UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~December 31, 2008~~September 30, 2009


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period fromto

Commission file number 1-14131

ALKERMES, INC.

(Exact name of registrant as specified in its charter)


PENNSYLVANIA		23-2472830
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

~~88 Sidney Street, Cambridge, MA~~		~~02139-4234~~

88 Sidney Street, Cambridge, MA 02139-4234
(617) 494-0171
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)~~(Zip Code)~~

~~Registrant’s telephone number including area code:~~
~~(617) 494-0171~~

~~(Former name, former address, and former fiscal year, if changed since last report)~~

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): Yes o No o

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 “large~~and large accelerated ~~filer,” “accelerated~~ filer” ~~and “smaller reporting company”~~ in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filerþ	Accelerated filer o	~~Accelerated~~ Non-accelerated filero	~~Non-accelerated filer~~o	~~Smaller reporting company~~o
			(Do not check if a smaller reporting company)	Smaller reporting company o

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:


	As of November 2,
Class	~~February 2,~~ 2009
Common Stock, $.01 par value		~~94,501,982~~94,382,663
Non-Voting Common Stock, $.01 par value		382,632

PART I. FINANCIAL INFORMATION

Item 1.Condensed Consolidated Financial Statements:

ALKERMES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

December 31, March 31,
2008 2008
(In thousands, except share and
per share amounts)
ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ 63,264 $ 101,241
Investments — short-term 281,464 240,064
Receivables 26,713 47,249
Inventory 21,113 18,884
Prepaid expenses and other current assets 14,920 5,720

Total current assets 407,474 413,158

PROPERTY, PLANT AND EQUIPMENT:
Land 301 301
Building and improvements 36,460 35,003
Furniture, fixtures and equipment 65,148 63,364
Equipment under capital lease 464 464
Leasehold improvements 33,711 33,387
Construction in progress 41,735 42,859

177,819 175,378
Less: accumulated depreciation (70,520 ) (62,839 )

Total property, plant and equipment — net 107,299 112,539

INVESTMENTS — LONG-TERM 78,865 119,056
OTHER ASSETS 3,029 11,558

TOTAL ASSETS $ 596,667 $ 656,311

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 30,310 $ 36,046
Unearned milestone revenue — current portion — 5,927
Deferred revenue — current portion 11,705 —
Long-term debt — current portion — 47
Non-recourse RISPERDAL CONSTA secured 7% notes — current portion 23,750 —

Total current liabilities 65,765 42,020

NON-RECOURSE RISPERDAL CONSTA SECURED 7% NOTES 68,692 160,324
UNEARNED MILESTONE REVENUE — LONG-TERM PORTION — 111,730
DEFERRED REVENUE — LONG-TERM PORTION 5,369 27,837
OTHER LONG-TERM LIABILITIES 7,272 9,086

TOTAL LIABILITIES 147,098 350,997

COMMITMENTS AND CONTINGENCIES (Note 13)

SHAREHOLDERS’ EQUITY:
Capital stock, par value, $0.01 per share; 4,550,000 shares authorized (includes 3,000,000 shares of preferred stock); none issued and outstanding — —
Common stock, par value, $0.01 per share; 160,000,000 shares authorized; 104,020,561 and 102,977,348 shares issued; 94,516,877 and 95,099,166 shares outstanding at December 31, 2008 and March 31, 2008, respectively 1,040 1,030
Non-voting common stock, par value, $0.01 per share; 450,000 shares authorized; 382,632 shares issued and outstanding at December 31, 2008 and March 31, 2008 4 4
Treasury stock, at cost (9,503,684 and 7,878,182 shares at December 31, 2008 and March 31, 2008, respectively) (125,978 ) (107,322 )
Additional paid-in-capital 888,811 869,695
Accumulated other comprehensive loss (1,841 ) (1,526 )
Accumulated deficit (312,467 ) (456,567 )

TOTAL SHAREHOLDERS’ EQUITY 449,569 305,314

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 596,667 $ 656,311


	September 30,			March 31,
	2009			2009
	(In thousands, except share and per share amounts)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	52,992		$	86,893
Investments — short-term		242,098			236,768
Receivables		33,699			24,588
Inventory		18,524			20,297
Prepaid expenses and other current assets		7,856			7,500

Total current assets		355,169			376,046

PROPERTY, PLANT AND EQUIPMENT, NET		94,467			106,461
INVESTMENTS — LONG-TERM		74,435			80,821
OTHER ASSETS		3,206			3,158

TOTAL ASSETS	$	527,277		$	566,486


LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses	$	28,272		$	36,483
Deferred revenue — current		1,880			6,840
Non-recourse RISPERDAL^® CONSTA^® secured 7% Notes — current		25,667			25,667

Total current liabilities		55,819			68,990

NON-RECOURSE RISPERDAL CONSTA SECURED 7% NOTES — LONG-TERM		37,862			50,221
DEFERRED REVENUE — LONG-TERM		5,115			5,238
OTHER LONG-TERM LIABILITIES		6,450			7,149

Total liabilities		105,246			131,598


COMMITMENTS AND CONTINGENCIES (Note 12)

SHAREHOLDERS’ EQUITY:
Capital stock, par value, $0.01 per share; 4,550,000 shares authorized (includes 3,000,000 shares of preferred stock); none issued		—			—
Common stock, par value, $0.01 per share; 160,000,000 shares authorized; 104,304,607 and 104,044,663 shares issued; 94,384,663 and 94,536,212 shares outstanding at September 30, 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 September 30, 2009 and March 31, 2009		4			4
Treasury stock, at cost (9,919,944 and 9,508,451 shares at September 30, 2009 and March 31, 2009, respectively)		(129,431	)		(126,025	)
Additional paid-in capital		900,076			892,415
Accumulated other comprehensive loss		(4,724	)		(6,484	)
Accumulated deficit		(344,936	)		(326,062	)

Total shareholders’ equity		422,031			434,888

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	527,277		$	566,486

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ALKERMES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF ~~INCOME~~OPERATIONS
(unaudited)

Three Months Ended Nine Months Ended
December 31, December 31,
2008 2007 2008 2007
(In thousands, except per share amounts)
REVENUES:
Manufacturing revenues $ 20,533 $ 14,275 $ 92,182 $ 69,929
Royalty revenues 7,970 7,384 24,990 21,714
Research and development revenue under collaborative arrangements 3,736 23,985 40,438 68,641
Net collaborative profit 123,422 5,127 125,354 18,025

Total revenues 155,661 50,771 282,964 178,309

EXPENSES:
Cost of goods sold 5,536 7,499 31,921 26,862
Research and development 22,669 30,395 64,640 91,331
Selling, general and adminstrative 14,568 15,249 38,173 45,136

Total expenses 42,773 53,143 134,734 163,329

OPERATING INCOME (LOSS) 112,888 (2,372 ) 148,230 14,980

OTHER (EXPENSE) INCOME:
Gain on sale of investment in Reliant Pharmaceuticals, Inc. — 174,631 — 174,631
Interest income 2,574 4,292 8,883 12,940
Interest expense (2,436 ) (4,088 ) (10,905 ) (12,238 )
Other (expense) income (641 ) (393 ) (1,471 ) 784

Total other (expense) income (503 ) 174,442 (3,493 ) 176,117

INCOME BEFORE INCOME TAXES 112,385 172,070 144,737 191,097
INCOME TAX (BENEFIT) PROVISION (330 ) 3,189 637 5,771

NET INCOME $ 112,715 $ 168,881 $ 144,100 $ 185,326

EARNINGS PER COMMON SHARE:
BASIC $ 1.18 $ 1.66 $ 1.51 $ 1.82

DILUTED $ 1.18 $ 1.63 $ 1.49 $ 1.78

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
BASIC 95,316 101,703 95,246 101,676

DILUTED 95,818 103,914 96,398 104,097


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
	(In thousands, except per share amounts)
REVENUES:
Manufacturing revenues	$	32,835		$	33,039		$	61,639		$	71,649
Royalty revenues		8,818			8,439			17,519			17,020
Product sales, net		4,643			—			8,869			—
Research and development revenue under collaborative arrangements		1,174			5,252			2,624			36,702
Net collaborative profit		687			581			5,002			1,932

Total revenues		48,157			47,311			95,653			127,303

EXPENSES:
Cost of goods manufactured and sold		15,092			12,071			27,758			26,385
Research and development		20,664			19,710			46,250			41,971
Selling, general and administrative		20,625			11,679			39,893			23,605

Total expenses		56,381			43,460			113,901			91,961

OPERATING (LOSS) INCOME		(8,224	)		3,851			(18,248	)		35,342

OTHER EXPENSE, NET:
Interest income		1,088			2,693			2,649			6,309
Interest expense		(1,566	)		(4,243	)		(3,275	)		(8,469	)
Other expense, net		(67	)		(666	)		(130	)		(830	)

Total other expense, net		(545	)		(2,216	)		(756	)		(2,990	)

(LOSS) INCOME BEFORE INCOME TAXES		(8,769	)		1,635			(19,004	)		32,352
(BENEFIT) PROVISION FOR INCOME TAXES		(60	)		(63	)		(130	)		967

NET (LOSS) INCOME	$	(8,709	)	$	1,698		$	(18,874	)	$	31,385


(LOSS) EARNINGS PER COMMON SHARE:
Basic	$	(0.09	)	$	0.02		$	(0.20	)	$	0.33

Diluted	$	(0.09	)	$	0.02		$	(0.20	)	$	0.32

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic		94,886			95,637			94,830			95,211

Diluted		94,886			97,356			94,830			96,729

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ALKERMES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Nine Months Ended						Six Months Ended
	December 31,			December 31,			September 30,
	2008			2007			2009			2008
	(In thousands)						(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	144,100		$	185,326
Adjustments to reconcile net income to cash flows from operating activities:
Share-based compensation		11,590			15,477
Net (loss) income							$	(18,874	)	$	31,385
Adjustments to reconcile net (loss) income to cash flows from operating activities:
Depreciation		7,501			9,380			15,482			4,901
Share-based compensation expense								7,438			8,309
Other non-cash charges		4,531			4,225			2,093			2,564
Loss on the purchase of non-recourse RISPERDAL CONSTA 7% Notes		1,989			—
Gain on sale of investment in Reliant Pharmaceuticals, Inc.		—			(174,631	)
Change in the fair value of warrants		—			(1,425	)
Loss on the purchase of non-recourse RISPERDAL CONSTA secured 7% notes								—			1,989
Changes in assets and liabilities:
Receivables		11,585			14,368			(9,111	)		2,251
Inventory, prepaid expenses and other assets		(4,746	)		(7,904	)		10			890
Accounts payable and accrued expenses		(4,722	)		(14,004	)		(8,702	)		(10,785	)
Unearned milestone revenue		(117,657	)		(9,537	)		—			(3,039	)
Deferred revenue		(9,529	)		6,909			(5,083	)		2,092
Other liabilities		(1,415	)		(180	)
Other long-term liabilities								(920	)		(1,363	)
Payment of non-recourse RISPERDAL CONSTA secured 7% notes principal attributable to original issue discount								(1,009	)		(4,590	)

Cash flows provided by operating activities		43,227			28,004
Cash flows (used in) provided by operating activities								(18,676	)		34,604

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(4,145	)		(17,618	)
Purchase of property, plant and equipment								(3,885	)		(3,567	)
Sales of property, plant and equipment		7,717			—			169			7,717
Purchases of investments		(543,408	)		(371,342	)		(295,318	)		(462,412	)
Sales and maturities of investments		540,721			453,403			298,134			463,959
Proceeds from the sale of investment in Reliant Pharmaceuticals, Inc.		—			166,865

Cash flows provided by investing activities		885			231,308
Cash flows (used in) provided by investing activities								(900	)		5,697

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock		7,606			9,510
Excess tax benefit from stock options		75			211
Payment of debt		(47	)		(975	)
Purchase of non-recourse RISPERDAL CONSTA secured 7% Notes		(71,775	)		—
Purchase of treasury stock		(17,948	)		(27,627	)
Proceeds from the issuance of common stock for share-based compensation arrangements								183			7,221
Excess tax benefit from share-based compensation								—			74
Payment of non-recourse RISPERDAL CONSTA secured 7% notes principal								(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	)		(13,080	)

Cash flows used in financing activities		(82,089	)		(18,881	)		(14,325	)		(73,017	)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(37,977	)		240,431
NET DECREASE IN CASH AND CASH EQUIVALENTS								(33,901	)		(32,716	)
CASH AND CASH EQUIVALENTS — Beginning of period		101,241			80,500			86,893			101,241

CASH AND CASH EQUIVALENTS — End of period	$	63,264		$	320,931		$	52,992		$	68,525

SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest	$	7,663		$	9,004		$	2,784		$	6,662

Cash paid for income taxes	$	435		$	980

Cash paid for taxes							$	53		$	435
Non-cash investing and financing activities:
Purchased capital expenditures included in accounts payable and accrued expenses	$	1,883		$	328		$	1,967		$	678

Net share exercise of warrants into common stock of the issuer	$	—		$	2,994

Receipt of Alkermes shares for the purchase of stock options or as payment to satisfy minimum withholding tax obligations related to stock based awards	$	707		$	1,480

Receipt of Alkermes shares for the purchase of stock options or to satisfy minimum tax withholding obligations related to stock based awards							$	722		$	568

ALKERMES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (UNAUDITED)

1. ~~DESCRIPTION OF BUSINESS AND~~ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

~~Description of Business~~

Alkermes, Inc. (the “Company”) is a fully integrated biotechnology company committed to developing innovative medicines to improve patients’ lives. Alkermes developed, manufactures and commercializes VIVITROL^® ~~for alcohol dependence and manufactures RISPERDAL~~^® ~~CONSTA~~^® for schizophrenia. Alkermes’ pipeline includes extended-release injectable, pulmonary and oral products for the treatment of prevalent, chronic diseases, such as central nervous system disorders, addiction and diabetes. Headquartered in Cambridge, Massachusetts, Alkermes has research facilities in Massachusetts and a commercial manufacturing facility in Ohio.

Basis of Presentation

The accompanying condensed consolidated financial statements of ~~the Company~~Alkermes, Inc. (the “Company” or “Alkermes”) for the three and ~~nine~~six months ended ~~December 31,~~September 30, 2009 and 2008 ~~and 2007~~ are unaudited and have been prepared on a basis substantially consistent with the audited financial statements for the year ended March 31, ~~2008.~~2009. 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 ~~(“U.S.”)~~of America (commonly referred to as “GAAP”). In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, that are necessary to present fairly the results of operations for the reported periods.

These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto which are contained in the Company’s Annual Report on Form 10-K for the year ended March 31, ~~2008, as~~2009, 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 ~~“7%~~“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.

~~Revenue Recognition~~Segment Information

— The Company ~~recognizes revenue from~~operates as one business segment, which is the ~~sale~~business of ~~VIVITROL~~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 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 7% notes” for the six months ended September 30, 2008, was reclassified to “Payment of non-recourse RISPERDAL CONSTA secured 7% notes principal attributable to original issue discount” in ~~accordance with~~ the ~~Securities and Exchange Commission’s Staff~~accompanying condensed consolidated statements of cash flows to conform to current period presentation.

New Accounting ~~Bulletin No. 101,~~~~Revenue Recognition in Financial Statements~~Pronouncements~~(“SAB 101”), as amended by SEC Staff Accounting Bulletin No. 104,~~~~Revenue Recognition~~ (“SAB 104”). Specifically, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred and title to the product and associated risk of loss has passed to the customer, the sales price is fixed or determinable, and collectibility is reasonably assured.

~~The~~On April 1, 2009, the Company ~~sells VIVITROL primarily to wholesalers, distributors and specialty pharmacies. In accordance with Statement of~~adopted new guidance issued by the Financial Accounting Standards Board (“~~SFAS”~~FASB”) ~~No. 48,~~~~“Revenue Recognition When Right~~on the accounting for collaborative arrangements. The guidance defined collaborative arrangements and established reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. The adoption of ~~Return Exists”(“SFAS No. 48”),~~this standard did not have an impact on the ~~Company cannot recognize revenue on product shipments until it can reasonably estimate returns related to these shipments. The Company defers the recognition~~Company’s financial position or results of revenue on shipments of VIVITROL to its customers until the product has left the distribution channel. The Company estimates product shipments out of the distribution channel through data provided by external sources,operations.

ALKERMES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

including information on inventory levels provided by its wholesalers, specialty distributor and specialty pharmacies, as well as prescription information. In order to match the cost of goods related to products shipped to customers with the associated revenue, On April 1, 2009, the Company adopted new accounting guidance issued by the FASB on fair value measurements for its nonfinancial assets and liabilities that are subject to measurement at fair value on a non-recurring basis. The adoption of this standard did not impact the Company’s financial position or results of operations; however, this standard may impact 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 ~~deferring~~active or inactive and whether third-party transactions with similar assets and liabilities are distressed in determining the ~~recognition~~fair value of its assets and liabilities measured at fair value on a recurring basis. The adoption of this standard did not impact the Company’s financial position or results of operations.

