e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the fiscal year ended
March 31, 2006
|
OR
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period
from to
|
Commission file number: 1-14131
ALKERMES, INC.
(Exact name of registrant as
specified in its charter)
|
|
|
Pennsylvania
|
|
23-2472830
|
(State or other jurisdiction
of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
88 Sidney Street, Cambridge,
MA
(Address of principal
executive offices)
|
|
02139-4234
(Zip Code)
|
(617) 494-0171
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, par value $0.01 per share
Series A Junior Participating Preferred Stock Purchase
Rights
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
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. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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 and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of September 30, 2005 (the last business day of the
second fiscal quarter) the aggregate market value of the
88,390,866 outstanding shares of voting and non-voting common
equity held by non-affiliates of the registrant was
$1,484,966,549. Such aggregate value was computed by reference
to the closing price of the common stock reported on the NASDAQ
National Market on September 30, 2005.
As of May 31, 2006, 91,894,457 shares of the
Registrants common stock were issued and outstanding, and
382,632 shares of the Registrants non-voting common
stock were issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement to be filed within
120 days after March 31, 2006 for the
Registrants Annual Shareholders Meeting are
incorporated by reference into Part III of this Report on
Form 10-K.
ALKERMES,
INC. AND SUBSIDIARIES
ANNUAL
REPORT ON
FORM 10-K
FOR THE
FISCAL YEAR ENDED MARCH 31, 2006
INDEX
2
PART I
The following business section contains forward-looking
statements which involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors. See
Risk Factors and Managements Discussion
and Analysis of Financial Condition and Results of
Operations Forward-Looking Statements.
General
Alkermes, Inc. (together with its subsidiaries, referred to as
we, us, our or the
Registrant), a Pennsylvania corporation organized in
1987, is a biotechnology company that develops products based on
sophisticated drug delivery technologies to enhance therapeutic
outcomes in major diseases. We have two commercial products.
RISPERDAL®
CONSTA®
[(risperidone) long-acting injection] is the first and only
long-acting atypical antipsychotic medication approved for use
in schizophrenia and is marketed worldwide by Janssen-Cilag
(Janssen), a subsidiary of Johnson &
Johnson.
VIVITROLtm
(naltrexone for extended-release injectable suspension) is the
first and only once-monthly injection approved for the treatment
of alcohol dependence and is marketed in the United States
(U.S.) primarily by Cephalon, Inc.
(Cephalon). We have a pipeline of extended-release
injectable products and pulmonary products based on our
proprietary technologies and expertise. Our product development
strategy is twofold: we partner our proprietary technology
systems and drug delivery expertise with several of the
worlds finest pharmaceutical and biotechnology companies;
and we also develop novel, proprietary drug candidates for our
own account. Our headquarters are located in Cambridge,
Massachusetts, and we operate research and manufacturing
facilities in Massachusetts and Ohio.
Our
Strategy
We are leveraging our unique drug delivery capabilities and
technologies to become a profitable growth company by
developing, both with partners and on our own, novel and
important drug products that enhance patient outcomes in major
therapeutic areas.
We have entered into select collaborations with pharmaceutical
and biotechnology companies to develop significant new product
candidates, based on existing drugs and incorporating our
technologies. Our partner, Janssen, currently markets RISPERDAL
CONSTA, a formulation developed and manufactured by us that
utilizes our proprietary
Medisorb®
drug delivery technology and Janssens atypical
antipsychotic drug
RISPERDAL®
(risperidone). RISPERDAL CONSTA is the only long-acting atypical
antipsychotic drug on the market today. We also have two
important initiatives in diabetes with corporate partners. The
first is an inhaled formulation of insulin
(AIR®
insulin), based on our AIR pulmonary drug delivery technology,
which is being developed with Eli Lilly and Company
(Lilly). The second is exenatide LAR, a long-acting
formulation of the diabetes drug
BYETTA®
(exenatide), which is being developed with our partners Amylin
Pharmaceuticals, Inc. (Amylin) and Lilly, using our
Medisorb drug delivery technology.
In addition, we develop our own proprietary therapeutics by
applying our innovative drug delivery technologies to certain
pharmaceuticals. Our drug VIVITROL, which was approved by the
U.S. Food and Drug Administration (FDA) in
April 2006, is the first and only once-monthly injectable
medication for the treatment of alcohol dependence. It is an
extended-release formulation of the oral medication, naltrexone,
based on our proprietary Medisorb drug delivery technology.
We are also working to create value by establishing our own
specialized sales and marketing capabilities. Under our VIVITROL
collaboration with Cephalon we support the product
commercialization effort with a team of managers of market
development. They work with the Cephalon field sales team to
facilitate local and health care system level approaches to
marketplace education and awareness and program support. Under
our agreement, we have the option to develop our own field sales
force, in addition to the managers of market development, at the
time of the first sales force expansion, which has not yet
occurred. If we elect to develop
3
our own sales force, we may seek to expand our commercial
presence by developing or acquiring additional products to
market.
Products
and Development Programs
The following discusses the primary indications, development
stage and collaborative partner, if any, for our products and
certain of our product candidates. We are developing other
product candidates that are in preclinical development for
various other indications that are not discussed below. The
results from preclinical testing and early clinical trials may
not be predictive of results obtained in subsequent clinical
trials and there can be no assurance that our, or our
collaborators, clinical trials will demonstrate the safety
and efficacy of any product candidates necessary to obtain
regulatory approval.
