit for the three months ended September 30, 2008 is $0.1 million which represents the amount the Company estimates it will benefit from as a result of the recently enactedHousing and Economic Recovery Act of 2008. This legislation allows for certain taxpayers to forego bonus depreciation in lieu of a refundable cash credit based on certain qualified asset purchases. The utilization of tax loss carryforwards is limited in the calculation of AMT and, as a result, a federal tax charge was recorded in the three and six months ended September 30, 2008 and 2007. The AMT liability is available as a credit against future tax obligations upon the full utilization or expiration of the Company’s net operating loss carryforward.
12. COMMITMENTS AND CONTINGENCIES
From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of business. The Company is not aware of any such proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its business, financial condition or results of operations.
In November 2007, Reliant Pharmaceuticals, Inc. (“Reliant”) was acquired by GlaxoSmithKline (“GSK”). Under the terms of the acquisition, Alkermesthe Company received $166.9 million upon the closing of the transaction in December 2007 in exchange for the Company’s investment in Series C convertible, redeemable preferred stock of Reliant. The Company is entitled to receive up to an additional $7.7 million of funds held in escrow subject to the terms of an escrow agreement between GSK and Reliant. The escrowed funds represent the maximum potential amount of future payments that may be payable to GSK under the terms of the escrow agreement, which is effective for a
12
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
period of 15 months following the closing of the transaction. The Company has not recorded a liability related to the indemnification to GSK as the Company currently believes that it is remote that any of the escrowed funds will be needed to indemnify GSK for any losses it might incur related to the representations and warranties made by Reliant in connection with the acquisition.
This transaction was recorded as a non-operating gain on sale of investment in Reliant Pharmaceuticals, Inc. of $174.6 million in the three and nine months ended December 31, 2007. The $7.7 million of funds held in escrow is included within other assets in the condensed consolidated balance sheet as of December 31, 2007. The Company purchased the Series C convertible, redeemable preferred stock of Reliant for $100.0 million in December 2001. The Company’s investment in Reliant had a carrying value of $0 at the time of the sale.
The Company records a deferred tax asset or liability based on the difference between the financial statement and tax bases of assets and liabilities, as measured by enacted tax rates assumed to be in effect when these differences reverse. As of December 31, 2007, the Company determined that it is more likely than not that the deferred tax assets may not be realized and a full valuation allowance continues to be recorded.
The provision for income taxes in the amount of $3.2 million and $5.8 million for the three and nine months ended December 31, 2007, respectively, and $0.4 million and $0.8 million for the three and nine months ended December 31, 2006, respectively, relates to the U.S. alternative minimum tax (“AMT”). The utilization of tax loss carryforwards is limited in the calculation of AMT and as a result, a federal tax charge was recorded in the three and nine months ended December 31, 2007 and 2006. The current AMT liability is available as a credit against future tax obligations upon the full utilization or expiration of the Company’s net operating loss carryforward. The provision for income taxes reflects tax recognition of the portion of the nonrefundable milestone payments the Company received from Cephalon, Inc. (“Cephalon”) under its collaborative arrangement which have not been fully recognized for financial reporting purposes as of December 31, 2007.
The Company adopted FIN No. 48 on April 1, 2007. The implementation of FIN No. 48 did not have a material impact on the Company’s condensed consolidated financial statements. At the adoption date of
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ALKERMES, INC. AND SUBSIDIARIES
13. SEGMENT INFORMATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
April 1, 2007, and also at December 31, 2007, the Company had no significant unrecognized tax benefits. The tax years 1993 through 2006 remain open to examination by major taxing jurisdictions to which the Company is subject, which are primarily in the United States (“U.S.”), as carryforward attributes generated in years past may still be adjusted upon examination by the Internal Revenue Service (“IRS”) or state tax authorities if they have or will be used in a future period. The Company is currently in the process of conducting a study of its research and development credit carryforwards. This study may result in an adjustment to the Company’s research and development credit carryforwards, however, until the study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position under FIN No. 48. A full valuation allowance has been provided against the Company’s research and development credits and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the condensed consolidated balance sheet or statement of income if an adjustment were required.
In addition, the Company recently concluded a study of its net operating loss (“NOL”) carryforwards to determine whether such amounts are limited under IRC Sec. 382. The Company does not believe the limitations will significantly impact its ability to offset income with available NOLs.
The Company has elected to include interest and penalties related to uncertain tax positions as a component of its provision for taxes. For the three and nine months ended December 31, 2007, the Company did not recognize any accrued interest and penalties in its condensed consolidated financial statements.