In June 2009, the FASB issued accounting guidance regarding the accounting for transfers of financial assets that will improve the relevance, representational faithfulness and comparability of the ~~cost~~information that a reporting entity provides in its financial statements about a transfer of ~~goods~~financial assets, the effects of such a transfer on its financial position, financial performance and cash flows, and provide information as to ~~the period~~a transferor’s continuing involvement, if any, in ~~which the associated revenue is recognized.~~

~~In connection with the termination of the collaboration agreement with Cephalon, Inc. (“Cephalon”) as discussed in Note 2,~~~~Collaborations~~, the Company recognized $120.7 million of “net collaborative profit,” consisting of $113.9 million of unearned milestone revenue and $6.8 million of deferred revenue remaining on the Company’s books at December 1, 2008 (the “Termination Date”). At the Termination Date, the Company had $22.8 million of deferred revenue related to the original sale of the two partially completed VIVITROL manufacturing lines to Cephalon.transferred financial assets. The Company paid Cephalon $16.0 million to reacquire the title to these manufacturing lines and accounted for the payment as a reduction to the deferred revenue previously recognized. The remaining $6.8 million of deferred revenue and the $113.9 million of unearned milestone revenue were recognized in the three months ended December 31, 2008, through net collaborative profit, as the Company had no remaining performance obligations to Cephalon beyond the Termination Date, and the amounts were nonrefundable to Cephalon. The Company received $11.0 million from Cephalon as payment to fund their share of estimated VIVITROL product losses during the one-year period following the Termination Date, and the Company is recognizing this payment as revenue through the application of a proportional performance model based on VIVITROL net product losses.

~~New Accounting Pronouncements~~

~~In November 2007, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) reached a final consensus on EITF Issue No. 07-1,~~~~“Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property”~~~~(“EITF No. 07-1”). EITF No. 07-1~~guidance is effective for the Company’s fiscal year beginning April 1, 2009. Adoption is on a retrospective basis to all prior periods presented for all collaborative arrangements existing as of the effective date. The Company is currently evaluating the impact of the adoption of EITF No. 07-1 on its consolidated financial statements.

~~In March 2008, the FASB issued SFAS No. 161,~~~~“Disclosures about Derivative Instruments and Hedging Activities”~~(“SFAS No. 161”). SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for the Company’s fiscal year beginning April 1, 2009,2010, and the Company does not expect the adoption of this standard to have a ~~material~~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.

~~2. COLLABORATIONS~~

~~In November 2008,~~ The new guidance revises the ~~Company~~method of accounting for a number of aspects of business combinations and ~~Cephalon agreed~~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 ~~end the collaboration~~non-acquired minority interests) and post-acquisition exit activities of acquired businesses. The guidance is effective for the ~~development, supply and commercialization of certain products, including VIVITROL in the U.S., effective December~~Company’s fiscal year beginning April 1, ~~2008,~~2010, and the Company ~~assumed~~does not expect the ~~risks~~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 ~~responsibilities~~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 ~~marketing and sale of VIVITROL in the U.S. The Company paid Cephalon $16.0 million for title to two partially completed VIVITROL manufacturing lines,~~Company’s fiscal year beginning April 1, 2011, and the Company ~~received $11.0 million from Cephalon~~does not expect the adoption of this standard to have a significant impact on its financial position or results of operations.

2. COMPREHENSIVE (LOSS) INCOME

Comprehensive (loss) income is as payment to fund their share of estimated VIVITROL product losses during the one-year period following the Termination Date. As of the Termination Date, the Company is responsible for all VIVITROL profits or losses and Cephalon has no rights to royalty payments on future sales of VIVITROL. For a period of six months following the Termination Date, in order to facilitate the transfer of commercialization of VIVITROL to the Company, Cephalon, at the Company’s option, performs certain transition services on behalf of the Company. Cephalon provides the Company with transition services at a full-time equivalent rate (“FTE”) agreed to by the parties.follows:

Three Months Ended Six Months Ended
September 30 September 30
(In thousands) 2009 2008 2009 2008
Net (loss) income $ (8,709 ) $ 1,698 $ (18,874 ) $ 31,385
Unrealized (losses) gains on available-for-sale securities:
Holding (losses) gains (1) (228 ) (61 ) 1,760 (266 )
Reclassification of unrealized losses to realized losses on available-for-sale securities — 559 — 607

Unrealized (losses) gains on available-for-sale securities (228 ) 498 1,760 341

Comprehensive (loss) income $ (8,937 ) $ 2,196 $ (17,114 ) $ 31,726


(1)		During the three months ended September 30, 2009, the Company recorded an out of period adjustment of $1.9 million for unrealized losses on available-for-sale securities. This adjustment had no impact on reported net loss.

~~3. COMPREHENSIVE INCOME~~

~~Comprehensive income for the three and nine months ended December 31, 2008 and 2007 is as follows:~~

ALKERMES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Three Months Ended Nine Months Ended
December 31, December 31,
(In thousands) 2008 2007 2008 2007
Net income $ 112,715 $ 168,881 $ 144,100 $ 185,326
Unrealized losses on available-for-sale securities:
Holding losses (1,212 ) (1,469 ) (1,478 ) (2,019 )
Reclassification of unrealized losses to realized losses on available-for-sale securities 556 337 1,163 337

Unrealized losses on available-for-sale securities (656 ) (1,132 ) (315 ) (1,682 )

Comprehensive income $ 112,059 $ 167,749 $ 143,785 $ 183,644

4.3. EARNINGS PER ~~COMMON~~ 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 ~~restricted~~ stock ~~units.~~awards.

Basic and diluted (loss) earnings per common share are calculated as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended					Six Months Ended
	December 31,				December 31,				September 30					September 30
(In thousands)	2008		2007		2008		2007		2009			2008		2009			2008
Numerator:
Net income	$	112,715	$	168,881	$	144,100	$	185,326
Net (loss) income									$	(8,709	)	$	1,698	$	(18,874	)	$	31,385

Denominator:
Weighted average number of common shares outstanding		95,316		101,703		95,246		101,676		94,886			95,637		94,830			95,211
Effect of dilutive securities:
Stock options		446		2,159		974		2,354		—			1,479		—			1,329
Restricted stock units		56		52		178		67		—			240		—			189

Dilutive common share equivalents		502		2,211		1,152		2,421		—			1,719		—			1,518

Shares used in calculating diluted earnings per share		95,818		103,914		96,398		104,097
Shares used in calculating diluted (loss) earnings per share										94,886			97,356		94,830			96,729

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)
September 30, 2009

Short-term investments:
Available-for-sale securities:
U.S. government and agency debt securities $ 209,896 $ 389 $ — $ 210,285
International government agency debt securities 28,692 148 — 28,840
Other debt securities 3,267 — (294 ) 2,973

Total short-term investments 241,855 537 (294 ) 242,098

Long-term investments:
Available-for-sale securities:
U.S. government and agency debt securities 17,994 — (17 ) 17,977
Corporate debt securities 43,162 — (3,162 ) 40,000
Other debt securities 11,510 — (1,788 ) 9,722
Strategic investments 738 142 — 880

73,404 142 (4,967 ) 68,579

Held-to-maturity securities:
U.S. government obligations 416 — — 416
Certificates of deposit 5,440 — — 5,440

Total long-term investments 79,260 142 (4,967 ) 74,435

Total investments $ 321,115 $ 679 $ (5,261 ) $ 316,533

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 six months ended September 30, 2009, the Company had $298.1 million of proceeds from the sales and maturities of marketable securities. The proceeds from the sales and maturities of its marketable securities resulted in realized gains of $0.2 million and realized losses of less than $0.1 million.

ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company’s available-for-sale ~~investments are carried~~and held-to-maturity securities at September 30, 2009 have contractual maturities in the following periods:

Available-for-Sale Held-to-Maturity
Amortized Estimated Amortized Estimated
(in thousands) Cost Fair Value Cost Fair Value
Within 1 year $ 124,069 $ 124,061 $ 416 $ 416
After 1 year through 5 years (1) 131,784 131,700 — —
After 5 years through 10 years (1) 48,668 45,578 — —
After 10 years 10,000 8,458 — —

Total $ 314,521 $ 309,797 $ 416 $ 416


(1)		Investments in available-for-sale securities within these categories, with an amortized cost of $151.4 million and an estimated fair value of $148.2 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 if 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. In 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 in the Company’s condensed consolidated balance sheets and include U.S. government and agency debt securities, investment grade corporate debt securities, including asset backed debt securities and student loan backed auction rate securities, and strategic equity investments, which are investments in certain publicly traded companies. The Company’s held-to-maturity securities are carried atof an individual security is less than its amortized cost ~~and include U.S. government debt securities and corporate debt~~basis. Unrealized losses on available-for-sale securities that are ~~restricted~~determined to be temporary, and ~~held as collateral under certain letters of credit~~not related to ~~certain~~credit loss, are recorded, net of tax, in accumulated other comprehensive income.

For available-for-sale debt securities 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 recovery of the ~~Company’s lease agreements.~~

~~At December 31, 2008,~~amortized cost basis. If the Company ~~had gross~~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 ~~gains~~loss is recorded within earnings as an impairment loss. Regardless of ~~$4.0 million and gross~~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 ~~$5.8 million on~~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 ~~available-for-sale investments.~~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 ~~believes that~~then considers its intent and ability to hold the ~~gross unrealized losses on these investments are temporary, and~~equity security for a period of time sufficient to recover its carrying value. If the Company ~~has~~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 $14.0 million consist of investment grade subordinated, medium term, callable step-up floating rate notes (“FRN”) issued by the Royal Bank of Scotland Group (“RBS”) and UBS AG (“UBS”). At September 30, 2009, these FRN’s had composite ratings by Moody’s, Standard & Poor’s (“S&P”) and Fitch of between A and BBB+. During the six months ended September 30, 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 September 30, 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 $12.2 million at September 30, 2009.

In making the determination that the decline in fair value of these FRN’s 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; the financial condition and near term prospects of the

ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

issuers; and the intent not to sell these securities ~~to recovery, which may be at maturity. For the nine months ended December 31, 2008,~~and assessment that it is more likely than not that the Company ~~recognized $1.2 million in charges for other-than-temporary losses~~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 ~~its strategic equity investments.~~

~~At December 31, 2008,~~future financial market conditions. These FRN’s held by the Company ~~had $10.0 million~~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 securities the Company has held have been called at par by issuers prior to maturity. The Company will continue 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.

The Company’s two investments in auction rate securities ~~with an unrealized loss~~consist of ~~$1.1 million. The securities represent the Company’s investment in~~ taxable student loan revenue bonds issued by ~~state higher education authorities~~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.~~Program (“FFELP”). The bonds ~~were triple A rated at the date of purchase and~~ are collateralized by student loans purchased by the authorities, which are guaranteed by state sponsored agencies and reinsured by the U.S. Department of Education. Liquidity for these securities is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals. ~~Each of~~The Colorado and Brazos securities were rated Aaa and Baa3 by Moody’s, respectively, at September 30, 2009. Due to repeated failed auctions since January 2008, the Company no longer considers these securities ~~had been subject~~ to ~~auction processes for which there had been insufficient bidders on the scheduled auction dates~~be liquid and ~~the auctions subsequently failed. The Company is not able to liquidate its~~has classified them as long-term investments in ~~auction rate securities until future auctions are successful, a buyer is found outside of~~ the ~~auction process or the bonds are redeemed by the issuer.~~condensed consolidated balance sheets. The securities continue to pay interest ~~at predetermined interest rates~~ during the periods in which the auctions have failed. ~~At December 31, 2008,~~

Since the security auctions have failed and fair value cannot be derived from quoted prices, the Company ~~determined~~used a discounted cash flow model to determine the estimated fair value of the securities at September 30, 2009. 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, that 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. These securities were ~~temporarily impaired due~~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 $8.5 million at September 30, 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,~~position; the extent to which fair value was less than ~~cost, the~~cost; financial condition and near term prospects of the ~~issuers~~issuers; and the ~~guarantee agencies,~~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 will continue to monitor the securities and the ~~Company’s intent~~financial markets and ~~ability to hold each security for a period~~if there is continued deterioration, the fair value of ~~time sufficient to allow for any anticipated recovery~~these securities could decline further resulting in ~~fair value.~~an other-than-temporary impairment charge.

At ~~December 31, 2008,~~September 30, 2009, the ~~Company had $7.5 million in~~Company’s investments in asset backed debt securities ~~with an unrealized loss~~consist of ~~$0.9 million. The securities represent the Company’s investment in investment grade~~ medium term floating rate notes (“MTN”) of Aleutian Investments, LLC (“Aleutian”) and Meridian Funding Company, LLC (“Meridian”), which are qualified special purpose entities (“QSPE’s”) of Ambac Financial Group, Inc. (“Ambac”) and MBIA, Inc. (“MBIA”), respectively. Ambac and MBIA are guarantors of financial obligations and are referred to as monoline financial guarantee insurance companies. The QSPE’s, which purchase pools of assets or securities and fund the purchase through the issuance of MTN’s, have been established to provide a vehicle to access the capital markets for asset backed debt securities and corporate borrowers. The MTN’s include sinking fund redemption features which match-fund the terms of redemptions to the maturity dates of the underlying pools of assets or securities in order to mitigate potential liquidity risk to the QSPE’s. At ~~December 31, 2008, a portion~~September 30, 2009, $5.1 million of the Company’s initial $9.9 million investment in ~~the Meridian~~ MTN’s had been redeemed ~~by MBIA~~ through scheduled sinking fund redemptions at par ~~value, and the first sinking fund redemption on the Aleutian MTN is scheduled for June 2009.~~value.

ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and S&P, respectively, and MBIA had ratings of Ba3 and BB+ by Moody’s and in November, Moody’s further downgraded Ambac’s rating to Baa1 with a developing outlook. Standard and Poor’s (“S&P”) reduced Ambac’s rating to double A in June 2008 and in August 2008, affirmed its double A rating with a negative outlook. In June 2008, MBIA was downgraded from triple A to A2 by Moody’s and in September Moody’s placed MBIA on review for possible downgrade. S&P, ~~reduced MBIA’s rating~~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 ~~double A~~determine the estimated fair value of the securities at September 30, 2009. The Company’s valuation analyses consider, among other items, assumptions that market participants would use in ~~June 2008~~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 ~~August 2008, affirmed~~ its ~~double A rating with~~valuation analyses, the most critical of which is the discount rate, which includes a ~~negative outlook. All downgrades were due~~provision for default and liquidity risk. The Company estimated the fair value of the asset backed securities to ~~Ambac’s and MBIA’s inability to maintain triple A capital levels.~~be $4.2 million at September 30, 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, 2008,~~September 30, 2009, the Company determined that the securities had been temporarily impaired due toto: the length of time each security was in an unrealized loss ~~position,~~position; the extent to which fair value was less than ~~cost,~~cost; the financial condition and near term prospects of the ~~issuers,~~issuers; current redemptions made by ~~one of~~ the ~~issuers~~issuers; and the ~~Company’s~~ intent not to sell these securities and ~~ability~~assessment that it is more likely than not that the Company would not be required to ~~hold each security for a period~~sell these securities before the recovery of ~~time sufficient to allow for any anticipated recovery in fair value or until scheduled redemption.~~

~~ALKERMES, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~their amortized cost basis.

The ~~Company also holds~~Company’s strategic investments include common stock in companies with which it has or did have a ~~warrant to purchase securities of a certain publicly held company included in its portfolio of strategic equity investments. This warrant is considered to be a derivative instrument,~~collaborative agreement. For the six months ended September 30, 2009 and ~~at December 31, 2008 and March 31, 2008 the carrying value of the warrant was immaterial.~~

~~6. FAIR VALUE MEASUREMENTS~~

~~Effective April 1,~~ 2008, the Company ~~implemented SFAS No. 157, “~~~~Fair Value Measurements~~~~” (“SFAS No. 157”)~~recognized none and $0.6 million, respectively, in charges for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period. The adoption of SFAS No. 157 did not have a material impact on the Company’s financial position and results of operations. In accordance with the provisions of FASB Staff Position FAS 157-2, “~~Effective Date of FASB Statement No. 157~~” (“FSP FAS 157-2”), the Company has elected to defer implementation of SFAS No. 157 as it relates to non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis until April 1, 2009. The Company is evaluating the impact, if any, this standard will haveother-than-temporary losses on its ~~non-financial assets and liabilities.~~

~~SFAS No. 157 provides a framework for measuring~~strategic investments due to declines in their fair value and requires expanded disclosures regarding fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, SFAS No. 157 permits the use of various valuation approaches, including market, income and cost approaches. SFAS No. 157 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. In October 2008, the FASB issued FASB Staff Position FAS 157-3~~“Determining the Fair Value of a Financial Asset When the Market for that Asset is not Active”~~(“FSP FAS 157-3”). FSP FAS 157-3 clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 was effective for the Company’s condensed consolidated financial statements for the quarter ended September 30, 2008. The adoption of this standard did not have a material impact on the consolidated financial statements.

~~The fair value hierarchy is broken down into three levels based on the reliability of inputs. The Company has categorized its cash, cash equivalents and investments within the hierarchy as follows:~~

~~Level 1~~- These valuations are based on a market approach using quoted prices in active markets for identical assets. Valuations of these products do not require a significant degree of judgment. Assets utilizing Level 1 inputs include investments in money market funds, U.S. government and agency debt securities, bank deposits and exchange-traded equity securities of certain publicly held companies;

~~Level 2~~- These valuations are based on a market approach using quoted prices obtained from brokers or dealers for similar securities or for securities for which we have limited visibility into their trading volumes. Valuations of these products do not require a significant degree of judgment. Assets utilizing Level 2 inputs consist of investments in corporate debt securities; and

~~Level 3~~- These valuations are based on an income approach using certain inputs that are unobservable and are significant to the overall fair value measurement. Valuations of these products require a significant degree of judgment. Assets utilizing Level 3 inputs consist of investments in auction rate securities and asset backed debt securities that are not currently trading. In addition, the Company holds a warrant in a certain publicly held company that is classified using Level 3 inputs. The carrying balance of this warrant was immaterial at December 31, 2008 and March 31, 2008.

ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table illustrates the 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 3,687
Sales and redemptions, at par value (18,773 )
Transfers out of Level 3 (33,920 )

Balance, September 30, 2009 $ 24,871

The fair values of the Company’s investments in ~~asset backed~~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. ~~Typically, auction rate securities trade at their par value due to~~During the ~~short interest rate reset period and the availability of buyers or sellers~~six months ended September 30, 2009, certain of the corporate debt securities ~~at recurring auctions. However, 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 its investments in auction rate securities at December 31, 2008. The Company also used a discounted cash flow model to determine the estimated fair value of its investments in asset backed debt securities ~~at December 31, 2008, as~~held by the ~~asset backed debt~~Company had minimal or no trades and the security auctions for the Company’s auction rate securities ~~are not actively trading.~~had failed. The ~~assumptions~~Company is unable to derive a fair value for these investments using quoted market prices and used ~~in the~~ discounted cash flow models ~~used to determine~~as described in Note 4, Investments.

During the ~~estimated fair value of these securities include estimates~~three months ended September 30, 2009, trading resumed for interest rates, timing of cash flows, expected holding periods and risk adjusted discount rates, which include a provision for default and liquidity risk. The Company’s valuation analyses consider, among other items, assumptions that market participants would use in their estimates of fair value, such as the collateral underlying the security, the inability to sell the investment in an active market, the creditworthiness of the issuer and any associated guarantees, the timing of expected future cash flows, and the expectation of the next time the security will have a successful auction or when callability features may be exercised by the issuer. These securities were also compared, where possible, to other observable market data with similar characteristics.

~~The following table is a rollforward of the fair value~~certain of the Company’s investments in ~~asset backed~~corporate debt ~~securities and auction rate securities whose~~securities. At September 30, 2009, the Company derived a fair value ~~is determined~~for these investments using market observable inputs instead of through the use of a discounted cash flow model. Accordingly, the Company transferred these investments from a Level 3 ~~inputs:~~

(In thousands) Fair Value
Balance, April 1, 2008 $ 18,612
Total unrealized losses included in earnings —
Total unrealized losses included in comprehensive income (902 )
Redemptions, at par value (2,245 )

Balance, December 31, 2008 $ 15,465

classification to a Level 2 classification.

~~In February 2007,~~The carrying amounts reflected in the ~~FASB issued SFAS No. 159, “~~~~The Fair Value Option~~condensed consolidated balance sheets for ~~Financial Assets~~cash and ~~Financial Liabilities Including an Amendment of FASB Statement No. 115~~~~” (“SFAS No. 159”). SFAS No. 159 permits, but does not require, entities to elect to measure selected financial instruments~~cash equivalents, accounts receivable, other current assets, accounts payable and ~~certain other items at fair value. Unrealized gains and losses on items for which the~~accrued expenses approximate fair value ~~option has been elected are recognized in earnings~~due to their short-term nature. The Company’s non-recourse 7% Notes had a carrying value of $63.5 million and $75.9 million and a fair value of $60.4 million and $74.7 million at ~~each reporting period.~~September 30, 2009 and March 31, 2009, respectively. The ~~Company adopted~~estimated fair value of the ~~provisions of SFAS No. 159~~non-recourse 7% Notes was based on April 1, 2008 and did not elect to measure any new assets or liabilities at their respective fair values and, therefore, the adoption of SFAS No. 159 did not have an impact on its results of operations and financial position.

ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

September 30, March 31,
(In thousands) 2009 2009
Land $ 301 $ 301
Building and improvements 36,325 36,325
Furniture, fixture and equipment 66,295 67,165
Leasehold improvements 33,980 33,996
Construction in progress 43,918 41,908

Subtotal 180,819 179,695
Less: accumulated depreciation (86,352 ) (73,234 )

Total property, plant and equipment, net $ 94,467 $ 106,461

As a result of the Company’s planned relocation of its corporate headquarters from Cambridge, Massachusetts to Waltham, Massachusetts in early calendar year 2010, the Company recorded a charge of $11.0 million to depreciation during the six months ended September 30, 2009. The depreciation charge relates to the acceleration of depreciation on laboratory related leasehold improvements located at the Company’s current headquarters, which will have no benefit or use to the Company once the Company exits the Cambridge facility, 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 consist of the following:


	December 31,		March 31,		September 30,		March 31,
(In thousands)	2008		2008		2009		2009
Accounts payable	$	5,364	$	7,042	$	5,457	$	8,046
Accrued compensation		9,211		11,245		10,072		13,817
Accrued interest		1,662		2,975		1,123		1,549
Accrued restructuring — current portion		771		4,037
Amounts due to Cephalon						—		1,169
Accrued other		13,302		10,747		11,620		11,902

Total	$	30,310	$	36,046
Total accounts payable and accrued expenses					$	28,272	$	36,483

~~11. EXTINGUISHMENT OF DEBT~~ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

10. RESTRUCTURING

In ~~June and July~~connection with the 2008 restructuring program, in which the Company ~~purchased,~~and Eli Lilly and Company announced the decision to discontinue the AIR^® Insulin development program (the “2008 Restructuring”), the Company recorded charges of $6.9 million during the year ended March 31, 2008. Activity related to the 2008 Restructuring was as follows:

(in thousands)
Accrued restructuring, March 31, 2009 $ 4,193
Payments for facility closure costs (416 )
Other adjustments 106

Accrued restructuring, September 30, 2009 $ 3,883

At September 30, 2009 and March 31, 2009, the restructuring liability related to the 2008 Restructuring consists of $0.7 million classified as current, respectively, and $3.2 million and $3.5 million classified as long-term, respectively, in ~~three privately negotiated transactions, $75.0~~the accompanying condensed consolidated balance sheets. As of September 30, 2009, the Company has paid in cash, written off, recovered and made restructuring charge adjustments that totaled approximately less than $0.1 million in principal amount of its outstanding 7% Notes for $71.8 million. As a result of the purchases, $95.0 million principal amount of the 7% Notes remains outstanding at December 31, 2008. The Company recorded a loss on the extinguishment of the purchased 7% Notes of $2.0facility closure costs, $2.9 million in employee separation costs and $0.1 million in other contract termination costs in connection with the ~~six months ended~~2008 Restructuring. The $3.9 million remaining in the restructuring accrual at September 30, ~~2008, which was recorded as interest expense.~~2009 is expected to be paid out through fiscal year 2016 and relates primarily to future lease costs associated with an exited facility.

~~12.~~11. INCOME TAXES

The Company records a deferred tax asset or liability based on the difference between the financial statement and tax bases of assets and liabilities, as measured by enacted tax rates assumed to be in effect when these differences reverse. At ~~December 31, 2008,~~September 30, 2009, 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 ~~earned income before income taxes of $112.4 million and $144.7 million during the three and nine months ended December 31, 2008, respectively and the Company~~ recorded an income tax benefit of ~~$0.3 million and an income tax provision of $0.6~~$0.1 million for the three and ~~nine~~six months ended ~~December 31, 2008, respectively. This variation in~~September 30, 2009, which represents the ~~customary relationship between income earned before income taxes and~~amount the ~~income tax provision is due to termination of~~Company estimates it will benefit from the ~~VIVITROL collaboration with Cephalon as discussed in Note 2,~~~~Collaborations~~. The Company previously recognized, for tax purposes, the milestone payments received from Cephalon under the VIVITROL collaboration. The income tax benefit and provision recorded for the three and nine months ended December 31, 2008, respectively, and the income tax provision of $3.2 million and $5.8 million for the three and nine months ended December 31, 2007, respectively, related to the U.S. alternative minimum tax (“AMT”). Included in the $0.6 million provision for the nine months ended December 31, 2008 is a $0.1 million estimated benefit as a result of the recently enactedHousing and Economic Recovery Act of ~~2008~~.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 $0.1 million and provision of $1.0 million for the three and six months ended September 30, 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 ~~was~~and charge were recorded in the three and six months ended ~~December 31,~~September 30, 2008, ~~and a federal tax charge was recorded in the nine months ended December 31, 2008 and in the three and nine months ended December 31, 2007.~~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.~~carryforward and research and development credits.

~~13.~~12. COMMITMENTS AND CONTINGENCIES

From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of business. The Company is not aware of any such proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its business, financial condition or results of operations.

In ~~November 2007, Reliant Pharmaceuticals, Inc. (“Reliant”) was acquired~~April 2009, the Company entered into a lease agreement in connection with the move of its corporate headquarters from Cambridge, Massachusetts to Waltham, Massachusetts, which is scheduled to occur in early calendar year 2010. The initial lease term, which begins upon the Company’s move into the new facility, 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 ~~GlaxoSmithKline (“GSK”)~~the Company by approximately 15%. The total rent expense related to the new headquarters will be 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 ~~acquisition,~~agreement, the Company ~~received $166.9~~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, ~~upon~~which equals the ~~closing~~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 transaction in December 2007 in exchange for the Company’s investment in Series C convertible, redeemable preferred stock of Reliant. The Company is entitled to receive up to an additional $7.7 million of funds held in escrow subject to the terms of an escrow agreement between GSK and Reliant. The escrowed funds represent the maximum potential amount of future payments that may be payable to GSK under the terms of the escrow agreement, which is effective for a period of 15 months following the closing of the transaction. The Company has not recorded a liability related to the indemnification to GSK, as the Company currently believes that it is remote that any of the escrowed funds will be needed to indemnify GSK for any losses it might incur related to the representations and warranties made by Reliant in connection with the acquisition.lease term.

1315

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

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^® for alcohol dependence and manufacture RISPERDAL^® CONSTA^® for ~~schizophrenia.~~schizophrenia and bipolar disorder. Our robust pipeline includes extended-release injectable, pulmonary and oral products for the treatment of prevalent, chronic diseases, such as central nervous system disorders, addiction and diabetes. ~~Headquartered in Cambridge, Massachusetts, we~~We have research facilities in Massachusetts and a commercial manufacturing facility in Ohio. We are relocating our corporate headquarters from Cambridge, Massachusetts, to Waltham, Massachusetts in early calendar year 2010.

Forward-Looking Statements

Any statements herein or otherwise made in writing or orally by us with regard to our expectations as to financial results and other aspects of our business may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements concerning future operating results, the achievement of certain business and operating goals, manufacturing revenues, product sales and royalty revenues, plans for clinical trials, regulatory approvals, ~~and~~ manufacture and commercialization of products and product candidates, spending relating to research and development, manufacturing, and selling and marketing activities, financial goals and projections of capital expenditures, recognition of revenues and future financings. These statements relate to our future plans, objectives, expectations and intentions and may be identified by words like “believe,” “expect,” “designed,” “may,” “will,” “should,” “seek,” or “anticipate,” and similar expressions.

Although we believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, the forward-looking statements contained in this document are neither promises nor guarantees, and our business is subject to significant risk and uncertainties and there can be no assurance that our actual results will not differ materially from our expectations. These forward looking statements include, but are not limited to, statements concerning: the achievement of certain business and operating milestones and future operating results and profitability; continued growth of RISPERDAL CONSTA sales; the commercialization of VIVITROL in the United States (“U.S.”) by us and in Russia and ~~countries in~~ the Commonwealth of Independent States (“CIS”) by Cilag GmbH International (“Cilag”), a subsidiary of Johnson & Johnson; recognition of milestone payments from Cilag related to the future sales of ~~VIVITROL;~~VIVITROL in Russia and the CIS; the successful continuation of development activities for our programs, including exenatide once weekly, ~~a four-week formulation of RISPERDAL CONSTA,~~ VIVITROL for ~~opiate~~opioid dependence, ALKS ~~27,~~29, ALKS 2933, ALKS 36 and ALKS ~~33;~~37; the expectation and timeline for regulatory approval of the ~~NDA~~New Drug Application (“NDA”) submission for exenatide once weekly; and the successful manufacture of our products and product candidates, including RISPERDAL CONSTA, VIVITROL and ~~VIVITROL,~~polymer for exenatide once weekly, by us at a commercial scale, and the successful manufacture of exenatide once weekly by Amylin Pharmaceuticals, Inc. (“Amylin”)~~; and our building a successful commercial infrastructure for VIVITROL.~~. Factors which could cause actual results to differ materially from our expectations set forth in our forward-looking statements include, among others: (i) manufacturing and royalty revenues 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 this product; (ii) we may be unable to manufacture RISPERDAL CONSTA, VIVITROL and ~~VIVITROL~~polymer for exenatide once weekly, in sufficient quantities and with sufficient yields to meet our or our partners’ requirements or to add additional production capacity for RISPERDAL CONSTA and VIVITROL, or unexpected events could interrupt manufacturing operations at our RISPERDAL CONSTA and VIVITROL manufacturing facility, which is the sole source of supply for these products; (iii) 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 other countries in the CIS; (v) Cilag may be unable to successfully commercialize ~~VIVITROL;~~VIVITROL in Russia and the CIS; (vi) third party payors may not cover or reimburse ~~VIVITROL;~~us for purchases of our products; (vii) if approved, Eli Lilly and Company (“Lilly”) 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; ~~(viii)~~(ix) we may not be able to source raw materials for our production processes from third parties; ~~(ix)~~(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”) may not find the product produced in the Amylin facility comparable to the product used in

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; ~~(xvii)~~(xviii) after the completion of clinical trials for our product candidates, including exenatide once weekly, or after the submission for marketing approval of such product ~~candidate,~~candidates, the FDA or other health authorities could refuse to accept such filings, could 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 ~~product~~products to receive marketing approval; ~~(xviii)~~(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 market acceptance, be precluded from commercialization by proprietary rights of third parties or experience substantial competition in the marketplace; ~~(xix)~~(xx) technological change in the biotechnology or pharmaceutical industries could render our products and/or product candidates obsolete or non-competitive; ~~(xx)~~(xxi) difficulties or set-backs in obtaining and enforcing our patents and difficulties with the patent rights of others could occur; ~~(xxi)~~(xxii) we may incur losses in the future; ~~(xxvi)~~(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; ~~(xxii)~~(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 ~~our~~corporate debt securities, asset backed debt securities and auction rate securities.

The forward-looking statements made in this document are made only as of the date hereof and we do not intend to update any of these factors or to publicly announce the results of any revisions to any of our forward-looking statements other than as required under the federal securities laws.

Our Strategy

We leverage our ~~unique~~ formulation expertise and drug development technologies to develop, both with partners and on our own, innovative and competitively advantaged drug products that can enhance patient outcomes in major therapeutic areas. We ~~develop our own proprietary therapeutics by applying our innovative formulation expertise and drug development capabilities to create new pharmaceutical products. In addition, we~~ enter into select collaborations with pharmaceutical and biotechnology companies to develop significant new product candidates, based on existing drugs and incorporating our technologies. In addition, we apply our innovative formulation expertise and drug development capabilities to create our own new, proprietary pharmaceutical products. Each of these approaches is discussed in more detail ~~below.~~in “Products and Development Programs.”

~~Product Developments~~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, ~~FDA-approved~~ atypical ~~antipsychotic.~~antipsychotic approved by the FDA for both the treatment of both schizophrenia and bipolar I disorder. The medication uses our proprietary Medisorb^® technology to deliver and maintain therapeutic medication levels in the body through just one injection every two weeks. RISPERDAL CONSTA is marketed by Janssen and is exclusively manufactured by us. RISPERDAL CONSTA was first approved by regulatory authorities in the United Kingdom and Germany in August 2002 and by the FDA in October 2003. RISPERDAL CONSTA is approved for the treatment of schizophrenia in approximately 85 countries and marketed in approximately 60 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 brain disorder characterized by disorganized thinking, delusions and hallucinations. Studies have demonstrated that as many as 75 percent of patients with schizophrenia have difficulty taking their oral medication on a regular basis, which can lead to worsening of symptoms. Clinical data has shown that treatment with RISPERDAL CONSTA may lead to improvements in symptoms, sustained remission and decreases in hospitalization. RISPERDAL CONSTA is marketed by Janssen and is exclusively manufactured by us. RISPERDAL CONSTA was first approved by regulatory authorities in the United Kingdom (“UK”) and Germany in August 2002 and the FDA in October 2003. RISPERDAL CONSTA is approved in approximately 85 countries and marketed in approximately 60 countries, and Janssen continues to launch the product around the world.

In April 2008, we announced that our partner, Johnson & Johnson Pharmaceutical Research & Development, L.L.C. (“J&JPRD”), submitted a Supplemental New Drug Application (“sNDA”) for RISPERDAL CONSTA to the FDA seeking approval for adjunctive maintenance treatment to delay the occurrence of mood episodeshospitalization in patients with frequently relapsing bipolar disorder (“FRBD”). FRBD is defined as four or more manic or depressive episodes in the previous year that require a doctor’s care. The condition may affect 10 to 20 percent of the estimated 27 million people world-wide with bipolar disorder.

In May 2008, the results of a study sponsored by Janssen were presented at the American Psychiatric Association (“APA”) 161st Annual Meeting in Washington D.C. This 24 - month, open-label, active-controlled, international study investigated whether treatment with Risperidone Long-Acting Injection (“RLAI”), compared with oral quetiapine when tested in a routine care setting within general psychiatric services, had an effect on long-term efficacy maintenance as measured by time to relapse in patients with schizophrenia. The results demonstrated that the average relapse-free time was significantly longer in patients treated with RLAI (607 days) compared to quetiapine (533 days) (p<0.0001). Furthermore, over the 24 - month treatment period, relapse occurred in 16.5 percent of patients treated with RLAI and 31.3 percent in the quetiapine treatment arm.

