UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2009September 30, 2010
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o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-14131
ALKERMES, INC.
(Exact name of registrant as specified in its charter)
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PENNSYLVANIA | | 23-2472830 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
852 Winter Street, Waltham, MA 02451-142002451
(781) 609-6000
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): Yesoþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer or a smaller reporting company. See the definitions of “largeand large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filerþ | | Accelerated filero | | Non-accelerated filero | | Smaller reporting companyo |
| | | | (Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yeso Noþ
The number of shares outstanding of each of the issuer’s classes of common stock was:
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| Class | | | As of FebruaryNovember 1, |
Class 2010 | | 2010 |
| Common Stock, $.01$0.01 par value | | | 94,440,904 | 95,233,058 | | |
| Non-Voting Common Stock, $.01$0.01 par value | | | | 382,632 | | |
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ALKERMES, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
INDEX
2
PART I. FINANCIAL INFORMATION
Item 1.Condensed Consolidated Financial Statements:
ALKERMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
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| | December 31, | | March 31, | | | | | | | | | |
| | 2009 | | 2009 | | | September 30, | | March 31, | |
| | (In thousands, except share and per | | | 2010 | | 2010 | |
| | share amounts) | | | (In thousands, except share and per share amounts) | |
ASSETS | | |
CURRENT ASSETS: | | |
Cash and cash equivalents | | $ | 73,932 | | $ | 86,893 | | | $ | 37,256 | | $ | 79,324 | |
Investments — short-term | | 165,016 | | 236,768 | | | 193,222 | | 202,053 | |
Receivables | | 28,233 | | 24,588 | | | 35,770 | | 25,316 | |
Inventory | | 20,049 | | 20,297 | | | �� | 18,257 | | 20,653 | |
Prepaid expenses and other current assets | | 5,950 | | 7,500 | | | 14,696 | | 10,936 | |
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Total current assets | | 293,180 | | 376,046 | | | 299,201 | | 338,282 | |
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PROPERTY, PLANT AND EQUIPMENT, NET | | 96,332 | | 106,461 | | | 97,184 | | 96,905 | |
INVESTMENTS — LONG-TERM | | 118,531 | | 80,821 | | | 43,087 | | 68,816 | |
OTHER ASSETS | | 11,857 | | 3,158 | | | 9,660 | | 11,597 | |
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TOTAL ASSETS | | $ | 519,900 | | $ | 566,486 | | | $ | 449,132 | | $ | 515,600 | |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | |
CURRENT LIABILITIES: | | |
Accounts payable and accrued expenses | | $ | 29,560 | | $ | 36,483 | | | $ | 31,123 | | $ | 37,881 | |
Deferred revenue — current | | 2,305 | | 6,840 | | | 3,894 | | 2,220 | |
NON-RECOURSE RISPERDAL® CONSTA® SECURED 7% NOTES — CURRENT | | 25,667 | | 25,667 | | |
Non-Recourse RISPERDAL® CONSTA® Secured 7% Notes — Current | | | — | | 51,043 | |
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Total current liabilities | | 57,532 | | 68,990 | | | 35,017 | | 91,144 | |
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NON-RECOURSE RISPERDAL CONSTA SECURED 7% NOTES — LONG-TERM | | 31,636 | | 50,221 | | |
DEFERRED REVENUE — LONG-TERM | | 5,120 | | 5,238 | | | 5,123 | | 5,105 | |
OTHER LONG-TERM LIABILITIES | | 6,386 | | 7,149 | | | 6,901 | | 6,735 | |
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Total liabilities | | 100,674 | | 131,598 | | | 47,041 | | 102,984 | |
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COMMITMENTS AND CONTINGENCIES (Note 13) | | |
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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 | | — | | — | | |
Common stock, par value, $0.01 per share; 160,000,000 shares authorized; 104,354,986 and 104,044,663 shares issued; 94,418,724 and 94,536,212 shares outstanding at December 31, 2009 and March 31, 2009, respectively | | 1,042 | | 1,040 | | |
Non-voting common stock, par value, $0.01 per share; 450,000 shares authorized; 382,632 shares issued and outstanding at December 31, 2009 and March 31, 2009 | | 4 | | 4 | | |
Treasury stock, at cost (9,936,262 and 9,508,451 shares at December 31, 2009 and March 31, 2009, respectively) | | | (129,567 | ) | | | (126,025 | ) | |
Common stock, par value, $0.01 per share; 160,000,000 shares authorized; 105,248,764 and 104,815,328 shares issued; 95,206,971 and 94,870,063 shares outstanding at September 30, 2010 and March 31, 2010, respectively | | | 1,050 | | 1,047 | |
Non-voting common stock, par value, $0.01 per share; 450,000 shares authorized; 382,632 shares issued and outstanding at September 30, 2010 and March 31, 2010 | | | 4 | | 4 | |
Treasury stock, at cost (10,041,793 and 9,945,265 shares at September 30, 2010 and March 31, 2010, respectively) | | | | (130,779 | ) | | | (129,681 | ) |
Additional paid-in capital | | 903,480 | | 892,415 | | | 921,024 | | 910,326 | |
Accumulated other comprehensive loss | | | (3,980 | ) | | | (6,484 | ) | | | (2,445 | ) | | | (3,392 | ) |
Accumulated deficit | | | (351,753 | ) | | | (326,062 | ) | | | (386,763 | ) | | | (365,688 | ) |
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Total shareholders’ equity | | 419,226 | | 434,888 | | | 402,091 | | 412,616 | |
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 519,900 | | $ | 566,486 | | | $ | 449,132 | | $ | 515,600 | |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
ALKERMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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| | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Six Months Ended | |
| | December 31, | | December 31, | | | September 30, | | September 30, | |
| | 2009 | | 2008 | | 2009 | | 2008 | | | 2010 | | 2009 | | 2010 | | 2009 | |
| | (In thousands, except per share amounts) | | | (In thousands, except per share amounts) | |
REVENUES: | | |
Manufacturing revenues | | $ | 28,650 | | $ | 20,533 | | $ | 90,289 | | $ | 92,182 | | | $ | 33,163 | | $ | 32,835 | | $ | 60,054 | | $ | 61,639 | |
Royalty revenues | | 9,970 | | 7,970 | | 27,489 | | 24,990 | | | 9,460 | | 8,818 | | 18,377 | | 17,519 | |
Product sales, net | | 5,451 | | — | | 14,320 | | — | | | 6,469 | | 4,643 | | 12,673 | | 8,869 | |
Research and development revenue under collaborative arrangements | | 81 | | 3,736 | | 2,705 | | 40,438 | | | 155 | | 1,174 | | 423 | | 2,624 | |
Net collaborative profit | | — | | 123,422 | | 5,002 | | 125,354 | | | — | | 687 | | — | | 5,002 | |
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Total revenues | | 44,152 | | 155,661 | | 139,805 | | 282,964 | | | 49,247 | | 48,157 | | 91,527 | | 95,653 | |
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EXPENSES: | | |
Cost of goods manufactured and sold | | 10,072 | | 5,536 | | 37,830 | | 31,921 | | | 13,911 | | 15,092 | | 26,576 | | 27,758 | |
Research and development | | 22,577 | | 22,669 | | 68,827 | | 64,640 | | | 23,932 | | 20,664 | | 46,909 | | 46,250 | |
Selling, general and administrative | | 17,739 | | 14,568 | | 57,632 | | 38,173 | | | 18,436 | | 20,625 | | 38,162 | | 39,893 | |
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Total expenses | | 50,388 | | 42,773 | | 164,289 | | 134,734 | | | 56,279 | | 56,381 | | 111,647 | | 113,901 | |
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OPERATING (LOSS) INCOME | | | (6,236 | ) | | 112,888 | | | (24,484 | ) | | 148,230 | | |
OPERATING LOSS | | | | (7,032 | ) | | | (8,224 | ) | | | (20,120 | ) | | | (18,248 | ) |
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OTHER EXPENSE, NET: | | |
Interest income | | 1,017 | | 2,574 | | 3,666 | | 8,883 | | | 673 | | 1,088 | | 1,525 | | 2,649 | |
Interest expense | | | (1,423 | ) | | | (2,436 | ) | | | (4,698 | ) | | | (10,905 | ) | | | (2,168 | ) | | | (1,566 | ) | | | (3,298 | ) | | | (3,275 | ) |
Other expense, net | | | (160 | ) | | | (641 | ) | | | (290 | ) | | | (1,471 | ) | | | (82 | ) | | | (67 | ) | | | (183 | ) | | | (130 | ) |
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Total other expense, net | | | (566 | ) | | | (503 | ) | | | (1,322 | ) | | | (3,493 | ) | | | (1,577 | ) | | | (545 | ) | | | (1,956 | ) | | | (756 | ) |
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(LOSS) INCOME BEFORE INCOME TAXES | | | (6,802 | ) | | 112,385 | | | (25,806 | ) | | 144,737 | | |
PROVISION (BENEFIT) FOR INCOME TAXES | | 15 | | | (330 | ) | | | (115 | ) | | 637 | | |
LOSS BEFORE INCOME TAXES | | | | (8,609 | ) | | | (8,769 | ) | | | (22,076 | ) | | | (19,004 | ) |
INCOME TAX BENEFIT | | | | (943 | ) | | | (60 | ) | | | (1,001 | ) | | | (130 | ) |
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NET (LOSS) INCOME | | $ | (6,817 | ) | | $ | 112,715 | | $ | (25,691 | ) | | $ | 144,100 | | |
NET LOSS | | | $ | (7,666 | ) | | $ | (8,709 | ) | | $ | (21,075 | ) | | $ | (18,874 | ) |
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(LOSS) EARNINGS PER COMMON SHARE: | | |
Basic | | $ | (0.07 | ) | | $ | 1.18 | | $ | (0.27 | ) | | $ | 1.51 | | |
LOSS PER COMMON SHARE: | | |
Basic and diluted | | | $ | (0.08 | ) | | $ | (0.09 | ) | | $ | (0.22 | ) | | $ | (0.20 | ) |
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Diluted | | $ | (0.07 | ) | | $ | 1.18 | | $ | (0.27 | ) | | $ | 1.49 | | |
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: | | |
Basic | | 94,784 | | 95,316 | | 94,815 | | 95,246 | | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES | | |
OUTSTANDING: | | |
Basic and diluted | | | 95,511 | | 94,886 | | 95,419 | | 94,830 | |
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Diluted | | 94,784 | | 95,818 | | 94,815 | | 96,398 | | |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
ALKERMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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| | Nine Months Ended | | | Six Months Ended | |
| | December 31, | | | September 30, | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (In thousands) | | | (In thousands) | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | |
Net (loss) income | | $ | (25,691 | ) | | $ | 144,100 | | |
Adjustments to reconcile net (loss) income to cash flows from operating activities: | | |
Net loss | | | $ | (21,075 | ) | | $ | (18,874 | ) |
Adjustments to reconcile net loss to cash flows from operating activities: | | |
Depreciation | | 20,314 | | 7,501 | | | 4,062 | | 15,482 | |
Share-based compensation expense | | 10,811 | | 11,590 | | | 9,404 | | 7,438 | |
Other non-cash charges | | 3,520 | | 4,531 | | | 1,899 | | 2,093 | |
Loss on the purchase of non-recourse RISPERDAL CONSTA secured 7% notes | | — | | 1,989 | | |
Changes in assets and liabilities: | | |
Receivables | | | (3,645 | ) | | 11,585 | | | | (10,454 | ) | | | (9,111 | ) |
Inventory, prepaid expenses and other assets | | 1,199 | | | (4,746 | ) | | 1,791 | | 10 | |
Accounts payable and accrued expenses | | | (11,199 | ) | | | (4,722 | ) | | | (7,710 | ) | | | (8,702 | ) |
Unearned milestone revenue | | — | | | (117,657 | ) | |
Deferred revenue | | | (4,653 | ) | | | (9,529 | ) | | 1,692 | | | (5,083 | ) |
Other long-term liabilities | | | (1,369 | ) | | | (1,415 | ) | | | (75 | ) | | | (920 | ) |
Payment of non-recourse RISPERDAL CONSTA secured 7% notes principal attributable to original issue discount | | | (1,574 | ) | | | (4,590 | ) | | | (6,611 | ) | | | (1,009 | ) |
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Cash flows (used in) provided by operating activities | | | (12,287 | ) | | 38,637 | | |
Cash flows used in operating activities | | | | (27,077 | ) | | | (18,676 | ) |
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CASH FLOWS FROM INVESTING ACTIVITIES: | | |
Purchase of property, plant and equipment | | | (9,197 | ) | | | (4,145 | ) | | | (6,719 | ) | | | (3,885 | ) |
Sales of property, plant and equipment | | 249 | | 7,717 | | | 206 | | 169 | |
Investment in Acceleron Pharmaceuticals, Inc. | | | (8,000 | ) | | — | | | (501) | | — | |
Purchases of investments | | | (390,818 | ) | | | (543,408 | ) | | | (240,371 | ) | | | (295,318 | ) |
Sales and maturities of investments | | 427,270 | | 540,721 | | | 276,437 | | 298,134 | |
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Cash flows provided by investing activities | | 19,504 | | 885 | | |
Cash flows provided by (used in) investing activities | | | 29,052 | | | (900 | ) |
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CASH FLOWS FROM FINANCING ACTIVITIES: | | |
Proceeds from the issuance of common stock for share-based compensation arrangements | | 182 | | 7,606 | | | 1,354 | | 183 | |
Excess tax benefit from share-based compensation | | — | | 75 | | |
Payment of non-recourse RISPERDAL CONSTA secured 7% notes principal | | | (17,676 | ) | | — | | | | (45,397 | ) | | | (11,824 | ) |
Purchase of non-recourse RISPERDAL CONSTA secured 7% notes | | — | | | (67,185 | ) | |
Payment of capital leases | | — | | | (47 | ) | |
Purchase of common stock for treasury | | | (2,684 | ) | | | (17,948 | ) | | — | | | (2,684 | ) |
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Cash flows used in financing activities | | | (20,178 | ) | | | (77,499 | ) | | | (44,043 | ) | | | (14,325 | ) |
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NET DECREASE IN CASH AND CASH EQUIVALENTS | | | (12,961 | ) | | | (37,977 | ) | | | (42,068 | ) | | | (33,901 | ) |
CASH AND CASH EQUIVALENTS — Beginning of period | | 86,893 | | 101,241 | | | 79,324 | | 86,893 | |
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CASH AND CASH EQUIVALENTS — End of period | | $ | 73,932 | | $ | 63,264 | | | $ | 37,256 | | $ | 52,992 | |
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SUPPLEMENTAL CASH FLOW DISCLOSURE: | | |
Cash paid for interest | | $ | 3,706 | | $ | 7,663 | | | $ | 1,684 | | $ | 2,784 | |
Cash paid for taxes | | $ | 53 | | $ | 435 | | | $ | 31 | | $ | 53 | |
Non-cash investing and financing activities: | | |
Purchased capital expenditures included in accounts payable and accrued expenses | | $ | 3,933 | | $ | 1,883 | | | $ | 578 | | $ | 1,967 | |
Receipt of Alkermes shares for the purchase of stock options or to satisfy minimum tax withholding obligations related to stock based awards | | $ | 858 | | $ | 707 | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) — (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Alkermes, Inc. (the “Company” or “Alkermes”) is a fully integrated biotechnology company committed to developing innovative medicines to improve patients’ lives. The Company developed, manufactures and commercializes VIVITROL® for alcohol dependence and for the prevention of relapse to opioid dependence, following opioid detoxification. The Company also manufactures RISPERDAL® CONSTA® for schizophrenia and bipolar I disorder. The Company’s pipeline includes extended-release injectable and oral products for the treatment of prevalent, chronic diseases, such as central nervous system (“CNS”) disorders, reward disorders, addiction, diabetes and autoimmune disorders. The Company is headquartered in Waltham, Massachusetts and has a research facility in Massachusetts and a commercial manufacturing facility in Ohio.
The accompanying condensed consolidated financial statements of Alkermes Inc. (the “Company” or “Alkermes”) for the three and ninesix months ended December 31,September 30, 2010 and 2009 and 2008 are unaudited and have been prepared on a basis substantially consistent with the audited financial statements for the year ended March 31, 2009.2010. 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 (“U.S.”) (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 on Form 10-K for the year ended March 31, 2009,2010, 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% Notes”), and the assets of Alkermes are not available to satisfy obligations of Royalty Sub. 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.
Segment Information— 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 diseases. The Company’s chief decision maker, the Chairman, President and Chief Executive Officer, reviews the Company’s operating results on an aggregate basis and manages the Company’s operations as a single operating unit.
Reclassifications— $4.6 million that was previously classified as “Purchase of non-recourse RISPERDAL CONSTA Secured 7% notes” for the nine months ended December 31, 2008, was reclassified to “Payment of non-recourse RISPERDAL CONSTA secured 7% notes principal attributable to original issue discount” in the accompanying condensed consolidated statements of cash flows to conform to current period presentation.
New Accounting Pronouncements
On April 1,In September 2009, the Company adopted new guidance issued byEmerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) issued accounting guidance related to revenue recognition that amends the previous guidance on arrangements with multiple deliverables. The new guidance provides accounting principles and application guidance on whether multiple deliverables exist, how the accountingarrangement should be separated, and provides for collaborative arrangements. Theseparate revenue recognition based upon management’s estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. Accounting guidance defined collaborative arrangements and established reporting requirements for transactions between participantspreviously required that the fair value of the undelivered item be the price of the item either sold in a collaborative arrangement andseparate transaction between participantsunrelated third parties or the price charged for each item when the item is sold separately by the vendor. This was difficult to determine when the product was not individually sold because of its unique features. Under the previous guidance, if the fair value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. This guidance is effective prospectively for revenue arrangements entered into or materially modified in the Company’s fiscal year beginning April 1, 2011, and third parties. Thethe Company is currently evaluating the potential impact of this standard on its consolidated financial statements. Early adoption is permitted, however, adoption of this standard did not have an impact onguidance as of a date other than April 1, 2011 will require the Company’s financial position or resultsCompany to apply this guidance retrospectively effective as of operations.April 1, 2010, and will require disclosure of the effect of this guidance as applied to all previously reported interim periods in the fiscal year of adoption.
6
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On April 1, 2009,In January 2010, the Company adopted newFASB issued accounting guidance issued by the FASB onrelated to fair value measurements for its nonfinancial assetsthat requires additional disclosure related to transfers in and liabilities that are subject to measurement atout of Levels 1 and 2 of the fair value onhierarchy. The guidance also requires additional disclosure for activity within Level 3 of the fair value hierarchy. The guidance requires a non-recurring basis.reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 and describe the reasons for the transfers. In addition, this guidance requires a reporting entity to present information separately about purchases, sales issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3. This accounting standard was effective for interim and annual reporting periods beginning after December 31, 2009, other than for disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 31, 2010 and for interim periods within those fiscal years. The adoptionCompany adopted all provisions of this standardpronouncement, except for those related to the disclosure of disaggregated Level 3 activity, on January 1, 2010, and as this guidance only amends required disclosures in the Company’s condensed consolidated financial statements, it did not impacthave an effect upon the Company’s financial position or results of operations; however, this standard may impactoperations. The Company does not expect the Company in subsequent periods and require additional disclosures. Also, effective April 1, 2009, the Company adopted new accounting guidance issued by the FASB on fair value measurements in determining whether a market is active or inactive and whether third-party transactions with similar assets and liabilities are distressed in determining the fair value of its assets and liabilities measured at fair value on a recurring basis. The adoption of the remaining provisions of this standard did notamendment to have a significant impact the Company’son its consolidated financial position or results of operations.statements.