On October 10, 2006, a purported shareholder derivative lawsuit, captioned “Thomas Bennett, III vs. Richard Pops et al.” and docketed as CIV-06-3606, was filed ostensibly on the Company’s behalf in Middlesex County Superior Court, Massachusetts. The complaint in that lawsuit alleged, among other things that in connection with certain stock option grants made by the Company, certain of its directors and officers committed violations of state law, including breaches of fiduciary duty. The complaint named the Company as a nominal defendant, but did not seek monetary relief from the Company. The lawsuit sought recovery of damages allegedly caused to the Company as well as certain other relief, including an order requiring the Company to take action to enhance its corporate governance and internal procedures. The defendants moved to dismiss the lawsuit and, following oral argument, the Massachusetts Superior Court issued a decision dated July 10, 2007 granting the defendants’ motion to dismiss the lawsuit in its entirety. The plaintiff did not appeal the Court’s decision and the plaintiff’s time to appeal has expired.
The Company has received four letters, allegedly sent on behalf of owners of its securities, which claim, among other things, that certain of the Company’s officers and directors breached their fiduciary duties to the Company by, among other allegations, allegedly violating the terms of its stock option plans, allegedly violating GAAP by failing to recognize compensation expenses with respect to certain option grants during certain years, and allegedly publishing materially inaccurate financial statements relating to the Company. The letters demand, among other things, that the Company’s Board of Directors take action on its behalf to recover from the current and former officers and directors identified in the letters the damages allegedly sustained by the Company as a result of their alleged conduct, among other amounts. The letters do not seek any monetary recovery from the Company. The Company’s Board of Directors appointed a special independent committee of the Board of Directors to investigate, assess and evaluate the allegations contained in these and any other demand letters relating to the Company’s stock option granting practices and to report its findings, conclusions and recommendations to the Company’s Board of Directors. The special independent committee was assisted by independent outside legal counsel. In November 2006, based on the results of its investigation, the special independent committee of the Company’s Board of Directors concluded that the assertions contained in the demand letters lacked merit, that nothing had come to its attention that would cause it to believe that there are any instances where management of the Company or the Compensation Committee of the Company had retroactively selected a date for the grant of stock options during the 1995 through 2006 period, and that it
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ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
would not be in the Company’s best interests or the best interests of the Company’s shareholders to commence litigation against its current or former officers or directors as demanded in the letters. The findings and conclusions of the special independent committee of the Company’s Board of Directors have been presented to and adopted by the Company’s Board of Directors.
From time to time, the Company may be subject to other legal proceedings and claims in the ordinary course of business. The Company is not aware of any such proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its business, financial condition or results of operations.
The Company operates as one business segment, which is the business of developing, manufacturing and commercializing innovative medicines designed to yield better therapeutic outcomes and improve the lives of patients with serious disease. The Company’s chief decision maker, the Chief Executive Officer, reviews the Company’s operating results on an aggregate basis and manages the Company’s operations as a single operating unit.
During the nine months ended December 31, 2007, in connection with the Company’s publicly announced share repurchase program, the Company repurchased 1,919,327 shares of treasury stock for $27.6 million. In addition, the Company executed three broker-assisted trades to purchase 358,867 shares of treasury stock at an aggregate cost of $5.7 million in December 2007 that were not settled until January 2008 and have not been reflected in the Company’s condensed consolidated financial statements.
On February 7, 2008, the Company entered into an agreement for an Accelerated Share Repurchase Transaction (the “ASR”) with Morgan Stanley & Co. Incorporated (“Morgan Stanley”) pursuant to which the Company will repurchase $60.0 million of its outstanding common stock from Morgan Stanley. The Company is acquiring these shares as part of a previously announced share repurchase program of up to $175.0 million approved by the Company’s Board of Directors. Under the ASR, the final price of shares repurchased will be determined based on a discount to the volume weighted average trading price of the Company’s common stock over a period not to exceed three months. Depending on the final price and number of shares being repurchased, Morgan Stanley may deliver additional shares to the Company at the completion of the transaction, or the Company may, at its option, deliver to Morgan Stanley either cash or shares. The Company expects that Morgan Stanley will purchase shares of the Company’s common stock from time to time in the open market in connection with the ASR and may also sell shares in the open market from time to time.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Alkermes, Inc. (“Alkermes” or the “Company” as(as used in this section, together with our subsidiaries, “us”, “we”, “our” or “our”the “Company”) is a biotechnology company that uses proprietary technologies and know-howcommitted to createdeveloping innovative medicines designed to yield better therapeutic outcomes for patients with serious disease. Alkermes manufacturesimprove patients’ lives. We manufacture RISPERDAL® CONSTA®, marketed by divisions of Johnson & Johnson, for schizophrenia and developed and manufacturesmanufacture VIVITROL®, marketed in the U.S. primarily by Cephalon, Inc. (“Cephalon”). The company’s for alcohol dependence. Our pipeline includes extended-release injectable, pulmonary and oral products for the treatment of prevalent, chronic diseases, such as central nervous system disorders, addiction and diabetes. Alkermes is headquarteredHeadquartered in Cambridge, Massachusetts, withwe have research and manufacturing facilities in Massachusetts and Ohio.