RISPERDAL CONSTA. We have developed a
long-acting formulation of Janssens antipsychotic drug
RISPERDAL, called RISPERDAL CONSTA, using our Medisorb drug
delivery technology for the treatment of schizophrenia, a brain
disorder, characterized by disorganized thinking, delusions and
hallucinations. RISPERDAL CONSTA is administered via
intramuscular injection every two weeks, as opposed to RISPERDAL
tablets, which must be taken daily. RISPERDAL CONSTA is marketed
in more than 55 countries around the world including the U.S.,
United Kingdom, Spain, France and Germany. The product has been
approved in more than 75 countries, and Janssen continues to
launch the product around the world. RISPERDAL is the most
commonly prescribed drug for the treatment of schizophrenia and,
along with RISPERDAL CONSTA, had sales of over $3.6 billion
worldwide in calendar year 2005. In December 2005, Janssen
presented data at the American Psychiatric Association meeting
which demonstrated that stable patients treated with RISPERDAL
CONSTA showed low rates of relapse and rehospitalization.
In January 2005, Johnson & Johnson initiated a
Phase III clinical trial with RISPERDAL CONSTA, with the
goal of expanding the label to include an indication for
maintenance therapy for bipolar disorder. In May 2006, Janssen
presented additional data supporting the use of RISPERDAL CONSTA
in schizophrenia and bipolar maintenance.
We are the exclusive manufacturer of RISPERDAL CONSTA for
Janssen, and we earn both manufacturing fees and royalties from
Janssen. See Collaborative
Arrangements Janssen for more information
about manufacturing fees and royalties received from Janssen.
Our non-recourse RISPERDAL CONSTA secured 7% notes (the
7% Notes) are secured by RISPERDAL CONSTA cash
flows. See Note 6 to the consolidated financial statements
included in this
Form 10-K.
VIVITROL. VIVITROL, our first FDA-approved
proprietary product, is an injectable, extended-release Medisorb
formulation of naltrexone. Naltrexone, an FDA-approved drug
indicated for the treatment of alcohol dependence and for the
blockade of effects of exogenously administered opioids, is
currently available in daily oral dosage form. VIVITROL, the
first and only once-monthly injectable medication for alcohol
dependence, is indicated 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. Treatment with VIVITROL should be used in
combination with psychosocial support, such as counseling or
group therapy. VIVITROL was available to physicians and patients
in the U.S. beginning on June 13, 2006. VIVITROL is
available as a single dose 380mg intramuscular injection.
Alcohol dependence is a serious and chronic disease that affects
multiple regions of the brain, providing rationale for the use
of medication with psychosocial support as part of an integrated
treatment plan. Of the more than approximately 7.8 million
Americans who are dependent on alcohol, approximately
2.2 million seek treatment for their alcohol problems.
Approximately 75% of these patients relapse within the first
year of beginning treatment using currently available treatment
options. Vivitrol development has been funded in part with
federal funds from the National Institute on Alcohol Abuse and
Alcoholism, and the National Institutes of Health.
We and Cephalon are discussing the development and
implementation of a clinical program for VIVITROL in opioid
dependence.
4
In June 2005, we partnered with Cephalon to commercialize
VIVITROL in the U.S. We are the exclusive manufacturer of
VIVITROL, and we earn manufacturing revenue from Cephalon and
share net collaborative profits and losses with Cephalon. See
Collaborative Arrangements Cephalon
for more information about manufacturing revenues and the profit
and loss sharing arrangement with Cephalon.
AIR insulin. We are collaborating with Lilly
to develop inhaled formulations of insulin and other potential
products for the treatment of diabetes based on our AIR
pulmonary drug delivery technology. We believe that our AIR
insulin product candidate, currently in Phase III clinical
development, may improve the treatment of diabetes by providing
a simpler dosing regimen and thereby potentially increasing
medication adherence and leading to better health outcomes for
patients over time. As part of the comprehensive Phase III
pivotal program that began in July 2005, we are currently
conducting two long-term safety and efficacy studies: a
24-month
study in 400 type-one diabetes patients; and a
12-month
study in 600 type-one and type-two diabetes patients with mild
to moderate asthma or mild to moderate chronic obstructive lung
disease. In addition, in April 2006, we and Lilly announced the
initiation of a Phase III clinical trial required for
registration for AIR insulin. This study in type-two diabetes
patients is designed to compare A1C, an average measure of blood
sugar (glucose) over a three-month period, between AIR insulin
and injectable pre-meal insulin. Additional studies are planned
to commence in calendar year 2006. Lilly is responsible for
designing and conducting clinical trials.
In June and September 2005, we and Lilly presented detailed
results from a Phase II clinical study of inhaled insulin
in people with type-one diabetes, showing that patients using
AIR insulin achieved blood sugar levels similar to patients
treated with injected insulin. The Phase II trial was a
multi-center, cross-over design study with 120 patients
with type-one diabetes receiving an inhaled formulation of
insulin using AIR technology for a three-month period. Eighty
percent (80%) of patients in this study expressed a preference
for AIR insulin at mealtime over injected insulin. In addition,
results from a Phase I dose response and equivalence study
were presented, which showed that AIR insulin and injected
insulin lispro were generally well-tolerated and that the
overall effect on blood sugar was similar, illustrating that
doses could be reliably correlated.
We manufacture AIR insulin for clinical trials. Under our
current agreement, we and Lilly will manufacture AIR insulin
products for commercial sale, if any.