In June 2009,April 2010, the FASB issued accounting guidance regardingrelated to the accountingmilestone method of revenue recognition for transfersresearch and development arrangements. Under this guidance, the Company may recognize revenue contingent upon the achievement of financial assets that will improve the relevance, representational faithfulness and comparability of the information that a reporting entity providesmilestone in its financial statements about a transfer of financial assets,entirety, in the effects of such a transfer on its financial position, financial performance and cash flows, and provide information asperiod in which the milestone is achieved, only if the milestone meets all the criteria within the guidance to a transferor’s continuing involvement, if any, in transferred financial assets. Thebe considered substantive. This guidance is effective on a prospective basis for research and development milestones achieved in the Company’s fiscal year beginning April 1, 2011. Early adoption is permitted, however, adoption of this guidance as of a date other than April 1, 2011 will require the Company to apply this guidance retrospectively effective as of April 1, 2010, and will require disclosure of the effect of this guidance as applied to all previously reported interim periods in the fiscal year of adoption. The Company plans to implement this guidance prospectively and the effect of this guidance will be limited to future transactions. The Company does not expect the adoption of this standard to have a significant impact on its financial position or results of operations.
In June 2009, the FASB issued accounting guidance on business combinations and noncontrolling interests in consolidated financial statements. The new guidance revises the method of accounting for a number of aspects of business combinations and noncontrolling interests, including acquisition costs, contingencies (including contingent assets, contingent liabilities and contingent purchase price), the impacts of partial and step-acquisitions (including the valuation of net assets attributable to non-acquired minority interests) and post-acquisition exit activities of acquired businesses. The guidance is effective for the Company’s fiscal year beginning April 1, 2010, and the Company does not expect the adoption of this standard to have a significant impact on its financial position or results of operations.
In September 2009, the Emerging Issues Task Force (“EITF”) of the FASB issued accounting guidance related to revenue recognition that amends the previous guidance on arrangements with multiple deliverables. This guidance provides principles and application guidance on whether multiple deliverables exist, how the arrangements should be separated and how the consideration should be allocated. It also clarifies the method to allocate revenue in an arrangement using the estimated selling price. This guidance is effective for the Company’s fiscal year beginning April 1, 2011, and the Company does not expect the adoption of this standard to have a significantmaterial impact on its financial position or results of operations.
2. COMPREHENSIVE (LOSS) INCOMELOSS
Comprehensive (loss) incomeloss is as follows:
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | December 31 | | | December 31 | |
(In thousands) | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
Net (loss) income | | $ | (6,817 | ) | | $ | 112,715 | | | $ | (25,691 | ) | | $ | 144,100 | |
Unrealized gains (losses) on available-for-sale securities: | | | | | | | | | | | | | | | | |
Holding gains (losses) | | | 650 | | | | (1,212 | ) | | | 2,410 | | | | (1,478 | ) |
Reclassification of unrealized losses to realized losses on available-for-sale securities | | | 94 | | | | 556 | | | | 94 | | | | 1,163 | |
| | | | | | | | | | | | |
Unrealized gains (losses) on available-for-sale securities | | | 744 | | | | (656 | ) | | | 2,504 | | | | (315 | ) |
| | | | | | | | | | | | |
Comprehensive (loss) income | | $ | (6,073 | ) | | $ | 112,059 | | | $ | (23,187 | ) | | $ | 143,785 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
| | September 30, | | | September 30, | |
(In thousands) | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Net loss | | $ | (7,666 | ) | | $ | (8,709 | ) | | $ | (21,075 | ) | | $ | (18,874 | ) |
Unrealized gains on available-for-sale securities: | | | | | | | | | | | | | | | | |
Holding gains (losses), net of tax | | | 453 | | | | (228 | ) | | | 947 | | | | 1,760 | |
| | | | | | | | | | | | |
Unrealized gains (losses) on available-for-sale securities | | | 453 | | | | (228 | ) | | | 947 | | | | 1,760 | |
| | | | | | | | | | | | |
Comprehensive loss | | $ | (7,213 | ) | | $ | (8,937 | ) | | $ | (20,128 | ) | | $ | (17,114 | ) |
| | | | | | | | | | | | |
3. LOSS PER SHARE
Basic loss per common share is calculated based upon net loss available to holders of common shares divided by the weighted average number of common shares outstanding. For the three and six months ended September 30, 2010 and 2009, as the Company was in a net loss position, the diluted loss per share does not assume conversion or exercise of stock options and awards as they would have an anti-dilutive effect on loss per share. Therefore, the weighted average number of basic and diluted voting shares of common stock outstanding for the three and six months ended September 30, 2010 and 2009 were as follows:
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
| | September 30, | | | September 30, | |
(In thousands) | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Weighted average number of common shares outstanding | | | 95,511 | | | | 94,886 | | | | 95,419 | | | | 94,830 | |
| | | | | | | | | | | | |
7
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. EARNINGS PER SHARE
Basic (loss) earnings per common share is calculated based upon net (loss) 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.
Basic and diluted (loss) earnings per common share are calculated as follows:
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | December 31 | | | December 31 | |
(In thousands) | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
Numerator: | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (6,817 | ) | | $ | 112,715 | | | $ | (25,691 | ) | | $ | 144,100 | |
| | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | | |
Weighted average number of common shares outstanding | | | 94,784 | | | | 95,316 | | | | 94,815 | | | | 95,246 | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | |
Stock options | | | — | | | | 446 | | | | — | | | | 974 | |
Restricted stock units | | | — | | | | 56 | | | | — | | | | 178 | |
| | | | | | | | | | | | |
Dilutive common share equivalents | | | — | | | | 502 | | | | — | | | | 1,152 | |
| | | | | | | | | | | | |
Shares used in calculating diluted (loss) earnings per share | | | 94,784 | | | | 95,818 | | | | 94,815 | | | | 96,398 | |
| | | | | | | | | | | | |
The following amounts are not included in the calculation of (loss) earningsdiluted loss per common share because their effects are anti-dilutive:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Six Months Ended | |
| | December 31 | | December 31 | | | September 30, | | September 30, | |
(In thousands) | | 2009 | | 2008 | | 2009 | | 2008 | | | 2010 | | 2009 | | 2010 | | 2009 | |
Stock options | | 17,658 | | 16,356 | | 17,801 | | 15,366 | | | 13,898 | | 17,821 | | 13,736 | | 17,920 | |
Restricted stock units | | 538 | | 630 | | 318 | | — | | | 909 | | 407 | | 850 | | 308 | |
| | | | | | | | | | | | | | | | | | |
Total | | 18,196 | | 16,986 | | 18,119 | | 15,366 | | | 14,807 | | 18,228 | | 14,586 | | 18,228 | |
| | | | | | | | | | | | | | | | | | |
4. INVESTMENTS
Investments consist of the following:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Gross Unrealized | | | | | |
| | | | | | | | | | Losses | | | | |
| | Amortized | | | | | | | Less than | | | Greater than | | | Estimated | |
| | Cost | | | Gains | | | One Year | | | One Year | | | Fair Value | |
| | (In thousands) | |
September 30, 2010 | | | | | | | | | | | | | | | | | | | | |
Short-term investments: | | | | | | | | | | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | |
U.S. government and agency debt securities | | $ | 164,185 | | | $ | 402 | | | $ | (1 | ) | | $ | — | | | $ | 164,586 | |
International government agency debt securities | | | 18,078 | | | | 265 | | | | — | | | | — | | | | 18,343 | |
Corporate debt securities | | | 9,029 | | | | 78 | | | | — | | | | (15 | ) | | | 9,092 | |
| | | | | | | | | | | | | | | |
| | | 191,292 | | | | 745 | | | | (1 | ) | | | (15 | ) | | | 192,021 | |
| | | | | | | | | | | | | | | |
Money market funds | | | 1,201 | | | | — | | | | — | | | | — | | | | 1,201 | |
| | | | | | | | | | | | | | | |
Total short-term investments | | | 192,493 | | | | 745 | | | | (1 | ) | | | (15 | ) | | | 193,222 | |
| | | | | | | | | | | | | | | |
Long-term investments: | | | | | | | | | | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | |
Corporate debt securities | | | 25,238 | | | | — | | | | — | | | | (664 | ) | | | 24,574 | |
Auction rate securities | | | 5,000 | | | | — | | | | — | | | | (571 | ) | | | 4,429 | |
International government agency debt securities | | | 4,994 | | | | — | | | | (1 | ) | | | — | | | | 4,993 | |
U.S. government and agency debt securities | | | 1,997 | | | | — | | | | (1 | ) | | | — | | | | 1,996 | |
Strategic equity investments | | | 644 | | | | 594 | | | | — | | | | — | | | | 1,238 | |
| | | | | | | | | | | | | | | |
| | | 37,873 | | | | 594 | | | | (2 | ) | | | (1,235 | ) | | | 37,230 | |
| | | | | | | | | | | | | | | |
Held-to-maturity securities: | | | | | | | | | | | | | | | | | | | | |
Certificates of deposit | | | 5,440 | | | | — | | | | — | | | | — | | | | 5,440 | |
U.S. government debt securities | | | 417 | | | | — | | | | — | | | | — | | | | 417 | |
| | | | | | | | | | | | | | | |
| | | 5,857 | | | | — | | | | — | | | | — | | | | 5,857 | |
| | | | | | | | | | | | | | | |
Total long-term investments | | | 43,730 | | | | 594 | | | | (2 | ) | | | (1,235 | ) | | | 43,087 | |
| | | | | | | | | | | | | | | |
Total investments | | $ | 236,223 | | | $ | 1,339 | | | $ | (3 | ) | | $ | (1,250 | ) | | $ | 236,309 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
March 31, 2010 | | | | | | | | | | | | | | | | | | | | |
Short-term investments: | | | | | | | | | | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | |
U.S. government and agency debt securities | | $ | 160,876 | | | $ | 204 | | | $ | — | | | $ | — | | | $ | 161,080 | |
International government agency debt securities | | | 23,441 | | | | 136 | | | | — | | | | (1 | ) | | | 23,576 | |
Corporate debt securities | | | 15,225 | | | | 14 | | | | — | | | | (2 | ) | | | 15,237 | |
Asset backed debt securities | | | 983 | | | | — | | | | — | | | | (24 | ) | | | 959 | |
| | | | | | | | | | | | | | | |
| | | 200,525 | | | | 354 | | | | — | | | | (27 | ) | | | 200,852 | |
| | | | | | | | | | | | | | | |
Money market funds | | | 1,201 | | | | — | | | | — | | | | — | | | | 1,201 | |
| | | | | | | | | | | | | | | |
Total short-term investments | | | 201,726 | | | | 354 | | | | — | | | | (27 | ) | | | 202,053 | |
| | | | | | | | | | | | | | | |
Long-term investments: | | | | | | | | | | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | |
Corporate debt securities | | | 26,109 | | | | — | | | | — | | | | (942 | ) | | | 25,167 | |
U.S. government and agency debt securities | | | 24,727 | | | | — | | | | (39 | ) | | | — | | | | 24,688 | |
Auction rate securities | | | 10,000 | | | | — | | | | — | | | | (1,454 | ) | | | 8,546 | |
International government agency debt securities | | | 3,225 | | | | — | | | | (2 | ) | | | — | | | | 3,223 | |
Strategic equity investments | | | 644 | | | | 691 | | | | — | | | | — | | | | 1,335 | |
| | | | | | | | | | | | | | | |
| | | 64,705 | | | | 691 | | | | (41 | ) | | | (2,396 | ) | | | 62,959 | |
| | | | | | | | | | | | | | | |
Held-to-maturity securities: | | | | | | | | | | | | | | | | | | | | |
Certificates of deposit | | | 5,440 | | | | — | | | | — | | | | — | | | | 5,440 | |
U.S. government debt securities | | | 417 | | | | — | | | | — | | | | — | | | | 417 | |
| | | | | | | | | | | | | | | |
| | | 5,857 | | | | — | | | | — | | | | — | | | | 5,857 | |
| | | | | | | | | | | | | | | |
Total long-term investments | | | 70,562 | | | | 691 | | | | (41 | ) | | | (2,396 | ) | | | 68,816 | |
| | | | | | | | | | | | | | | |
Total investments | | $ | 272,288 | | | $ | 1,045 | | | $ | (41 | ) | | $ | (2,423 | ) | | $ | 270,869 | |
| | | | | | | | | | | | | | | |
8
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. INVESTMENTS
Investments consist of the following:
| | | | | | | | | | | | | | | | |
| | Amortized | | | Gross Unrealized | | | Estimated | |
| | Cost | | | Gains | | | Losses | | | Fair Value | |
| | | | | | (In thousands) | | | | | |
December 31, 2009 | | | | | | | | | | | | | | | | |
Short-term investments: | | | | | | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | | | |
U.S. government and agency debt securities | | $ | 126,980 | | | $ | 202 | | | $ | — | | | $ | 127,182 | |
International government agency debt securities | | | 28,641 | | | | 162 | | | | — | | | | 28,803 | |
Corporate debt securities | | | 6,748 | | | | | | | | (99 | ) | | | 6,649 | |
Other debt securities | | | 2,501 | | | | — | | | | (119 | ) | | | 2,382 | |
| | | | | | | | | | | | |
Total short-term investments | | | 164,870 | | | | 364 | | | | (218 | ) | | | 165,016 | |
| | | | | | | | | | | | |
Long-term investments: | | | | | | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | | | |
U.S. government and agency debt securities | | | 61,346 | | | | — | | | | (340 | ) | | | 61,006 | |
International government agency debt securities | | | 851 | | | | — | | | | (14 | ) | | | 837 | |
Corporate debt securities | | | 43,817 | | | | — | | | | (2,112 | ) | | | 41,705 | |
Other debt securities | | | 10,000 | | | | — | | | | (1,716 | ) | | | 8,284 | |
Strategic investments | | | 644 | | | | 198 | | | | — | | | | 842 | |
| | | | | | | | | | | | |
| | | 116,658 | | | | 198 | | | | (4,182 | ) | | | 112,674 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Held-to-maturity securities: | | | | | | | | | | | | | | | | |
U.S. government obligations | | | 417 | | | | — | | | | — | | | | 417 | |
Certificates of deposit | | | 5,440 | | | | — | | | | — | | | | 5,440 | |
| | | | | | | | | | | | |
Total long-term investments | | | 122,515 | | | | 198 | | | | (4,182 | ) | | | 118,531 | |
| | | | | | | | | | | | |
Total investments | | $ | 287,385 | | | $ | 562 | | | $ | (4,400 | ) | | $ | 283,547 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
March 31, 2009 | | | | | | | | | | | | | | | | |
Short-term investments: | | | | | | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | | | |
U.S. government and agency debt securities | | $ | 225,490 | | | $ | 2,635 | | | $ | (6 | ) | | $ | 228,119 | |
Corporate debt securities | | | 8,160 | | | | 9 | | | | — | | | | 8,169 | |
Other debt securities | | | 500 | | | | — | | | | (20 | ) | | | 480 | |
| | | | | | | | | | | | |
Total short-term investments | | | 234,150 | | | | 2,644 | | | | (26 | ) | | | 236,768 | |
| | | | | | | | | | | | |
Long-term investments: | | | | | | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | | | |
U.S. government and agency debt securities | | | 10,149 | | | | — | | | | (3 | ) | | | 10,146 | |
Corporate debt securities | | | 57,887 | | | | — | | | | (6,326 | ) | | | 51,561 | |
Other debt securities | | | 16,350 | | | | — | | | | (2,683 | ) | | | 13,667 | |
Strategic investments | | | 738 | | | | 53 | | | | — | | | | 791 | |
| | | | | | | | | | | | |
| | | 85,124 | | | | 53 | | | | (9,012 | ) | | | 76,165 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Held-to-maturity securities: | | | | | | | | | | | | | | | | |
U.S. government obligations | | | 416 | | | | — | | | | — | | | | 416 | |
Certificates of deposit | | | 4,240 | | | | — | | | | — | | | | 4,240 | |
| | | | | | | | | | | | |
Total long-term investments | | | 89,780 | | | | 53 | | | | (9,012 | ) | | | 80,821 | |
| | | | | | | | | | | | |
Total investments | | $ | 323,930 | | | $ | 2,697 | | | $ | (9,038 | ) | | $ | 317,589 | |
| | | | | | | | | | | | |
During the nine months ended December 31, 2009, the Company had $427.3 million of proceeds Proceeds from the sales and maturities of investments. The proceeds from the salesmarketable securities, excluding strategic equity investments, which were primarily reinvested and maturities of its investments resulted in realized gains of $0.2 million and realized losses, of less than $0.1 million.were as follows:
9
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued) | | | | | | | | |
| | Six Months Ended | |
| | September 30, | | | September 30, | |
(In thousands) | | 2010 | | | 2009 | |
Proceeds from the sales and maturities of marketable securities | | $ | 276,437 | | | $ | 298,134 | |
Realized gains | | $ | 63 | | | $ | 186 | |
Realized losses | | $ | 20 | | | $ | 1 | |
The Company’s available-for-sale and held-to-maturity securities at December 31, 2009September 30, 2010 have contractual maturities in the following periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Available-for-Sale | | Held-to-Maturity | | | Available-for-Sale | | Held-to-Maturity | |
| | Amortized | | Estimated | | Amortized | | Estimated | | | Amortized | | Estimated | | Amortized | | Estimated | |
(in thousands) | | Cost | | Fair Value | | Cost | | Fair Value | | |
(In thousands) | | | Cost | | Fair Value | | Cost | | Fair Value | |
Within 1 year | | $ | 72,188 | | $ | 72,095 | | $ | 5,857 | | $ | 5,857 | | | $ | 72,430 | | $ | 72,527 | | $ | 5,857 | | $ | 5,857 | |
After 1 year through 5 years (1) | | 149,919 | | 149,787 | | — | | — | | | 123,024 | | 123,408 | | — | | — | |
After 5 years through 10 years (1) | | 48,777 | | 46,682 | | — | | — | | | 28,067 | | 27,649 | | — | | — | |
After 10 years | | 10,000 | | 8,284 | | — | | — | | | 5,000 | | 4,429 | | — | | — | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 280,884 | | $ | 276,848 | | $ | 5,857 | | $ | 5,857 | | | $ | 228,521 | | $ | 228,013 | | $ | 5,857 | | $ | 5,857 | |
| | | | | | | | | | | | | | | | | | |
| | |
(1) | | Investments in available-for-sale securities within these categories, with an amortized cost of $98.5$49.1 million and an estimated fair value of $96.6$48.6 million, have issuer call dates prior to May 2011. |
The Company recognizes other-than-temporary impairments through a charge to earnings if it has the intent to sell the debt security or if it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, even ifAt September 30, 2010, the Company does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if a credit loss has occurred. Inbelieves that the event of a credit loss, only the amount associated with the credit loss is recognized in operating results. The amount of loss relating to other factors is recorded in accumulated other comprehensive income. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses on its available-for-sale securities thatinvestments are determined to be temporary, and not related to credit loss, are recorded, net of tax, in accumulated other comprehensive income.