We have funded our operations primarily with funds generated by our business operations and through public offerings and private placements of debt and equity securities, bank loans, term loans, equipment financing arrangements and payments received under research and development agreements and other agreements with collaborators. We expect to incur significant additional research and development and other costs in connection with certain collaborative arrangements and as we expand the development of our proprietary product candidates, including costs related to preclinical studies, clinical trials and facilities expansion. Our costs, including research and development costs for our product candidates and selling, marketing and promotion expenses for any future products to be marketed by us or our collaborators, if any, may exceed revenues in the future, which may result in losses from operations.
Forward-Looking Statements
Any statements herein or otherwise made in writing or orally by us with regard to our expectations as to financial results and other aspects of our business may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements concerning future operating results, the achievement of certain business and operating goals, including those related to commercialization of our products, manufacturing revenues, royalty revenues, research and development revenues under collaborative arrangements, net collaborative profit, research and development activities and spending, plans for clinical trials and regulatory approvals, spending relating to selling and marketing income taxes,and clinical development activities, financial goals and projections of capital expenditures, recognition of revenues, and future financings. These statements relate to our future plans, objectives, expectations and intentions and may be identified by words like “believe,” “expect,” “designed,” “may,” “will,” “should,” “seek,” or “anticipate,” and similar expressions.
Although we believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, the forward-looking statements contained in this document are neither promises nor guarantees;guarantees, and our business is subject to significant risk and uncertainties and there can be no assurance that our actual results will not differ materially from our expectations. These forward looking statements include, but are not limited to, statements concerning: the achievement of certain business and operating milestones and future operating results and profitability; continued revenue growth from RISPERDAL CONSTA; the commercialization of VIVITROL in the U.S. by Cephalon and in Russia and countries in the Commonwealth of Independent States by Cilag GmbH International (“Cilag”), a subsidiary of Johnson & Johnson; recognition of milestone payments from our partners related to the future sales of VIVITROL; the successful continuation of development activities for our programs, including exenatide once weekly; the successful manufacture of our products and product candidates, including RISPERDAL CONSTA and VIVITROL at a commercial scale, and the successful manufacture of exenatide once weekly by Amylin Pharmaceuticals, Inc. (“Amylin”); and the building of a selling and marketing infrastructure for VIVITROL. Factors which could cause actual results to differ materially from our expectations set forth in our forward-looking statements include, among others: (i) manufacturing and royalty revenues forfrom RISPERDAL CONSTA may not continue to grow, or even decline, particularly because we rely on our partner, Janssen Pharmaceutica, Inc., a division of Johnson & Johnson,Ortho-McNeil-Janssen Pharmaceuticals, Inc. and Janssen Pharmaceutica International, a division of Cilag International (together, “Janssen”), to forecast and market this product; (ii) we may be unable to manufacture RISPERDAL CONSTA and VIVITROL in sufficient quantities and with sufficient yields to meet Janssen’sour partners’ requirements or to add additional production capacity for RISPERDAL CONSTA and VIVITROL, or unexpected events could interrupt manufacturing operations at our RISPERDAL CONSTA and VIVITROL manufacturing facility, which is the sole source of supply for that product;these products; (iii) manufacturing and other revenues for VIVITROL may not grow, or even decline; (iv) we may be unable to manufacturedevelop the selling and marketing capabilities, and/or infrastructure, necessary to successfully commercialize VIVITROL; (iv) Cilag may be unable to receive approval for VIVITROL for the treatment of opioid dependence in sufficient quantitiesRussia and with sufficient yieldsfor the treatment of alcohol and opioid dependence in the other countries in the CIS; (v) Cilag may be unable to meet commercial requirements,successfully commercialize VIVITROL; (vi) third party payors may not cover or unexpected events could interrupt manufacturing operations at our VIVITROL facility, which is the sole source of supply for that product; (v)reimburse VIVITROL; (vii) we may be unable toscale-up and manufacture our product candidates including AIR Insulin, ALKS 27commercially or
14