Exenatide LAR. We are developing a long-acting
release (LAR) Medisorb formulation of Amylins
exenatide (exenatide). Exenatide
injection (trade name BYETTA) was approved by the FDA in
April 2005 as adjunctive therapy to improve blood sugar control
in patients with type-two diabetes who have not achieved
adequate control on metformin
and/or a
sulfonylurea, two commonly used oral diabetes medications.
BYETTA is a twice-daily injection. Exenatide LAR is being
developed as a once-weekly formulation. Amylin entered into a
collaboration agreement with Lilly for the development and
commercialization of exenatide, including exenatide LAR.
In March 2006, we, Amylin and Lilly announced that, following
discussions with the FDA, a long-term comparator clinical study
of once-weekly exenatide LAR and twice-daily BYETTA in patients
with type-two diabetes had been initiated. This study is
designed to generate the type of safety and efficacy data that
could form the basis of a new drug application (NDA).
This trial follows the completion of a randomized,
placebo-controlled, multi-dose study in patients with type-two
diabetes that was designed to assess the safety, tolerability,
and pharmacokinetics of exenatide LAR given once a week. In
August 2005, we, Amylin and Lilly announced the preliminary
results of this study, which found that after 15 weeks,
both doses of exenatide LAR were well tolerated and expected
therapeutic blood levels of exenatide were achieved.
Dose-dependent improvements in hemoglobin A1C and reductions in
weight were observed. This multiple-dose study included
approximately 45 subjects with type-two diabetes who were
failing to achieve adequate glucose control using diet and
exercise with or without metformin.
In parallel with clinical activities, manufacturing process
development and scale-up activities are underway. The material
for this trial is being manufactured at development scale, and
the companies are working to determine the overall manufacturing
strategy.
5
In October 2005, we amended our existing development and license
agreement with Amylin, and reached agreement regarding the
construction of a manufacturing facility for exenatide LAR and
certain technology transfer related thereto. See
Collaborative Arrangements Amylin
for more information relating to the manufacture of exenatide
LAR.
AIR®
parathyroid hormone. In January 2006, we and
Lilly announced an agreement to develop and commercialize
inhaled formulations of parathyroid hormone (PTH)
utilizing our AIR pulmonary drug delivery system. The initial
development program will utilize our AIR pulmonary drug delivery
system in combination with Lillys recombinant PTH,
FORTEO®
(teriparatide (rDNA origin) injection). FORTEO was approved in
2002 by the FDA to treat osteoporosis in men and postmenopausal
women who are at high risk for bone fracture.
Under the terms of the agreement, we receive funding for product
and process development activities and upfront and milestone
payments. Lilly will have exclusive worldwide rights to products
resulting from the collaboration and will pay us royalties based
on product sales, if any.
We are responsible for manufacturing AIR PTH for preclinical
studies, and Phase I and Phase II clinical trials, if
any.
Collaborative
Arrangements
Our business strategy includes forming collaborations to develop
and commercialize our products, and to access technological,
financial, marketing, manufacturing and other resources. We have
entered into several collaborative arrangements, as described
below.
Janssen
Pursuant to a development agreement, we collaborated with
Janssen on the development of RISPERDAL CONSTA. Under the
development agreement, Janssen provided funding to us for the
development of RISPERDAL CONSTA, and Janssen is responsible for
securing all necessary regulatory approvals for the product.
RISPERDAL CONSTA has been approved in more than 75 countries.
RISPERDAL CONSTA has been launched in more than 55 countries,
including the U.S. and several major international markets. We
exclusively manufacture RISPERDAL CONSTA for commercial sale and
receive manufacturing revenues when product is shipped to
Janssen and royalty revenues upon the final sale of the product.
Under product license agreements, Janssen and an affiliate of
Janssen have exclusive worldwide licenses from us to use and
sell RISPERDAL CONSTA. Under the license agreements, Janssen is
required to pay us certain royalties on all RISPERDAL CONSTA
sold to customers. Janssen can terminate the license agreements
upon 30 days prior written notice to us.
Pursuant to a manufacturing and supply agreement, Janssen has
appointed us as the exclusive supplier of RISPERDAL CONSTA for
commercial sales. Under our manufacturing and supply agreement
with Janssen, we record manufacturing revenues upon shipment of
product by us to Janssen, based on a percentage of
Janssens net selling price. This percentage of net selling
price varies based upon the volume of units shipped to Janssen
in any given calendar year, with a minimum manufacturing fee of
7.5%. Under our license agreements with Janssen, we also record
royalty revenues equal to 2.5% of Janssens net sales of
RISPERDAL CONSTA in the quarter when the product is sold by
Janssen.
Under our manufacturing and supply agreement, Janssen is
required to pay us certain annual minimum manufacturing revenues
relating to our sales of RISPERDAL CONSTA to Janssen. The annual
minimum manufacturing revenues from sales of RISPERDAL CONSTA
are determined by a formula and, in the aggregate, are currently
estimated to be approximately $184.5 million. This amount
was automatically increased from $150.0 million as a result
of additional investment by us in the RISPERDAL CONSTA
manufacturing infrastructure. As of March 31, 2006, we had
recognized approximately $143.4 million of cumulative
manufacturing revenues against the estimated $184.5 million
minimum.
6
The manufacturing and supply agreement terminates on expiration
of the license agreements. In addition, either party may
terminate the manufacturing and supply agreement upon a material
breach by the other party which is not resolved within
60 days written notice or upon written notice in the
event of the other partys insolvency or bankruptcy.
Janssen may terminate the agreement upon six months
written notice to us. In the event that Janssen terminates the
manufacturing and supply agreement without terminating the
product license agreements, the royalty rate payable to us on
Janssens net sales of RISPERDAL CONSTA will increase from
2.5% to 5.0%.