For available-for-sale debt securitiestemporary. The investments with unrealized losses the Company performs an analysis to assess whether it intends to sell, or whether it would more likely than not be required to sell, the security before the expected recoveryconsist of the amortized cost basis. If the Company intends to sell a security, or may be required to do so, the security’s decline in fair value is deemed to be other-than-temporary and the full amount of the unrealized loss is recorded within earnings as an impairment loss. Regardless of its intent to sell a security, the Company performs additional analyses on all securities with unrealized losses to evaluate losses associated with the creditworthiness of the security. Credit losses are identified when the Company does not expect to receive cash flows sufficient to recover the amortized cost basis of a security.
For equity securities, when assessing whether a decline in fair value below its cost basis is other-than-temporary, the Company considers the fair market value of the security, the duration of the security’s decline and the financial condition of the issuer. The Company then considers its intent and ability to hold the equity security for a period of time sufficient to recover its carrying value. If the Company determines that it lacks the intent and ability to hold an equity security to its expected recovery, the security’s decline in fair value is deemed to be other-than-temporary and is recorded within operating results as an impairment loss.
Certain of the Company’s investments in corporate debt securities with a cost of $2.0 million consist of investment grade subordinated, medium term, callable step-up floatingand an auction rate notes (“FRN”) issued by the Royal Bank of Scotland Group (“RBS”). At December 31, 2009, these FRN’s had a composite rating by Moody’s, Standard & Poor’s (“S&P”) and Fitch of A. During the nine months ended December 31, 2009, these FRN’s had minimal or no trades and because a fair value could not be derived from quoted prices, the Company used a discounted cash flow model to determine the estimated fair value of the securities at December 31, 2009. The assumptions used in the discounted cash flow model included estimates for interest rates, expected holding periods and risk adjusted discount rates, which the Company believes to be the most critical assumptions utilized within the analysis. The valuation analysis considered, among other items, assumptions that market participants would use in their estimates of fair value, such as the creditworthiness and credit spreads of the issuer and when callability features may be exercised by the issuer. These securities were also compared, where possible, to securities with observable market data with similar characteristics to the securities held by the Company. The Company estimated the fair value of these FRN’s to be $1.7 million at December 31, 2009.
security. In making the determination that the decline in fair value of these FRN’ssecurities was temporary, the Company considered various factors, including but not limited to: the length of time each security was in an unrealized loss
10
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
position; the extent to which fair value was less than cost; the financial condition and near term prospects of the issuers; and the Company’s intent not to sell these securities and the assessment that it is more likely than not that the Company would not be required to sell these securities before the recovery of their amortized cost basis.
The estimated fair value of these FRN’s could change significantly based on future financial market conditions. These FRN’s held by the Company did not trade either because they were nearing their scheduled call dates or due to abnormally high credit spreads on the debt of the issuers, or both. Similar securitiesCompany’s strategic equity investments include common stock in public companies with which the Company has held have been called at par by issuers prior to maturity.or had a collaborative arrangement. In addition, in December 2009, the Company entered into a collaborative arrangement with, and made an investment in, Acceleron Pharma, Inc. (“Acceleron”). The Company’s Chairman, President and Chief Executive Officer is one of nine members of Acceleron’s board of directors. The Company’s December 2009 investment in Acceleron consisted of an $8.0 million purchase of shares of Series D-1 convertible, redeemable preferred stock. In July 2010, the Company invested an additional $0.5 million in exchange for shares of Series E convertible, redeemable preferred stock and common stock warrants. The Company accounts for its investment in Acceleron under the cost method as Acceleron is a privately-held company over which the Company does not exercise significant influence. The Company will continue to monitor this investment to evaluate whether any decline in its value has occurred that would be other-than-temporary, based on the implied value from any recent rounds of financing completed by Acceleron, specific events at Acceleron, market prices of comparable public companies and general market conditions. The Company’s investment balance of $8.5 million and $8.0 million at September 30, 2010 and March 31, 2010, respectively, is recorded within “Other assets” in the accompanying condensed consolidated balance sheets.
9
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. FAIR VALUE MEASUREMENTS
The following table presents information about the Company’s assets that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:
| | | | | | | | | | | | | | | | |
| | September 30, | | | | | | | | | | | | | |
(In thousands) | | 2010 | | | Level 1 | | | Level 2 | | | Level 3 | |
Cash equivalents and money market funds | | $ | 1,303 | | | $ | 1,303 | | | $ | — | | | $ | — | |
U.S. government and agency debt securities | | | 166,582 | | | | 166,582 | | | | — | | | | — | |
International government agency debt securities | | | 23,336 | | | | 23,336 | | | | — | | | | — | |
Corporate debt securities | | | 33,666 | | | | — | | | | 31,912 | | | | 1,754 | |
Auction rate securities | | | 4,429 | | | | — | | | | — | | | | 4,429 | |
Strategic equity investments | | | 1,238 | | | | 1,238 | | | | — | | | | — | |
| | | | | | | | | | | | |
Total | | $ | 230,554 | | | $ | 192,459 | | | $ | 31,912 | | | $ | 6,183 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | March 31, | | | | | | | | | | | | | |
| | 2010 | | | Level 1 | | | Level 2 | | | Level 3 | |
Cash equivalents and money market funds | | $ | 1,289 | | | $ | 1,289 | | | $ | — | | | $ | — | |
U.S. government and agency debt securities | | | 185,768 | | | | 185,768 | | | | — | | | | — | |
International government agency debt securities | | | 26,799 | | | | 26,799 | | | | — | | | | — | |
Corporate debt securities | | | 40,404 | | | | — | | | | 38,668 | | | | 1,736 | |
Auction rate securities | | | 8,546 | | | | — | | | | — | | | | 8,546 | |
Asset backed debt securities | | | 959 | | | | — | | | | — | | | | 959 | |
Strategic equity investments | | | 1,335 | | | | 1,335 | | | | — | | | | — | |
| | | | | | | | | | | | |
Total | | $ | 265,100 | | | $ | 215,191 | | | $ | 38,668 | | | $ | 11,241 | |
| | | | | | | | | | | | |
There were no transfers or reclassifications of any securities between Level 1 and Level 2 during the financial markets and if there is continued deterioration,six months ended September 30, 2010. The following table illustrates the rollforward of the fair value of thesethe Company’s investments whose fair value is determined using Level 3 inputs:
| | | | |
| | Fair | |
(In thousands) | | Value | |
Balance, March 31, 2010 | | $ | 11,241 | |
Total unrealized gains included in comprehensive loss | | | 925 | |
Sales and redemptions, at par value | | | (5,983 | ) |
| | | |
Balance, September 30, 2010 | | $ | 6,183 | |
| | | |
Substantially all of the Company’s investments in corporate debt securities could decline further resultinghave been classified as Level 2 investments. These securities have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing market observable data. The market observable data includes reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers and other industry and economic events. The Company validates the prices developed using the market observable data by obtaining market values from other pricing sources, analyzing pricing data in an other-than-temporary impairment charge.certain instances and confirming that the relevant markets are active.
The Company’s two investments in auction rate securities consist of taxable student loan revenue bonds issued by the Colorado Student Obligation Bond Authority (“Colorado”), with a cost of $5.0 million, and Brazos Higher Education Service Corporation (“Brazos”), with a cost of $5.0 million, which service student loans under the Federal Family Education Loan Program (“FFELP”). The bonds 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. The Colorado and Brazos securities were rated Aaa and Baa3 by Moody’s, respectively, at December 31, 2009. Due to repeated failed auctions since January 2008, the Company no longer considers these securities to be liquid and has classified them as long-term investments in the condensed consolidated balance sheets. The securities continue to pay interest during the periods in which the auctions have failed.
Since the security auctions have failed and fair value cannot be derived from quoted prices, the Company used a discounted cash flow model to determine the estimated fair value of the securitiesits Level 3 investments. The Company’s most significant Level 3 investment at December 31, 2009.September 30, 2010 consists of its investment in a student loan backed auction rate security, with an amortized cost of $5.0 million, which was not trading at September 30, 2010. The assumptions used in the discounted cash flow model include estimates for interest rates, timing of cash flows, expected holding periods and risk adjusted discount rates, which include provisions for default and liquidity risk, which the Company believes to be the most critical assumptions utilized within the analysis. The valuation analysis considers, among other items, assumptions that market participants would use in their estimates of fair value, such as the collateral underlying the security, the creditworthiness of the issuer and any associated guarantees, the timing of expected future cash flows, the timing of, and the likelihood that the security will have a successful auction or when callability features may be exercised by the issuer. TheseThe securities were also compared, where possible, to other observable market data with similar characteristics to the securities held by the Company. The Company estimated the fair value of the auction rate securities to be $8.3 million at December 31, 2009.
In making the determination that the decline in fair value of the auction rate securities was temporary, the Company considered various factors, including, but not limited to: the length of time each security was in an unrealized loss position; the extent to which fair value was less than cost; financial condition and near term prospects of the issuers; and the intent not to sell these securities and assessment that it is more likely than not that the Company would not be required to sell these securities before the recovery of their amortized cost basis. The estimated fair value of the auction rate securities could change significantly based on future financial market conditions. The Company continues to monitor the securities and the financial markets and if there is continued deterioration, the fair value of these securities could decline further resulting in an other-than-temporary impairment charge.
At December 31, 2009, the Company’s investments in asset backed debt securities consist of 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 December 31, 2009, $7.4 million of the Company’s initial $9.9 million investment in MTN’s had been redeemed through scheduled and unscheduled sinking fund redemptions at par value.
1110
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. At December 31, 2009, Ambac had ratings of Caa2 and CC by Moody’s and S&P, respectively, and MBIA had ratings of Ba3 and BB+ by Moody’s and S&P, respectively. Because the MTN’s are not actively trading in the credit markets and fair value cannot be derived from quoted prices, the Company used a discounted cash flow model to determine the estimated fair value of the securities at December 31, 2009. 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 creditworthiness of the issuer and the associated guarantees by Ambac and MBIA, the timing of expected future cash flows, including whether the callability features of these investments may be exercised by the issuer. These securities were also compared, where possible, to securities with observable market data with similar characteristics to the securities held by the Company. The Company believes there are several significant assumptions that are utilized in its valuation analyses, the most critical of which is the discount rate, which includes a provision for default and liquidity risk. The Company estimated the fair value of the asset backed securities to be $2.4 million at December 31, 2009.
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 December 31, 2009, 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 the issuers; and the intent not to sell these securities and assessment that it is more likely than not that the Company would not be required to sell these securities before the recovery of their amortized cost basis.
The Company’s strategic investments include common stock in publicly-traded companies with which it has or did have a collaborative agreement. For the nine months ended December 31, 2009 and 2008, the Company recognized $0.1 million and $1.2 million, respectively, in charges for other-than-temporary losses on its strategic investments due to declines in their fair value.
5. FAIR VALUE MEASUREMENTS
The following table presents information about the Company’s assets that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:
| | | | | | | | | | | | | | | | |
| | December 31, | | | | | | | | | | |
(In thousands) | | 2009 | | | Level 1 | | | Level 2 | | | Level 3 | |
Cash equivalents | | $ | 91 | | | $ | 91 | | | $ | — | | | $ | — | |
U.S. government and agency debt securities | | | 188,188 | | | | 188,188 | | | | — | | | | — | |
International government agency debt securities | | | 29,640 | | | | 29,640 | | | | — | | | | — | |
Corporate debt securities | | | 48,354 | | | | — | | | | 46,656 | | | | 1,698 | |
Other debt securities | | | 10,666 | | | | — | | | | — | | | | 10,666 | |
Strategic equity investments | | | 842 | | | | 842 | | | | — | | | | — | |
| | | | | | | | | | | | |
Total | | $ | 277,781 | | | $ | 218,761 | | | $ | 46,656 | | | $ | 12,364 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | March 31, | | | | | | | | | | |
(In thousands) | | 2009 | | | Level 1 | | | Level 2 | | | Level 3 | |
Cash equivalents | | $ | 822 | | | $ | 822 | | | $ | — | | | $ | — | |
U.S. government and agency debt securities | | | 238,265 | | | | 238,265 | | | | — | | | | — | |
Corporate debt securities | | | 59,730 | | | | — | | | | — | | | | 59,730 | |
Other debt securities | | | 14,147 | | | | — | | | | — | | | | 14,147 | |
Strategic equity investments | | | 791 | | | | 791 | | | | — | | | | — | |
| | | | | | | | | | | | |
Total | | $ | 313,755 | | | $ | 239,878 | | | $ | — | | | $ | 73,877 | |
| | | | | | | | | | | | |
12
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table is a rollforward of the fair value of the Company’s investments whose fair value is determined using Level 3 inputs:
| | | | |
| | Fair | |
(In thousands) | | Value | |
Balance, March 31, 2009 | | $ | 73,877 | |
Total unrealized gains included in comprehensive loss | | | 4,496 | |
Sales and redemptions, at par value | | | (21,049 | ) |
Transfers out of Level 3 | | | (44,960 | ) |
| | | |
Balance, December 31, 2009 | | $ | 12,364 | |
| | | |
The fair values of the Company’s investments in certain of its corporate debt securities and other debt securities, including auction rate securities and asset backed debt securities, are determined using certain inputs that are unobservable and considered significant to the overall fair value measurement. During the nine months ended December 31, 2009, certain of the corporate debt securities and asset backed debt securities held by the Company had minimal or no trades and the security auctions for the Company’s auction rate securities had failed. The Company is unable to derive a fair value for these investments using quoted market prices and used discounted cash flow models as described in Note 4, Investments.
During the three months ended September 30, 2009, trading resumed for certain of the Company’s investments in corporate debt securities and these corporate debt securities, with a fair value of $33.9 million, were transferred from a Level 3 classification to a Level 2 classification. During the three months ended December 31, 2009, the Company transferred an additional $11.0 million of corporate debt securities to a Level 2 classification as trading resumed for these securities. At December 31, 2009, the Company derived a fair value for its Level 2 investments using market observable inputs.
The carrying amounts reflected in the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses approximate fair value due to their short-term nature. The Company’s non-recourse RISPERDAL CONSTA secured 7% Notesnotes (the “non-recourse 7% Notes”) were fully redeemed on July 1, 2010 and had a carrying value of $57.3 million and $75.9$51.0 million and a fair value of $55.0 million and $74.7$48.7 million at December 31, 2009 and March 31, 2009, respectively.2010. The estimated fair value of the non-recourse 7% Notes at March 31, 2010 was based on a discounted cash flow model.
6. INVENTORY
Inventory is stated at the lower of cost or market value. Cost is determined using the first-in, first-out method. Inventory consists of the following:
| | | | | | | | | | | | | | | | |
| | December 31, | | March 31, | | | September 30, | | March 31, | |
(In thousands) | | 2009 | | 2009 | | | 2010 | | 2010 | |
Raw materials | | $ | 5,169 | | $ | 5,916 | | | $ | 3,822 | | $ | 4,130 | |
Work in process | | 6,251 | | 5,397 | | | 6,306 | | 7,788 | |
Finished goods (1) | | 8,381 | | 7,015 | | | 7,505 | | 8,501 | |
Consigned-out inventory (2) | | 248 | | 1,969 | | | 624 | | 234 | |
| | | | | | | | | | |
Inventory | | $ | 20,049 | | $ | 20,297 | | |
Total inventory | | | $ | 18,257 | | $ | 20,653 | |
| | | | | | | | | | |
| | |
(1) | | At December 31, 2009September 30, 2010 and March 31, 2009,2010, the Company had $1.6$0.8 million and none, respectively,$0.7 million of finished goods inventory located at its third-partythird party warehouse and shipping service provider. |
|
(2) | | At DecemberSeptember 30, 2010 and March 31, 2009,2010, consigned-out inventory relates to VIVITROL inventory in the distribution channel for which the Company has not recognized revenue. At March 31, 2009, consigned-out inventory consisted of $1.8 million of consigned-out inventory and $0.2 million of inventory in the distribution channel for which the Company had not recognized revenue. |
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
| | | | | | | | |
| | September 30, | | | March 31, | |
(In thousands) | | 2010 | | | 2010 | |
Land | | $ | 301 | | | $ | 301 | |
Building and improvements | | | 36,766 | | | | 36,759 | |
Furniture, fixture and equipment | | | 65,276 | | | | 62,501 | |
Leasehold improvements | | | 44,488 | | | | 42,660 | |
Construction in progress | | | 42,165 | | | | 43,695 | |
| | | | | | |
Subtotal | | | 188,996 | | | | 185,916 | |
Less: accumulated depreciation | | | (91,812 | ) | | | (89,011 | ) |
| | | | | | |
Total property, plant and equipment, net | | $ | 97,184 | | | $ | 96,905 | |
| | | | | | |
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
| | | | | | | | |
| | September 30, | | | March 31, | |
(In thousands) | | 2010 | | | 2010 | |
Accounts payable | | $ | 7,903 | | | $ | 8,197 | |
Accrued compensation | | | 10,880 | | | | 15,276 | |
Accrued other | | | 12,340 | | | | 14,408 | |
| | | | | | |
Total accounts payable and accrued expenses | | $ | 31,123 | | | $ | 37,881 | |
| | | | | | |
1311
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
7. PROPERTY, PLANT AND EQUIPMENT9. LONG-TERM DEBT
Property, plant and equipment consistLong-term debt consists of the following:
| | | | | | | | |
| | December 31, | | | March 31, | |
(In thousands) | | 2009 | | | 2009 | |
Land | | $ | 301 | | | $ | 301 | |
Building and improvements | | | 36,548 | | | | 36,325 | |
Furniture, fixture and equipment | | | 61,635 | | | | 67,165 | |
Leasehold improvements | | | 33,980 | | | | 33,996 | |
Construction in progress | | | 50,677 | | | | 41,908 | |
| | | | | | |
Subtotal | | | 183,141 | | | | 179,695 | |
Less: accumulated depreciation | | | (86,809 | ) | | | (73,234 | ) |
| | | | | | |
Total property, plant and equipment, net | | $ | 96,332 | | | $ | 106,461 | |
| | | | | | |
| | | | | | | | |
| | September 30, | | | March 31, | |
| | 2010 | | | 2010 | |
Non-recourse 7% Notes | | $ | — | | | $ | 51,043 | |
Less: current portion | | | — | | | | (51,043 | ) |
| | | | | | |
Long-term debt | | $ | — | | | $ | — | |
| | | | | | |
As a resultOn July 1, 2010, in addition to the scheduled principal payment of $6.4 million, the Company fully redeemed the balance of the Company’s relocation of its corporate headquarters from Cambridge, Massachusetts to Waltham, Massachusetts in January 2010, the Company recorded a charge of $14.8non-recourse 7% Notes for $39.2 million, to depreciation during the nine months ended December 31, 2009. The depreciation charge relates to the acceleration of depreciation on laboratory related leasehold improvements located at the Company’s Cambridge facility, which no longer has any benefit or future use to the Company, and the write-down of laboratory equipment that is no longer in use and will be disposed of.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consistrepresenting 101.75% of the following:
| | | | | | | | |
| | December 31, | | | March 31, | |
(In thousands) | | 2009 | | | 2009 | |
Accounts payable | | $ | 6,140 | | | $ | 8,046 | |
Accrued compensation | | | 11,482 | | | | 13,817 | |
Accrued interest | | | 1,011 | | | | 1,549 | |
Amounts due to Cephalon | | | — | | | | 1,169 | |
Accrued other | | | 10,927 | | | | 11,902 | |
| | | | | | |
Total accounts payable and accrued expenses | | $ | 29,560 | | | $ | 36,483 | |
| | | | | | |
outstanding principal balance in accordance with the terms of the Indenture for the non-recourse 7% Notes. The non-recourse 7% Notes were previously scheduled to mature on January 1, 2012.9.10. SHARE-BASED COMPENSATION
Share-based compensation expense consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Six Months Ended | |
| | December 31 | | December 31 | | | September 30, | | September 30, | |
(In thousands) | | 2009 | | 2008 | | 2009 | | 2008 | | | 2010 | | 2009 | | 2010 | | 2009 | |
Cost of goods manufactured and sold | | $ | 434 | | $ | 291 | | $ | 1,263 | | $ | 1,148 | | | $ | 525 | | $ | 519 | | $ | 886 | | $ | 829 | |
Research and development | | 759 | | 527 | | 2,485 | | 3,397 | | | 1,637 | | 919 | | 3,152 | | 1,726 | |
Selling, general and administrative (1) | | 2,179 | | 2,463 | | 7,063 | | 7,045 | | | 2,786 | | 2,770 | | 5,366 | | 4,883 | |
| | | | | | | | | | | | | | | | | | |
Total share-based compensation expense | | $ | 3,372 | | $ | 3,281 | | $ | 10,811 | | $ | 11,590 | | | $ | 4,948 | | $ | 4,208 | | $ | 9,404 | | $ | 7,438 | |
| | | | | | | | | | | | | | | | | | |
| | |
(1) | | In September 2009, in connection with the resignation of its former President and Chief Executive Officer, the Company entered into a separation agreement that provided for, among other things: the acceleration of vesting of certain stock options and restricted stock awards that were scheduled to vest through June 30, 2010; and the period in which vested stock options are exercisable was extended until the earlier of June 30, 2011 or the stated expiration date of the stock options. As a result of these stock option and award modifications, the Company recorded an expense of $0.9 million during the three months ended September 30, 2009. |
At December 31, 2009September 30, 2010 and March 31, 2009,2010, $0.5 million and $0.4 million, respectively, of share-based compensation expensecost was capitalized and recorded as Inventory in the condensed consolidated balance sheets.