economically; (viii) we may not be able to source raw materials for our production processes from third parties; (ix) we may not be able to successfully transfer manufacturing technology and ALKS 29 commercially or economically; (vi)related systems for exenatide once weekly to Amylin, and Amylin may not be able to successfully operate the manufacturing facility for exenatide once weekly; (x) our product candidates, if approved for marketing, may not be launched successfully in one or all indications for which marketing is approved and, if launched, may not produce significant revenues; (vii)(xi) we rely on our partners to determine the regulatory and marketing strategies for RISPERDAL CONSTA and our other partnered, non-proprietary programs; (xii) RISPERDAL CONSTA, VIVITROL and our product candidates in commercial use may have unintended side effects, adverse reactions or incidents of misuse and the U.S. Food and Drug Administration (“FDA”) or other health authorities could require post approval studies or require removal of our products from the market; (xiii) our collaborators could elect to terminate or delay programs at any time and disputes with collaborators or failure to negotiate acceptable new collaborative arrangements for our technologies could occur; (xiv) clinical trials may take more time or consume more resources than initially envisioned; (viii)(xv) results of earlier clinical trials may not necessarily be predictive of the safety and efficacy results in larger clinical trials; (ix)(xvi) our product candidates could be ineffective or unsafe during preclinical studies and clinical trials, and we and our collaborators may not be permitted by regulatory authorities to
13
undertake new or additional clinical trials for product candidates incorporating our technologies, or clinical trials could be delayed or terminated; (x)(xvii) after the completion of clinical trials for our product candidates and the submission for marketing approval, the U.S. Food and Drug Administration (“FDA”)FDA or foreign regulatoryother health authorities could refuse to accept such filings or could request additional preclinical or clinical studies be conducted, each of which could result in significant delays or the failure of such product to receive marketing approval; (xi)(xviii) even if our product candidates appear promising at an early stage of development, product candidates could fail to receive necessary regulatory approvals, be difficult to manufacture on a large scale, be uneconomical, fail to achieve market acceptance, be precluded from commercialization by proprietary rights of third parties or experience substantial competition in the marketplace; (xii)(xix) technological change in the biotechnology or pharmaceutical industries could render our productsand/or product candidates obsolete or non-competitive; (xiii)(xx) difficulties or set-backs in obtaining and enforcing our patents and difficulties with the patent rights of others could occur; (xiv)(xxi) we may continue to incur losses in the future; (xv)(xxvi) we may need to raise substantial additional funding to continue research and development programs and clinical trials and other operations and could incur difficulties or setbacks in raising such funds; (xvi)(xxii) we may not receive the full amount,be able to liquidate or any, of the proceeds placedotherwise recoup our investments in escrow in connection with the Reliant Pharmaceuticals, Inc. (“Reliant”) transaction due to claims against the escrow account;our asset backed debt securities and (xvii) whether we will purchase up to $175.0 million of our own stock.auction rate securities.
The forward-looking statements made in this document are made only as of the date hereof and we do not intend to update any of these factors or to publicly announce the results of any revisions to any of our forward-looking statements other than as required under the federal securities laws.
Our Strategy
We leverage our unique formulation expertise and drug development technologies to develop, both with partners and on our own, innovative and competitively advantaged drug products that enhance patient outcomes in major therapeutic areas. We enter into select collaborations with pharmaceutical and biotechnology companies to develop significant new product candidates, based on existing drugs and incorporating our technologies. In addition, we develop our own proprietary therapeutics by applying our innovative formulation expertise and drug development capabilities to create new pharmaceutical products. Each of these approaches is discussed in more detail below.
15
Product Developments
RISPERDAL CONSTA
UsingRISPERDAL CONSTA is a long-acting formulation of risperidone, a product of Janssen. RISPERDAL CONSTA is the first and only long-acting, atypical antipsychotic to be approved by the FDA. The medication uses our proprietary Medisorb® technology we developed RISPERDAL CONSTA, a long-acting formulation of Janssen’s antipsychotic drug RISPERDAL forto deliver and maintain therapeutic medication levels in the treatment of schizophrenia.body through just one injection every two weeks. Schizophrenia is a brain disorder characterized by disorganized thinking, delusions and hallucinations. Studies have demonstrated that as many as 75 percent of patients with schizophrenia have difficulty taking their oral medication on a regular basis, which can lead to worsening of symptoms. Clinical data has shown that treatment with RISPERDAL CONSTA may lead to improvements in symptoms, sustained remission and decreases in hospitalization. RISPERDAL CONSTA is administered via intramuscular injection every two weeks, alleviating the need for daily dosing.marketed by Janssen marketsand is exclusively manufactured by us. RISPERDAL CONSTA worldwide. We are the exclusive manufacturer of RISPERDAL CONSTA for Janssen, and we earn both manufacturing fees and royalties from Janssen.