In July 2008, we announced that our partner J&JPRD submitted a sNDA for RISPERDAL CONSTA to the FDA for approval as monotherapy in the maintenance treatment of bipolar I disorder to delay the time to occurrence of mood episodes in adults. Bipolar disorder is a brain disorder that causes unusual shifts in a person’s mood, energy and ability to function. ~~Characterized~~It is often characterized by debilitating mood swings, from extreme highs (mania) to extreme lows (depression)~~, bipolar~~. Bipolar I disorder ~~affects an estimated 5.7 million,~~is characterized based on the occurrence of at least one manic episode, with or ~~2.6 percent,~~without the occurrence of a major depressive episode. Clinical data has shown that RISPERDAL CONSTA significantly delayed the time to relapse compared to placebo treatment in patients with bipolar disorder.

In August 2009, we received notification from Johnson & Johnson Pharmaceutical Research and Development, L.L.C. (“J&JPRD”) that based on a portfolio review it has decided not to pursue further development of the ~~American adult population in any given year.~~

~~In October 2008, the FDA approved the deltoid muscle of the arm as a new injection site for RISPERDAL CONSTA. RISPERDAL CONSTA was previously approved as a gluteal injection only.~~

~~In January 2009, we announced that J&JPRD initiated a phase 1, single-dose, open-label study of a~~ four-week long-acting injectable formulation of RISPERDAL CONSTA for the treatment of schizophrenia. The study is designed to assess the pharmacokinetics, safety and tolerability of a gluteal injection of this risperidone formulation in approximately 26 patients diagnosed with chronic, stable schizophrenia.risperidone.

VIVITROL

We developed VIVITROL, an extended-release Medisorb formulation of naltrexone, which is the first and only once-monthly injectable medication for the treatment of alcohol ~~dependence in patients who are able to abstain from drinking in an outpatient setting and are not actively drinking prior to treatment initiation.~~dependence. 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. 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. ~~Each injection of VIVITROL provides medication for one month and alleviates the need for patients to make daily medication dosing decisions.~~ VIVITROL was approved by the FDA in April 2006 and was launched in June 2006.

In April 2007, we submitted a Marketing Authorization Application (“MAA”) for VIVITROL for the treatment of alcohol dependence to regulatory authorities in the UK and Germany based on the single pivotal clinical study used to register VIVITROL in the U.S. In July 2008, based on feedback from the UK health authorities that data from a single study would not be sufficient to register VIVITROL in the UK and Germany, we withdrew the MAA.

~~In December 2007, we entered into an exclusive agreement with Cilag to commercialize VIVITROL for the treatment of alcohol dependence and opioid dependence in Russia and other countries in the CIS.~~ In August 2008, ~~we announced that Cilag received approval from~~ the Russian regulatory ~~authority to market~~authorities approved VIVITROL for the treatment of alcohol dependence. ~~Janssen-Cilag, an affiliate company of~~Our collaborator for the Russian and CIS markets, Cilag, ~~will commercialize VIVITROL. We retain exclusive development and marketing rights to~~launched VIVITROL in ~~all markets outside~~ Russia ~~and other countries~~ in ~~the CIS.~~March 2009.

We are ~~responsible~~also developing VIVITROL for ~~manufacturing VIVITROL~~the treatment of opioid dependence, a serious and ~~will receive manufacturing fees and royalties based on product sales.~~

chronic brain disease characterized by compulsive, prolonged-self administration of opioid substances that are not used for a medical purpose. In June 2008, we initiated a randomized, multi-center registration study of VIVITROL in Russia for the treatment of opioid dependence. The ~~multi-center~~ study is designed to assess the efficacy and safety of VIVITROL in ~~approximately 200 patients diagnosed with~~more than 250 opioid ~~dependence.~~dependent patients. The clinical data from this study may form the basis of a ~~sNDA~~Supplemental NDA to the FDA for VIVITROL for the treatment of opioid ~~dependence, a chronic brain disease.~~dependence. In April 2009, we completed enrollment for this registration study. We expect data from the study to be available in late calendar year 2009.

In November 2008, we and Cephalon agreed to end the collaboration for the development, supply and commercialization of certain products, including VIVITROL in the U.S., effective December 1, 2008 (the “Termination Date”), and we assumed the risks and responsibilities for the marketing and sale of VIVITROL in the U.S. We paid Cephalon $16.0 million for title to two partially completed VIVITROL manufacturing lines, and we received $11.0 million from Cephalon as payment to fund their share of estimated VIVITROL product losses during the one-year period following the Termination Date. As of the Termination Date, Cephalon is no longer responsible for the marketing and sale of VIVITROL in the U.S., and we are responsible for all VIVITROL profits or losses. Cephalon has no rights to royalty payments on future sales of VIVITROL. For a period of six months following the Termination Date, in order to facilitate the transfer of commercialization of VIVITROL to us, Cephalon, at our option, performs certain transition services on our behalf. Cephalon provides us with transition services at a full-time equivalent rate (“FTE”) agreed to by the parties.

Exenatide Once Weekly

We are collaborating with Amylin on the development of exenatide once weekly for the treatment of type 2 diabetes. Exenatide once weekly is an injectable formulation of Amylin’s BYETTA^® (exenatide) ~~which~~. 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. 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 ~~sulfonylurea; two~~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 ~~thiazolidinedione,~~thiazolidinediones, a class of diabetes medications. Amylin has an agreement with ~~Eli~~ Lilly ~~and Company (“Lilly”)~~ for the development and commercialization of exenatide, including exenatide once weekly. Exenatide once weekly is being developed with the goal of providing patients with an effective and more patient-friendly treatment option.

In ~~June 2008,~~May 2009, Amylin submitted an 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 ~~Amylin and Lilly~~ announced positive results from ~~a 52-week, open-label clinical~~the DURATION-3 study ~~(“DURATION-1 study”) that showed the durable efficacy of exenatide once weekly. At 52 weeks, patients taking~~designed to compare exenatide once weekly ~~showed an average A1C improvement~~to LANTUS^® (insulin glargine) in 467 patients with type 2 diabetes taking stable

doses of ~~2 percent and an average weight loss of 9.5 pounds. The study also showed that patients who switched from BYETTA injection after 30 weeks~~metformin alone or in combination with a sulfonylurea. Patients randomized to exenatide once weekly experienced ~~additional improvements~~a statistically superior reduction in A1C, ~~and fasting plasma glucose. 74 percent~~a measure of ~~all patients in the study achieved an endpoint~~average blood sugar over three months, of ~~A1C~~1.5 percentage points from baseline, compared to a reduction of ~~7 percent or less at 52 weeks. Exenatide once weekly was well tolerated, with no major hypoglycemia events regardless~~1.3 percentage points for LANTUS after completing 26 weeks of ~~background therapy and nausea was predominantly mild and transient.~~

~~In November 2008, we announced that Amylin had received feedback from the FDA that the data it submitted from its~~~~in vitro in vivo~~correlation studies to demonstrate comparability between exenatide once weekly manufactured by us in our facility, and used in previous clinical studies, and exenatide once weekly manufactured on a commercial scale in Amylin’s Ohio facility did not meet FDA requirements. In December 2008, the FDA indicated that the ongoing extension of the DURATION-1 study is appropriate to use as the basis for demonstrating comparability between intermediate-scale clinical trial material made in our manufacturing facility and the commercial-scale drug product made at Amylin’s manufacturing facility. The DURATION-1 study is ongoing and results are expected in early calendar 2009. The collaboration is planning to submit an NDA to the FDA bytreatment. At the end of the ~~first half~~study, patients treated with exenatide once weekly achieved a mean A1C of ~~calendar 2009.~~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, although patients treated with exenatide once weekly experienced a greater reduction in blood glucose than those treated with LANTUS, those patients also reported significantly fewer episodes of confirmed hypoglycemia. Additional studies designed to demonstrate the superiority of exenatide once weekly are ongoing.

ALKS 33

ALKS 33 is an oral opioid modulator for the potential treatment 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 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 twenty-four healthy, non-dependent, opioid-experienced subjects. Based on these results, we expect to initiate a phase 2 study of ALKS 33 by the end of calendar year 2009.

ALKS 29

We are developing ALKS 29, an oral ~~compound~~combination therapy for the treatment of alcohol dependence. ~~In July 2007, we announced positive preliminary results from~~ALKS 29 is a ~~phase 1/2 multi-center, randomized, double-blind, placebo-controlled, eight-week study that was designed to assess the efficacy and safety~~co-formulation of ALKS ~~29 in approximately 150~~33, a proprietary opioid modulator, and baclofen, an FDA-approved muscle relaxant and antispasmodic therapeutic. Research suggests that baclofen may attenuate the compulsive component of alcohol ~~dependent patients. In the study, ALKS 29 was generally well tolerated and led to both~~dependence. As a statistically significant increase in the percent of days abstinent and a decrease in drinking compared to placebo when combined with psychosocial therapy. The study endpoints included the percent of day’s abstinent, percent of heavy drinking days and number of drinks per day. Heavy drinking was defined as five or more drinks per day for men and four or more drinks per day for women.

~~In December 2008, we initiated a phase 1, open-label crossover study~~co-formulation of ALKS 33 and baclofen, ALKS 29 ~~which~~ is designed to ~~assess~~address both the ~~pharmacokinetics, safety~~compulsive and ~~tolerability~~impulsive components of ~~ALKS 29 compared to an oral control. We expect to report top-line results from the study in the first half of calendar 2009.~~alcohol dependence.

ALKS 27

Using our AIR^® pulmonary technology, we are ~~independently~~ developing an inhaled trospium product for the treatment of chronic obstructive pulmonary disease (“COPD”). COPD is a serious, chronic disease characterized by a gradual loss of lung function. ~~Last year,~~

In August 2009, we ~~reported~~announced positive ~~clinical~~ data from a phase 2a study ~~showing that single doses~~of ALKS 27. The double-blind, cross-over, placebo-controlled study was designed to assess the safety, tolerability, pharmacokinetics and efficacy of ALKS 27 ~~demonstrated~~in 24 patients with moderate to severe COPD. The study also explored a combination dose of ALKS 27 and formoterol fumarate, a long-acting beta agonist already approved for the treatment of COPD. In the study, ALKS 27 was generally well tolerated, had a rapid onset of action and ~~produced a~~led to statistically significant ~~improvement~~improvements in lung function compared to a placebo. The combination of ALKS 27 and formoterol fumarate showed an additive effect on lung function improvement. We do not plan to pursue further development of ALKS 27 without a partner.

ALKS 37

We are ~~manufacturing clinical trial material for a phase 2 dose ranging study expected to start in the first quarter of calendar 2009.~~

developing ALKS 33

~~ALKS 33 is a novel~~37, an investigational oral, peripherally-restricted opioid modulator, identified from the library of compounds in-licensed from Rensselaer Polytechnic Institute (“RPI”). These compounds represent an opportunity for us to develop important therapeutics for a broad range of diseases and medical conditions, including addiction, pain and other central nervous system disorders. In July 2008, we announced positive preclinical results for three proprietary molecules targeting opioid receptors, including ALKS 33. The study results included efficacy data from an

ethanol drinking behavior model in rodents, a well-characterized model for evaluating the effects of potential therapeutics targeting opioid receptors. Results showed that single, oral doses of our novel molecules significantly reduced the ethanol drinking behavior in rodents, with an average reduction from baseline ranging from 35 percent to 50 percentantagonist for the ~~proprietary molecules compared~~treatment of opioid-induced constipation. Research indicates that a high percentage of patients receiving opioids are likely to ~~10 percent~~experience side effects affecting gastrointestinal motility. There are currently no available oral treatments for ~~the naltrexone control arm (P less than 0.05). Details from an evaluation~~this condition, which has severe quality of ~~the~~~~in vivo~~~~pharmacology, pharmacokinetics and~~~~in vitro~~metabolism were also presented. Data showed that the molecules have improved metabolic stability compared to the naltrexone control arm when cultured with human hepatocytes (liver cells), suggesting that they are not readily metabolized by the liver, a unique advantage over existing oral therapies for addiction. Pharmacokinetic results showed that the oral bioavailability of ALKS 33 was significantly greater than that of the active control.

life implications. In ~~December 2008,~~October 2009, we initiated a phase 1 study of ALKS 37 in approximately 40 healthy volunteers. The randomized, double-blind, placebo-controlled study ~~for ALKS 33 in approximately 16 healthy volunteers. The study is designed to~~will assess the ~~pharmacokinetics,~~ safety, tolerability, pharmacokinetic and ~~tolerability~~pharmacologic effects of ~~ALKS 33 following~~a single oral administration ~~at escalating dose levels. Initiation~~ of ~~this trial is based on recent data from preclinical studies that showed~~five doses of ALKS ~~33 demonstrated statistically superior oral efficacy compared to naltrexone.~~37. We expect to report ~~top-line~~topline results from the study in the first half of calendar ~~2009.~~2010. ALKS 37 is a component of ALKS 36.

~~Critical Accounting Estimates~~ALKS 36

~~The discussion~~ALKS 36, an investigational co-formulation of an opioid analgesic and ~~analysis of our financial condition and results of operations~~an oral, peripherally-restricted opioid antagonist, 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 the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. Except as noted in this section, refer to Part II, Item 7 of our Annual Report on Form 10-Kbeing developed for the ~~year ended March 31, 2008 in~~treatment of pain without the ~~“Critical Accounting Policies” section for~~side effects of constipation. Research indicates that a ~~discussion~~high percentage of ~~our critical accounting policies and estimates.~~

~~Product Revenue Recognition~~– On December 1, 2008, we became responsible for the marketing and sale of VIVITROL in the U.S. We recognize revenue from the sale of VIVITROL upon delivery, when title and associated risk of product loss has passedpatients receiving opioids are likely to ~~the customer, and collectibility is reasonably assured. Due to the expected introduction of a return policy, and~~experience side effects affecting gastrointestinal motility. A pain medication that does not inhibit gastrointestinal motility, such as we do not have history to allow us to estimate returns, we defer the recognition of revenue on shipments of VIVITROL to our customers until the product has left the distribution channel. We estimate product shipments out of the distribution channel through data provided by external sources, including information as to inventory levels provided by our wholesalers, specialty distributor and specialty pharmacies, as well as prescription information. In order to match the cost of goods related to products shipped to customers with the associated revenue, we are deferring the recognition of the cost of goods to the period in which the associated revenue will be recognized.ALKS 36, could provide an advantage over current therapies.

~~Financial Highlights — Three and Nine Months Ended December 31, 2008~~Executive Summary

Net ~~income~~loss for the three months ended ~~December 31, 2008~~September 30, 2009 was ~~$112.7~~$8.7 million, or ~~$1.18~~$0.09 per common share — basic and diluted, as compared to net income of ~~$168.9~~$1.7 million, or ~~$1.66~~$0.02 per common share — basic and ~~$1.63~~diluted, for the three months ended September 30, 2008. Net loss for the six months ended September 30, 2009 was $18.9 million, or $0.20 per common share — basic and diluted, as compared to net income of $31.4 million, or $0.33 per common share — basic and $0.32 per common share — diluted, for the ~~three~~six months ended ~~December 31, 2007.~~September 30, 2008. Net income for the nine months ended December 31, 2008 was $144.1 million, or $1.51 per common share — basic and $1.49 per common share — diluted, as compared to net income of $185.3 million, or $1.82 per common share — basic and $1.78 per common share — diluted, for the nine months ended December 31, 2007.

In connection with the termination of the VIVITROL collaboration with Cephalon, we recognized $120.7 million of previously deferred and unearned milestone revenue as net collaborative profit in the three months ended December 31, 2008.

~~Worldwide sales of RISPERDAL CONSTA by Janssen were $318.8 million and $999.5 million~~loss for the three and ~~nine~~six months ended ~~December 31, 2008, respectively, as compared to $295.1~~September 30, 2009 includes $4.1 million and ~~$867.4~~$12.3 million, ~~for~~respectively, in charges associated with the ~~three and nine months ended December 31, 2007, respectively.~~planned relocation of our corporate headquarters from Cambridge, Massachusetts to Waltham, Massachusetts.

Results of Operations

Manufacturing Revenues

Three Months Ended Nine Months Ended
December 31, December 31,
(In millions) 2008 2007 Change 2008 2007 Change
Manufacturing revenues:
RISPERDAL CONSTA $ 21.3 $ 12.9 $ 8.4 $ 88.0 $ 66.1 $ 21.9
VIVITROL (0.8 ) 1.4 (2.2 ) 4.2 3.9 0.3

Total manufacturing revenues 20.5 14.3 6.2 92.2 70.0 22.2

Royalty revenues 8.0 7.4 0.6 25.0 21.7 3.3
Research and development revenue under collaborative arrangements 3.8 24.0 (20.2 ) 40.4 68.6 (28.2 )
Net collaborative profit 123.4 5.1 118.3 125.4 18.0 107.4

Total revenues $ 155.7 $ 50.8 $ 104.9 $ 283.0 $ 178.3 $ 104.7

Three Months Ended Change Six Months Ended Change
September 30 Favorable/ September 30 Favorable/
(In millions) 2009 2008 (Unfavorable) 2009 2008 (Unfavorable)
Manufacturing revenues:
RISPERDAL CONSTA $ 31.9 $ 30.7 $ 1.2 $ 59.8 $ 66.6 $ (6.8 )
Polymer 0.4 — 0.4 1.4 — 1.4
VIVITROL 0.5 2.3 (1.8 ) 0.4 5.0 (4.6 )

Manufacturing revenues $ 32.8 $ 33.0 $ (0.2 ) $ 61.6 $ 71.6 $ (10.0 )

~~Manufacturing Revenues~~ The increase in RISPERDAL CONSTA manufacturing revenues for the three months ended September 30, 2009, as compared to the three months ended September 30, 2008, was primarily due to a 10% increase in the number of units shipped to Janssen, partially offset by a decrease in the net unit sales price. The decrease in RISPERDAL CONSTA manufacturing revenues for the six months ended September 30, 2009, as compared to the six months ended September 30, 2008, was primarily due to a 2% decrease in the number of units shipped to Janssen and a decrease in the net unit sales price. The decrease in the net unit sales price in the three and six months ended September 30, 2009 is primarily due to a stronger U.S. dollar in relation to the foreign currencies in which the product was sold, as compared to the three and six months ended September 30, 2008. The number of RISPERDAL CONSTA units shipped for sale in foreign countries comprised 74% and 84% of the total units shipped during the three months ended September 30, 2009 and 2008, respectively, and 75% and 82% of the total units shipped during the six months ended September 30, 2009 and 2008, respectively. 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 ~~RISPERDAL CONSTA~~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 ~~nine~~six months ended ~~December 31,~~September 30, 2009 and 2008, ~~and 2007,~~ our RISPERDAL CONSTA manufacturing revenues were based on an average of 7.5% of Janssen’s unit net sales price of RISPERDAL CONSTA. We anticipate that we will earn manufacturing revenues at 7.5% of Janssen’s unit net sales price of RISPERDAL CONSTA for product shipped ~~during~~in the fiscal year ending March 31, ~~2009.~~2010 and beyond.