14
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. COLLABORATIONS
In December 2009, the Company entered into a collaboration and license agreement with Acceleron Pharma, Inc. (“Acceleron”). In exchange for a nonrefundable upfront payment of $2.0 million, an equity investment in Acceleron of $8.0 million and certain potential milestone payments and royalties, the Company has obtained an exclusive license to Acceleron’s proprietary long-acting Fc fusion technology platform, called the MedifusionTM technology, which is designed to extend the circulating half-life of proteins and peptides. The first drug candidate being developed with this technology is a long-acting form of a TNF receptor-Fc fusion protein for the treatment of rheumatoid arthritis and related autoimmune diseases. The Company and Acceleron have agreed to collaborate on the development of product candidates from the Medifusion technology. Pursuant to the terms of the agreement, Acceleron will develop up to two selected drug compounds using the Medifusion technology through preclinical studies, at which point the Company will assume responsibility for all clinical development and commercialization of these two compounds and any other compounds the Company elects to develop resulting from the platform. Acceleron will retain all rights to the technology for products derived from the TGF-beta superfamily.
The Company’s $8.0 million investment in Acceleron consists of shares of Series D-1 convertible, redeemable preferred stock, which represents a 3% ownership position in Acceleron. The Company’s Chief Executive Officer has been one of nine members of Acceleron’s board of directors. The Company is accounting for its investment in Acceleron under the cost method as Acceleron is a privately-held company over which the Company does not exercise significant influence. Accordingly, the Company does not record any share of Acceleron’s net income or losses, but would record dividends, if received. The carrying value of the investment is $8.0 million at December 31, 2009 and is recorded within “other assets” in the accompanying condensed consolidated balance sheet. The Company will monitor this investment to evaluate whether any decline in its value has occurred that would be other than temporary, based on the implied value from any recent rounds of financing completed by the investee, market prices of comparable public companies, and general market conditions.
In addition to the upfront payment and equity investment, the Company will reimburse Acceleron for any time, at an agreed-upon full-time equivalent (“FTE”) rate, and materials Acceleron incurs during development. The Company is obligated to make developmental and sales milestone payments in the aggregate of up to $110.0 million per product in the event that certain development and sales goals are achieved. The Company is also obligated to make tiered royalty payments in the mid-single digits on annual net sales in the event any products developed under the agreement are commercialized.
During the three months ended December 31, 2009, the Company incurred expenses of $0.1 million in connection with its arrangement with Acceleron, which is recorded within research and development expense in the accompanying condensed consolidated statement of operations. Additionally, the $2.0 million upfront payment was charged to research and development expense as technological feasibility of the acquired technology has not been established.
11. RESTRUCTURING
In connection with the 2008 restructuring program, in which the Company and Eli Lilly and Company announced the decision to discontinue the AIR® Insulin development program (the “2008 Restructuring”), the Company recorded net restructuring charges of approximately $6.9 million duringin the year ended March 31, 2008. Activity related to the 2008 Restructuring in the ninesix months ended December 31, 2009September 30, 2010 was as follows:
| | | | | | | | |
(In thousands) | | Balance | | | Balance | |
Accrued restructuring, March 31, 2009 | | $ | 4,193 | | |
Accrued restructuring, March 31, 2010 | | | $ | 3,596 | |
Payments for facility closure costs | | | (611 | ) | | | (451 | ) |
Other adjustments | | 158 | | | 340 | |
| | | | | | |
Accrued Restructuring, December 31, 2009 | | $ | 3,740 | | |
Accrued restructuring, September 30, 2010 | | | $ | 3,485 | |
| | | | | | |
At December 31, 2009September 30, 2010 and March 31, 2009,2010, the restructuring liability related to the 2008 Restructuring consists of $0.6$0.7 million classified as current and $3.1 million and $3.5$2.8 million classified as long-term, respectively, in the accompanying condensed consolidated balance sheets. As of December 31, 2009,September 30, 2010, the Company hashad paid in cash, written off, recovered and made restructuring charge adjustments totalingthat totaled approximately $0.2$0.4 million in facility closure costs, $2.9 million in employee separation costs and $0.1$0.2 million in other contract termination costs in connection with the 2008 Restructuring. The $3.7$3.5 million remaining in the restructuring accrual at December 31, 2009September 30, 2010 is expected to be paid out through fiscal year 2016 and relates primarily to future lease costs associated with an exited facility.
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ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. 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 December 31, 2009,September 30, 2010, 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 Company hadrecorded an income tax provisionbenefit of $0.9 million and $1.0 million for the three and six months ended September 30, 2010, respectively, primarily related to a $0.8 million tax benefit for bonus depreciation pursuant to theSmall Business Jobs Act of 2010 (“Act”). Bonus depreciation increases the Company’s 2010 alternative minimum tax (“AMT”) net operating loss (“NOL”) carryback and will allow the Company to recover AMT paid in the carryback period. The tax benefit was recorded as a discrete item during the three months ended September 30, 2010, the period in which the Act was enacted. The income tax benefit of less than $0.1 million and an income tax benefit of $0.1 million during the three and nine months ended December 31, 2009, respectively. This income tax provision and benefit for the three and ninesix months ended December 31,September 30, 2009, respectively, primarily representsrepresented the amount the Company estimatesestimated it willwould benefit from theHousing 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 income tax benefit of $0.3 million and provision of $0.6 million for the three and nine months ended December 31, 2008 respectively, is related 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 benefit and charge were recorded in the three and nine months ended December 31, 2008, respectively. 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 and research and development credits.
13. 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 does not believe that it is not aware ofcurrently party to 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 April 2009, the Company entered into a lease agreement in connection with the relocation of its corporate headquarters from Cambridge, Massachusetts to Waltham, Massachusetts, which began in January 2010. The initial lease term, which began in December 2009, is for 10 years with provisions for the Company to extend the lease term up to an additional 10 years. In June 2009, the Company executed an amendment to the lease agreement which increased the square footage leased by the Company by approximately 15%. The total rent expense related to the new headquarters is approximately $3.1 million annually during the initial lease term.
In April 2009, the Company entered into an agreement to sublease a portion of its Cambridge, Massachusetts headquarters. Under the terms of the agreement, the Company exited and made available certain of its Cambridge, Massachusetts facility to the leasee on August 1, 2009 and recorded a charge of $1.0 million, which equals the amount of rent expense in excess of estimated sublease income associated with the vacated space the Company expects to collect through the remainder of the lease term.
14. SUBSEQUENT EVENTS
The Company has evaluated events occurring subsequent to December 31, 2009 through February 4, 2010, which is the date the Company’s financial statements were issued. The Company does not have any recognized or nonrecognized subsequent events to disclose.
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| | |
Item 2. | | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Alkermes, Inc. (as usedThe following discussion should be read in this section, togetherconjunction with our subsidiaries, “us”, “we”, “our” orcondensed consolidated financial statements and related notes beginning on page 6 of this Quarterly Report on Form 10-Q, and the “Company”) is a fully integrated biotechnology company committed to developing innovative medicines to improve patients’ lives. We developed, manufactureaudited financial statements and commercialize VIVITROL® for alcohol dependencenotes thereto, and manufacture RISPERDAL® CONSTA® for schizophreniaManagement’s Discussion and bipolar disorder. Our robust pipeline includes extended-release injectable, pulmonaryAnalysis of Financial Condition and oral products forResults of Operations included in our Annual Report on Form 10-K, which has been filed with the treatment of prevalent, chronic diseases, such as central nervous system disorders, addictionSecurities and diabetes. We have research facilities in Massachusetts and a commercial manufacturing facility in Ohio. In January 2010, we relocated our corporate headquarters from Cambridge, Massachusetts, to Waltham, Massachusetts.Exchange Commission (“SEC”).
Forward-Looking Statements
Any statements herein or otherwise made in writing or orallyThis document contains and incorporates by us with regard to our expectations as to financial results and other aspects of our business may constitute forward-looking statementsreference “forward-looking statements” within the meaning of Section 27A of the Private Securities Litigation Reform Act of 1995. These1933 and Section 21E of the Securities Exchange Act of 1934. In some cases, these statements relate to our future plans, objectives, expectations and intentions and maycan be identified by words like “believe,” “expect,” “designed,”the use of forward-looking terminology such as “may,” “will,” “could,” “should,” “seek,“would,” or“expect,” “anticipate,” “continue” or other similar words. These statements discuss future expectations; contain projections of results of operations or of financial condition, or state trends and similar expressions. Theseknown uncertainties or other forward looking information. Forward-looking statements mayin this Quarterly Report on Form 10-Q include, without limitation, statements regarding:
our expectations regarding our financial performance, including, but are not limited to statements concerning:revenues, expenses, gross margins, liquidity, capital expenditures and income taxes;
our expectations regarding the achievement of certain business and operating goals and future operating results and profitability; manufacturing revenues; product sales and royalty revenues; spending relating to research and development, manufacturing, and selling and marketing activities; financial goals and projections of capital expenditures; recognition of revenues; future financings; continued growthcommercialization of RISPERDAL CONSTA sales;and VIVITROL including the commercializationsales and marketing efforts of VIVITROL inour partners Ortho-McNeil-Janssen Pharmaceuticals, Inc. and Janssen Pharmaceutica International, a division of Cilag International AG (“Janssen”), and our ability to establish and maintain successful sales and marketing, reimbursement and distribution arrangements for VIVITROL;
• | | our expectation and timeline for regulatory approval of the New Drug Application (“NDA”) submission for BYDUREONTM (exenatide for extended-release injectable suspension) and, if approved, the commercialization of BYDUREON by Amylin Pharmaceuticals, Inc. (“Amylin”), and Eli Lilly & Co. (“Lilly”); |
our expectations regarding our product candidates, including the United States (“U.S.”) by usdevelopment, regulatory review and in Russiacommercial potential of such product candidates and the Commonwealth of Independent States (“CIS”) by Cilag GmbH International (“Cilag”), a subsidiary of Johnson & Johnson; recognition of milestone payments from Cilagcosts and expenses related to the future sales of VIVITROL in Russia and the CIS; the successful continuation of development activities for thereto;
our programs, including exenatide once weekly, VIVITROL for opioid dependence (including our plans to file a supplemental NDA (“sNDA”) for VIVITROL for the treatment of opioid dependence), ALKS 29, ALKS 33, ALKS 36 and ALKS 37, ALKS 6931, ALKS 9070; the expectation and timeline for regulatory approval of the New Drug Application (“NDA”) submission for exenatide once weekly; the patentability of our new chemistry-based LinkeRxTM technology platform; andexpectations regarding the successful manufacture of our products and product candidates, including RISPERDAL CONSTA VIVITROL and polymer for exenatide once weekly,VIVITROL, by us at a commercial scale, and our expectations regarding the successful manufacture of exenatide once weeklyBYDUREON by Amylin Pharmaceuticals, Inc. (“Amylin”).our partner Amylin;
the continuation of our collaborations and other significant agreements and our ability to establish and maintain successful development collaborations;
the impact of new accounting pronouncements;
our expectations concerning the status, intended use and financial impact of our properties, including manufacturing facilities; and
our future capital requirements and capital expenditures and our ability to finance our operations and capital requirements.
Although we believeYou are cautioned that our expectationsforward-looking statements are based on reasonable assumptions within the boundscurrent expectations and are inherently uncertain. Actual performance and results of our knowledge of our business and operations may differ materially from those projected or suggested in the forward-looking statements contained in this document are neither promises nor guarantees. Our business is subjectdue to significant riskvarious risks and uncertainties, and there can be no assurance that our actual results will not differ materially from our expectations. Factors which could cause actual results to differ materially from our expectations set forth in our forward-looking statements are set forth in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2009 and subsequent Quarterly Reports on Form 10-Q, and include, among others: (i) including:
manufacturing and royalty revenues from RISPERDAL CONSTA may not continue to grow, particularly because we rely on our partner, Janssen, Pharmaceutica, Inc., a division of Ortho-McNeil-Janssen Pharmaceuticals, Inc., and Janssen Pharmaceutica International, a division of Cilag International (together “Janssen”), to forecast and market and sell this product and because our partner markets and sells INVEGA® SUSTENNA™, a competing product; (ii)
we may be unable to manufacture RISPERDAL CONSTA, VIVITROL and polymer for exenatide once weekly,our product candidates in sufficient quantities and with sufficient yields to meet our orand our partners’ requirements orrequirements;
Amylin may not be able to add additional production capacity for RISPERDAL CONSTA and VIVITROL, or unexpected events could interrupt manufacturing operations at our RISPERDAL CONSTA and VIVITROLsuccessfully operate the manufacturing facility which is the sole source of supply for these products; (iii) BYDUREON;
we may be unable to develop the commercial 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 Russia and for the treatment of alcohol and opioid dependence in the CIS; (v) Cilag may be unable to successfully commercialize VIVITROL in Russia and the CIS; (vi) third party payors may not cover or reimburse us for purchases of our products; (vii) if approved, Eli Lilly and CompanyUnited States (“Lilly”U.S.”) and Amylin may be unable to successfully commercialize exenatide once weekly; (viii) we may be unable to scale-up and manufacture our product candidates commercially or economically; (ix) we may not be able to source raw
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materials for our production processes from third parties; (x) Amylin may not be able to successfully operate the manufacturing facility for exenatide once weekly and the U.S. Food and Drug Administration (“FDA”) and foreign regulatory agencies may not find the product produced in the Amylin facility comparable to the product used in the pivotal clinical study which was manufactured in our facility; (xi) our product candidates,approve BYDUREON and, even if approved, for marketing,such product may not be launched successfully in one or all indications for which marketing is approved and, if launched, may not produce significant revenues; (xii) commercialized;
we rely solely on our collaborative partners to determine and implement, and to inform us in a timely manner of any developments concerning, the regulatory and marketing strategies for RISPERDAL CONSTA and our other partnered, non-proprietary programs; (xiii) RISPERDAL CONSTA, VIVITROL and, if approved,BYDUREON, including the four-week formulation of exenatide once weekly may have unintended side effects, adverse reactions or incidents of misusecurrently being developed by us, and the FDA or other health authorities could require post approval studies or the removal of our products from the market; (xiv) 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; (xv) clinical trials
• | | RISPERDAL CONSTA, VIVITROL and BYDUREON, if and when approved, experience and will continue to experience competition, including from competing products marketed by our collaborative partners, such as INVEGA® SUSTENNATM (paliperidone palmitate), and from marketing approvals for new products; |
third party payors may take more timenot cover or consume more resourcesreimburse our products;
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the impact of recently enacted, and any future, health reform legislation may be greater than initially envisioned; (xvi) results of earlier clinical trials may not necessarily be predictive of the safety and efficacy results in larger clinical trials, and the results of clinical trials may not be predictive of the safety or efficacy results of the product in commercial use; (xvii) expected;
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 undertake new or additional clinical trials for product candidates incorporating our technologies, or clinical trials could be delayed or terminated; (xviii) after the completion of clinical trials for
RISPERDAL CONSTA, VIVITROL, BYDUREON, if and when approved, and our product candidates including exenatide once weekly,in commercial use may have unintended side effects, adverse reactions or after the submission for marketing approvalincidents of such product candidates,misuse and the FDA or other health authorities could require post approval studies or require removal of our products from the market;
clinical trials may take more time or consume more resources than initially envisioned and the results of earlier clinical trials may not necessarily be predictive of the safety and efficacy results of larger clinical trials;
U.S. and foreign regulatory agencies may refuse to accept such filings, couldapplications for marketing authorization for our product candidates, may request additional preclinical or clinical studies be conducted or request a safety monitoring program, any of which could result in significant delays or the failure of such products to receive marketing approval; (xix) 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 marketapproval or acceptance be precluded from commercialization by proprietary rights of third parties or experience substantial competition in the marketplace; (xx) technological change in the biotechnology or pharmaceutical industries could render our products and/or product candidates obsolete or non-competitive; (xxi)
difficulties or set-backs in obtaining and enforcing our patents including but not limited to those related to our LinkeRx technology platform, and difficulties with the patent rights of others could occur; (xxii)
we may suffer potential costs resulting from product liability or other third party claims;
we may incur losses in the future; (xxiii) 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, which may be further impacted by current economic conditions and the lack of available credit sources; (xxiv) our methodology for determining the fair value of our investments may change; and (xxv)
we may not be able to liquidate or otherwise recoup our investments in corporate debt securities asset backed debt securities and auction rate securities.securities;
exchange rate valuations and fluctuations may negatively impact our revenues, results of operations and financial condition; and
the other risks and uncertainties described or discussed in Part 1, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended March 31, 2010.