Cephalon
In June 2005, we entered into a license and collaboration
agreement and supply agreement with Cephalon to jointly develop,
manufacture and commercialize extended-release forms of
naltrexone, including VIVITROL (the Products), in
the U.S. (the Agreements). We have formed a
joint development team with Cephalon, and the companies share
responsibility for additional development of the Products. We
have primary responsibility for conducting such development and
were responsible for obtaining marketing approval for VIVITROL
in the U.S. for the treatment of alcohol dependence, which
we received from the FDA in April 2006. We have formed a joint
commercialization team with Cephalon, and the companies share
responsibility for developing the commercial strategy for the
Products. Cephalon has primary responsibility for the
commercialization, including distribution and marketing, of the
Products in the U.S., and we support this effort with a team of
managers of market development. We have the option to staff our
own field sales force in addition to our managers of market
development at the time of the first sales force expansion,
should one occur. We have also formed a joint supply team with
Cephalon, and we have primary responsibility for the manufacture
of the Products.
In June 2005, Cephalon made a nonrefundable payment of
$160.0 million to us upon signing the Agreements. In April
2006, Cephalon made a second nonrefundable payment of
$110.0 million to us upon FDA approval of VIVITROL.
Cephalon will make additional nonrefundable milestone payments
to us of up to $220.0 million if calendar year net sales of
the Products exceed certain agreed-upon sales levels. Cephalon
will record net sales from the Products in the U.S. Under
the terms of the Agreements, we are responsible for the first
$120.0 million of net losses incurred on VIVITROL
(Product Losses) through December 31, 2007. The
Product Losses specifically exclude development costs incurred
by us to obtain FDA approval of VIVITROL and costs to complete
the first manufacturing line, both of which we are solely
responsible for. If Product Losses exceed $120.0 million
through December 31, 2007, Cephalon is responsible for
paying all Product Losses in excess of $120.0 million
during this period. If VIVITROL is profitable through
December 31, 2007, net profits will be shared equally
between us and Cephalon. After December 31, 2007, all
profits and losses earned on VIVITROL will be shared equally
between us and Cephalon.
The Agreements are in effect until the later of: (i) the
expiration of certain patent rights; or (ii) fifteen
(15) years from the date of the first commercial sale of
the Products in the U.S.
Cephalon has the right to terminate the Agreements at any time
by providing 180 days prior written notice to us,
subject to certain continuing rights and obligations between the
parties. The supply agreement terminates upon termination or
expiration of the license and collaboration agreement or the
later expiration of our obligations pursuant to the Agreements
to continue to supply Products to Cephalon. In addition, either
party may terminate the license and collaboration agreement upon
a material breach by the other party which is not cured within
90 days written notice of material breach or, in
certain circumstances, a 30 day extension of that period,
and either party may terminate the supply agreement upon a
material breach by the other party which is not cured within
180 days written notice of material breach or, in
certain circumstances, a 30 day extension of that period.
Lilly
AIR
insulin
In April 2001, we entered into a development and license
agreement with Lilly for the development of inhaled formulations
of insulin and other compounds potentially useful for the
treatment of diabetes, based on
7
our AIR pulmonary drug delivery technology. Pursuant to the
agreement, we are responsible for formulation and preclinical
testing as well as the development of a device to use in
connection with any products developed. Lilly has paid or will
pay to us certain initial fees, research funding and milestones
payable upon achieving certain development and commercialization
goals. Lilly has exclusive worldwide rights to make, use and
sell pulmonary formulations of such compounds. Lilly will be
responsible for clinical trials, obtaining all regulatory
approvals and marketing any AIR insulin products. We will
manufacture such product candidates for clinical trials and both
we and Lilly will manufacture such products for commercial
sales, if any. We will receive certain royalties and commercial
manufacturing fees based upon such product sales, if any.
Lilly has the right to terminate the agreement upon
90 days written notice to us at any time prior to the
first commercial launch of a product or upon 180 days
written notice at any time after such first commercial launch.
In addition, either party may terminate the agreement upon a
material breach or default by the other party which is not cured
within 90 days of written notice of material breach or
default.
In February 2002, we entered into an agreement with Lilly that
provided for an investment by them in our production facility
for inhaled products based on our AIR pulmonary drug delivery
technology. This facility, located in Chelsea, Massachusetts, is
designed to accommodate the manufacturing of multiple products.
Lillys investment was used to fund a portion of AIR
insulin production and packaging capabilities. This funding is
secured by Lillys ownership of specific equipment located
and used in the facility. We have the right to purchase the
equipment from Lilly, at any time, at the then-current net book
value.
In December 2002, we expanded our collaboration with Lilly
following the achievement of development milestones relating to
clinical progress and manufacturing activities for our insulin
dry powder aerosols and inhalers. In connection with the
expansion, Lilly purchased $30.0 million of our newly
issued 2002 redeemable convertible preferred stock,
$0.01 par value per share (the Preferred Stock)
in accordance with the December 2002 preferred stock agreement.
Under the expanded collaboration, the royalties payable to us on
sales of the AIR insulin product were increased. We agreed to
use the proceeds from issuance of the Preferred Stock primarily
to fund the AIR insulin development program and to use a portion
of the proceeds to fund the AIR hGH development program. We did
not record research and development revenue on these programs
while the proceeds of the Preferred Stock funded this
development. The $30.0 million of research and development
expended by us was recognized as research and development
expense as incurred. All of the proceeds from the issuance of
the Preferred Stock had been spent through fiscal year 2005.