RISPERDAL CONSTA was first approved by regulatory authorities in the United Kingdom (“U.K”U.K.”) and Germany in August 2002 and was approved by the FDA in October 2003. RISPERDAL CONSTA is approved in approximately 8385 countries and marketed in approximately 6360 countries, and Janssen continues to launch the product around the world.
In April 2008, we announced that our partner, Johnson & Johnson Pharmaceutical Research & Development, L.L.C. (“J&JPRD”), submitted a Supplemental New Drug Application (“sNDA”) for RISPERDAL CONSTA to the FDA seeking approval for adjunctive maintenance treatment to delay the occurrence of mood episodes in patients with frequently relapsing bipolar disorder (“FRBD”). FRBD is defined as four or more manic or depressive episodes in the previous year that require a doctor’s care. The condition may affect 10 to 20 percent of the 27 million people with bipolar disorder.
In FebruaryMay 2008, we and Janssen agreed to begin development of a four-week formulation of RISPERDAL CONSTA, which could offer patients and physicians another dosing option.
In May 2008, the results of a study sponsored by Janssen were presented at the 14th Biennial Winter WorkshopAmerican Psychiatric Association (“APA”) 161st Annual Meeting in Washington D.C. This twenty-four month, open-label, active-controlled, international study investigated whether treatment with Risperidone Long-Acting Injection (“RLAI”), compared with oral quetiapine when tested in a routine care setting within general psychiatric services, had an effect on Schizophrenialong-term efficacy maintenance as measured by time to relapse in patients with schizophrenia. The results demonstrated that the average relapse-free time was significantly longer in patients treated with RLAI (607 days) compared to quetiapine (533 days) (p<0.0001). Furthermore, over the 24 month treatment period, relapse occurred in 16.5 percent of patients treated with RLAI and Bipolar Disorders31.3 percent in Montreux, Switzerland. This one-year, phase 3 trial was the first placebo-controlled studyquetiapine treatment arm.
In July 2008, we announced that our partner, J&JPRD, submitted a sNDA for RISPERDAL CONSTA to explore the use of a long-acting injectable medicationFDA for approval as monotherapy in the maintenance treatment of frequently relapsing bipolar I disorder (FRBD). FRBD, defined as four or more manic or depressive
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AIR parathyroid hormoneALKS 33
ALKS 33 is a novel opioid modulator, identified from the library of compounds in-licensed from Rensselaer Polytechnic Institute (“RPI”). These compounds represent an opportunity for us to develop important therapeutics for a broad range of diseases and medical conditions, including addiction, pain and other central nervous system disorders. In July 2008, we announced positive preclinical results for three proprietary molecules targeting opioid receptors, including ALKS 33. The study results included efficacy data from an ethanol drinking behavior model in rodents, a well-characterized model for evaluating the effects of potential therapeutics targeting opioid receptors. Results showed that single, oral doses of our novel molecules significantly reduced the ethanol drinking behavior in rodents, with an average reduction from baseline ranging from 35 percent to 50 percent for the proprietary molecules compared to 10 percent for the active control (P less than 0.05). Details from an evaluation of thein vivopharmacology, pharmacokinetics andin vitrometabolism were also presented. Data showed that the molecules have improved metabolic stability compared to the active control when cultured with human hepatocytes (liver cells), suggesting that they are not readily metabolized by the liver. Pharmacokinetic results showed that the oral bioavailability of ALKS 33 was significantly greater than that of the active control. We are on track to file our Investigational New Drug Application (“IND”) and Lilly completedbegin a phase 1 study of inhaled formulations of parathyroid hormone (“PTH”)ALKS 33 in healthy post menopausal women. The data fromvolunteers by the study indicates that additional feasibility and formulation work are required. At this time, we and Lilly are not planning to pursue further developmentend of inhaled formulations of PTH.
calendar 2008.
Critical Accounting Policies
A summaryThe discussion and analysis of significantour financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting policiesprinciples generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and a descriptionassumptions that affect the reported amounts of accounting policies that are considered criticalassets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may be found indiffer from these estimates under different assumptions or conditions. Refer to Part II, Item 7 of our Annual Report onForm 10-K for the year ended March 31, 20072008 in the “Critical Accounting Policies” section. Other than as described below,section for a discussion of our critical accounting policies and estimates are as set forth in theForm 10-K.
Provision for Income Taxes— We record a deferred tax asset or liability based on the difference between the financial statement and tax bases of assets and liabilities, as measured by enacted tax rates assumed to be in effect when these differences reverse. As of December 31, 2007, we determined that it was more likely than not that the deferred tax assets may not be realized and a full valuation allowance continues to be recorded.
We adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48,“Accounting for Uncertainty in Income Taxes”(“FIN No. 48”) on April 1, 2007. The implementation of FIN No. 48 did not have a material impact on our condensed consolidated financial statements. At the adoption date of April 1, 2007, and also at December 31, 2007, we had no significant unrecognized tax benefits. The tax years 1993 through 2006 remain open to examination by major taxing jurisdictions to which we are subject, which are primarily in the U.S., as carryforward attributes generated in years past may still be adjusted upon examination by the IRS or state tax authorities if they have or will be used in a future period. We are currently in the process of conducting a study of our research and development credit carryforwards. This study may result in an adjustment to our research and development credit carryforwards, however, until the study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position under FIN No. 48. A full valuation allowance has been provided against our research and development credits, and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the condensed consolidated balance sheet or statement of income if an adjustment were required.
In addition, we recently concluded a study of our net operating loss (“NOL”) carryforwards to determine whether such amounts are limited under IRC Sec. 382. We do not believe the limitations will significantly impact our ability to offset income with available NOLs.
We have elected to include interest and penalties related to uncertain tax positions as a component of our provision for taxes. For the three and nine months ended December 31, 2007, we did not recognize any accrued interest and penalties in our condensed consolidated financial statements.
policies.
Results of Operations
Net income for the three months ended December 31, 2007September 30, 2008 was $168.9$1.7 million, or $1.66$0.02 per common share — basic and $1.63diluted, as compared to net income of $7.7 million, or $0.08 per common share — basic and $0.07 per common share — diluted, for the three months ended September 30, 2007.
Net income for the six months ended September 30, 2008 was $31.4 million, or $0.33 per common share — basic and $0.32 per common share — diluted, as compared to net income of $2.9$16.4 million, or $0.03$0.16 per common share — basic and diluted, for the threesix months ended December 31, 2006.
Net income for the nine months ended December 31, 2007 was $185.3 million, or $1.82 per common share — basic and $1.78 per common share — diluted, as compared to net income of $5.9 million, or $0.06 per common share — basic and diluted, for the nine months ended December 31, 2006.
Total manufacturing revenues were $14.3 million and $69.9 million for the three and nine months ended December 31, 2007, respectively, as compared to $28.8 million and $77.1 million for the three and nine months ended December 31, 2006, respectively.
RISPERDAL CONSTA manufacturing revenues were $12.9 million and $66.1 million for the three and nine months ended December 31, 2007, respectively, as compared to $23.6 million and $63.6 million for the three and nine months ended December 31, 2006, respectively. The decrease in RISPERDAL CONSTASeptember 30, 2007.
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Revenues
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
| | September 30, | | | September 30, | |
(In millions) | | 2008 | | | 2007 | | | Change | | | 2008 | | | 2007 | | | Change | |
Manufacturing revenue: | | | | | | | | | | | | | | | | | | | | | | | | |
RISPERDAL CONSTA | | $ | 30.7 | | | $ | 22.9 | | | $ | 7.8 | | | $ | 66.7 | | | $ | 53.1 | | | $ | 13.6 | |
VIVITROL | | | 2.3 | | | | 1.2 | | | | 1.1 | | | | 5.0 | | | | 2.5 | | | | 2.5 | |
| | | | | | | | | | | | | | | | | | |
Total manufacturing revenue | | | 33.0 | | | | 24.1 | | | | 8.9 | | | | 71.7 | | | | 55.6 | | | | 16.1 | |
| | | | | | | | | | | | | | | | | | |
Royalty revenue | | | 8.4 | | | | 7.4 | | | | 1.0 | | | | 17.0 | | | | 14.3 | | | | 2.7 | |
Research and development revenue under collaborative arrangements | | | 5.3 | | | | 21.2 | | | | (15.9 | ) | | | 36.7 | | | | 44.7 | | | | (8.0 | ) |
Net collaborative profit | | | 0.6 | | | | 5.9 | | | | (5.3 | ) | | | 1.9 | | | | 12.9 | | | | (11.0 | ) |
| | | | | | | | | | | | | | | | | | |
Total revenues | | $ | 47.3 | | | $ | 58.6 | | | $ | (11.3 | ) | | $ | 127.3 | | | $ | 127.5 | | | $ | (0.2 | ) |
| | | | | | | | | | | | | | | | | | |
The increase in RISPERDAL CONSTA manufacturing revenues for the three and six months ended December 31, 2007,September 30, 2008, as compared to the three and six months ended December 31, 2006,September 30, 2007, was primarily due to a decrease25% and 16% increase, respectively, in units of RISPERDAL CONSTA shipped to Janssen, partially offset by an increase in the net sales price of units of RISPERDAL CONSTA shipped to Janssen. The increase in RISPERDAL CONSTA revenues for the nine months ended December 31, 2007, as compared to the nine months ended December 31, 2006,There was due to an increase in the net sales price of units of RISPERDAL CONSTA shipped to Janssen, partially offset byalso a slight decrease in units of RISPERDAL CONSTA shipped to Janssen. The increase in the net sales price of RISPERDAL CONSTA in the three and ninesix months ended December 31, 2007,September 30, 2008, as compared to the three and ninesix months ended December 31, 2006,September 30, 2007, which was due in part to fluctuations in the exchange ratio of the U.S. dollar and the foreign currencies of the countries in which the product was sold. See Part I, Item 3. Quantitative“Quantitative and Qualitative Disclosures about Market RiskRisk” for information on foreign currency exchange rate risk related to RISPERDAL CONSTA revenues. Shipments of RISPERDAL CONSTA were lower in the three and nine months ended December 31, 2007, as compared to the three and nine months ended December 31, 2006, as Janssen manages its levels of product inventory, due in part to increased efficiencies and reliability in our RISPERDAL CONSTA processes. We expect manufacturing revenues related to RISPERDAL CONSTA to increase for the three months ended March 31, 2008, as compared to the three months ended December 31, 2007.