We record manufacturing revenues under our arrangement with Amylin for polymer sales at an agreed upon

price when product is shipped to them. The ~~increase~~polymer is used in ~~RISPERDAL CONSTA~~the formulation of exenatide once weekly. During the three and six months ended September 30, 2008, we did not make any shipments of polymer to Amylin.

We record manufacturing revenues under our arrangement with Cilag at an agreed upon price when product is shipped to them. VIVITROL manufacturing revenues for the three and ~~nine~~six months ended ~~December 31, 2008, as compared~~September 30, 2009 consisted entirely of product shipments to ~~the three and nine months ended December 31, 2007, was primarily due to a 95% and 29% increase~~Cilag for resale in units shipped to Janssen, respectively, and to unit net sales price increases. Shipments of RISPERDAL CONSTA were lower in the three and nine months ended December 31, 2007 as Janssen was managing its product inventory due in part to increased efficiencies and reliability in our RISPERDAL CONSTA manufacturing process. For the three months ended December 31, 2008, the increase in the unit net sales price was partially offset by an overall strengthening of the U.S. dollar in relation to the foreign currencies of the countries in which the product was sold. For the nine months ended December 31, 2008, the increase in the unit net sales price was due in part to an overall weakening in the exchange ratio of the U.S. dollar in relation to the foreign currencies of the countries 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.

In connection with the termination of the VIVITROL collaboration with Cephalon, we 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 manufacturing revenues by $(0.8) million to reverse the previous sale of this inventory to Cephalon.Russia. VIVITROL manufacturing revenues for the three and six months ended ~~December 31, 2007 consisted entirely of product shipped to Cephalon. For the nine months ended December 31,~~September 30, 2008 ~~VIVITROL manufacturing revenues~~ consisted of ~~$2.8~~$1.9 million and $4.6 million, respectively, of billings to Cephalon, Inc. (“Cephalon”) under the collaborative arrangement in existence at the time, and $0.4 million of billings to ~~Cephalon~~Cilag for ~~failed product batches, $0.7 million of net~~ shipments of VIVITROL to ~~Cephalon, $0.3 million related to manufacturing profit on VIVITROL, which equals a 10% markup on VIVITROL cost of goods manufactured, all occurring prior to~~support the ~~termination of the VIVITROL collaboration; and $0.4 million of shipments of VIVITROL to Janssen-Cilag to support~~ commercialization of VIVITROL in Russia. ~~For the nine months~~Effective December 1, 2008 (the “Termination Date”), we ended December 31, 2007, VIVITROL manufacturing revenues consisted of $2.2 million of billings to Cephalon for idle capacity costs, $1.4 million of shipments of VIVITROL to Cephalon and $0.3 million related to manufacturing profit on VIVITROL, which equals a 10% markup on VIVITROL cost of goods manufactured. Due to the termination of the VIVITROLour collaboration with Cephalon ~~we expect a decrease in VIVITROL manufacturing revenues after December 31, 2008 as we will earn manufacturing revenues only on VIVITROL sold to Janssen-Cilag for sale in Russia.~~

~~Prior to the termination of the VIVITROL collaboration with Cephalon, gross sales of VIVITROL by Cephalon were $3.1 million~~ and ~~$12.6 million~~assumed full responsibility for the ~~three~~marketing and ~~nine months ended December 31, 2008, respectively, and $5.0 million and $13.7 million for the three and nine months ended December 31, 2007, respectively. We began selling~~sale of VIVITROL in the U.S. ~~on December 1, 2008 upon the termination~~As such, we expect that VIVITROL manufacturing revenues in fiscal year 2010 and beyond will consist of ~~the VIVITROL collaboration with Cephalon and had gross shipments of $1.6 million made primarily to~~

pharmaceutical wholesalers, specialty pharmacies and distributors. We defer the recognition of revenue on shipments of VIVITROL to our customers until the product has left the distribution channel. We estimate product shipments ~~out~~to Cilag for resale in Russia.

Royalty Revenues

Three Months Ended Change Six Months Ended Change
September 30 Favorable/ September 30 Favorable/
(In millions) 2009 2008 (Unfavorable) 2009 2008 (Unfavorable)
Royalty revenues $ 8.8 $ 8.4 $ 0.4 $ 17.5 $ 17.0 $ 0.5

Substantially all of ~~the distribution channel through data provided by external sources, including information on inventory levels provided by~~ our ~~wholesalers, distributors and specialty pharmacies as well as prescription information.~~

~~Royalty Revenues~~

~~Royalty~~royalty revenues for the three and ~~nine~~six months ended ~~December 31,~~September 30, 2009 and 2008 ~~and 2007~~ were related to sales of RISPERDAL CONSTA. Under our license agreements with Janssen, we record royalty revenues equal to 2.5% of Janssen’s net sales of RISPERDAL CONSTA in the period that the product is sold by Janssen. RISPERDAL CONSTA royalty revenues for the three and six months ended September 30, 2009 were based on RISPERDAL CONSTA sales of $352.6 million and $700.3 million, respectively. Royalty revenues for the three and ~~nine~~six months ended ~~December 31,~~September 30, 2008 were based on RISPERDAL CONSTA sales of ~~$318.8~~$337.5 million and ~~$999.5~~$680.7 million, respectively. ~~Royalty revenues~~

Product Sales, net

Upon termination of the VIVITROL collaboration with Cephalon, we assumed the risks and responsibilities for the marketing and sale of VIVITROL in the U.S., effective on the Termination Date. The following table presents the adjustments deducted from VIVITROL product sales, gross to arrive at VIVITROL product sales, net during the three and ~~nine~~six months ended ~~December 31, 2007 were based on RISPERDAL CONSTA~~September 30, 2009:

Three Months Ended Six Months Ended
September 30 September 30
(In millions) 2009 % of Sales 2009 % of Sales
Product sales, gross $ 5.2 100.0 % $ 10.5 100.0 %
Adjustments to product sales, gross:
Wholesaler fees (0.2 ) (3.8 )% (0.4 ) (3.7 )%
Medicaid rebates (0.1 ) (1.9 )% (0.3 ) (2.9 )%
Free product coupons — — % (0.3 ) (2.9 )%
Prompt-pay discounts (0.1 ) (1.9 )% (0.2 ) (1.9 )%
Product returns (1) 0.1 1.9 % (0.1 ) (1.0 )%
Other (0.3 ) (5.8 )% (0.3 ) (2.9 )%

Total adjustments (0.6 ) (11.5 )% (1.6 ) (15.3 )%

Product sales, net $ 4.6 88.5 % $ 8.9 84.7 %


(1)		Following the introduction of a return policy for VIVITROL, our estimate for product returns 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 through data provided by external sources, including information on inventory levels provided by our customers as well as prescription information.

Net sales of ~~$295.1~~VIVITROL by Cephalon during the three and six months ended September 30, 2008 were $4.1 million and ~~$867.4~~$8.2 million, respectively. For the three months ended December 31, 2008, the increase in sales was partially offset by an overall strengthening of the U.S. dollar in relation to the foreign currencies of the countries in which the product was sold. For the nine months ended December 31, 2008, the increase sales was due in part to an overall weakening of the U.S. dollar in relation to the foreign currencies of the countries 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.

Research and Development Revenue Under Collaborative Arrangements

Three Months Ended Change Six Months Ended Change
September 30 Favorable/ September 30 Favorable/
(In millions) 2009 2008 (Unfavorable) 2009 2008 (Unfavorable)
Research and development programs:
Four-week RISPERDAL CONSTA $ 0.9 $ 1.0 $ (0.1 ) $ 1.9 $ 1.9 $ —
Exenatide once weekly 0.1 2.9 (2.8 ) 0.4 7.8 (7.4 )
AIR Insulin — 1.1 (1.1 ) — 26.6 (26.6 )
Other 0.2 0.3 (0.1 ) 0.3 0.4 (0.1 )

Research and development revenue under collaborative arrangements $ 1.2 $ 5.3 $ (4.1 ) $ 2.6 $ 36.7 $ (34.1 )

~~The decrease in research and~~In August 2009, we announced that our collaborative partner, J&JPRD, decided not to pursue further development ~~revenue under collaborative arrangements (“R&D revenue”)~~of the four-week formulation of RISPERDAL CONSTA for the treatment 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 in the three and six months ended ~~December 31, 2008,~~September 30, 2009, as compared to the three and six months ended ~~December 31, 2007,~~September 30, 2008. The decrease in revenue from the AIR Insulin program in the three and six months ended September 30, 2009, as compared to the three and six months ended September 30, 2008, was ~~primarily~~ due to the termination of the AIR Insulin development program in March 2008 and reductions in revenues earned under the exenatide once weekly development program, partially offset by increased revenues earned on the four-week RISPERDAL CONSTA development program. The decrease in R&D revenue for the nine months ended December 31, 2008, as compared to the nine months ended December 31, 2007, was due to the termination of the AIR Insulin development program, reductions in revenues earned under the exenatide once weekly development program and the termination of the AIR parathyroid hormone (“PTH”) development program in the quarter ended September 30, 2007, partially offset by increased revenues earned on the four-week RISPERDAL CONSTA development program.2008.

In June 2008, we entered into an agreement with Eli Lilly and Company (“Lilly”) in connection with the termination of the development and license agreements and supply agreement for the development of AIR Insulin (the “AIR Insulin Termination Agreement”). Under the AIR Insulin Termination Agreement, we received $40.0 million in cash as payment for all services we had performed through the date of the AIR Insulin Termination Agreement. We previously recognized $14.5 million of this payment as R&D revenue in the year ended March 31, 2008 and recognized $25.5 million of this payment as R&D revenue in the three months ended June 30, 2008. Revenues from the AIR Insulin development program totaled $10.9 million and $36.8 million for the three and nine months ended December 31, 2007, respectively. We do not expect to record any material amounts of revenue from the AIR Insulin development program in the future.

The decrease in the revenues earned under the exenatide once weekly development program was due to reduced activity as the program nears the anticipated date of submission of the NDA to the FDA. Revenues from the exenatide once weekly development program totaled $1.5 million and $9.3 million for the three and nine months ended December 31, 2008, as compared to $12.5 million and $24.9 million for the three and nine months ended December 31, 2007. We also saw a decline in revenues during the nine months ended December 31, 2008, as compared to the nine months ended December 31, 2007, due to the termination of the AIR PTH development program during the three months ended September 30, 2007. This decline was partially offset by revenues earned on the four-week RISPERDAL CONSTA development program.

Net Collaborative Profit

Three Months Ended Change Six Months Ended Change
September 30 Favorable/ September 30 Favorable/
(In millions) 2009 2008 (Unfavorable) 2009 2008 (Unfavorable)
Net collabortive profit:
Milestone revenue — license $ — $ 1.3 $ (1.3 ) $ — $ 2.6 $ (2.6 )
Net payments to Cephalon — (0.7 ) 0.7 — (0.7 ) 0.7
VIVITROL losses funded by Cephalon, post termination 0.7 — 0.7 5.0 — 5.0

Net collaborative profit $ 0.7 $ 0.6 $ 0.1 $ 5.0 $ 1.9 $ 3.1

Net collaborative profit for the three and ~~nine~~six months ended ~~December 31 consists~~September 30, 2009 consisted of revenue earned as a result of the ~~following:~~

Three Months Ended Nine Months Ended
December 31, December 31,
(In millions) 2008 2007 2008 2007
Milestone revenue — cost recovery $ — $ — $ — $ 5.3
Milestone revenue — license 0.8 1.3 3.5 3.9

Total milestone revenue — cost recovery and license 0.8 1.3 3.5 9.2
Net payments from Cephalon 0.7 3.8 — 8.8
VIVITROL losses funded by Cephalon, post termination 1.2 — 1.2 —
Recognition of deferred and unearned milestone revenue due to termination of VIVITROL collaboration 120.7 — 120.7 —

Net collaborative profit $ 123.4 $ 5.1 $ 125.4 $ 18.0

~~Prior to the termination of the VIVITROL collaboration, Cephalon had paid us an aggregate of $274.6~~$11.0 million ~~in non-refundable milestone payments and~~payment we were responsible to fund the first $124.6 million of cumulative net losses incurred on VIVITROL (the “cumulative net loss cap”). VIVITROL reached the cumulative net loss cap in April 2007, at which time Cephalon became responsible to fund all net losses incurred on VIVITROL through December 31, 2007. Beginning January 1, 2008, all net losses incurred on VIVITROL within the collaboration were divided between us and Cephalon in approximately equal shares. For the three and nine months ended December 31, 2008, we recognized no milestone revenue — cost recovery, as VIVITROL had reached the cumulative loss cap prior to these reporting periods. Milestone ~~revenue — license,~~ related to the license provided to Cephalon to commercialize VIVITROL and was being recognized on a straight-line basis over 10 years, at approximately $5.2 million per year. Net payments from Cephalon were received ~~based upon the sharing of VIVITROL costs and losses incurred during the reporting periods.~~

~~Upon the termination of the VIVITROL collaboration with Cephalon, we received $11.0 million~~ from Cephalon to fund ~~their~~its share of estimated VIVITROL ~~product~~ losses during the one-year period following the Termination Date. We recorded the $11.0 million payment as deferred revenue and ~~are recognizing~~recognized it as revenue ~~though~~through the application of a proportional performance model based on VIVITROL ~~net product~~ losses. InThe deferred revenue was recognized in full during the three months ended ~~December 31, 2008,~~September 30, 2009, and we recognized $1.2 million of revenue under proportional performance. In addition, we recognized $120.7 million of net collaborative profit, consisting of $113.9 million of unearned milestone revenue that existed at the Termination Date and $6.8 million of deferred revenue. At the Termination Date, we had $22.8 million of deferred revenue related to the original sale of the two partially completed VIVITROL manufacturing lines to Cephalon. We paid Cephalon $16.0 million to acquire the title to these manufacturing lines and accounted for the payment as a reduction to deferred revenue. The remaining $6.8 million of deferred revenue and the $113.9 million of unearned milestone revenue were recognized in the three months ended December 31, 2008, as we had no remaining performance obligations to Cephalon and the amounts were nonrefundable. We do not expect to recognize any further net collaborative profit. Net collaborative profit ~~after~~during the ~~$11.0 million payment has been fully recognized as~~three and six months ended September 30, 2008 consisted of milestone revenue from the license provided to Cephalon to commercialize VIVITROL, which we ~~expect to occur in fiscal~~recognized on a straight-line basis over a 10 year ~~2010.~~

~~Expenses~~

Three Months Ended Nine Months Ended
December 31, December 31,
(In millions) 2008 2007 Change 2008 2007 Change
Cost of goods sold:
RISPERDAL CONSTA $ 5.0 $ 5.9 $ 0.9 $ 24.0 $ 23.0 $ (1.0 )
VIVITROL 0.5 1.6 1.1 7.9 3.9 (4.0 )

Total cost of goods sold 5.5 7.5 2.0 31.9 26.9 (5.0 )

Research and development 22.7 30.4 7.7 64.6 91.3 26.7
Selling, general and administrative 14.6 15.2 0.6 38.2 45.1 6.9

Total expenses $ 42.8 $ 53.1 $ 10.3 $ 134.7 $ 163.3 $ 28.6

~~Cost~~amortization schedule, and net payments we received from Cephalon under the product loss sharing terms of ~~Goods Sold~~the collaborative arrangement.