In September 2005, we received a milestone payment of
$9.0 million from Lilly upon the initiation of the
Phase III clinical program for AIR insulin.
On October 4, 2005, we converted 1,500 shares of the
Preferred Stock with a carrying value of $15.0 million into
823,677 shares of our common stock. The conversion secured
a proportional increase in the minimum royalty rate payable to
us on sales of the AIR insulin product, if approved.
AIR
PTH
In December 2005, we entered into an agreement with Lilly to
develop and commercialize AIR PTH utilizing our AIR pulmonary
drug delivery system. The initial development program will
utilize our AIR pulmonary drug delivery system in combination
with Lillys recombinant PTH,
FORTEO®
(teriparatide (rDNA origin) injection). Forteo was approved by
the FDA in 2002 for the treatment of osteoporosis in men and
postmenopausal women who are at high risk of bone fracture.
Under the terms of the agreement, we will receive funding for
product development activities and upfront and milestone
payments. We will have principal responsibility for the
formulation and nonclinical development and testing of the
compound for use in the product device including device
development. Lilly will have principal responsibility for
toxicological and clinical development of the product and sole
responsibility for the achievement of regulatory approval and
commercialization of the product. Lilly will have exclusive
worldwide rights to products resulting from the collaboration
and will pay us royalties based on product sales, if any,
beginning on the date of product launch in the relevant country
and ending on the later of either the expiration of AIR patent
rights or ten years from product launch in that particular
country. We are responsible for the
8
manufacture of PTH for preclinical, Phase I and
Phase II clinical trials. Not later than the completion of
Phase II clinical trials for the product, the parties will
negotiate a manufacturing agreement for Phase III clinical
trial and commercial supply. Under this manufacturing agreement,
Lilly would be obligated to purchase from us an agreed to
minimum supply of the product each calendar year.
Lilly may terminate the development and license agreement for
any reason at any time, with or without cause, by providing us
with 90 days prior written notice prior to product
launch or upon 180 days prior written notice after
product launch. In addition, either party may terminate the
agreement upon a material breach or default by the other party
which is not cured within 90 days written notice of
material breach or default or, in certain cases, a 90 day
extension of this period.
Amylin
In May 2000, we entered into a development and license agreement
with Amylin for the development of exenatide LAR, which is under
development for the treatment of type-two diabetes. Pursuant to
the development and license agreement, Amylin has an exclusive,
worldwide license to the Medisorb technology for the development
and commercialization of injectable extended-release
formulations of exendins and other related compounds that Amylin
may develop. Amylin has entered into a collaboration agreement
with Lilly for the development and commercialization of
exenatide, including exenatide LAR. We receive funding for
research and development and milestone payments consisting of
cash and warrants for Amylin common stock upon achieving certain
development and commercialization goals and will also receive
royalty payments based on future product sales, if any. We are
responsible for formulation and non clinical development of any
products that may be developed pursuant to the agreement and for
manufacturing these products for use in clinical trials. Subject
to its arrangement with Lilly, Amylin is responsible for
conducting clinical trials, securing regulatory approvals and
marketing any products resulting from the collaboration on a
worldwide basis. We have the option of becoming the commercial
manufacturer of certain additional products developed under the
development and license agreement.
Amylin may terminate the development and license agreement for
any reason upon 90 days written notice to us if such
termination occurs before filing an NDA with the FDA or
180 days written notice after such event. In
addition, either party may terminate the development and license
agreement upon a material default or breach by the other party
that is not cured within 60 days written notice.
In October 2005, we amended our existing development and license
agreement with Amylin, and reached agreement regarding the
construction of a manufacturing facility for exenatide LAR and
certain technology transfer related thereto. In December 2005,
Amylin purchased a facility for the manufacture of exenatide LAR
and began construction in early calendar year 2006. Amylin is
responsible for all costs and expenses associated with the
design and validation of the facility. The parties have agreed
that we will transfer our technology for the manufacture of
exenatide LAR to Amylin. Following the completion of the
technology transfer, Amylin will be responsible for the
manufacture of the once-weekly formulation of exenatide LAR and
will operate the facility. Amylin will pay us royalties for
commercial sales of this product, if approved, in accordance
with the development and license agreement.
Drug
Delivery Technology
Our proprietary drug delivery technologies address several
important drug delivery opportunities, including injectable
extended-release of proteins, peptides and small molecule
pharmaceutical compounds and the pulmonary delivery of small
molecules, proteins and peptides. We have used these
technologies as a platform to establish drug development and
regulatory expertise.
Injectable
Extended-Release Drug Delivery
Our proprietary technology allows us to encapsulate traditional
small molecule pharmaceuticals, peptides and proteins, in
microspheres made of common medical polymers. The technology is
designed to enable novel formulations of pharmaceuticals by
providing controlled, extended-release of drugs over time. Drug
release from the microsphere is controlled by diffusion of the
drug through the microsphere and by biodegradation of
9
the polymer. These processes can be modulated through a number
of formulation and fabrication variables, including drug
substance and microsphere particle sizing and choice of polymers
and excipients.
Pulmonary
Drug Delivery
The AIR technology is our proprietary pulmonary delivery
technology that enables the delivery of both small molecules and
macromolecules to the lungs. Our proprietary technology allows
us to formulate drugs into dry powders made up of highly porous
particles with low mass density. These particles can be
efficiently delivered to the deep lung by a small, simple
inhaler. The AIR technology is useful for small molecules,
proteins or peptides and allows for both local delivery to the
lungs and systemic delivery via the lungs.