The forward-looking statements made in this document are made onlycontained and incorporated herein represent our judgment as of the date hereofof this Quarterly Report, and we caution readers not to place undue reliance on such statements. The information contained in this Quarterly Report is provided by us as of the date of this Quarterly Report, and, except as required by law, we do not intendundertake any obligation to update any forward-looking statements contained in this document as a result of thesenew information, future events or otherwise.
Unless otherwise indicated, information contained in this Quarterly Report concerning the disorders targeted by our products and product candidates and the markets in which we operate is based on information from various sources (including industry publications, medical and clinical journals and studies, surveys and forecasts and our internal research), on assumptions that we have made, which we believe are reasonable, based on those data and other similar sources and on our knowledge of the markets for our products and development programs. Our internal research has not been verified by any independent source and we have not independently verified any third-party information. These projections, assumptions and estimates are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, or to publicly announce the results of any revisions to anyincluding those described in Part 1, Item 1A, “Risk Factors” of our forward-looking statementsAnnual Report on Form 10-K for the year ended March 31, 2010. These and other thanfactors could cause results to differ materially from those expressed in the estimates included in this prospectus.
Overview
Alkermes, Inc. (as used in this section, together with our subsidiaries, “us”, “we”, “our” or the “Company”) is a fully integrated biotechnology company committed to developing innovative medicines to improve patients’ lives. We developed, manufacture and commercialize VIVITROL® (naltrexone for extended-release injectable suspension) for alcohol dependence and for the prevention of relapse to opioid dependence, following opioid detoxification. We also manufacture RISPERDAL® CONSTA® ((risperidone) long-acting injection) for schizophrenia and bipolar I disorder. Our robust pipeline includes extended-release injectable and oral products for the treatment of prevalent, chronic diseases, such as required under the federal securities laws.
Our Strategycentral nervous system (“CNS”) disorders, reward disorders, addiction, diabetes and autoimmune disorders. We are headquartered in Waltham, Massachusetts and have a research facility in Massachusetts and a commercial manufacturing facility in Ohio.
We leverage our formulation expertise and drug development technologiesproprietary product platforms to develop, both with partners and on our own, innovative and competitively advantaged drug productsmedications that can 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.proprietary product platforms. In addition, we apply our innovative formulation expertise and drug development capabilities to create our own new, proprietary pharmaceutical products. Each
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Financial Highlights
Net loss for the three months ended September 30, 2010 was $7.7 million, or $0.08 per common share, basic and diluted, as compared to a net loss of these approaches is discussed$8.7 million, or $0.09 per common share, basic and diluted, for the three months ended September 30, 2009. Net loss for the six months ended September 30, 2010 was $21.1 million, or $0.22 per common share, basic and diluted, as compared to a net loss of $18.9 million, or $0.20 per common share, basic and diluted, for the six months ended September 30, 2009. Revenues for the three and six months ended September 30, 2010 were driven by strong manufacturing and royalty revenues from RISPERDAL CONSTA. Worldwide sales of RISPERDAL CONSTA by Janssen were $377.7 million and $733.4 million for the three and six months ended September 30, 2010, respectively, an increase of 7.1% and 4.7% from the three and six months ended September 30, 2009, respectively.
On July 1, 2010, we redeemed the remaining non-recourse RISPERDAL CONSTA secured 7% notes (the “non-recourse 7% Notes”) for $45.6 million. As a result of this transaction, we recorded charges of $1.4 million relating to the write-off of the unamortized portion of deferred financing costs and $0.8 million primarily related to the premium paid on the redemption of the non-recourse 7% Notes. We expect to save $3.2 million in more detail in “Productsinterest and Development Programs.”accretion expense through the previously scheduled maturity date of January 1, 2012 as a result of redeeming the non-recourse 7% Notes.
Products and Development Programs
RISPERDAL CONSTA
RISPERDAL CONSTA is a long-acting formulation of risperidone, a product of Janssen, and is the first and only long-acting, atypical antipsychotic approved by the FDA for both the treatment of both schizophrenia and for the treatment of bipolar I disorder. The medication uses our proprietary Medisorb® injectable extended-release technology to deliver and maintain therapeutic medication levels in the body through just one injection every two weeks. RISPERDAL CONSTA is marketed by
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Janssen and is exclusively manufactured by us. RISPERDAL CONSTA was first approved for the treatment of schizophrenia by regulatory authorities in the United Kingdom and Germany in August 2002 and by the FDA in October 2003. The Pharmaceuticals and Medical Devices Agency in Japan approved RISPERDAL CONSTA for the treatment of schizophrenia in April 2009. RISPERDAL CONSTA is the first long-acting atypical antipsychotic to be available in Japan. RISPERDAL CONSTA is approved for the treatment of schizophrenia in approximately 85 countries and marketed in approximately 6070 countries, and Janssen continues to launch the product around the world. In the U.S., RISPERDAL CONSTA is also approved for the treatment of bipolar I disorder.
Schizophrenia is a chronic, severe and disabling brain disorder characterizeddisorder. The disease is marked by positive symptoms (hallucinations and delusions) and negative symptoms (depression, blunted emotions and social withdrawal), as well as by disorganized thinking, delusionsthinking. An estimated 2.4 million Americans have schizophrenia, with men and hallucinations.women affected equally. Worldwide, it is estimated that one person in every 100 develops schizophrenia, one of the most serious types of mental illness. Studies have demonstrated that as many as 75 percent75% of patients with schizophrenia have difficulty taking their oral medication on a regular basis, which can lead to worsening of symptoms. Clinical data have shown that treatment with RISPERDAL CONSTA may lead to improvements in symptoms, sustained remission and decreases in hospitalization in patients with schizophrenia.
In May 2009, the FDA approved RISPERDAL CONSTA as both monotherapy and adjunctive therapy to lithium or valproate in the maintenance treatment of bipolar I disorder. RISPERDAL CONSTA is also approved for the maintenance treatment of bipolar I disorder in Canada, Australia and Saudi Arabia.
Bipolar disorder is a brain disorder that causes unusual shifts in a person’s mood, energy and ability to function. It is often characterized by debilitating mood swings, from extreme highs (mania) to extreme lows (depression). Bipolar I disorder is characterized based on the occurrence of at least one manic episode, with or without the occurrence of a major depressive episode. Bipolar disorder is believed to affect approximately 5.7 million American adults, or about 2.6% of the U.S. population age 18 and older, in a given year. The median age of onset for bipolar disorders is 25 years. Clinical data have shown that RISPERDAL CONSTA significantly delayed the time to relapse compared to placebo treatment in patients with bipolar I disorder.
In August 2009, we received notification from Ortho-McNeil-Janssen Pharmaceuticals, Inc. and Janssen Pharmaceutica International, a division of Cilag International AG, that based on a portfolio review, it has decided not to pursue further development of the four-week long-acting injectable formulation of risperidone.
VIVITROL
We developed VIVITROL, an extended-release Medisorb formulation of naltrexone, which isas the first and only once-monthly, non-narcotic, non-addictive injectable medication for the treatment of alcohol dependence.dependence and for the prevention of relapse to opioid dependence following opioid detoxification.
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Alcohol dependence is a serious and chronic brain disease characterized by cravings for alcohol, loss of control over drinking, withdrawal symptoms and an increased tolerance for alcohol. According to the National Institute on Alcohol Abuse and Alcoholism’s 2001—2002 National Epidemiologic Survey on Alcohol and Related Conditions, it is estimated that more than 18 million Americans suffer from alcohol dependence. Adherence to medication is particularly challenging with this patient population. In clinical trials, when used in combination with psychosocial support, VIVITROL was shown to reduce the number of drinking days and heavy drinking days and to prolong abstinence in patients who abstained from alcohol the week prior to starting treatment. VIVITROL was approved by the FDA in April 2006 for the treatment of alcohol dependence and was launched in the U.S. in June 2006.2006 with our then partner, Cephalon, Inc. (“Cephalon”). In December 2008, we assumed sole responsibility for the commercialization of VIVITROL in the U.S..U.S. from Cephalon. In December 2007, we exclusively licensed the right to commercialize VIVITROL for the treatment of alcohol dependence and opioid dependence in Russia and other countries in the CISCommonwealth of Independent States (“CIS”) to Cilag.Cilag GmbH international (“Cilag”). In August 2008, the Russian regulatory authorities approved VIVITROL for the treatment of alcohol dependence. Cilag launched VIVITROL in Russia in March 2009. In March 2010, the FDA approved a Risk Evaluation and Mitigation Strategy (“REMS”), for VIVITROL that consists of a Medication Guide and other customary REMS assessment requirements.
We are also developing VIVITROL for the treatment of opioidOpioid dependence is a serious and chronic brain disease characterized by compulsive, prolonged-self administrationcognitive, behavioral and physiological symptoms in which an individual continues to use opioids despite significant harm to oneself and others. In addition to the use of heroin, an illegal opioid drug, opioid dependence includes the non-medical use of opioid substances that are not usedanalgesics, including prescription pain relievers, and represents a growing public health problem in the U.S. According to the 2009 U.S. National Survey on Drug Use and Health, an estimated 1.6 million people aged 18 or older were dependent on pain relievers or heroin. In October 2010, the FDA approved VIVITROL for a medical purpose. In November 2009, we announced positive preliminary results from a phase 3 clinical trialthe prevention of relapse to opioid dependence, following opioid detoxification. The FDA approval of VIVITROL for the treatmentprevention of relapse to opioid dependence. Thedependence, following opioid detoxification was based on data from a six-month phase 3 study met its primary efficacy endpoint, and all secondary endpoints, and data showed that patients treated once-monthly with VIVITROL demonstrated statistically significant higher rates of clean (opioid-free) urine screens, compared toin which patients treated with placebo. Based onVIVITROL in combination with psychosocial support sustained complete abstinence (opioid-free urine screens and negative self-report of opioid use) during the positive results of this phase 3 study we plan to fileperiod at a supplemental New Drug Application (sNDA)rate significantly greater than those patients treated with the FDAplacebo in the first half of calendar year 2010.combination with psychosocial support.
Exenatide Once WeeklyBYDUREON
We are collaborating with Amylin on the development of exenatidea once weekly formulation of exenatide, called BYDUREON, for the treatment of type 2 diabetes. Exenatide once weeklyBYDUREON is an injectable formulation of Amylin’s BYETTA® (exenatide). and is being developed with the goal of providing patients with an effective and more patient-friendly treatment option. BYETTA is an injection administered twice daily. Diabetes is a disease in which the body does not produce or properly use insulin. Diabetes can result in serious health complications, including cardiovascular, kidney and nerve disease. Diabetes is believed to affect more than 24 million people in the U.S. and an estimated 285 million adults worldwide. Approximately 90 — 95% of those affected have type 2 diabetes.
According to the Centers for Disease Control and Prevention’s National Health and Nutrition Examination Survey, approximately 60% of people with diabetes do not achieve their target blood sugar levels with their current treatment regimen. In addition, 85% of type 2 diabetes patients are overweight and 55% are considered obese. BYETTA was approved by the FDA in April 2005 as adjunctive therapy to improve blood sugar control in patients with type 2 diabetes who have not achieved adequate control on metformin and/or a sulfonylurea, which are commonly used oral diabetes medications. In December 2006, the FDA approved BYETTA as an add-on therapy for people with type 2 diabetes unable to achieve adequate glucose control on thiazolidinediones, a class of diabetes medications. Amylin has an agreement with Lilly for the development and commercialization of exenatide, including exenatide
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once weekly. Exenatide once weekly is being developed with the goal of providing patients with an effective and more patient-friendly treatment option.
In May 2009, Amylin submitted a NDA to the FDA for the treatment of type 2 diabetes. The FDA accepted the submission in July 2009.
In July 2009, Amylin, Lilly and we announced positive results from the DURATION-3 study designed to compare exenatide once weekly to LANTUS® (insulin glargine) in 467 patients with type 2 diabetes taking stable doses of metformin alone or in combination with a sulfonylurea. Patients randomized to exenatide once weekly experienced a statistically superior reduction in A1C, a measure of average blood sugar over three months, of 1.5 percentage points from baseline, compared to a reduction of 1.3 percentage points for LANTUS after completing 26 weeks of treatment. At the end of the study, patients treated with exenatide once weekly achieved a mean A1C of 6.8 percent compared with a mean A1C of 7.0 percent in those treated with LANTUS. Treatment with exenatide once weekly also produced a statistically significant difference in weight, with a mean weight loss of 5.8 pounds at 26 weeks, compared with a mean weight gain of 3.1 pounds for LANTUS, a difference of 8.9 pounds between the treatments. In addition, patients treated with exenatide once weekly reported significantly fewer episodes of confirmed hypoglycemia than those patients treated with LANTUS.
In October 2009, the FDA approved BYETTA as a stand-alone medication (monotherapy) along with diet and exercise to improve glycemic control in adults with type 2 diabetes. Amylin has an agreement with Lilly for the development and commercialization of exenatide, including BYDUREON.
In December 2009,March 2010, Amylin received a complete response letter in reference to the NDA for BYDUREON submitted in May 2009. The complete response letter did not include requests for new pre-clinical or clinical trials. Requests raised in the letter primarily related to the finalization of the product labeling with accompanying REMS and clarification of existing manufacturing processes. In April 2010, Amylin announced that it had submitted a response to the FDA’s complete response letter. In May 2010, the FDA accepted the response and issued a PDUFA action date of October 22, 2010 for the NDA.
In April 2010, Lilly announced that the EMA had accepted the Marketing Authorization Application filing for BYDUREON for the treatment of type 2 diabetes.
In October 2010, Amylin, Lilly and we announced positivethat the FDA issued a complete response letter regarding the NDA for BYDUREON. In the complete response letter, the FDA requested a thorough QT (tQT) study and the submission of the results fromof the DURATION-5 study designed to compare exenatide once weeklyevaluate the efficacy, and the labeling of the safety and effectiveness, of the commercial formulation of BYDUREON.
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ALKS 33
ALKS 33, one of our proprietary candidates, is an oral opioid modulator that we are developing for the potential treatment of addiction and other CNS disorders. In November 2009, we initiated a phase 2 clinical study to BYETTAassess the safety and efficacy of multiple doses of ALKS 33 in patients with type 2 diabetes who were not achieving adequate glucose control using background therapies that included dietalcohol dependence and exercise, metformin, sulfonylurea, thiazolidinediones orto further define the clinical profile of ALKS 33.
In April 2010, we announced plans for the development of ALKS 33 for the treatment of binge-eating disorder and as a combination therapy with buprenorphine, an existing medication for the treatment of opioid addiction, for the treatment of addiction and mood disorders. Binge-eating disorder is characterized by recurrent binge eating episodes during which a person feels a loss of control over his or her eating. Unlike bulimia, binge eating episodes are not followed by purging, excessive exercise or fasting. As a result, people with binge-eating disorder often are overweight or obese. It is estimated that approximately 1% to 2% of Americans suffer from binge-eating disorder. We expect to receive data from a phase 2 study of ALKS 33 in binge eating disorder in the first half of calendar 2011.
In October 2010, we announced positive topline results from a randomized, double-blind, multi-dose, placebo-controlled phase 1 clinical study that assessed the safety, tolerability and pharmacodynamic effects of the agents. Patients randomizedcombination of ALKS 33 and buprenorphine when administered alone and in combination to exenatide once weekly experienced12 opioid-experienced users. Data from the study showed that the combination therapy was generally well tolerated and sublingual administration of ALKS 33 effectively blocked the agonist effects of buprenorphine. Based on these positive results, we expect to initiate a statistically superior reduction in A1C, a measure of average blood sugar over three months, of 1.6 percentage points from baseline, compared to a reduction of 0.9 percentage points for BYETTA after completing 24 weeks of treatment. At the endphase 2a study of the combination therapy for the treatment of cocaine addiction in the first half of calendar year 2011. The phase 2a study patients treated with exenatide once weekly achievedis expected to be funded through a mean A1C of 7.1 percent compared with a mean A1C of 7.7 percent in those treated with BYETTA. Both treatment groups achieved statistically significant weight loss bygrant from the endNational Institute on Drug Abuse (“NIDA”). NIDA has granted us up to $2.4 million to accelerate the clinical development of the study, with an average lossALKS 33 and buprenorphine combination therapy. Currently, there are no medications approved for the treatment of 5.1 pounds for patients taking exenatide once weekly and 3.0 pounds for patients taking BYETTA. Additional studies designed to demonstrate the superiority of exenatide once weekly compared to commonly prescribed diabetes medications are ongoing.cocaine addiction.
ALKS 37
We are developing ALKS 37, an oral,orally active, peripherally-restricted opioid antagonist for the treatment of opioid-induced constipation. Research indicatesconstipation (“OIC”). According to IMS Health, over 243 million prescriptions were written for opioids in 2009 in the U.S. Many studies indicate that a high percentage of patients receiving opioids are likely to experience side effects affecting gastrointestinal motility. There are currently no available oral treatments for this condition, which has severe quality of life implications. In October 2009, we initiated a phase 1 study of ALKS 37 in approximately 40 healthy volunteers. The randomized, double-blind, placebo-controlled study will assess the safety, tolerability, pharmacokinetic and pharmacologic effects of a single oral administration of five doses of ALKS 37. We expect to report topline results from the study in the first half of calendar 2010. ALKS 37 is a component of ALKS 36.36, which is discussed below.
In April 2010, we commenced a multicenter, randomized, double-blind, placebo-controlled, multidose study designed to evaluate the efficacy, safety and tolerability of ALKS 37 in approximately 60 patients with OIC. We expect to report preliminary results from the phase 2 study of ALKS 37 in the first quarter of calendar 2011.
ALKS 36
In October 2009, we announced our intention to develop ALKS 36, which is expected to consist of a co-formulation of an opioid analgesic and an oral, peripherally-restricted opioid antagonist, is being developedALKS 37, for the treatment of pain without the side effects of constipation. Research indicates that a high percentage of patients receiving opioids are likely to experience side effects affecting gastrointestinal motility. A pain medication that does not inhibit gastrointestinal motility, such as ALKS 36, could provide an advantage over current therapies. The preliminary results from the phase 2 study of ALKS 37, which are expected in the first quarter of calendar 2011, will inform further development of ALKS 36.