Under our manufacturing and supply agreement with Janssen, we earn manufacturing revenues when product is shipped to Janssen, based on a percentage of Janssen’s estimated unit net sales price. Revenues include a quarterly adjustment from Janssen’s estimated unit net sales price to Janssen’s actual unit net sales price for product shipped. ForIn the three and ninesix months ended December 31,September 30, 2008 and 2007, and 2006, our RISPERDAL CONSTA manufacturing revenues were based on an average of 7.5% of Janssen’s unit net sales price of RISPERDAL CONSTA. We anticipate that we will earn manufacturing revenues at 7.5% of Janssen’s unit net sales price of RISPERDAL CONSTA for product shipped in the fiscal year ending March 31, 20082009 and beyond.
VIVITROL manufacturing revenues were $1.4 million and $3.8 million for the three and nine months ended December 31, 2007, respectively, as compared to $5.2 million and $13.5 million for the three and nine months ended December 31, 2006, respectively. Under our agreements with Cephalon, we bill Cephalon for all manufacturing costs related to VIVITROL.
The decrease in VIVITROL manufacturing revenues for the three and ninesix months ended December 31, 2007, as compared to the threeSeptember 30, 2008 consisted of $1.7 million and nine months ended December 31, 2006, was due to lower manufacturing activity and shipments of VIVITROL. We began shipping VIVITROL to Cephalon for the first time during the quarter ended June 30, 2006, and during that quarter and the remainder of the fiscal year ended March 31, 2007 we shipped quantities sufficient to build inventory to support the commercial launch of the product. We are currently managing our manufacturing volumes of VIVITROL to avoid excess inventory and shipped a small quantity of product to Cephalon during the three and nine months ended December 31, 2007. VIVITROL manufacturing revenues for the three and nine months ended December 31, 2007 included $0 and $2.2$2.8 million, respectively, of billings to Cephalon for idle capacity costs, as comparedfailed batches and $0 and $1.4 million, respectively, for shipments of VIVITROL to $1.5Cephalon and $0.4 million for the three and nine months ended December 31, 2006.shipments of VIVITROL to Janssen-Cilag to support commercialization of VIVITROL in Russia. In addition, VIVITROL manufacturing revenues for the three and ninesix months ended December 31, 2007September 30, 2008 included $0.1$0.2 million and $0.3$0.4 million, respectively, of milestone revenue related to manufacturing profit on VIVITROL under our arrangement with Cephalon, which isequals a 10% markup on VIVITROL cost of goods manufactured as compared to $0.5 million and $1.2 million for the three and nine months ended December 31, 2006, respectively.draws down from unearned milestone revenue from Cephalon.
All royaltyVIVITROL manufacturing revenues for the three and ninesix months ended December 31,September 30, 2007 consisted of billings to Cephalon for idle capacity costs and 2006no product was shipped to them during these reporting periods. VIVITROL manufacturing revenues for the three and six months ended September 30, 2007 included $0.1 million and $0.2 million, respectively, of milestone revenue related to the manufacturing profit on VIVITROL under our arrangement with Cephalon, which equals a 10% markup on VIVITROL cost of goods manufactured and draws down from unearned milestone revenue from Cephalon.