AIR particles can be aerosolized and inhaled efficiently with
simple inhaler devices because low forces of cohesion allow the
particles to disaggregate easily. We are developing a family of
relatively inexpensive, compact,
easy-to-use
inhalers. The AIR devices are breath activated and made from
injection molded plastic. The powders are designed to quickly
discharge from the device over a range of inhalation flow rates,
which may lead to low
patient-to-patient
variability and high lung deposition of the inhaled dose. By
varying the ratio and type of excipients used in the
formulation, we believe we can deliver a range of drugs from the
device that may provide both immediate and extended release.
Manufacturing
We currently maintain manufacturing facilities in Massachusetts
and Ohio. We either purchase active drug product from third
parties or receive it from our third party collaborators to
formulate product using our technologies. The manufacture of our
product for clinical trials and commercial use is subject to
current good manufacturing practices (cGMP) and
other regulatory agency regulations. We have been producing
commercial product since 1999 and have limited experience in
operating multi-state, multi-line FDA-approved commercial
manufacturing sites.
Injectable
Extended-Release Drug Delivery
We own and occupy a manufacturing, office and laboratory site in
Wilmington, Ohio. We manufacture RISPERDAL CONSTA, VIVITROL and
development-scale products at this facility. The facility has
been inspected by U.S. and European regulatory authorities, and
they have concluded that the facility meets required cGMP
standards for continued commercial manufacturing. The facility
is undergoing a significant expansion (See Item 2.
Properties for details of the facility expansion). The
expansion of this facility is intended to increase supply of
RISPERDAL CONSTA and VIVITROL.
We have established and are operating clinical facilities, with
the capability to produce clinical supplies of our injectable
extended-release drug delivery products, within our headquarters
facility in Cambridge, Massachusetts.
Pulmonary
Drug Delivery
We lease a 90,000 square foot facility located in Chelsea,
Massachusetts that is designed to accommodate manufacturing of
multiple products and contains a 40,000 square foot
facility used for clinical manufacturing of our AIR products.
Our inhalation devices are produced by a contract manufacturer
in the U.S under cGMP standards.
Marketing
Under our collaboration agreements with Janssen, Lilly and
Amylin, these companies are responsible for the
commercialization of the products developed thereunder if, and
when, regulatory approval is obtained. Cephalon is primarily
responsible for VIVITROL commercialization, however, we support
the product commercialization effort with a team of managers of
market development, whose responsibility it is to work in
collaboration with the Cephalon field sales team to facilitate
local and health care system level approaches to marketplace
education and awareness and program support. Together with
Cephalon, our goal is to establish a
10
steady increase in sales over time and our marketing strategy
will initially focus on a core group of receptive, influential
and high volume prescribers of medication to treat alcohol
dependence, establishing a solid foundation for further
expansion. Under the collaboration, we have the option to
establish our own field sales force, in addition to the managers
of market development, at the time of the first sales force
expansion, which has not yet occurred.
Competition
The biotechnology and pharmaceutical industries are subject to
rapid and substantial technological change. We face intense
competition in the development, manufacturing, marketing and
commercialization of our products and product candidates from
academic institutions, government agencies, research
institutions, biotechnology and pharmaceutical companies,
including our collaborators, and other drug delivery companies.
Our success in the marketplace depends largely on our ability to
identify and successfully commercialize products developed from
our research activities and to access financial resources to
fund our clinical trials, manufacturing, and commercialization
activities. Competition for our marketed products and product
candidates may be based on product efficacy, safety,
convenience, reliability, availability and price, among other
factors. The timing of entry of new pharmaceutical products in
the market can be a significant factor in product success, and
the speed with which we receive approval for products, bring
them to market and produce commercial supplies may impact the
competitive position of our products in the marketplace.
Many of our competitors and potential competitors have
substantially more capital resources, manufacturing and
marketing experience, research and development resources and
production facilities than we do. Many of these competitors have
significantly more experience than we do in undertaking
preclinical testing and clinical trials of new pharmaceutical
products and obtaining FDA and other regulatory approvals. There
can be no assurance that developments by our competitors will
not render our products, product candidates or our technologies
obsolete or noncompetitive, or that our collaborators will not
choose to use competing drug delivery methods.
With respect to our injectable drug delivery technologies, we
are aware that there are other companies developing
extended-release delivery systems for pharmaceutical products.
For example, a number of products are being developed which may
compete with RISPERDAL CONSTA, including a number of new oral
compounds for the treatment of schizophrenia, and paliperidone
palmitate, an injectable, four week long-acting product being
developed by Johnson & Johnson.
VIVITROL may compete with
CAMPRAL®
by Forest Laboratories, Inc. and
ANTABUSE®
by Odyssey Pharmaceuticals, Inc. as well as currently marketed
drugs also formulated from naltrexone, such as
REVIA®
by Duramed Pharmaceuticals, Inc.,
NALOREX®
by Bristol-Myers Squibb Co. and
DEPADE®
by Mallinckrodt. Other pharmaceutical companies are
investigating product candidates that have shown some promise in
treating alcohol dependence and that, if approved by the FDA,
would compete with VIVITROL.
With respect to our AIR drug delivery technology, we are aware
that there are other companies marketing or developing pulmonary
delivery systems for pharmaceutical products. If approved, our
AIR insulin product candidate would compete with
EXUBERA®,
marketed by Pfizer, Inc. in collaboration with Nektar
Therapeutics, Inc., which received FDA and EMEA approval for
marketing in January 2006. There are a number of large companies
currently developing inhaled insulin product candidates that are
in late stage clinical trials that would compete with our AIR
insulin product, if approved.