ALKS 339070
ALKS 339070 is an oral opioid modulator for the potential treatmenta once-monthly, injectable, sustained-release version of addiction and other central nervous system disorders. In October 2009, we announced positive topline data from two clinical trials of ALKS 33. Data from the
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studies, ALK33-003 and ALK33-004, showed that ALKS 33 was generally well tolerated and successfully blocked the effects of an opioid with a duration of action that supports once daily dosing. ALK33-003 was a phase 1 randomized, double-blind, placebo-controlled, multi-dose study designed to assess the steady-state pharmacokinetics, safety and tolerability of ALKS 33 in 30 healthy subjects. ALK33-004 was a phase 1, randomized, single-blind, placebo-controlled, single-dose study designed to test the ability of ALKS 33 to block the subjective and objective effects of a potent opioid agonist, remifentanil (a commercially available analgesic) in 24 healthy, non-dependent, opioid-experienced subjects. In November 2009, we announced the initiation of a phase 2 clinical study to assess the safety and efficacy of multiple doses of ALKS 33 in patients with alcohol dependence and to further define the clinical profile of ALKS 33.
ALKS 29
We are developing ALKS 29, an oral combination therapyaripiprazole for the treatment of alcohol dependence.schizophrenia. ALKS 299070 is our first candidate to leverage our proprietary LinkeRxTM product platform. Aripiprazole is commercially available under the name ABILIFY® for the treatment of a co-formulationnumber of CNS disorders. We recently initiated a phase 1 clinical study of ALKS 33, a proprietary opioid modulator,9070, and baclofen, an FDA-approved muscle relaxant and antispasmodic therapeutic. Research suggests that baclofen may attenuatewe expect to report topline data from this study in the compulsive componentfirst half of alcohol dependence. As a co-formulation of ALKS 33 and baclofen, ALKS 29 is designed to address both the compulsive and impulsive components of alcohol dependence.calendar 2011.
ALKS 6931
ALKS 6931 is a long-acting form of a TNF receptor-FC fusion protein for the treatment of rheumatoid arthritis and related autoimmune diseases. ALKS 6931 is our first candidate being developed using the MedifusionTM technology licensed from Acceleron Pharmaceuticals,Pharma, Inc. (“Acceleron”). ALKS 6931 is structurally similar to etanercept, commercially available under the name ENBREL®. We continue to conduct preclinical studies of ALKS 6931 and intend to wait to file an IND until such preclinical work is complete and we are convinced that we have the most optimized clinical candidate.
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ALKS 90707921
ALKS 90707921, the second candidate from the LinkeRx platform, is a once-monthly, injectable, sustained-releaseextended-release version of aripiprazoleolanzapine for the treatment of schizophrenia. ALKS 9070 is our first candidate to leverage our proprietary LinkeRxTM technology platform. AripiprazoleOlanzapine is commercially available under the trade name ABILIFYZYPREXA® (olanzapine). We are engineering ALKS 7921 to seek to prevent early, inadvertent release of free olanzapine into systemic circulation and, in so doing, to provide another valuable option for the treatment of a number of CNS disorders. Based on encouraging preclinical results, ALKS 9070 is expectedpatients and physicians to enter the clinic in the second half of calendar 2010.manage schizophrenia.
Executive Summary
Net loss for the three months ended December 31, 2009 was $6.8 million, or $0.07 per common share — basic and diluted, as compared to net income of $112.7 million, or $1.18 per common share — basic and diluted, for the three months ended December 31, 2008. Net loss for the nine months ended December 31, 2009 was $25.7 million or $0.27 per common share— basic and diluted, as compared to net income of $144.1 million, or $1.51 per common share — basic and $1.49 per common share — diluted, for the nine months ended December 31, 2008. Net loss for the three and nine months ended December 31, 2009 includes $3.6 million and $15.9 million, respectively, in charges associated with the relocation of our corporate headquarters from Cambridge, Massachusetts to Waltham, Massachusetts.
Results of Operations
Manufacturing Revenues
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Change | | Nine Months Ended | | Change | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31 | | Favorable/ | | December 31 | | Favorable/ | | | Three Months Ended September 30, | | Six Months Ended September 30, | |
(In millions) | | 2009 | | 2008 | | (Unfavorable) | | 2009 | | 2008 | | (Unfavorable) | | | 2010 | | 2009 | | Change | | 2010 | | 2009 | | Change | |
Manufacturing revenues: | | |
RISPERDAL CONSTA | | $ | 27.2 | | $ | 21.3 | | $ | 5.9 | | $ | 87.0 | | $ | 88.0 | | $ | (1.0 | ) | | $ | 32.6 | | $ | 31.9 | | $ | 0.7 | | $ | 59.0 | | $ | 59.8 | | $ | (0.8 | ) |
Polymer | | 1.5 | | — | | 1.5 | | 2.9 | | — | | 2.9 | | | 0.6 | | 0.4 | | 0.2 | | 1.1 | | 1.4 | | | (0.3 | ) |
VIVITROL | | — | | | (0.8 | ) | | 0.8 | | 0.4 | | 4.2 | | | (3.8 | ) | | — | | 0.5 | | | (0.5 | ) | | — | | 0.4 | | | (0.4 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Manufacturing revenues | | $ | 28.7 | | $ | 20.5 | | $ | 8.2 | | $ | 90.3 | | $ | 92.2 | | $ | (1.9 | ) | | $ | 33.2 | | $ | 32.8 | | $ | 0.4 | | $ | 60.1 | | $ | 61.6 | | $ | (1.5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
The increase in RISPERDAL CONSTA manufacturing revenues for the three months ended December 31, 2009,
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September 30, 2010, as compared to the three months ended December 31, 2008,September 30, 2009, was primarily due to an 8%a 9% increase in the number of units shipped to Janssen, and an increasepartially offset by a decrease in the unit net unit sales price.price of 2%. The decrease in RISPERDAL CONSTA manufacturing revenues for the ninesix months ended December 31, 2009,September 30, 2010, as compared to the ninesix months ended December 31, 2008,September 30, 2009, was primarily due to a 2% decrease in the unit net unit sales price, partially offset by an increase in the number of units shipped to Janssen of less than 1%5%. The increase in the net unit sales price in the three months ended December 31, 2009, as compared to the three months ended December 31, 2008, was primarily due to a weaker U.S. dollar in relation to the foreign currencies in which the product was sold. The decrease in the net unit sales price infor both the nine months ended December 31, 2009, as compared to the nine months ended December 31, 2008, wasthree and six month period is primarily due to increased sales deductions recorded by Janssen on RISPERDAL CONSTA sales as a strongerresult of healthcare reform in the U.S., as further described in Product Sales, net, below; and the strengthening of the U.S. dollar in relation to the foreign currencies in which the product was sold. See Part I, Item 3. “Quantitative and Qualitative Disclosures about Market Risk” for information on foreign currency exchange rate risk related to RISPERDAL CONSTA revenues.
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. In the three and ninesix months ended December 31,September 30, 2010 and 2009, and 2008, our RISPERDAL CONSTA manufacturing revenues were based on an average of 7.5% of Janssen’s unit net sales price of RISPERDAL CONSTA.price. We anticipate that we will continue to 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, 20102011 and beyond.
PolymerThe increase in polymer manufacturing revenues for the three and nine months ended December 31,September 30, 2010, as compared to the three months ended September 30, 2009, consistwas primarily due to a 30% increase in the amount of polymer salesshipped to AmylinAmylin. The decrease in polymer manufacturing revenues for usethe six months ended September 30, 2010, as compared to the six months ended September 30, 2009, was primarily due to a 13% decrease in the formulationamount of exenatide once weekly.polymer shipped to Amylin. We record manufacturing revenues under our arrangement with Amylin for polymer sales at an agreed upon price when product is shipped to them. During the three and nine months ended December 31, 2008, we did not make any shipments ofThe polymer to Amylin.
We record VIVITROL manufacturing revenues under our arrangement with Cilag at an agreed upon price when product is shipped to them. We made no shipments during the three months ended December 31, 2009 or 2008. VIVITROL manufacturing revenues for the nine months ended December 31, 2009 consisted entirely of product shipments to Cilag for resale in Russia. During the nine months ended December 31, 2008, we had $0.4 million of billings to Cilag for shipments of VIVITROL to support the commercialization of VIVITROL in Russia.
Effective December 1, 2008 (the “Termination Date”), we ended our collaboration with Cephalon and assumed full responsibility for the marketing and sale of VIVITROLused in the U.S., and assumed title to certain VIVITROL inventory which we had previously sold to Cephalon prior to the termination. In the three months ended December 31, 2008, we reduced VIVITROL manufacturing revenues by $0.8 million to reverse the previous saleformulation of this inventory to Cephalon. VIVITROL manufacturing revenues for the nine months ended December 31, 2008 consisted of $2.8 million of billings to Cephalon for failed product batches, $0.7 million of net shipments of VIVITROL to Cephalon and $0.3 million related to manufacturing profit on VIVITROL, which equaled a 10% markup on VIVITROL cost of goods manufactured, all of which occurred prior to the termination of the VIVITROL collaboration.BYDUREON.
Royalty Revenues
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Change | | Nine Months Ended | | Change | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31 | | Favorable/ | | December 31 | | Favorable/ | | | Three Months Ended September 30, | | Six Months Ended September 30, | |
(In millions) | | 2009 | | 2008 | | (Unfavorable) | | 2009 | | 2008 | | (Unfavorable) | | | 2010 | | 2009 | | Change | | 2010 | | 2009 | | Change | |
Royalty revenues | | $ | 10.0 | | $ | 8.0 | | $ | 2.0 | | $ | 27.5 | | $ | 25.0 | | $ | 2.5 | | | $ | 9.5 | | $ | 8.8 | | $ | 0.7 | | $ | 18.4 | | $ | 17.5 | | $ | 0.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Substantially all of our royalty revenues for the three and ninesix months ended December 31,September 30, 2010 and 2009 and 2008 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. RISPERDAL CONSTA royalty revenues for the three and ninesix months ended December 31,September 30, 2010 were based on RISPERDAL CONSTA sales of $377.7 million and $733.4 million, respectively. RISPERDAL CONSTA royalty revenues for the three and six months ended September 30, 2009 were based on RISPERDAL CONSTA sales of $398.7$352.6 million and $1,099.1$700.3 million, respectively. Royalty revenuesSee Part I, Item 3. “Quantitative and Qualitative Disclosures about Market Risk” for the three and nine months ended December 31, 2008 were basedinformation on foreign currency exchange rate risk related to RISPERDAL CONSTA sales of $318.8 million and $999.5 million, respectively. During the three and nine months ended December 31, 2009, 67% and 64% of RISPERDAL CONSTA sales occurred in foreign countries, respectively, as compared to 63% and 64% during the three and nine months ended December 31, 2008, respectively.revenues.
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Product Sales, net
Upon terminationOur product sales consist of the VIVITROL collaboration with Cephalon, we assumed the risks and responsibilities for the marketing and salesales of VIVITROL in the U.S., effective on the Termination Date. to wholesalers, specialty distributors and specialty pharmacies. The following table presents the adjustments deducted from VIVITROL product sales, gross to arrive at VIVITROL product sales, net during the three and ninesix months ended December 31,September 30, 2010 and 2009:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Six Months Ended | |
| | December 31 | | December 31 | | | September 30, | | September 30, | |
(In millions) | | 2009 | | % of Sales | | 2009 | | % of Sales | | |
| | | 2010 | | % of Sales | | 2009 | | % of Sales | | 2010 | | % of Sales | | 2009 | | % of Sales | |
Product sales, gross | | $ | 7.2 | | | 100.0 | % | | $ | 17.7 | | | 100.0 | % | | $ | 10.8 | | | 100.0 | % | | $ | 5.2 | | | 100.0 | % | | $ | 18.2 | | | 100.0 | % | | $ | 10.5 | | | 100.0 | % |
Adjustments to product sales, gross: | | |
Reserve for inventory in the distribution channel (1) | | | | (2.1 | ) | | | (19.4 | )% | | 0.1 | | | 1.9 | % | | | (1.7 | ) | | | (9.3) | % | | | (0.1 | ) | | | (1.0) | % |
Chargebacks | | | (0.4 | ) | | | (5.6 | )% | | | (0.7 | ) | | | (4.0 | )% | | | (0.5 | ) | | | (4.6 | )% | | | (0.2 | ) | | | (3.9) | % | | | (0.9 | ) | | | (5.0) | % | | | (0.3 | ) | | | (2.7) | % |
Medicaid rebates | | | | (0.3 | ) | | | (2.8 | )% | | | (0.1 | ) | | | (1.9) | % | | | (0.8 | ) | | | (4.4) | % | | | (0.3 | ) | | | (2.7) | % |
Wholesaler fees | | | (0.3 | ) | | | (4.2 | )% | | | (0.7 | ) | | | (4.0 | )% | | | (0.3 | ) | | | (2.8 | )% | | | (0.2 | ) | | | (3.8) | % | | | (0.6 | ) | | | (3.3) | % | | | (0.4 | ) | | | (3.9) | % |
Medicaid rebates | | | (0.3 | ) | | | (4.2 | )% | | | (0.6 | ) | | | (3.4 | )% | |
Product returns (1) | | | (0.4 | ) | | | (5.6 | )% | | | (0.5 | ) | | | (2.8 | )% | |
Other | | | (0.3 | ) | | | (4.2 | )% | | | (0.9 | ) | | | (5.1 | )% | | | (1.1 | ) | | | (10.2 | )% | | | (0.2 | ) | | | (3.8) | % | | | (1.5 | ) | | | (8.2) | % | | | (0.5 | ) | | | (4.9) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total adjustments | | | (1.7 | ) | | | (23.8 | )% | | | (3.4 | ) | | | (19.3 | )% | | | (4.3 | ) | | | (39.8 | )% | | | (0.6 | ) | | | (11.5) | % | | | (5.5 | ) | | | (30.2) | % | | | (1.6 | ) | | | (15.2) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Product sales, net | | $ | 5.5 | | | 76.2 | % | | $ | 14.3 | | | 80.7 | % | | $ | 6.5 | | | 60.2 | % | | $ | 4.6 | | | 88.5 | % | | $ | 12.7 | | | 69.8 | % | | $ | 8.9 | | | 84.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
(1) | | FollowingOur reserve for inventory in the introduction of a return policy for VIVITROL, ourdistribution channel is an estimate for product returnsthat reflects the deferral of the recognition of revenue on shipments of VIVITROL to our customers until the product has left the distribution channel, as we do not yet have the history to reasonably estimate returns related to these shipments. We estimate the product shipments out of the distribution channel throughbased on data provided by external sources, including information on inventory levels provided by our customers as well as prescription information. |
We began selling VIVITROLThe increase in product sales, gross for the U.S. on December 1, 2008three and had gross sales duringsix months ended September 30, 2010, as compared to the month of December of $1.6 million, but no net salesthree and six months ended September 30, 2009, was primarily due to an 81% and 50% increase in the deferralnumber of $1.4 million of revenue as none of the productunits sold was estimated to have leftinto the distribution channel. Netchannel, respectively, and a 15% increase in price. The adjustments to product sales, of VIVITROL by Cephalongross to arrive at product sales, net, increased during the three and ninesix months ended December 31, 2008 were $2.8 millionSeptember 30, 2010, as compared to the three and $11.0 million, respectively.six months ended September 30, 2009, primarily as a result of the increase in product shipped into the distribution channel during these periods.
Our product sales may fluctuate from period to period as a result of factors such as end user demand, which can create uneven purchasing patterns by our customers. Our product sales may also fluctuate as the result of changes or adjustments to our reserves or changes in government or customer rebates. For example, in March 2010, U.S. healthcare reform legislation was enacted which contains several provisions that impact our business. Although many provisions of the new legislation did not take effect immediately, several provisions became effective in the first quarter of calendar 2010, including the following:
• | | an increase in the minimum statutory Medicaid rebate to states participating in the Medicaid program from 15.1% to 23.1%; |
|
• | | an extension of the Medicaid rebate to drugs dispensed to Medicaid beneficiaries enrolled with managed care organizations; and |
|
• | | an expansion of the 340(B)/Public Health Services (“PHS”) drug pricing program, which provides drugs at reduced rates, to include additional hospitals, clinics, and healthcare centers in an outpatient setting. |
In addition, beginning in calendar 2011, we may incur our share of a new fee assessed on all branded prescription drug manufacturers and importers. This fee will be calculated based upon VIVITROL’s percentage share of total branded prescription drug sales to U.S. government programs (such as Medicare, Medicaid and Veterans’ Administration and PHS discount programs) made during the previous year. The aggregated industry-wide fee is expected to total $28 billion through 2019, ranging from $2.5 billion to $4.1 billion annually. Presently, uncertainty exists as many of the specific determinations necessary to implement this new legislation have yet to be decided and communicated to industry participants. For example, determinations as to how the annual fee on branded prescription drugs will be calculated and allocated remain to be clarified, though, as noted above, this provision will not be effective until calendar 2011.
We expect that during the remainder of fiscal year 2011 and into the future, our net sales as a percentage of gross sales will be negatively affected as a result of certain aspects of the recently enacted healthcare legislation, specifically, the increase in the minimum Medicaid rebates, the expansion of those entities entitled to receive Medicaid rebates based on use of our product and the expansion of those entities entitled to purchase our products at a discounted basis under the 340(B)/PHS drug pricing program. It is possible that the effect of this legislation could further adversely impact our future revenues. We are still assessing the full extent of this legislation’s future impact on our business.
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Research and Development Revenue Under Collaborative Arrangements
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Change | | | Nine Months Ended | | | Change | |
| | December 31 | | | Favorable/ | | | December 31 | | | Favorable/ | |
(In millions) | | 2009 | | | 2008 | | | (Unfavorable) | | | 2009 | | | 2008 | | | (Unfavorable) | |
Research and development programs: | | | | | | | | | | | | | | | | | | | | | | | | |
Four-week RISPERDAL CONSTA | | $ | — | | | $ | 1.6 | | | $ | (1.6 | ) | | $ | 2.0 | | | $ | 3.5 | | | $ | (1.5 | ) |
Exenatide once weekly | | | — | | | | 1.5 | | | | (1.5 | ) | | | 0.4 | | | | 9.3 | | | | (8.9 | ) |
AIR Insulin | | | — | | | | 0.1 | | | | (0.1 | ) | | | — | | | | 26.8 | | | | (26.8 | ) |
Other | | | 0.1 | | | | 0.5 | | | | (0.4 | ) | | | 0.3 | | | | 0.8 | | | | (0.5 | ) |
| | | | | | | | | | | | | | | | | | |
Research and development revenue under collaborative arrangements | | $ | 0.1 | | | $ | 3.7 | | | $ | (3.6 | ) | | $ | 2.7 | | | $ | 40.4 | | | $ | (37.7 | ) |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | Six Months Ended September 30, | |
(In millions) | | 2010 | | | 2009 | | | Change | | | 2010 | | | 2009 | | | Change | |
Research and development revenue | | | | | | | | | | | | | | | | | | | | | | | | |
under collaborative arrangements | | $ | 0.2 | | | $ | 1.2 | | | $ | (1.0 | ) | | $ | 0.4 | | | $ | 2.6 | | | $ | (2.2 | ) |
| | | | | | | | | | | | | | | | | | |
InThe decrease in research and development (“R&D”) revenue under collaborative arrangements for the three and six months ended September 30, 2010, as compared to the three and six months ended September 30, 2009, was primarily due to the decision made by our collaborative partner, Johnson & Johnson Pharmaceutical Research and Development, L.L.C. (“J&JPRD”) in August 2009 we announced that Ortho-McNeil-Janssen Pharmaceuticals, Inc. and Janssen Pharmaceutica International, a division of Cilag International AG, decided not to pursue further development of the four-weeka four week formulation of RISPERDAL CONSTA. The four week RISPERDAL CONSTA for the treatmentprogram contributed $0.9 million and $1.9 million of schizophrenia. Accordingly, we do not expect to recognize revenue from this development program in the future. The NDA for exenatide once weekly was filed with the FDA in May 2009 and, as a result, revenues under the program decreased induring the three and ninesix months ended December 31,September 30, 2009, as compared to the three and nine months ended December 31, 2008. The decrease in revenue from the AIR Insulin program in the three and nine months ended December 31, 2009, as compared to the three and nine months ended December 31, 2008, was due to the termination of the AIR Insulin development program in March 2008.respectively.