2223

~~RISPERDAL CONSTA~~Cost of Goods Manufactured and Sold

Three Months Ended Change Six Months Ended Change
September 30 Favorable/ September 30 Favorable/
(In millions) 2009 2008 (Unfavorable) 2009 2008 (Unfavorable)
Cost of goods manufactured and sold:
RISPERDAL CONSTA $ 12.1 $ 8.1 $ (4.0 ) $ 21.8 $ 18.9 $ (2.9 )
VIVITROL 2.6 4.0 1.4 4.6 7.5 2.9
Polymer 0.4 — (0.4 ) 1.4 — (1.4 )

Cost of goods manufactured and sold $ 15.1 $ 12.1 $ (3.0 ) $ 27.8 $ 26.4 $ (1.4 )

The increase in cost of goods ~~sold~~manufactured for RISPERDAL CONSTA in the three months ended ~~December 31, 2008 decreased,~~September 30, 2009, as compared to the three months ended ~~December 31, 2007,~~September 30, 2008, was due to a ~~decrease in the unit cost of RISPERDAL CONSTA shipped, partially offset by an~~10% increase in the number of ~~units shipped. The increase in RISPERDAL CONSTA cost of goods sold for the nine months ended December 31, 2008, as compared to the nine months ended December 31, 2007, was due to an increase in~~ units of RISPERDAL CONSTA shipped to Janssen, an increase in costs incurred for failed product batches and an increase in overhead and support costs allocated to cost of goods manufactured as a result of decreased development activities at our Ohio manufacturing facility, which shifted overhead and support costs from research and development (“R&D”) expense to cost of goods manufactured during the period. The increase in cost of goods manufactured for RISPERDAL CONSTA in the six months ended September 30, 2009, as compared to the six months ended September 30, 2008, was due to the increase in overhead and support costs allocated to cost of goods manufactured for the reason previously discussed and an increase in costs incurred for failed product batches, partially offset by a 2% decrease in the ~~unit cost~~number of units of RISPERDAL CONSTA ~~shipped.~~

~~VIVITROL cost of goods sold for the three months ended December 31, 2008 consisted of $1.0 million of expense related~~shipped to the restart of the VIVITROL manufacturing line following a planned manufacturing shutdown, $0.2 million of cost for failed product batches, offset by a reduction in cost of goods sold due to the reversal of prior sales of VIVITROL to Cephalon of $0.7 million in connection with the termination of the VIVITROL collaboration with Cephalon. Cost of goods sold for VIVITROL for the three months ended December 31, 2007 consisted of $1.1 million for shipments of VIVITROL to Cephalon and $0.5 million for idle capacity costs, which consisted of current period manufacturing costs related to underutilized VIVITROL manufacturing capacity.

VIVITROL cost of goods sold for the nine months ended December 31, 2008 consisted of $3.6 million of expense related to the restart of the VIVITROL manufacturing line following a planned shutdown, $3.4 million of cost for failed batches, $1.3 million for shipments of VIVITROL to Cephalon, and $0.3 million of shipments to Janssen-Cilag to support the commercialization of VIVITROL in Russia. These costs were partially offset by the reversal of prior sales of VIVITROL to Cephalon of $0.7 million. Cost of goods sold for VIVITROL for the nine months ended December 31, 2007 consisted of $1.1 million for shipments of VIVITROL to Cephalon and $2.8 million for idle capacity costs, which consisted of current period manufacturing costs related to underutilized VIVITROL manufacturing capacity.

~~Research and Development~~Janssen.

The decrease in ~~research~~cost of goods manufactured and ~~development expenses~~sold for VIVITROL in the three months ended ~~December 31, 2008,~~September 30, 2009, as compared to the three months ended ~~December 31, 2007,~~September 30, 2008, is primarily due to a $2.4 million decrease in costs incurred for failed batches and costs related to the restart of the manufacturing line following a shutdown of the line, partially offset by a 162% increase in the number of units sold during the period. The decrease in cost of goods manufactured and sold for VIVITROL in the six months ended September 30, 2009, as compared to the six months ended September 30, 2008, is primarily due to a $3.6 million decrease in costs incurred for failed batches and costs related to the restart of the manufacturing line following a shutdown of the line, partially offset by a 1% increase in the number of units sold during the period.

During the three and six months ended September 30, 2008, we did not make any shipments of polymer to Amylin.

Research and Development Expense

The increase in R&D expenses in the three and six months ended September 30, 2009, as compared to the three and six months ended September 30, 2008, was primarily due to ~~the termination~~costs we incurred as a result of the ~~AIR Insulin development program in March 2008, and reductions in costs on the exenatide once weekly development program as the program nears the anticipated date of submission~~decision to move our corporate headquarters from Cambridge, Massachusetts, to Waltham, Massachusetts. As a result of the ~~NDA to the FDA. These reductions were partially offset by increased costs on the ALKS 29~~planned move, we recorded approximately $4.1 million and ~~ALKS 33 programs, which began phase 1 clinical trials~~$12.1 million of expense in the three and six months ended ~~December 31, 2008, costs related~~September 30, 2009, respectively, due primarily to the ~~four-week RISPERDAL CONSTA development program,~~acceleration of depreciation on laboratory related leasehold improvements located at our current headquarters, which ~~began phase 1 clinical trials in January 2009,~~will have no benefit or use to us once we exit the Cambridge facility, and the ~~VIVITROL opioid dependence development program,~~write-down of laboratory equipment that is no longer in ~~which a multi-center registration study was initiated~~use and will be disposed of. In addition, R&D expenses increased in ~~June 2008.~~

~~The decrease in research~~the three and ~~development expenses for the nine~~six months ended ~~December 31, 2008,~~September 30, 2009, as compared to the ~~nine~~three and six months ~~ended December 31, 2007, was primarily due to the termination of the AIR Insulin development program in March 2008, the termination of the AIR PTH development program in the quarter~~ ended September 30, ~~2007~~2008, due to an increase in the number of pre-clinical and ~~reductions~~toxicology studies we conducted. Partially offsetting these increases in R&D expenses was a decrease in labor and benefits due to a reduction in R&D headcount and a decrease in overhead and support costs on the exenatide once weekly development program. These reductions were partially offset by increased costs on the ALKS 29, ALKS 33, four-week RISPERDAL CONSTA and the VIVITROL opioid dependence development programs.allocated to R&D at our Ohio manufacturing facility, as discussed above.

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 are reimbursed to us by our partners. We generally bill our partners under collaborative arrangements using a negotiated ~~full-time equivalent (“FTE”)~~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 Six Months Ended Change
September 30 Favorable/ September 30 Favorable/
(In millions) 2009 2008 (Unfavorable) 2009 2008 (Unfavorable)
Selling, general and administrative $ 20.6 $ 11.7 $ (8.9 ) $ 39.9 $ 23.6 $ (16.3 )

The ~~decrease~~increase in selling, general and administrative ~~expenses~~costs for the three and six months ended ~~December 31, 2008,~~September 30, 2009, as compared to the three and six months ended ~~December 31, 2007,~~September 30, 2008, was primarily due to ~~a decrease in share-based compensation expense, consulting expense and IT-related expenses, partially offset by~~ increased sales and marketing ~~expenses in December 2008 related to VIVITROL. The decrease in selling, general and administrative expenses~~costs as we became responsible for the ~~nine months ended~~commercialization of VIVITROL in the U.S. beginning December ~~31,~~1, 2008 ~~as compared to~~and $2.3 million in severance costs we recorded in connection with the ~~nine months ended December 31, 2007, was primarily due to a decrease~~resignation of our former President and Chief Executive Officer in ~~personnel related costs, including share-based compensation expense, professional fees and taxes, partially offset by the increased sales and marketing expenses related to VIVITROL.~~September 2009.

Other ~~(Expense) Income~~Expense, Net

Three Months Ended Nine Months Ended
December 31, December 31,
(In millions) 2008 2007 Change 2008 2007 Change
Interest income $ 2.6 $ 4.3 $ (1.7 ) $ 8.9 $ 12.9 $ (4.0 )
Interest expense (2.4 ) (4.1 ) 1.7 (10.9 ) (12.2 ) 1.3
Other (expense) income (0.7 ) (0.4 ) (0.3 ) (1.5 ) 0.8 (2.3 )
Gain on sale of investment in Reliant Pharmaceuticals, Inc. — 174.6 (174.6 ) — 174.6 (174.6 )

Total other (expense) income $ (0.5 ) $ 174.4 $ (174.9 ) $ (3.5 ) $ 176.1 $ (179.6 )

~~Interest income~~

Three Months Ended Change Six Months Ended Change
September 30 Favorable/ September 30 Favorable/
(In millions) 2009 2008 (Unfavorable) 2009 2008 (Unfavorable)
Interest income $ 1.1 $ 2.7 $ (1.6 ) $ 2.6 $ 6.3 $ (3.7 )
Interest expense (1.6 ) (4.2 ) 2.6 (3.3 ) (8.5 ) 5.2
Other expense, net (0.1 ) (0.7 ) 0.6 (0.1 ) (0.8 ) 0.7

Total other expense, net $ (0.6 ) $ (2.2 ) $ 1.6 $ (0.8 ) $ (3.0 ) $ 2.2

The decrease in interest income for the three and ~~nine~~six months ended ~~December 31, 2008,~~September 30, 2009, as compared to the three and ~~nine~~six months ended ~~December 31, 2007,~~September 30, 2008, was due to ~~lower interest rates earned during the comparable periods, partially offset by~~ a ~~higher~~lower average balance of cash and ~~investments. We expect our~~investments as well as lower interest ~~earnings to decrease as compared to prior periods due to a general reduction in interest rates.~~

~~Interest expense~~

rates earned. The decrease in interest expense for the three and six months ended ~~December 31, 2008,~~September 30, 2009, as compared to ~~December 31, 2007,~~the three and six months ended September 30, 2008, was athe result of ~~the purchase~~our repurchase of ~~$75.0~~an aggregate total of $93.0 million in principal amount, or approximately 55%, of our non-recourse RISPERDAL CONSTA secured 7% ~~notes~~Notes (the ~~“7%~~“non-recourse 7% Notes”), in ~~three privately~~five separately negotiated transactions during the year ended March 31, 2009. We also began making quarterly scheduled principal payments on our non-recourse 7% Notes, beginning in ~~June~~April 2009, which reduced interest expense in the three and ~~July 2008.~~six months ended September 30, 2009. The decrease in ~~interest~~other expense, for the nine months ended December 31, 2008, as compared to December 31, 2007, was due to reduced interest expense due to the repurchase of the 7% Notes, partially offset by an aggregate of $2.0 million in debt extinguishment charges related to the 7% Notes repurchases, which were recorded as interest expense in June and July 2008. We expect our interest expense to decrease as compared to prior periods due to the decrease in our borrowings.

~~Other (expense) income~~

~~The increase in other expense~~net, for the three and six months ended ~~December 31, 2008,~~September 30, 2009, as compared to the three and six months ended ~~December 31, 2007,~~September 30, 2008, was ~~primarily~~ due to increased charges for other-than-temporary impairments on our investments in the common stock of certain publicly held companies. Other expense during the nine months ended December 31, 2008 consisted primarily of charges for other-than-temporary impairments on our investments in the common stock of certain publicly held companies, compared to other income during the nine months ended December 31, 2007, which consisted primarily of income recognized on the changes in the fair value of our investments in warrants of certain publicly held companies, partially offset by other-than-temporary impairment charges taken in the three months ended September 30, 2008 on our ~~investments~~investment in the common stock of certain publicly held companies.

~~Gain on sale of investment in Reliant Pharmaceuticals, Inc.~~Provision for Income Taxes

Three Months Ended Change Six Months Ended Change
September 30 Favorable/ September 30 Favorable/
(In millions) 2009 2008 (Unfavorable) 2009 2008 (Unfavorable)
(Benefit) provision for income taxes $ (0.1 ) $ (0.1 ) $ — $ (0.1 ) $ 1.0 $ 1.1

The gain on sale of investment in Reliant Pharmaceuticals, Inc. (“Reliant”), for the three and nine months ended December 31, 2007 is due to the purchase of Reliant by GlaxoSmithKline (“GSK”) in November 2007. Under the terms of the acquisition, we received $166.9 million upon the closing of the transaction in December 2007 in exchange for our investment in Series C convertible, redeemable preferred stock of Reliant. In March 2009, we are entitled to receive up to an additional $7.7 million of funds held in escrow subject to the terms of an escrow agreement between GSK and Reliant.

~~Income Taxes~~

Three Months Ended Nine Months Ended
December 31, December 31,
(In millions) 2008 2007 Change 2008 2007 Change
Income tax (benefit) provision $ (0.3 ) $ 3.2 $ 3.5 $ 0.6 $ 5.8 $ 5.2

~~We earned income before income taxes of $112.4 million and $144.7 million during the three and nine months ended December 31, 2008, respectively, and we recorded an~~ income tax benefit of ~~$0.3 million and an income tax provision of $0.6~~$0.1 million for the three and ~~nine~~six months ended ~~December 31, 2008, respectively. This variation is due~~September 30, 2009 represents the amount we expect to benefit from the termination of the VIVITROL collaboration with Cephalon. We previously recognized, for tax purposes, the milestone payments received from Cephalon under the VIVITROL collaboration. The income tax benefit and provision recorded for the three and nine months ended December 31, 2008, respectively, and the income tax provision of $3.2 million and $5.8 million for the three and nine months ended December 31, 2007, respectively, related to the U.S. alternative minimum tax (“AMT”). Included in the $0.6 million provision for the nine months ended December 31, 2008 is a $0.1 million estimated benefit as a result of the recently enactedHousing and Economic Recovery Act of ~~2008~~.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 $0.1 million and income tax provision of $1.0 million for the three and six months ended September 30, 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 six months ended ~~December 31,~~September 30, 2008, ~~and a federal tax charge was recorded in the nine months ended December 31, 2008 and in the three and nine months ended December 31, 2007.~~respectively. The AMT liability is available as a credit against future tax obligations upon the full utilization or expiration of ~~the Company’s~~our net operating loss carryforward.

Liquidity and Capital Resources

~~Our financial condition is summarized as follows:~~

December 31, March 31,
(In millions) 2008 2008
Cash and cash equivalents $ 63.3 $ 101.2
Investments — short-term 281.4 240.1
Investments — long-term 78.9 119.1

Total cash, cash equivalents and investments $ 423.6 $ 460.4

Working capital $ 341.7 $ 371.1

Outstanding borrowings — current and long-term $ 92.4 $ 160.4

~~Operating Activities~~

Cash provided by operating activities was $43.2 million and $28.0 million for the nine months ended December 31, 2008 and 2007, respectively. The increase in cash flows from operating activities in the nine months ended December 31, 2008, as compared to the nine months ended December 31, 2007, was primarily due to the $40.0 million we received from Lilly related to the AIR Insulin Termination Agreement, of which $25.5 million was recognized as revenue in the first quarter of fiscal 2009, and a net reduction in working capital accounts.

~~Investing Activities~~

Cash provided by investing activities was $0.9 million and $231.3 million for the nine months ended December 31, 2008 and 2007, respectively. The decrease in cash provided by investing activities in the nine months ended December 31, 2008, as compared to the nine months ended December 31, 2007, was due to the $166.9 million we received from the sale of our investment in Reliant and $82.1 million in net sales of investments in the nine months ended December 31, 2007, partially offset by reduced purchases of property, plant and equipment.

~~Financing Activities~~

Cash used in financing activities was $82.1 million and $18.9 million in the nine months ended December 31, 2008 and 2007, respectively. The increase in cash used in financing activities in the nine months ended December 31, 2008, as compared to the nine months ended December 31, 2007, was due to the purchase of $75.0 million principal amount of our non-recourse RISPERDAL CONSTA 7% notes (the “7% Notes”) for $71.8 million during the nine months ended December 31, 2008, partially offset by a $9.7 million decrease in the amount of treasury stock purchased under our publicly announced share repurchase programs.

We invest in short-term and long-term investments consisting of U.S. government and agency debt securities, investment grade corporate debt securities, including asset backed debt securities, and student loan backed auction rate securities issued by major financial institutions in accordance with our documented corporate policies. Our investment objectives are, first, to assure liquidity

and conservation of capital and, second, to obtain investment income. At December 31, 2008, we had gross unrealized gains of $4.0 million and gross unrealized losses of $5.8 million in our investment portfolio. We performed an analysis of our investments with unrealized losses at December 31, 2008 for impairment and determined that they are temporarily impaired and consist primarily of investments in corporate debt securities, including asset backed debt securities and student loan backed auction rate securities. We determined that we had an other-than-temporary impairment of $0.6 million attributed to investments in the common stock of certain collaborative partners. Temporary impairments are unrealized and are recorded in accumulated other comprehensive income, a component of shareholders’ equity. Other-than-temporary impairments are realized and recorded in our condensed consolidated statements of income.

At December 31, 2008, we have classified $74.2 million of our available-for-sale investments in securities with temporary losses of $5.8 million as Investments — Long-Term in the accompanying condensed consolidated balance sheet, as we believe the recovery of the losses will extend beyond one year and we have the intent and ability to hold the investments to recovery, which may be maturity.

~~On April 1, 2008, we implemented SFAS No. 157, “~~~~Fair Value Measurements~~” (“SFAS No. 157”) for our financial assets and liabilities that are re-measured and reported at fair value at each reporting period. SFAS No. 157 provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, SFAS No. 157 permits the use of various valuation approaches, including market, income and cost approaches. SFAS No. 157 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available.

~~The fair value hierarchy is broken down into three levels based on the reliability of inputs. We have categorized our cash, cash equivalents and investments within the hierarchy as follows:~~

~~Level 1~~- These valuations are based on a market approach using quoted prices in active markets for identical assets. Valuations of these products do not require a significant degree of judgment. Assets utilizing Level 1 inputs include investments in money market funds, U.S. government debt securities, U.S. agency debt securities, municipal debt securities, bank deposits and exchange-traded equity securities of certain publicly held companies;

~~Level 3~~- These valuations are based on an income approach using certain inputs that are unobservable and are significant to the overall fair value measurement. Valuations of these products require a significant degree of judgment. Assets utilizing Level 3 inputs consist of investments in auction rate securities and asset backed debt securities that are not currently trading. In addition, we hold warrants in certain publicly held companies that are classified using Level 3 inputs. The carrying balance of these warrants was immaterial at December 31, 2008 and March 31, 2008.