Other companies are developing new chemical entities or improved
formulations of existing products which, if developed
successfully, could compete against our formulations of any
products we develop or those of our collaborators. These
chemical entities are being designed to have different
mechanisms of action or improved safety and efficacy. In
addition, our collaborators may develop, either alone or with
others, products that compete with the development and marketing
of our product candidates.
11
Patents
and Proprietary Rights
Our success will be dependent, in part, on our ability to obtain
patent protection for our product candidates and those of our
collaborators, maintaining trade secret protection and operating
without infringing upon the proprietary rights of others.
We have a proprietary portfolio of patent rights and exclusive
licenses to patents and patent applications. We have filed
numerous U.S. and international patent applications directed to
compositions of matter as well as processes of preparation and
methods of use, including applications relating to each of our
delivery technologies. We own approximately 120 issued
U.S. patents. No U.S. patent issued to us that is
currently material to our business will expire prior to 2013. In
the future, we plan to file further U.S. and foreign patent
applications directed to new or improved products and processes.
We intend to file additional patent applications when
appropriate and defend our patent position aggressively.
We have exclusive rights through licensing agreements with third
parties to approximately 35 issued U.S. patents, a number
of U.S. patent applications and corresponding foreign
patents and patent applications in many countries, subject in
certain instances to the rights of the U.S. government to
use the technology covered by such patents and patent
applications. No issued U.S. patent to which we have
licensed rights and which is currently material to our business
will expire prior to 2016. Under certain licensing agreements,
we currently pay annual license fees
and/or
minimum annual royalties. During the year ended March 31,
2006, these fees totaled approximately $0.3 million. In
addition, under these licensing agreements, we are obligated to
pay royalties on future sales of products, if any, covered by
the licensed patents.
We know of several U.S. patents issued to other parties
that may relate to our products and product candidates. One
party has asked us to compare our Medisorb drug delivery
technology to that partys patented technology. Another
party has asked a collaborative partner to substantiate how our
ProLease microspheres are different from that partys
patented technology. The manufacture, use, offer for sale, sale
or import of some of our product candidates might be found to
infringe on the claims of these patents. A party might file an
infringement action against us. Our cost of defending such an
action is likely to be high and we might not receive a favorable
ruling.
We also know of patent applications filed by other parties in
the U.S. and various foreign countries that may relate to some
of our product candidates if issued in their present form. If
patents are issued to any of these applicants, we or our
collaborators may not be able to manufacture, use, offer for
sale, or sell some of our product candidates without first
getting a license from the patent holder. The patent holder may
not grant us a license on reasonable terms or it may refuse to
grant us a license at all. This could delay or prevent us from
developing, manufacturing or selling those of our product
candidates that would require the license.
We try to protect our proprietary position by filing U.S. and
foreign patent applications related to our proprietary
technology, inventions and improvements that are important to
the development of our business. Because the patent position of
biotechnology and pharmaceutical companies involves complex
legal and factual questions, enforceability of patents cannot be
predicted with certainty. Patents, if issued, may be challenged,
invalidated or circumvented. Thus, any patents that we own or
license from others may not provide any protection against
competitors. Our pending patent applications, those we may file
in the future, or those we may license from third parties, may
not result in patents being issued. If issued, they may not
provide us with proprietary protection or competitive advantages
against competitors with similar technology. Furthermore, others
may independently develop similar technologies or duplicate any
technology that we have developed outside the scope of our
patents. The laws of certain foreign countries do not protect
our intellectual property rights to the same extent as do the
laws of the U.S.
We also rely on trade secrets, know-how and technology, which
are not protected by patents, to maintain our competitive
position. We try to protect this information by entering into
confidentiality agreements with parties that have access to it,
such as our corporate partners, collaborators, employees and
consultants. Any of these parties may breach the agreements and
disclose our confidential information or our competitors might
learn of the information in some other way. If any trade secret,
know-how or other technology not protected
12
by a patent were to be disclosed to or independently developed
by a competitor, our business, results of operations and
financial condition could be materially adversely affected.
Government
Regulation
Before new pharmaceutical products may be sold in the U.S. and
other countries, clinical trials of the products must be
conducted and the results submitted to appropriate regulatory
agencies for approval. The regulatory approval process requires
a demonstration of product safety and efficacy and the ability
to effectively manufacture such product. Generally, such
demonstration of safety and efficacy includes preclinical
testing and clinical trials of such product candidates. The
manufacture and marketing of pharmaceutical products in the
U.S. requires the approval of the FDA. The FDA has
established mandatory procedures and safety standards which
apply to the preclinical testing and clinical trials,
manufacture and marketing of these products. Similar standards
are established by
non-U.S. regulatory
bodies for marketing approval of such products. Pharmaceutical
marketing and manufacturing activities are also regulated by
state, local and other authorities. The regulatory approval
process in the U.S. is described in brief below.
As an initial step in the FDA regulatory approval process,
preclinical studies are typically conducted in animal models to
assess the drugs efficacy, identify potential safety
problems and evaluate potential for harm to humans. The results
of these studies must be submitted to the FDA as part of an
investigational new drug application (IND), which
must be reviewed by the FDA within 30 days of submission
and before proposed clinical (human) testing can begin. If the
FDA is not convinced of the product candidates safety, it
has the authority to place the program on hold at any time
during the investigational stage and request additional animal
data or changes to the study design. Studies supporting approval
of products in the U.S. are typically accomplished under an
IND.