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Net Collaborative Profit
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Change | | | Nine Months Ended | | | Change | |
| | December 31 | | | Favorable/ | | | December 31 | | | Favorable/ | |
(In millions) | | 2009 | | | 2008 | | | (Unfavorable) | | | 2009 | | | 2008 | | | (Unfavorable) | |
Net collabortive profit: | | | | | | | | | | | | | | | | | | | | | | | | |
Milestone revenue — license | | $ | — | | | $ | 0.8 | | | $ | (0.8 | ) | | $ | — | | | $ | 3.5 | | | $ | (3.5 | ) |
Net payments from Cephalon | | | — | | | | 0.7 | | | | (0.7 | ) | | | — | | | | — | | | | — | |
VIVITROL losses funded by Cephalon, post termination | | | — | | | | 1.2 | | | | (1.2 | ) | | | 5.0 | | | | 1.2 | | | | 3.8 | |
Recognition of deferred and unearned milestone revenue due to termination of VIVITROL collaboration | | | — | | | | 120.7 | | | | (120.7 | ) | | | — | | | | 120.7 | | | | (120.7 | ) |
| | | | | | | | | | | | | | | | | | |
Net collaborative profit | | $ | — | | | $ | 123.4 | | | $ | (123.4 | ) | | $ | 5.0 | | | $ | 125.4 | | | $ | (120.4 | ) |
| | | | | | | | | | | | | | | | | | |
Net collaborative profit for the ninethree and six months ended December 31,September 30, 2009 of $0.7 million and $5.0 million, respectively, consisted of revenue earned as a result of the $11.0 million payment we received from Cephalon to fund itstheir share of estimated VIVITROL losses during the one-year period following the Termination Date.termination of the VIVITROL collaboration in December 2008. We recorded the $11.0 million payment as deferred revenue and recognized it as revenue through the application of a proportional performance model based on VIVITROL losses. This deferred revenueThe $11.0 million payment was completelyfully recognized as of July 31, 2009, and we do not expect to recognize any further net collaborative profit. Net collaborative profitrevenue during the three and ninesix months ended December 31, 2008 consisted primarily of $120.7 million of unearned milestone and deferred revenue that existed at the Termination Date, which was recognized in the three months ended December 31, 2008, as we had no remaining performance obligations to Cephalon and the amounts were nonrefundable.September 30, 2009.
Cost of Goods Manufactured and Sold
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Change | | Nine Months Ended | | Change | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31 | | Favorable/ | | December 31 | | Favorable/ | | | Three Months Ended September 30, | | Six Months Ended September 30, | |
(In millions) | | 2009 | | 2008 | | (Unfavorable) | | 2009 | | 2008 | | (Unfavorable) | | | 2010 | | 2009 | | Change | | 2010 | | 2009 | | Change | |
Cost of goods manufactured and sold: | | |
RISPERDAL CONSTA | | $ | 8.4 | | $ | 5.0 | | $ | (3.4 | ) | | $ | 30.2 | | $ | 24.0 | | $ | (6.2 | ) | | $ | 11.3 | | $ | 12.1 | | $ | 0.8 | | $ | 21.8 | | $ | 21.8 | | $ | — | |
VIVITROL | | 1.1 | | 0.5 | | | (0.6 | ) | | 5.7 | | 7.9 | | 2.2 | | | 2.4 | | 2.6 | | 0.2 | | 4.0 | | 4.6 | | 0.6 | |
Polymer | | 0.6 | | — | | | (0.6 | ) | | 1.9 | | — | | | (1.9 | ) | | 0.2 | | 0.4 | | 0.2 | | 0.8 | | 1.4 | | 0.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of goods manufactured and sold | | $ | 10.1 | | $ | 5.5 | | $ | (4.6 | ) | | $ | 37.8 | | $ | 31.9 | | $ | (5.9 | ) | | $ | 13.9 | | $ | 15.1 | | $ | 1.2 | | $ | 26.6 | | $ | 27.8 | | $ | 1.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
The increasedecrease in cost of goods manufactured for RISPERDAL CONSTA in the three months ended December 31, 2009,September 30, 2010, as compared to the three months ended December 31, 2008,September 30, 2009, was primarily due to a 8%14% decrease in the unit cost of RISPERDAL CONSTA, partially offset by a 9% increase in the number of units of RISPERDAL CONSTA shipped to Janssen, an increase in costs for failed batches and an increase in overhead and support costs allocated to cost of goods manufactured from research and development (“R&D”) expense as a result of increasing the focus on manufacturing activities, as compared to development activities, at our Ohio manufacturing facility. The increase in costJanssen. Cost of goods manufactured for RISPERDAL CONSTA infor the ninesix months ended December 31, 2009,September 30, 2010 was unchanged as compared to the ninesix months ended December 31, 2008, was primarilySeptember 30, 2009, due to a 5% decrease in the increase in overhead and support costs allocated tounit cost of goods manufactured for the reason previously discussed and an increase in costs for failed product batches.
The increase in cost of goods manufactured and sold for VIVITROL in the three months ended December 31, 2009, as compared to the three months ended December 31, 2008, was primarily due toRISPERDAL CONSTA, offset by an increase in the number of units sold duringshipped to Janssen of 5%. The decrease in the period. Duringunit cost of RISPERDAL CONSTA in the three and six months ended December 31, 2008, we did not ship any VIVITROLSeptember 30, 2010, as compared to Cephalon or Cilag,the three and we purchased product back from Cephalon resultingsix months ended September 30, 2009, was partially due to a decrease in a reversalcosts incurred for scrap of prior sales in connection with the termination of the VIVITROL collaboration with Cephalon.$0.8 million and $1.1 million, respectively.
The decrease in cost of goods manufactured and sold for VIVITROL in the ninethree and six months ended December 31, 2009,September 30, 2010, as compared to the ninethree and six months ended December 31, 2008,September 30, 2009, was primarily due to a decreasean $0.8 million and $1.8 million reduction in thecosts incurred for failed batches and costs related to the restart of the manufacturing line, following a scheduled shutdown of the line and reduced costs for failed batches,respectively, partially offset by ana 31% increase in the number of units sold duringout of the period.
Duringdistribution channel. Included in cost of goods sold for VIVITROL during the three and ninesix months ended December 31, 2008, we did not make any shipmentsSeptember 30, 2010 were idle capacity charges of $0.9 million and $1.4 million, respectively, which was the result of managing VIVITROL inventory levels and reducing manufacturing output.
The decrease in the cost of goods manufactured for polymer in the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, was due to a $0.2 million reduction in costs incurred for scrap, partially offset by a 30% increase in the amount of polymer shipped to Amylin. The decrease in the cost of goods manufactured for polymer in the six months ended September 30, 2010, as compared to the six months ended September 30, 2009, was due to a $0.4 million reduction in costs incurred for scrap and a 13% decrease in the amount of polymer shipped to Amylin.
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Research and Development Expense
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Change | | Nine Months Ended | | Change | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31 | | Favorable/ | | December 31 | | Favorable/ | | | Three Months Ended September 30, | | Six Months Ended September 30, | |
(In millions) | | 2009 | | 2008 | | (Unfavorable) | | 2009 | | 2008 | | (Unfavorable) | | | 2010 | | 2009 | | Change | | 2010 | | 2009 | | Change | |
Research and development | | $ | 22.6 | | $ | 22.7 | | $ | 0.1 | | $ | 68.8 | | $ | 64.6 | | $ | (4.2 | ) | | $ | 23.9 | | $ | 20.7 | | $ | (3.2 | ) | | $ | 46.9 | | $ | 46.3 | | $ | (0.6 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
The increase in R&D expenses in the three months ended December 31, 2009 were comparableSeptember 30, 2010, as compared to the R&D expenses in the three months ended December 31, 2008. DuringSeptember 30, 2009, was primarily due to a $5.8 million increase in internal clinical and preclinical study, laboratory and license and collaboration expenses due to an increase in the three months ended December 31, 2009, we recorded $3.5number of ongoing studies and clinical trials and a $2.4 million of costsincrease in professional services, primarily for activities related to the approval of VIVITROL for opioid dependence. These increased expenses were partially offset by a decrease in relocation and occupancy related expenses of $5.2 million as a result of the relocation of our corporate headquarters from Cambridge, Massachusetts, to Waltham, Massachusetts consisting primarilywhich was substantially completed during the fourth quarter of the acceleration of depreciation on laboratory related leasehold improvements located at our Cambridge facility, which no longer have any benefit or use to us once we exit the Cambridge facility, and the write-down of laboratory equipment that is no longer in use and will be disposed of. In addition, we incurred $2.1 million of R&D expense related to the collaboration and license agreement we signed with Acceleron, in December 2009. These expenses were offset by a decrease in occupancy costs due to the consolidation of space at our Cambridge, Massachusetts facility, as well as a decrease in overhead and support costs allocated to R&D at our Ohio manufacturing facility, as discussed above.fiscal 2010.
The increase in R&D expenses in the ninesix months ended December 31, 2009,September 30, 2010, as compared to the ninesix months ended December 31, 2008,September 30, 2009, was primarily due to $15.6a $11.1 million increase in internal clinical and preclinical study, laboratory and license and collaboration expenses due to an increase in the number of costs we incurredongoing studies and clinical trials and a $3.3 million increase in professional services, primarily for activities related to the approval of VIVITROL for opioid dependence. These increased expenses were partially offset by a decrease in relocation and occupancy related expenses of $15.3 million as a result of the relocation of our corporate headquarters, an increase in clinical and pre-clinical study expense resulting from an increase in the number of ongoing studies, and $2.1 million of expense related to the collaboration and license agreement we signed with Acceleron in December 2009. These expenses were partially offset by a decrease in overhead and support costs allocated to R&D at our Ohio manufacturing facility, a decrease in labor and benefits due to a reduction in R&D headcount and a decrease in occupancy costs due to the consolidation of space at our Cambridge, Massachusetts facility.headquarters.
A significant portion of our research and development expenses (including laboratory supplies, travel, dues and subscriptions, recruiting costs, temporary help costs, consulting costs and allocable costs such as occupancy and depreciation) are not tracked by project as they benefit multiple projects or our technologies in general. Expenses incurred to purchase specific services from third parties to support our collaborative research and development activities are tracked by project and aremay be reimbursed to us by our partners. We generally bill our partners under collaborative arrangements using a negotiated FTE or hourly rate. This rate has been established by us based on our annual budget of employee compensation, employee benefits and the billable non-project-specific costs mentioned above and is generally increased annually based on increases in the consumer price index. Each collaborative partner is billed using a negotiated FTE or hourly rate for the hours worked by our employees on a particular project, plus direct external costs, if any. We account for our research and development expenses on a departmental and functional basis in accordance with our budget and management practices.
Selling, General and Administrative Expense
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Change | | Nine Months Ended | | Change | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31 | | Favorable/ | | December 31 | | Favorable/ | | | Three Months Ended September 30, | | Six Months Ended September 30, | |
(In millions) | | 2009 | | 2008 | | (Unfavorable) | | 2009 | | 2008 | | (Unfavorable) | | | 2010 | | 2009 | | Change | | 2010 | | 2009 | | Change | |
Selling, general and administrative | | $ | 17.7 | | $ | 14.6 | | $ | (3.1 | ) | | $ | 57.6 | | $ | 38.2 | | $ | (19.4 | ) | | $ | 18.4 | | $ | 20.6 | | $ | 2.2 | | $ | 38.2 | | $ | 39.9 | | $ | 1.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
The increasedecrease in selling, general and administrative (“SG&A”) expense for the three and six months ended December 31, 2009,September 30, 2010, as compared to the three and six months ended December 31, 2008,September 30, 2009, was primarily due to increased salesa reduction in professional services of $2.1 million and $3.3 million, respectively, partially offset by an increase in marketing expenses of $1.2 million and $0.8 million, respectively. The decrease in professional services is primarily due to start-up costs as we became responsible forrelated to the commercialization of VIVITROL in the U.S. beginning December 1, 2008.fiscal year 2010 that were not incurred during fiscal year 2011. The increase in SG&A for the nine months ended December 31, 2009, as compared to the nine months ended December 31, 2008, wasmarketing expenses is primarily due to increased sales and marketing costs relatedincurred leading up to the launch of VIVITROL and severance costs we recorded in connection with the resignation of our former President and Chief Executive Officer in September 2009.for opioid dependence.
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Other Expense, Net
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Change | | Nine Months Ended | | Change | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31 | | Favorable/ | | December 31 | | Favorable/ | | | Three Months Ended September 30, | | Six Months Ended September 30, | |
(In millions) | | 2009 | | 2008 | | (Unfavorable) | | 2009 | | 2008 | | (Unfavorable) | | | 2010 | | 2009 | | Change | | 2010 | | 2009 | | Change | |
Interest income | | $ | 1.0 | | $ | 2.6 | | $ | (1.6 | ) | | $ | 3.7 | | $ | 8.9 | | $ | (5.2 | ) | | $ | 0.7 | | $ | 1.1 | | $ | (0.4 | ) | | $ | 1.5 | | $ | 2.6 | | $ | (1.1 | ) |
Interest expense | | | (1.4 | ) | | | (2.4 | ) | | 1.0 | | | (4.7 | ) | | | (10.9 | ) | | 6.2 | | | | (2.2 | ) | | | (1.6 | ) | | | (0.6 | ) | | | (3.3 | ) | | | (3.3 | ) | | — | |
Other expense, net | | | (0.2 | ) | | | (0.7 | ) | | 0.5 | | | (0.3 | ) | | | (1.5 | ) | | 1.2 | | | | (0.1 | ) | | | (0.1 | ) | | — | | | (0.2 | ) | | | (0.1 | ) | | | (0.1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total other expense, net | | $ | (0.6 | ) | | $ | (0.5 | ) | | $ | (0.1 | ) | | $ | (1.3 | ) | | $ | (3.5 | ) | | $ | 2.2 | | | $ | (1.6 | ) | | $ | (0.6 | ) | | $ | (1.0 | ) | | $ | (2.0 | ) | | $ | (0.8 | ) | | $ | (1.2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
The decrease in interest income for the three and ninesix months ended December 31, 2009,September 30, 2010, as compared to the three and ninesix months ended December 31, 2008,September 30, 2009, was due to a lower average balance of cash and investments as well as lower interest rates earned. The decreaseinvestments. Interest expense increased in interest expense for the three and nine months ended December 31, 2009,September 30, 2010, as compared to the three and nine months ended December 31, 2008, wasSeptember 30, 2009, due to the resultearly redemption of our repurchase of an aggregate total of $93.0 million principal amount, or approximately 55%, of our non-recourse RISPERDAL CONSTA secured 7% Notes (the “non-recourse 7% Notes”), in five separately negotiated transactions during the year ended March 31, 2009. In addition, we began making quarterly scheduled principal payments on our non-recourse 7% Notes beginning in April 2009, which reducedon July 1, 2010. As a result of this transaction, we recorded charges of $1.4 million relating to the write-off of the unamortized portion of deferred financing costs and $0.8 million primarily related to the premium paid on the redemption of the non-recourse 7% Notes. The amount of interest expense in the three and ninesix months ended December 31,September 30, 2010 was unchanged as compared to the six months ended September 30, 2009. The decreaseIt should be noted that interest expense in otherthe six months ended September 30, 2010 consisted of $2.2 million of charges associated with the redemption of the non-recourse 7% Notes, as previously discussed, and
22
$1.2 million of interest and accretion expense, net,as compared to $3.3 million of interest and accretion expense in the six months ended September 30, 2009. We expect to save $3.2 million in interest and accretion expense through the previously scheduled maturity date of January 1, 2012 as a result of redeeming the non-recourse 7% Notes on July 1, 2010.
Income Tax Benefit
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | Six Months Ended September 30, | |
(In millions) | | 2010 | | | 2009 | | | Change | | | 2010 | | | 2009 | | | Change | |
Income tax benefit | | $ | (0.9 | ) | | $ | (0.1 | ) | | $ | 0.8 | | | $ | (1.0 | ) | | $ | (0.1 | ) | | $ | 0.9 | |
| | | | | | | | | | | | | | | | | | |
We recorded an income tax benefit of $0.9 million and $1.0 million for the three and ninesix months ended December 31, 2009,September 30, 2010, respectively, primarily related to a $0.8 million tax benefit for bonus depreciation pursuant to theSmall Business Jobs Act of 2010(“Act”). Bonus depreciation increases our 2010 alternative minimum tax (“AMT”) net operating loss (“NOL”) carryback and will allow us to recover AMT paid in the carryback period. The tax benefit was recorded as compared toa discrete item during the three and nine months ended December 31, 2008,September 30, 2010, the period in which the Act was due to decreases in other-than-temporary impairment charges taken on our investments in the common stock of certain publicly held companies.
Provision for Income Taxes
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Change | | | Nine Months Ended | | | Change | |
| | December 31 | | | Favorable/ | | | December 31 | | | Favorable/ | |
(In millions) | | 2009 | | | 2008 | | | (Unfavorable) | | | 2009 | | | 2008 | | | (Unfavorable) | |
Provision (benefit) for income taxes | | $ | — | | | $ | (0.3 | ) | | $ | (0.3 | ) | | $ | (0.1 | ) | | $ | 0.6 | | | $ | (0.7 | ) |
| | | | | | | | | | | | | | | | | | |
enacted. The income tax benefit of less than $0.1 million and $0.1 million for the ninethree and six months ended December 31,September 30, 2009 consists primarily ofrepresented the amount we expect toestimated we would benefit from theHousing 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 income tax benefit of $0.3 million and the income tax provision of $0.6 million for the three and nine months ended December 31, 2008 respectively, is related 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 benefit and charge was recorded in the three and nine months ended December 31, 2008, respectively. The AMT liability is available as a credit against future tax obligations upon the full utilization or expiration of our net operating loss carryforward.
Liquidity and Capital Resources
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 as we expand the development of our proprietary product candidates, including costs related to preclinical studies and clinical trials. Our costs, including research and development costs for our product candidates, manufacturing, and sales, marketing and promotional expenses for any current or future products marketed by us or our collaborators, if any, may exceed revenues in the future, which may result in losses from operations. In addition, we have an ongoing share repurchase plan and have repurchased a portion of our outstanding debt and may continue with some or all of these activities in the future. We believe that our current cash and cash equivalents and short and long-term investments, combined with anticipated interest income and anticipated revenues, will generate sufficient cash flows to meet our anticipated liquidity and capital requirements for the foreseeable future.