Our investments in auction rate securities have a cost of $10.0 million and invest in taxable student loan revenue bonds issued by state higher education authorities which service student loans under the Federal Family Education Loan Program. The bonds were triple A rated at the date of purchase and are collateralized by student loans purchased by the authorities which are guaranteed by state sponsored agencies and reinsured by the U.S. Department of Education. Liquidity for these securities is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals. Each of these securities had been subject to auction processes for which there had been insufficient bidders on the scheduled auction dates and the auctions subsequently failed. We are not able to liquidate our investments in auction rate securities until future auctions are successful, a buyer is found outside of the auction process or the notes are redeemed by the issuer. The securities continue to pay interest at predetermined interest rates during the periods in which the auctions have failed.

Typically, auction rate securities trade at their par value due to the short interest rate reset period and the availability of buyers or sellers of the securities at recurring auctions. However, since the security auctions have failed and fair value cannot be derived from quoted prices, we used a discounted cash flow model to determine the estimated fair value of the securities at December 31, 2008. Our 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 any associated guarantees, the timing of expected future cash flows, and the expectation of the next time the security will have a successful auction or when callability features may be exercised by the issuer. These securities were also compared, where possible, to other observable market data with similar characteristics to the securities held by us. Based upon this methodology, we have recorded an unrealized loss related to our

investments in auction rate securities of approximately $1.1 million to accumulated other comprehensive income at December 31, 2008. We believe there are several significant assumptions that are utilized in our valuation analysis, the two most critical of which are the discount rate, which includes a provision for default and liquidity risk, and the average expected term.

At December 31, 2008, we 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, financial condition and near term prospects of the issuers and our intent and ability to hold each security for a period of time sufficient to allow for any anticipated recovery in fair value. We do not expect the estimated fair value of these securities to decrease significantly in the future unless credit market conditions continue to deteriorate significantly.

Our investments in asset backed debt securities have a cost of $7.5 million and consist of investment grade medium term floating rate notes (“MTN”) of Aleutian Investments, LLC (“Aleutian”) and Meridian Funding Company, LLC (“Meridian”), which are qualified special purpose entities (“QSPE”) 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 a sinking fund redemption feature 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, 2008, a substantial portion of our initial investment in the Meridian MTN’s had been redeemed by MBIA through scheduled sinking fund redemptions at par value, and the first sinking fund redemption on the Aleutian MTN is scheduled for June 2009.

The liquidity and fair value of these securities has been negatively impacted by the uncertainty in the credit markets and the exposure of these securities to the financial condition of monoline financial guarantee insurance companies, including Ambac and MBIA. In June 2008, Ambac had its triple A rating reduced to Aa3 by Moody’s and in November, Moody’s further downgraded Ambac’s rating to Baa1 with a developing outlook. Standard and Poor’s (“S&P”) reduced Ambac’s rating to double A in June 2008 and in August 2008, affirmed its double A rating with a negative outlook. In June 2008, MBIA was downgraded from triple A to A2 by Moody’s and in September Moody’s placed MBIA on review for possible downgrade. S&P reduced MBIA’s rating to double A in June 2008 and in August 2008, affirmed its double A rating with a negative outlook. All downgrades were due to Ambac’s and MBIA’s inability to maintain triple A capital levels.

We may not be able to liquidate our investment in these securities before the scheduled redemptions or until trading in the securities resumes in the credit markets, which may not occur. Because the MTN’s are not actively trading in the credit markets and fair value cannot be derived from quoted prices, we used a discounted cash flow model to determine the estimated fair value of the securities at December 31, 2008. Our 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. Based upon this methodology, we have an unrealized loss related to these asset backed debt securities of approximately $0.9 million in accumulated other comprehensive income at December 31, 2008. We believe there are several significant assumptions that are utilized in our valuation analysis, the two most critical of which are the discount rate, which includes a provision for default and liquidity risk, and the average expected term.

At December 31, 2008, we determined that the securities had been temporarily impaired due to the length of time each security was in an unrealized loss position, the extent to which fair value was less than cost, the financial condition and near term prospects of the issuers, current redemptions made by one of the issuers and our intent and ability to hold each security for a period of time sufficient to allow for any anticipated recovery in fair value or until scheduled redemption. We do not expect the estimated fair value of these securities to decrease significantly in the future unless credit market conditions continue to deteriorate significantly or the credit ratings of the issuers are further downgraded.

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-term~~ 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.

Our financial condition is summarized as follows:

September 30 March 31,
(In millions) 2009 2009
Cash and cash equivalents $ 53.0 $ 86.9
Investments — short-term 242.1 236.8
Investments — long-term 74.4 80.8

Total cash, cash equivalents and investments $ 369.5 $ 404.5

Working capital $ 299.4 $ 307.1
Outstanding borrowings — current and long-term $ 63.5 $ 75.9

Cash and Cash Equivalents

Our cash flows for the three months ended September 30, 2009 and 2008 were as follows:

Six Months Ended
September 30
(In millions) 2009 2008
Cash and cash equivalents, beginning of period $ 86.9 $ 101.2
Cash (used in) provided by operating activities (18.7 ) 34.6
Cash (used in) provided by investing activities (0.9 ) 5.7
Cash used in financing activities (14.3 ) (73.0 )

Cash and cash equivalents, end of period $ 53.0 $ 68.5

Operating Activities

The change in cash used in operating activities in the six months ended September 30, 2009, as compared to the cash provided by operating activities in the six months ended September 30, 2008, is primarily due to the $40.0 million payment we received from Lilly related to the termination of the AIR Insulin development program in June 2008. In addition, we used more cash for working capital during the six months ended September 30, 2009, partially offset by a decrease in cash used for the purchase of our non-recourse 7% Notes, in which the portion attributable to the original issue discount was charged to operating activities.

Investing Activities

The change in cash used in investing activities in the six months ended September 30, 2009, as compared to the cash provided by investing activities in the six months ended September 30, 2008, is primarily due to a decrease in cash provided from sales of property, plant and equipment.

Financing Activities

The decrease in cash used in financing activities during the six months ended September 30, 2009, as compared to the six months ended September 30, 2008, was due to the fact that we did not make any purchases of our non-recourse 7% Notes during the six months ended September 30, 2009, we purchased $10.4 million less common stock for treasury and we received $7.0 million less in cash from the exercise of employee stock options, partially offset by the scheduled quarterly principal payments we made on our non-recourse 7% Notes in April and July, 2009.

Investments

We ~~do not~~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 our investment policy. The primary objective of our investment policy is the preservation of capital with a secondary objective of generating income on our investments. 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.

As explained in Note 4, Investments and Note 5, Fair Value Measurements, in the “Notes to Condensed Consolidated Financial Statements,” 8% of our investments, which are reported at fair value on a recurring basis, are valued using unobservable, or Level 3, inputs to determine fair value. These investments are valued using discounted cash flow models, which use several inputs to determine fair value, including estimates for interest rates, the timing 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 ~~that inflation~~the valuation methodologies are appropriate, the use of valuation methodologies is highly judgmental and ~~changing prices~~changes in methodologies can have ~~had~~ a material impact on the values of these assets, our ~~results~~financial position and overall liquidity.

During the three months ended September 30, 2009, trading resumed for certain of ~~operations.~~our investments in corporate debt securities. At September 30, 2009, we derived a fair value for these investments using market observable inputs instead of through the use of a discounted cash flow model. Accordingly, we transferred these investments from a Level 3 classification to a Level 2 classification.

Borrowings

At ~~December 31, 2008,~~September 30, 2009, our borrowings consisted of $64.2 million principal amount of our non-recourse 7% Notes, which ~~had~~have a carrying value of ~~$92.4~~$63.5 million. ~~We are currently making~~Principal and interest payments on the non-recourse 7% Notes ~~with principal payments~~are due quarterly, and the non-recourse 7% Notes are scheduled to ~~begin~~be paid in April 2009. In June and July 2008, in three separate privately negotiated transactions, we purchased an aggregate total of $75.0 million principal amount of the 7% Notes for $71.8 million. We recorded a lossfull on the extinguishment of the notes of $2.0 million during the nine months ended December 31, 2008. As a result of the purchases, $95.0 principal amount of the 7% Notes remains outstanding, and we will save approximately $9.5 million in interest payments over the remaining life of the 7% notes.January 1, 2012.

~~Capital Requirements~~

We may continue to pursue opportunities to obtain additional financing in the future. Such financing may be sought through various sources, including debt and equity offerings, corporate collaborations, bank borrowings, arrangements relating to assets or other financing methods or structures. The source, timing and availability of any financings will depend on market conditions, interest rates and other factors. Our future capital requirements will also depend on many factors, including continued scientific progress in our research and development programs (including our proprietary product candidates), the size of these programs, progress with preclinical testing and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patent claims, the presence of competing technologies and the occurrence of market developments, the establishment of additional collaborative arrangements, the cost of manufacturing facilities and of commercialization activities and arrangements and the cost of product in-licensing and any possible acquisitions and, for any current or future proprietary products, the sales, marketing and promotion expenses associated with marketing such products. We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

We may need to raise substantial additional funds for longer-term product development, including development of our proprietary product candidates, regulatory approvals and manufacturing and sales and marketing activities that we might undertake in the future. There can be no assurance that additional funds will be available on favorable terms, if at all. If adequate funds are not available, we may be required to curtail significantly one or more of our research and development programs and/or obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies, product candidates or future products.

~~Capital expenditures are expected in the range from $2.5 million to $3.5 million for the year ending March 31, 2009.~~

Contractual Obligations

~~With~~In April 2009, we entered into a lease agreement in connection with the ~~exception of the repurchases~~move of our ~~7% Notes, discussed above under Borrowings, and~~corporate headquarters from Cambridge, Massachusetts to Waltham, Massachusetts, which is scheduled to occur in ~~Note 11~~early calendar year 2010. The initial lease term, which begins upon our move into the new facility, 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 ~~accompanying condensed consolidated financial statements,~~lease agreement which increased the square footage leased by us by approximately 15%. Operating expenses and rent will commence for the additional space 9 months and 18 months, respectively, after we move into the facility, and the lease amendment has the same termination date as the original lease. The total rent expense related to the new headquarters will be approximately $3.1 million annually during the initial lease term. 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, ~~2008 have not changed materially since the date of that report.~~2009.

Off-Balance Sheet Arrangements

~~As of December 31, 2008,~~At September 30, 2009, we were not a party to any off-balance sheet ~~arrangements that have, or are reasonably likely to have, a current or future effect~~arrangements.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations is based on our financial ~~condition, changes~~statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial ~~condition, revenue~~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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or ~~expenses,~~conditions. Refer to Part II, Item 7 of our Annual Report on Form 10-K for the year ended March 31, 2009 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, liquidity, capital expenditures or capital resources material~~operations.

New Accounting Standards

Refer to ~~investors.~~New Accounting Pronouncements included in Note 1, Summary of Significant Accounting Policies, in the “Notes to Condensed Consolidated Financial Statements” for a discussion of new accounting standards.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

~~We hold~~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 ~~instruments in~~markets, we have regularly reviewed our marketable securities holdings and shifted our investment holdings to those deemed to have reduced risk. Apart from such adjustments to our investment portfolio, ~~that are sensitive to market risks. Our investment portfolio, excluding warrants and equity securities we hold~~there have been no material changes in connection with our collaborations and licensing activities, is used to preserve capital until it is required to fund operations. Our held-to-maturity investments are restricted and are held as collateral under certain lettersthe first six months of ~~credit~~

~~related~~fiscal year 2010 to our ~~lease agreements. Our short-term~~market risks, and long-term investments consist of U.S. government debt securities, U.S. agency debt securities, municipal debt securities, investment grade corporate debt securities, including asset backed debt securities, and auction rate securities. These debt securities are: (i) classified as available-for-sale; (ii) recorded at fair value; and (iii) subject to interest rate risk, and could decline in value if interest rates increase. Fixed rate interest securities may have their market value adversely impacted by a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to a fall in interest rates or we ~~may suffer losses in principal if we are forced to sell securities that decline in the market value due to~~do not anticipate any near-term changes in interest rates. However, because we classify our investments in debt securities as available-for-sale, no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary. Should interest rates fluctuate by 10%, our interest income would change by approximately $1.2 million over an annual period. Due to the ~~conservative~~ nature of our ~~short-term and long-term investments and our investment policy, we do not believe that we have a material exposure to interest rate risk. Although our investments are subject to credit~~market risk ~~our investment policies specify credit quality standards for our investments and limit the amount of credit exposure from any single issue, issuer~~exposures or ~~type of investment.~~

Our investments that are subject to the greatest credit risk at this time are our investments in asset backed debt securities and auction rate securities. Holding all other factors constant, if we were to increase the discount rate utilized in our ~~valuation analysis of the asset backed debt securities~~management’s objectives and auction rate securities by 50 basis points (one-half of a percentage point), this change would have the effect of reducing the fair value of these investments by approximately $0.4 million and $0.1 million at December 31, 2008, respectively. Similarly, holding all other factors constant, if we werestrategies with respect to assume that the expected term of the asset backed debt securities was the full contractual maturity, which could be through calendar year 2012, this change would have the effect of reducing the fair value of these securities by approximately $0.7 million at December 31, 2008. As it relates to auction rate securities, holding all other factors constant, if we were to increase the average expected term utilized in our fair value analysis by one year, this change would have the effect of reducing the fair value of these securities by approximately $0.3 million at December 31, 2008.managing such exposures.

We ~~also hold warrants~~are exposed to ~~purchase the equity securities of certain publicly held companies that are considered derivative instruments and are recorded at fair value. These securities are sensitive~~foreign currency exchange risk related to changes in interest rates. Interest rate changes would result in a change in the fair value of warrants due to the difference between the market interest rate and the rate at the date of purchase. A 10% increase or decrease in market interest rates would not have a material impact on our consolidated financial statements.

~~At December 31, 2008, the fair value of our 7% Notes approximated the carrying value. The interest rate on these notes are fixed and therefore not subject to interest rate risk.~~

~~Foreign Currency Exchange Rate Risk~~

~~The~~ manufacturing and royalty revenues we receive on RISPERDAL CONSTA ~~are a percentage~~as summarized in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the ~~net sales made by~~year ended March 31, 2009. There has been no material change in our ~~collaborative partner, Janssen. A majority~~assessment of these sales are made in foreign countries and are denominated in foreign currencies. The manufacturing and royalty payments on these foreign sales is calculated initially in the foreign currency in which the sale is made and is then converted into U.S. dollarsour sensitivity to determine the amount that Janssen pays us for manufacturing and royalty revenues. Fluctuations in the exchange ratio of the U.S. dollar and these foreign currencies will have the effect of increasing or decreasing our manufacturing and royalty revenues even if there is a constant amount of sales in foreign currencies. For example, if the U.S. dollar weakens against a foreign currency, then our manufacturing and royalty revenues will increase given a constant amount of sales in such foreign currency.

~~The impact on our manufacturing and royalty revenues from~~ foreign currency exchange rate risk ~~is based on a number~~during the first six months of factors, including the exchange rate (and the change in the exchange rate from the prior period) between a foreign currency and the U.S. dollar, and the amount of RISPERDAL CONSTA sales by Janssen that are denominated in foreign currencies. For the nine months ended December 31, 2008, an average 10% strengthening of the U.S. dollar relative to the currencies in which RISPERDAL CONSTA is sold, would have resulted in our manufacturing and royalty revenues being reduced by approximately $7.5 million and $1.6 million, respectively. We do not currently hedge our foreign currency exchange rate risk.fiscal year 2010.

Item 4.Controls and Procedures

~~(a)~~a) Evaluation of Disclosure Controls and Procedures

We have carried out an evaluation, under the supervision and the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

~~Please see the Legal Proceedings section of our Annual Report on Form 10-K for the year ended March 31, 2008 for more information on litigation~~From time to ~~which~~time, we ~~are a party.~~

~~Item 1A.~~~~Risk Factors~~

~~The following risk factors are added~~may be subject to those included in our Annual Report on Form 10-K for the year ended March 31, 2008 as well as those included in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 which are hereby incorporated by reference.

~~VIVITROL may not be successfully marketed~~legal proceedings and ~~sold by Alkermes and may not generate significant revenues~~

In November 2008, we ended our collaboration with Cephalon related to VIVITROL. As part of the termination, we assumed all risks and responsibilities associated with the marketing and sale of VIVITROL. The revenues from the sale of VIVITROL have not been and may not become significant and will depend on numerous factors including but not limited to those specified below.

We have little experience with the commercialization of pharmaceutical products, including the marketing and sale of prescription drugs. We must build an infrastructure to support the sales and marketing of VIVITROL, including integrating members of the Cephalon sales force with our existing field force to build our own sales force, building a distribution and expanded commercial infrastructure and providing various support services for the sales force. Our ability to realize significant revenues from the marketing and sales activities associated with VIVITROL depends on our ability to retain qualified sales personnel for the sale and marketing of VIVITROL. We must also be able to attract new qualified sales personnel as needed to support potential sales growth and competition for qualified sales personnel is intense. Any failure to attract and retain qualified sales personnel now andclaims in the ~~future, could impair our ability to maintain sales levels and/or support potential future sales growth.~~

ordinary course of business. We are ~~responsible for~~not aware of any such proceedings or claims that we believe will have, individually or in the entire supply chain and distribution network for VIVITROL. We have limited experience in managing a complex, cGMP supply chain and pharmaceutical product distribution network. The manufacture of products and product components, packaging, storage and distribution of our products require successful coordination among ourselves and multiple third party providers. Issues with third parties who are part of our supply chain, including but not limited to suppliers, third party logistics

~~providers, distributors, wholesalers, and specialty pharmacies may have~~aggregate, a material adverse effect on our business, results of operations and financial condition. Our inability to coordinate these efforts, the lack of capacity available from third parties or any other problems with third party operators could cause a delay in shipment of saleable products; a recall of products previously shipped or an impairment of our ability to supply products at all. These setbacks could increase our costs, cause us to lose revenue or market share and damage our reputation.