Royalty revenues for the three and six months ended September 30, 2008 and 2007 were related to sales of RISPERDAL CONSTA. Under our license agreements with Janssen, we record royalty revenues equal to 2.5% of Janssen’s net sales of RISPERDAL CONSTA in the period that the product is sold by Janssen. Royalty revenues were $7.4 million for the three and six months ended December 31, 2007,September 30, 2008 were based on RISPERDAL CONSTA sales of $295.1$337.5 million and $21.7$680.7 million, respectively. Royalty revenues for the ninethree and six months ended December 31,September 30, 2007 were based on RISPERDAL CONSTA sales of $867.4 million, as compared to $5.7 million for the three months ended December 31, 2006, based on RISPERDAL CONSTA sales of $226.3$293.6 million and $16.6$572.3 million, for the nine months ended December 31, 2006, based on RISPERDAL CONSTA sales of $663.6 million.respectively. The increase in the net sales of RISPERDAL CONSTA infor the three and ninesix months ended December 31, 2007,September 30, 2008, as compared
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VIVITROL. During the three and nine months ended December 31, 2007, we made payments of $0 and $5.2 million, respectively, to Cephalon to reimburse their net losses on VIVITROL, and we received payments of $3.8 million and $14.1 million, respectively, from Cephalon to reimburse us for our expenses on VIVITROL, which we incurred after the cumulative loss cap was reached. In the aggregate, net collaborative profit of $5.1 million and $18.0 million for the three and nine months ended December 31, 2007, respectively, consisted of $1.3 million and $9.2 million of milestone revenue, respectively, in addition to net payments from Cephalon of $3.8 million and $8.8 million, respectively.
Net collaborative profit was $8.4 million and $29.8 million for the three and nine months ended December 31, 2006, respectively. For the three and nine months ended December 31, 2006, we recognized $7.3 million and $50.8 million of milestone revenue — cost recovery, respectively, to offset net losses on VIVITROL that we funded. In addition, during the three and nine months ended December 31, 2006, following FDA approval of VIVITROL, we recognized $1.2 million and $3.8 million, respectively, of milestone revenue related to the licenses provided to Cephalon to commercialize VIVITROL. During the three and nine months ended December 31, 2006, we made payments of $0 and $24.8 million, respectively, to Cephalon to reimburse their net losses on VIVITROL. In the aggregate, net collaborative profit of $8.4 million and $29.8 million for the three and nine months ended December 31, 2006, respectively, consisted of approximately $8.4 million and $54.6 million of milestone revenue, respectively, partially offset by $0 and $24.8 million, respectively, of payments we made to Cephalon to reimburse their net losses on VIVITROL.
Beginning January 1, 2008, all net profits or losses earned on VIVITROL within the collaboration will be sharedare divided between us and Cephalon.Cephalon in approximately equal shares. The net profits earned or losses incurred on VIVITROL beginning January 1, 2008 will beare dependent upon end-market sales which are difficult to predict at this time, and on the level of expenditures by both us and Cephalon in developing, manufacturing and commercializing VIVITROL, all of which is subject to change.
Cost Gross sales of goods manufactured was $7.5VIVITROL by Cephalon were $4.7 million and $26.9$9.5 million for the three and ninesix months ended December 31, 2007,September 30, 2008, respectively, and $13.0$4.7 million and $34.1$8.8 million for the three and ninesix months ended December 31, 2006,September 30, 2007, respectively. Through September 30, 2008, the cumulative net losses on VIVITROL were $190.7 million, of which $75.9 million was incurred by us on behalf of the collaboration and $114.8 million was incurred by Cephalon on behalf of the collaboration.
Cost of goods manufactured for RISPERDAL CONSTA was $5.9 million and $23.0 million forFor the three and ninesix months ended December 31, 2007, respectively, and $8.2 million and $21.8 million forSeptember 30, 2008, we recognized no milestone revenue — cost recovery, as VIVITROL had reached the cumulative loss cap prior to the reporting periods. For the three and ninesix months ended December 31, 2006, respectively.September 30, 2007, we recognized $0 and $5.3 million, respectively, of milestone revenue — cost recovery, respectively, to offset net losses on VIVITROL that we funded under the cumulative loss cap.
For the three and six months ended September 30, 2008 and 2007, we recognized $1.3 million and $2.6 million, respectively, of milestone revenue related to the licenses provided to Cephalon to commercialize VIVITROL. The decrease inlicense revenue is recognized on a straight-line basis over 10 years.
During the three and six months ended September 30, 2008, we made net payments of $0.7 million to Cephalon under the product loss sharing terms of the arrangement. During the three and six months ended September 30, 2007, we received net payments of $4.6 and $5.0 million, respectively, from Cephalon under the product loss sharing terms of the arrangement.
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