26
Our financial condition is summarized as follows:
| | | | | | | | |
| | December 31, | | | March 31, | |
(In millions) | | 2009 | | | 2009 | |
Cash and cash equivalents | | $ | 73.9 | | | $ | 86.9 | |
Investments — short-term | | | 165.0 | | | | 236.8 | |
Investments — long-term | | | 118.6 | | | | 80.8 | |
| | | | | | |
Total cash, cash equivalents and investments | | $ | 357.5 | | | $ | 404.5 | |
| | | | | | |
Working capital | | $ | 235.6 | | | $ | 307.1 | |
Outstanding borrowings — current and long-term | | $ | 57.3 | | | $ | 75.9 | |
Cash and Cash Equivalents | | | | | | | | |
| | September 30, | | | March 31, | |
(In millions) | | 2010 | | | 2010 | |
Cash and cash equivalents | | $ | 37.3 | | | $ | 79.3 | |
Investments — short-term | | | 193.2 | | | | 202.1 | |
Investments — long-term | | | 43.1 | | | | 68.8 | |
| | | | | | |
Total cash, cash equivalents and investments | | $ | 273.6 | | | $ | 350.2 | |
| | | | | | |
Working capital | | $ | 264.2 | | | $ | 247.1 | |
Outstanding borrowings — current and long-term | | $ | — | | | $ | 51.0 | |
|
Our cash flows for the six months ended September 30, 2010 and 2009 were as follows: |
|
| | Six Months Ended | |
| | September 30, | |
(In millions) | | 2010 | | | 2009 | |
Cash and cash equivalents, beginning of period | | $ | 79.3 | | | $ | 86.9 | |
Cash (used in) operating activities | | | (27.1 | ) | | | (18.7 | ) |
Cash provided by (used in) investing activities | | | 29.1 | | | | (0.9 | ) |
Cash (used in) financing activities | | | (44.0 | ) | | | (14.3 | ) |
| | | | | | |
Cash and cash equivalents, end of period | | $ | 37.3 | | | $ | 53.0 | |
| | | | | | |
Our cash flows for the nine months ended December 31, 2009 and 2008 were as follows:
| | | | | | | | |
| | Nine Months Ended | |
| | December 31 | |
(In millions) | | 2009 | | | 2008 | |
Cash and cash equivalents, beginning of period | | $ | 86.9 | | | $ | 101.2 | |
Cash (used in) provided by operating activities | | | (12.3 | ) | | | 38.6 | |
Cash provided by investing activities | | | 19.5 | | | | 0.9 | |
Cash used in financing activities | | | (20.2 | ) | | | (77.4 | ) |
| | | | | | |
Cash and cash equivalents, end of period | | $ | 73.9 | | | $ | 63.3 | |
| | | | | | |
Operating Activities
The primary reason for the change insource of liquidity is cash (used in) provided by our operating activities. The increase in cash used in operating activities during the ninesix months ended December 31, 2009,September 30, 2010, as compared to December 31, 2008,the six months ended September 30, 2009, is primarily due to the $40.0redemption of our non-recourse 7% Notes on July 1, 2010 and an increase in amounts paid to our suppliers of $2.4 million. On July 1, 2010, in addition to a scheduled principal payment of $6.4 million, payment we received from Lillyredeemed the balance of our non-recourse 7% Notes in full in exchange for $39.2 million, representing 101.75% of the outstanding principal balance in accordance with the terms of the Indenture for the non-recourse 7% Notes. We allocated $6.6 million of the principal payments made during the ninesix months ended December 31, 2008 relatedSeptember 30, 2010 to operating activities to account for the terminationoriginal issue discount on the non-recourse 7% Notes, and the remaining $45.4 million of principal payments was allocated to financing activities in the AIR insulin development program and a net reduction in working capital accounts.
Investing Activitiescondensed consolidated statement of cash flows.
The increase in cash flows provided by our investing activities induring the ninesix months ended December 31, 2009,September 30, 2010, as compared to the ninesix months ended December 31, 2008,September 30, 2009, is primarily due anto the net conversion of $36.1 million of our investments to cash during the six months ended September 30, 2010, as compared to $2.8 million during the six months ended September 30, 2009.
The increase in cash from sales and maturities of investments, net of investment purchases, partially offset by an increase in fixed asset purchases made during the period in connection with the relocation of our corporate headquarters from Cambridge, Massachusetts to Waltham, Massachusetts, and the purchase of $8.0 million of preferred stock of Acceleron in connection with our collaboration and license agreement. Also, during the nine months ended December 31, 2008, we received $7.7 million from the sale of equipment, as compared to $0.3 million from the sale of equipment during the nine months ended December 31, 2009.
Financing Activities
The decrease in cashflows used in financing activities during the ninesix months ended December 31, 2009,September 30, 2010, as compared to the ninesix months ended December 31, 2008,September 30, 2009, is primarily due to us not purchasingthe redemption of our non-recourse 7% Notes during the nine months ended December 31, 2009; we purchased $15.3 million less common stock for treasury; and we received $7.4 million less in cash from the exercise of employee stock options, partially offset by the $17.7 million of scheduled principal payments we made on our non-recourse 7% Notes during the nine months ended December 31, 2009.
Investments
We invest our cash reserves in bank deposits, certificates of deposit, commercial paper, corporate notes, U.S. and foreign government instruments and other interest bearing marketable debt instruments in accordance with ourJuly 1, 2010,
2723
partially offset by the purchase of $2.7 million of treasury stock during the six months ended September 30, 2009. During the six months ended September 30, 2010, we did not make any purchases of treasury stock.
Our investments at September 30, 2010 consist of the following:
| | | | | | | | | | | | | | | | |
| | Amortized | | | Gross Unrealized | | | Estimated | |
(in millions) | | Cost | | | Gains | | | Losses | | | Fair Value | |
Investments — short-term | | $ | 192.4 | | | $ | 0.8 | | | $ | — | | | $ | 193.2 | |
Investments — long-term available-for-sale | | | 37.9 | | | | 0.5 | | | | (1.2 | ) | | | 37.2 | |
Investments — long-term held-to-maturity | | | 5.9 | | | | — | | | | — | | | | 5.9 | |
| | | | | | | | | | | | |
Total | | $ | 236.2 | | | $ | 1.3 | | | $ | (1.2 | ) | | $ | 236.3 | |
| | | | | | | | | | | | |
Our investment policy. The primary objective of ourobjectives are, first, to preserve liquidity and conserve capital and, second, to generate investment policy is the preservation of capital with a secondary objective of generating income on our investments.income. We mitigate credit risk in our cash reserves by maintaining a well diversified portfolio that limits the amount of investment exposure as to institution, maturity and investment type. However, the value of these securities may be adversely affected by the instability of the global financial markets which could, in turn, adversely impact our financial position and our overall liquidity. Our available-for-sale investments consist primarily of short and long-term U.S. government and agency debt securities, debt securities issued by foreign agencies and backed by foreign governments and corporate debt securities. Our held-to-maturity investments consist of investments that are restricted and held as collateral under certain letters of credit related to certain of our lease agreements.
As explainedWe classify available-for-sale investments in Note 4, Investmentsan unrealized loss position, which do not mature within 12 months, as long-term investments. We have the intent and Note 5, Fair Value Measurements, in the “Notesability to Condensed Consolidated Financial Statements,” 4%hold these investments until recovery, which may be at maturity, and it is more likely than not that we would not be required to sell these securities before recovery of their amortized cost. At September 30, 2010, we performed an analysis of our investments whichwith unrealized losses for impairment and determined that they are reported at fair value on a recurring basis,temporarily impaired.
At September 30, 2010 and March 31, 2010, 3% and 4%, respectively, of our investments are valued using unobservable, or Level 3, inputs to determine fair value.value as they are not actively trading and fair values could not be derived from quoted market prices. These investments are valued using discounted cash flow models, which use several inputs to determine fair value, including estimates for interest rates, the timingconsist primarily of cash flows, expected holding periods and risk adjusted discount rates, which include provisions for default and liquidity risk. We validate the fair values, when possible, by comparing the fair values to other observable market data with similar characteristics to the securities held by us. While we believe the valuation methodologies are appropriate, the use of valuation methodologies is highly judgmental and changes in methodologies can have a material impact on the values of these assets, our financial position and overall liquidity.
student loan backed auction rate security. During the threesix months ended September 30, 2009, trading resumed for certain2010, $6.0 million of the Company’s investments in corporate debt securities, with a fair value of $33.9 million, and those corporate debt securities were transferred from aour Level 3 classification to a Level 2 classification. Duringinvestments were redeemed at par by the three months ended December 31, 2009, we transferred an additional $11.0 million of corporate debt securities to a Level 2 classification as trading resumed for these securities. At December 31, 2009, we derived a fair value for our Level 2 investments using market observable inputs.issuers.
Borrowings
At December 31, 2009, ourWe did not have any outstanding borrowings consistedat September 30, 2010. On July 1, 2010, in addition to a scheduled principal payment of $57.7$6.4 million, principal amountwe redeemed the balance of our non-recourse 7% Notes which have a carrying valuein full in exchange for $39.2 million, representing 101.75% of $57.3 million. Principal and interest payments onthe outstanding principal balance in accordance with the terms of the Indenture for the non-recourse 7% Notes are due quarterly,Notes. We expect to save $3.2 million in interest and accretion expense through the non-recourse 7% Notes arepreviously scheduled to be paid in full onmaturity date of January 1, 2012.2012 as a result of redeeming these notes on July 1, 2010.
Contractual Obligations
In April 2009, we entered into a lease agreement in connection with the relocationRefer to Part II, Item 7 of our corporate headquarters from Cambridge, Massachusetts to Waltham, Massachusetts, which began in January 2010. The initial lease term, which began in December 2009, is for 10 years with provisions for us to extend the lease term up to an additional 10 years. In June 2009, we executed an amendment to the lease agreement which increased the square footage leased by us by approximately 15%. Operating expenses and rent will commence for the additional space in September 2010 and September 2011, respectively, and the lease amendment has the same termination date as the original lease. The total rent expense related to the new headquarters is approximately $3.1 million annually during the initial lease term.
In December 2009, we and Acceleron entered into a license agreement granting us exclusive rights to Acceleron’s proprietary long-acting Fc fusion technology platform, called the MedifusionTM technology, which is designed to extend the circulating half-life of proteins and peptides. We and Acceleron agreed to collaborate on the development of product candidates from the Medifusion technology. We paid Acceleron a nonrefundable upfront payment of $2.0 million and are obligated to reimburse Acceleron for any time, at an agreed-upon FTE rate, and materials Acceleron incurs during development. We are obligated to make developmental and sales milestone payments in the aggregate of up to $110.0 million per product in the event that certain development and sales goals are achieved. We are also obligated to make tiered royalty payments in the mid-single digits on annual net sales in the event any products developed under the agreement are commercialized.
There are no other material changes to the contractual cash obligations as disclosed in our Annual Report on Form 10-K for the year ended March 31, 2009.2010 in the “Contractual Obligations” section for a discussion of our contractual obligations. Our contractual obligations as of September 30, 2010 were not materially changed from the date of that report with the exception of the non-recourse 7% Notes which, as noted in the “Borrowings” section above, were redeemed in full on July 1, 2010.
Off-Balance Sheet Arrangements
At December 31, 2009,September 30, 2010, we were not a party to any off-balance sheet arrangements.arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources material to investors.
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Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different
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assumptions or conditions. Refer to Part II, Item 7 of our Annual Report on Form 10-K for the year ended March 31, 20092010 in the “Critical Accounting Estimates” section for a discussion of our critical accounting estimates.
On April 1, 2009, we adopted new accounting guidance on the recognition and presentation of other-than-temporary impairments and enhanced our process for reviewing debt securities with unrealized losses for possible impairment to include a determination as to if we have the intent to sell a debt security or if it is more likely than not that we would be required to sell the security before recovery of its amortized cost basis. Also, an other-than-temporary impairment shall be considered to have occurred if we do not expect to recover the entire amortized cost basis of a security, regardless of our intent to hold the security to maturity. This enhancement to our impairment assessment process did not have a material impact on our financial position or results of operations.
New Accounting Standards
Refer to New Accounting Pronouncements included in Note 1, Summary“Summary of Significant Accounting Policies,Policies” in the “Notesaccompanying Notes to Condensed Consolidated Financial Statements”Statements for a discussion of new accounting standards.
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Item 3. | | Quantitative and Qualitative Disclosures about Market Risk |
Our market risks, and the ways we manage them, are summarized in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended March 31, 2009. In response to the instability in the global financial markets, we have2010. We regularly reviewedreview our marketable securities holdings and shiftedshift our investment holdings to those deemedthat best meet our investment objectives, which are, first, to have reduced risk.preserve liquidity and conserve capital and, second, to generate investment income. Apart from such adjustments to our investment portfolio, there have been no material changes to our market risks in the first ninesix months of fiscal year 2010 to our market risks,2011, and we do not anticipate any near-term changes in the nature of our market risk exposures or in our management’s objectives and strategies with respect to managing such exposures.
We are exposed to foreign currency exchange risk related to manufacturing and royalty revenues that we receive on RISPERDAL CONSTA as summarized in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended March 31, 2009.2010. There has been no material change in our assessment of our sensitivity to foreign currency exchange rate risk during the first ninesix months of fiscal year 2010.2011.
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Item 4. | | Controls and Procedures |
a) Evaluation of Disclosure Controls and Procedures
We have carried out an evaluation, under the supervision andOur management, with the participation of our management, including our principal executive officerChief Executive Officer and principal financial officer, ofChief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Securities Exchange Act)(the “Exchange Act”)) at December 31, 2009.September 30, 2010. Based uponon that evaluation, our principal executive officerChief Executive Officer and principal financial officerChief Financial Officer concluded that at December 31, 2009, our disclosure controls and procedures arewere effective in providingas of September 30, 2010 to provide reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECSEC’s rules and forms and (b)that such information is accumulated and communicated to our management, including our principal executive officerChief Executive Officer and principal financial officer,Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
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b) Change in Internal Control over Financial Reporting
During the period covered by this report, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
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Item 1. | | Legal Proceedings |
From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We do not believe that we are not aware ofcurrently party to any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, results of operations and financial condition.
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Item 2. | | Unregistered Sales of Equity Securities and Use of Proceeds |
We did not repurchase any of our stock during the three months ended December 31, 2009. On November 21, 2007, we publicly announced that our board of directors authorized a program to repurchase up to $175.0 million of our common stock to be repurchased at the discretion of management from time to time in the open market or through privately negotiated transactions. On June 16, 2008, we publicly announced that ourthe board of directors authorized the expansion of this repurchase program by an additional $40.0 million, bringing the total authorization under this program to $215.0 million. The repurchaseWe did not purchase any shares under this program has no set expiration date and may be suspended or discontinued at any time. At December 31, 2009,during the quarter ended September 30, 2010. As of September 30, 2010, we hadhave purchased a total of 8,866,342 shares under this program at a cost of $114.0 million.
During the three months ended December 31, 2009September 30, 2010, we acquired, by means of net share settlements, 16,31880 shares of Alkermes common stock at an average price of $8.36$12.62 per share related to the vesting of employee stock awards to satisfy employee withholding tax obligations.
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Item 4. | | Submission of Matters to a Vote of Security Holders |
We held our annual meeting of shareholders on October 6, 2009. The following proposals were voted upon at the meeting:
1. | | A proposal to elect ten members of the Board of Directors, each to serve until the next annual meeting of shareholders and until his or her successor is duly elected and qualified, was approved with the following vote: |
| | | | | | | | |
| | | | | | Authority |
Nominee | | Votes For | | Withheld |
David W. Anstice | | | 89,865,836 | | | | 743,471 | |
Floyd E. Bloom | | | 87,931,665 | | | | 2,677,642 | |
Robert A. Breyer | | | 88,071,529 | | | | 2,537,778 | |
David A. Broecker | | | 85,071,790 | | | | 5,537,517 | |
Geraldine Henwood | | | 88,720,730 | | | | 1,888,577 | |
Paul J. Mitchell | | | 88,705,326 | | | | 1,903,981 | |
Richard F. Pops | | | 87,184,289 | | | | 3,425,018 | |
Alexander Rich | | | 88,004,480 | | | | 2,604,827 | |
Mark B. Skaletsky | | | 89,890,957 | | | | 718,350 | |
Michael A. Wall | | | 87,712,797 | | | | 2,896,510 | |
On September 10, 2009, subsequent to the mailing of our proxy statement but before the annual meeting of the shareholders, David A. Broecker resigned from our Board of Directors and declined to stand for reelection as previously disclosed on our Current Report on Form 8-K filed with the SEC on September 11, 2009.
2. | | A proposal to ratify PricewaterhouseCoopers LLP as our independent registered public accountants for fiscal 2010 was approved with 88,785,709 votes for, 1,748,293 votes against and 75,305 abstentions. |
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Item 5. | | Other Information |
The Company’s policy governing transactions in its securities by its directors, officers and employees permits its officers, directors and employees to enter into trading plans in accordance with Rule 10b5-1 under the Exchange Act. During the three monthsquarter ended December 31, 2009,September 30, 2010, Mr. Floyd E. Bloom,Robert A. Breyer and Mr. Michael A. Wall, each a director of the Company, and Dr. Elliot W. Ehrich and Mr. Gordon G. Pugh, each an executive officer of the Company, entered
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into a trading planplans in accordance with Rule 10b5-1, and the Company’s policy governing transactions in its securities by its directors, officers and employees. The Company undertakes no obligation to update or revise the information provided herein, including for revision or termination of an established trading plan.
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(a) List of Exhibits:
| | |
Exhibit | | |
No. | | |
31.1 | | Rule 13a-14(a)/15d-14(a) Certification (furnished herewith). |
| | |
31.2 | | Rule 13a-14(a)/15d-14(a) Certification (furnished herewith). |
| | |
32.1 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
| | |
101 | | The following materials from Alkermes, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text (furnished herewith). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | |
| ALKERMES, INC. (Registrant) | |
| By: | /s/ Richard F. Pops | |
| | Richard F. PopsChairman, President and Chief Executive Officer | |
| | Chairman, President and Chief Executive Officer (Principal Executive Officer) | |
|
| | | |
| By: | /s/ James M. Frates | |
| | James M. FratesSenior Vice President, Chief Financial Officer and Treasurer | |
| | Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) | |
|
Date: FebruaryNovember 4, 2010
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EXHIBIT INDEX
| | |
Exhibit | | |
No. | | |
| | |
31.1 | | Rule 13a-14(a)/15d-14(a) Certification (furnished herewith). |
| | |
31.2 | | Rule 13a-14(a)/15d-14(a) Certification (furnished herewith). |
| | |
32.1 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
| | |
101 | | The following materials from Alkermes, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text (furnished herewith). |
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