Sales of our products are dependent, in part, on the availability of reimbursement from third-party payors such as federal and state government agencies under programs such as Medicare and Medicaid, and private insurance plans.

There have been, there are, and we expect there will continue to be, state and federal legislative and/or administrative proposals that could limit the amount that state or federal governments will pay to reimburse the cost of pharmaceutical products. Legislative or administrative acts that reduce reimbursement for our products could adversely affect our business. Third party payors continually attempt to contain or reduce the cost of health care by challenging the prices charged for medical products and services. We may not be able to sell VIVITROL profitably if reimbursement is unavailable or coverage is limited in scope or amount.

In addition, private insurers, such as managed care organizations, may adopt their own coverage restrictions or demand price concessions in response to legislation or administrative action. Reduction in reimbursement for our products could have a material adverse effect on our results of operations. Also, the increasing emphasis on managed care in the U.S. may put increased pressure on the price and usage of our products, which may adversely affect product sales. We cannot predict the availability or amount of reimbursement for VIVITROL and current reimbursement policies may change at any time.

If reimbursement for VIVITROL changes adversely, health care providers may limit how much or under what circumstances they will prescribe or administer VIVITROL, which could reduce use of VIVITROL or cause us to reduce the price of our product.

Additionally, we have assumed all of the risks and responsibilities associated with the additional development of VIVITROL, including regulatory approval and costs. We are currently conducting a randomized, multi-center registration study of VIVITROL in Russia for the treatment of opioid dependence. Clinical data from this study will form the basis of a sNDA to the FDA for VIVITROL for the treatment of opioid dependence. However, there is no assurance that the data from this study or any clinical or preclinical data will be sufficient to gain regulatory approval of VIVITROL for opioid dependence in the U.S. or other countries. Approval of VIVITROL for alcohol dependence in countries outside of the U.S., except for Russia and other countries in the CIS, and approval of VIVITROL for other indications in the U.S. and countries outside of the U.S. will depend on our sponsoring such efforts ourselves, including conducting additional clinical studies, which can be very costly, or entering into co-development, co-promotion or sales and marketing agreements with collaborators.

~~Our customer base for VIVITROL is highly concentrated.~~

Our principal customers for VIVITROL are wholesale drug distributors. These customers comprise a significant part of the distribution network for pharmaceutical products in the U.S. Three large wholesale distributors, Cardinal Health, Inc., McKesson Corporation and AmerisourceBergen Corporation, control a significant share of this network. Fluctuations in the buying patterns of these customers, which may result from seasonality, wholesaler buying decisions or other factors outside of our control, could significantly affect the level of our net sales on a period-to-period basis. The impact on net sales could have a material impact on our financial condition, cash flows and results of operations.

In an effort to combat the fluctuations in the buying patterns and the potential harm to our financial condition, we intend to enter into wholesaler distribution service agreements, (“DSAs”), with our three largest wholesale drug distributors. Under the DSAs, we would pay the wholesalers a fee to maintain certain minimum inventory levels that gradually decline over several quarters. We believe it is beneficial to enter into DSAs to establish specified levels of product inventory to be maintained by our wholesalers and to obtain more precise information as to the level of our product inventory available throughout the product distribution channel. We cannot be certain that the DSAs will be effective in limiting speculative purchasing activity, that there will not be a future drawdown of inventory as a result of declining minimum inventory requirements, or otherwise, or that the inventory level data provided through our DSAs are accurate. If speculative purchasing does occur, if the wholesalers significantly decrease their

~~inventory levels, or if inventory level data provided through DSAs is inaccurate, our business, financial condition, cash flows and results of operations may also be adversely affected.~~

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

A summary of our stock repurchase activity for the three months ended ~~December 31, 2008~~September 30, 2009 is as follows:

Total Approximate Dollar
Number of Shares Value of Shares that
Total Number Average Purchased as May Yet be Purchased
of Shares Price Paid Part of a Publicly Under the Program
Period Purchased (a) per Share Announced Program (a) (in millions)
October 1 through October 31 — — — 108.6
November 1 through November 30 — — — 108.6
December 1 through December 31 487,300 9.99 487,300 $ 103.7

Total 487,300 $ 9.99 487,300

Total Approximate Dollar
Number of Shares Value of Shares that
Total Number Average Purchased as May Yet be Purchased
of Shares Price Paid Part of a Publicly Under the Program
Period Purchased (a) per Share Announced Program (a) (In millions)
July 1 through July 31 — $ — — $ 101.1
August 1 through August 31 — $ — — $ 101.1
September 1 through September 30 18,900 $ 9.04 18,900 $ 101.0

Total 18,900 $ 9.04 18,900


(a)		InOn 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. ~~The repurchase program has no set expiration date and may be suspended or discontinued at any time. We~~On June 16, 2008, we publicly announced ~~the share repurchase program in~~that our ~~press release dated November 21, 2007. In June 2008, the~~ 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. ~~We publicly announced the expansion of the~~The repurchase program ~~in our press release dated June 16, 2008.~~has no set expiration date and may be suspended or discontinued at any time. At September 30, 2009, we have purchased a total of 8,866,342 shares under this program at a cost of $114.0 million.

In addition to the stock repurchases above, during the three ~~and nine~~ months ended ~~December 31, 2008,~~September 30, 2009 we acquired, by means of net share settlements, ~~16,339 and 51,871~~1,199 shares of Alkermes common stock at an average price of ~~$8.55 and $11.39~~$10.84 per share ~~respectively,~~ related to the vesting of employee stock awards to satisfy withholding tax obligations. In addition, during the nine months ended December 31, 2008, we acquired 9,176 shares of Alkermes common stock, at an average price of $12.66 per share, tendered by employees as payment of the exercise price of stock options granted under our equity compensation plans.

~~Item 4.~~~~Submission of Matters to a Vote of Security Holders~~

~~We held our annual meeting of shareholders on October 7, 2008. The following proposals were voted upon at the meeting:~~

A proposal to elect ten members to 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
Floyd E. Bloom 74,430,211 15,422,831
Robert A. Breyer 73,993,424 15,859,618
Geraldine Henwood 74,755,604 15,097,438
Paul J. Mitchell 73,167,273 16,685,769
Richard F. Pops 73,985,663 15,867,379
Alexander Rich 72,842,293 17,010,749
David A. Broecker 74,183,909 15,669,133
Mark B. Skaletsky 72,838,407 17,014,635
Michael A. Wall 69,941,022 19,912,020
David W. Anstice 88,613,546 1,239,496

~~A proposal to approve the Alkermes 2008 Stock Option and Incentive Plan was approved with 57,876,227 votes for, 23,164,456 votes against, 74,496 abstentions and 8,737,863 broker non-votes.~~

A proposal to ratify PricewaterhouseCoopers LLP as our independent registered public accountants for fiscal year 2009 was approved with 88,932,454 votes for, 854,501 votes against and 66,087 abstentions.

~~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 months ended December 31, 2008, Mr. Floyd E. Bloom, a director of the Company, and Mr. Gordon G. Pugh, an executive officer of the Company, each entered into a trading plan 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.

Item 6.Exhibits

(a) List of Exhibits:


Exhibit
No.
10.1		Separation Agreement by and between Alkermes, Inc.~~, 2008 Stock Option~~ and ~~Incentive Plan~~David A. Broecker, dated September 10, 2009 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on ~~October 7, 2008)~~September 11, 2009).

10.2		Alkermes, Inc. 2008 Stock Option and Incentive Plan, Stock Option Award Certificate (Incentive Stock Option) (incorporated by reference to Exhibit 10.2 to the Registrant’s Report on Form 8-K filed on October 7, 2008).

~~10.3~~		Alkermes, Inc. 2008 Stock Option and Incentive Plan, Stock Option Award Certificate (Non-Qualified Option) (incorporated by reference to Exhibit 10.3 to the Registrant’s Report on Form 8-K filed on October 7, 2008).

~~10.4~~		Alkermes, Inc. 2008 Stock Option and Incentive Plan, Stock Option Award Certificate (Non-Employee Director) (incorporated by reference to Exhibit 10.4 to the Registrant’s Report on Form 8-K filed on October 7, 2008).

~~10.5~~		Amendment No. 2 to Employment Agreement by and between Alkermes, Inc. and Richard F. Pops, dated September 10, 2009 (incorporated by reference to Exhibit ~~10.5~~10.2 to the Registrant’s Current Report on Form 8-K filed on ~~October 7, 2008).~~

~~10.6~~		~~Amendment to Employment Agreement by and between Alkermes, Inc. and David A. Broecker (incorporated by reference to Exhibit 10.6 to the Registrant’s Report on Form 8-K filed on October 7, 2008).~~

~~10.7~~		Form of Amendment to Employment Agreement by and between Alkermes, Inc. and each of each of Kathryn L. Biberstein, Elliot W. Ehrich, M.D., James M. Frates, Michael J. Landine, Gordon G. Pugh (incorporated by reference to Exhibit 10.7 to the Registrant’s Report on Form 8-K filed on October 7, 2008)September 11, 2009).

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).

3430

EXHIBIT INDEX


Exhibit
No.
10.1		Separation Agreement by and between Alkermes, Inc.~~, 2008 Stock Option~~ and ~~Incentive Plan~~David A. Broecker, dated September 10, 2009 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on ~~October 7, 2008)~~September 11, 2009).

10.2		Alkermes, Inc. 2008 Stock Option and Incentive Plan, Stock Option Award Certificate (Incentive Stock Option) (incorporated by reference to Exhibit 10.2 to the Registrant’s Report on Form 8-K filed on October 7, 2008).

~~10.3~~		Alkermes, Inc. 2008 Stock Option and Incentive Plan, Stock Option Award Certificate (Non-Qualified Option) (incorporated by reference to Exhibit 10.3 to the Registrant’s Report on Form 8-K filed on October 7, 2008).

~~10.4~~		Alkermes, Inc. 2008 Stock Option and Incentive Plan, Stock Option Award Certificate (Non-Employee Director) (incorporated by reference to Exhibit 10.4 to the Registrant’s Report on Form 8-K filed on October 7, 2008).

~~10.5~~		Amendment No. 2 to Employment Agreement by and between Alkermes, Inc. and Richard F. Pops, dated September 10, 2009 (incorporated by reference to Exhibit ~~10.5~~10.2 to the Registrant’s Current Report on Form 8-K filed on ~~October 7, 2008).~~

~~10.6~~		~~Amendment to Employment Agreement by and between Alkermes, Inc. and David A. Broecker (incorporated by reference to Exhibit 10.6 to the Registrant’s Report on Form 8-K filed on October 7, 2008).~~

~~10.7~~		Form of Amendment to Employment Agreement by and between Alkermes, Inc. and each of each of Kathryn L. Biberstein, Elliot W. Ehrich, M.D., James M. Frates, Michael J. Landine, Gordon G. Pugh (incorporated by reference to Exhibit 10.7 to the Registrant’s Report on Form 8-K filed on October 7, 2008)September 11, 2009).

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).

3632


		Page No.
*PART I — FINANCIAL INFORMATION*
Item 1. Condensed Consolidated Financial Statements:				3
Condensed Consolidated Balance Sheets — ~~December 31, 2008~~September 30, 2009 and March 31, ~~2008~~2009			3
Condensed Consolidated Statements of ~~Income~~Operations — For the Three and ~~Nine~~Six Months Ended ~~December 31,~~September 30, 2009 and 2008 ~~and 2007~~			4
Condensed Consolidated Statements of Cash Flows — For the ~~Nine~~Six Months Ended ~~December 31,~~September 30, 2009 and 2008 ~~and 2007~~			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15	17
Item 3. Quantitative and Qualitative ~~Disclosures~~Discloures about Market Risk			28
Item 4. Controls and Procedures		28
	29
*PART II — OTHER INFORMATION*

Item 1. Legal Proceedings			31
~~Item 1A. Risk Factors~~			31	30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33
~~Item 4. Submission of Matters to a Vote of Security Holders~~			33
~~Item 5. Other Information~~			34	30
Item 6. Exhibits			34	30
*Signatures*			35	31
*Exhibit Index*			36	32
~~Ex-31.1 - Sec~~EX-31.1 Section 302 Certification of ~~Principal Executive Officer~~CEO
~~Ex-32.1 - Sec~~EX-31.2 Section 302 Certification of ~~Principal Financial and Accounting Officer~~CFO
~~Ex-32.1 - Sec~~EX-32.1 Section 906 Certification of ~~Principal Executive Officer and Principal Financial Officer~~CEO & CFO


	ALKERMES, INC. (Registrant)
	By:	/s/ ~~David A. Broecker~~Richard F. Pops
		~~David A. Broecker~~Richard F. Pops
		Chairman, President and Chief Executive Officer ~~(Principal~~ (Principal Executive Officer)


	By:	/s/ James M. Frates
		James M. Frates
		Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)


	Amortized		Gross Unrealized					Estimated
	Cost		Gains		Losses			Fair Value
			(In thousands)
September 30, 2009
Short-term investments:
Available-for-sale securities:
U.S. government and agency debt securities	$	209,896	$	389	$	—		$	210,285
International government agency debt securities		28,692		148		—			28,840
Other debt securities		3,267		—		(294	)		2,973

Total short-term investments		241,855		537		(294	)		242,098

Long-term investments:
Available-for-sale securities:
U.S. government and agency debt securities		17,994		—		(17	)		17,977
Corporate debt securities		43,162		—		(3,162	)		40,000
Other debt securities		11,510		—		(1,788	)		9,722
Strategic investments		738		142		—			880

		73,404		142		(4,967	)		68,579

Held-to-maturity securities:
U.S. government obligations		416		—		—			416
Certificates of deposit		5,440		—		—			5,440

Total long-term investments		79,260		142		(4,967	)		74,435

Total investments	$	321,115	$	679	$	(5,261	)	$	316,533


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


	Available-for-Sale				Held-to-Maturity
	Amortized		Estimated		Amortized		Estimated
(in thousands)	Cost		Fair Value		Cost		Fair Value
Within 1 year	$	124,069	$	124,061	$	416	$	416
After 1 year through 5 years (1)		131,784		131,700		—		—
After 5 years through 10 years (1)		48,668		45,578		—		—
After 10 years		10,000		8,458		—		—

Total	$	314,521	$	309,797	$	416	$	416


	Fair
(In thousands)	Value
Balance, March 31, 2009	$	73,877
Total unrealized gains included in comprehensive loss		3,687
Sales and redemptions, at par value		(18,773	)
Transfers out of Level 3		(33,920	)

Balance, September 30, 2009	$	24,871


(In thousands)	Fair Value
Balance, April 1, 2008	$	18,612
Total unrealized losses included in earnings		—
Total unrealized losses included in comprehensive income		(902	)
Redemptions, at par value		(2,245	)

Balance, December 31, 2008	$	15,465


(1)		At September 30, 2009 and March 31, 2009, the Company had $1.5 million and none, respectively, of finished goods inventory located at its third-party warehouse and shipping service provider.

(2)		At September 30, 2009, consigned-out inventory relates to 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 has not recognized revenue.


	Facility						Other Contract
(In thousands)	Closure			Severance			Losses			Total
Balance, April 1, 2008	$	4,930		$	2,881		$	37		$	7,848
Additions		—			78			70			148
Payments		(725	)		(2,959	)		(107	)		(3,791	)
Other adjustments		149			—			—			149

Balance, December 31, 2008 (1)	$	4,354		$	—		$	—		$	4,354


(1)		~~At December 31, 2008,~~In September 2009, in connection with the ~~restructuring liability consists~~resignation of ~~$0.8~~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 ~~classified as current and $3.6 million classified as long-term in~~during the ~~accompanying condensed consolidated balance sheets.~~three months ended September 30, 2009.


	(in thousands)
Accrued restructuring, March 31, 2009	$	4,193
Payments for facility closure costs		(416	)
Other adjustments		106

Accrued restructuring, September 30, 2009	$	3,883


	Three Months Ended				Change			Six Months Ended				Change
	September 30				Favorable/			September 30				Favorable/
(In millions)	2009		2008		(Unfavorable)			2009		2008		(Unfavorable)
Manufacturing revenues:
RISPERDAL CONSTA	$	31.9	$	30.7	$	1.2		$	59.8	$	66.6	$	(6.8	)
Polymer		0.4		—		0.4			1.4		—		1.4
VIVITROL		0.5		2.3		(1.8	)		0.4		5.0		(4.6	)

Manufacturing revenues	$	32.8	$	33.0	$	(0.2	)	$	61.6	$	71.6	$	(10.0	)


					Total		Approximate Dollar
					Number of Shares		Value of Shares that
	Total Number		Average		Purchased as		May Yet be Purchased
	of Shares		Price Paid		Part of a Publicly		Under the Program
Period	Purchased (a)		per Share		Announced Program (a)		(in millions)
October 1 through October 31		—		—		—		108.6
November 1 through November 30		—		—		—		108.6
December 1 through December 31		487,300		9.99		487,300	$	103.7

Total		487,300	$	9.99		487,300


			Authority
Nominee	Votes For		Withheld
Floyd E. Bloom		74,430,211		15,422,831
Robert A. Breyer		73,993,424		15,859,618
Geraldine Henwood		74,755,604		15,097,438
Paul J. Mitchell		73,167,273		16,685,769
Richard F. Pops		73,985,663		15,867,379
Alexander Rich		72,842,293		17,010,749
David A. Broecker		74,183,909		15,669,133
Mark B. Skaletsky		72,838,407		17,014,635
Michael A. Wall		69,941,022		19,912,020
David W. Anstice		88,613,546		1,239,496