Typically, clinical testing involves a three-phase process:
Phase I trials are conducted with a small number of healthy
subjects and are designed to determine the early side effect
profile and, perhaps, the pattern of drug distribution and
metabolism; Phase II trials are conducted on patients with
a specific disease in order to determine appropriate dosages,
expand evidence of the safety profile and perhaps provide
preliminary evidence of product efficacy; and Phase III
trials are large-scale, comparative studies conducted on
patients with a target disease in order to generate enough data
to provide statistical evidence of efficacy and safety required
by national regulatory agencies. The results of the preclinical
testing and clinical trials of a pharmaceutical product, as well
as the information on the manufacturing of the product and
proposed labeling, are then submitted to the FDA in the form of
a new drug application (NDA) or, for a biological
product, a product license application (PLA), for
approval to commence commercial sales. Preparing such
applications involves considerable data collection,
verification, analysis and expense. In responding to an NDA or
PLA, the FDA may grant marketing approval, request additional
information or deny the application if it determines that the
application does not satisfy its regulatory approval criteria.
Submission of the application(s) for marketing authorization
does not guarantee approval. At the same time, an FDA request
for additional information does not mean the product may not be
approved or will significantly delay approval. On occasion,
regulatory authorities may require larger or additional studies,
leading to unanticipated delay or expense. Even after initial
FDA approval has been obtained, further clinical trials may be
required to provide additional data on safety and effectiveness
and are required to gain clearance for the use of a product as a
treatment for indications other than those initially approved.
It is also possible that the labeling may be more limited than
what was originally projected. Each marketing authorization
application is unique and should be considered as such.
The receipt of regulatory approval often takes a number of
years, involving the expenditure of substantial resources and
depends on a number of factors, including the severity of the
disease in question, the availability of alternative treatments
and the risks and benefits demonstrated in clinical trials. Data
obtained from preclinical testing and clinical trials are
subject to varying interpretations, which can delay, limit or
prevent FDA approval. In addition, changes in FDA approval
policies or requirements may occur, or new regulations may be
promulgated, which may result in delay or failure to receive FDA
approval. Similar delays or failures may be encountered in
foreign countries. Delays, increased costs and failures in
obtaining regulatory approvals could have a material adverse
effect on our business, financial condition and results of
operations.
13
Regulatory authorities track information on side effects and
adverse events reported during clinical studies and after
marketing approval. Non-compliance with FDA safety reporting
requirements may result in FDA regulatory action that may
include civil action or criminal penalties. Side effects or
adverse events that are reported during clinical trials can
delay, impede, or prevent marketing approval. Similarly, adverse
events that are reported after marketing approval can result in
additional limitations being placed on the products use
and, potentially, withdrawal or suspension of the product from
the market.
Among the conditions for a NDA or PLA approval is the
requirement that the prospective manufacturers quality
control and manufacturing procedures conform with cGMP on an
ongoing basis. Before approval of an NDA or PLA, the FDA may
perform a pre-approval inspection of a facility to determine its
compliance with cGMP and other rules and regulations. In
complying with cGMP, manufacturers must continue to expend time,
money and effort in the area of production and quality control
to ensure full technical compliance. After a facility is
licensed, it is subject to periodic inspections by the FDA.
Facilities are also subjected to the requirements of other
government bodies, such as the U.S. Occupational
Safety & Health Administration and the Environmental
Protection Agency.
Similarly, NDA or PLA approval may be delayed or denied due to
cGMP non-compliance or other issues at contract sites or
suppliers included in the NDA or PLA, and the correction of
these shortcomings may be beyond our control.
The requirements which we must satisfy to obtain regulatory
approval by governmental agencies in other countries prior to
commercialization of our product candidates in such countries
can be as rigorous and costly as those described above.
We are also subject to various laws and regulations relating to
safe working conditions, laboratory and manufacturing practices,
experimental use of animals and use and disposal of hazardous or
potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with
our research. Compliance with laws and regulations relating to
the protection of the environment has not had a material effect
on capital expenditures, earnings or our competitive position.
However, the extent of government regulation which might result
from any legislative or administrative action cannot be
accurately predicted.
Employees
As of May 31, 2006 we had approximately 760 full-time
employees. A significant number of our management and
professional employees have prior experience with
pharmaceutical, biotechnology or medical product companies. We
believe that we have been successful in attracting skilled and
experienced scientific and senior management personnel, however,
competition for such personnel is intense. None of our employees
are covered by a collective bargaining agreement. We consider
our relations with employees to be good.
Available
Information
Our internet address is www.alkermes.com, at which you can find,
free of charge, our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and all other reports filed with the Securities and Exchange
Commission (SEC). All such filings are available on
the website as soon as reasonably practicable after filing.
14
If any of the following risks actually occur, they could
materially adversely affect our business, financial condition or
operating results. In that case, the trading price of our common
stock could decline.
RISPERDAL
CONSTA, VIVITROL and our product candidates may not generate
significant revenues.
Even if a product candidate receives regulatory approval for
commercial sale, the revenues received or to be received from
the sale of the product may not be significant and will depend
on numerous factors, many of which are outside of our control,
including but not limited to, those factors set forth below.
RISPERDAL
CONSTA
We are not involved in the marketing or sales efforts for
RISPERDAL CONSTA. For reasons outside of our control, including
those mentioned below, revenues received from the sale of
RISPERDAL CONSTA may not meet our partners expectations.
Our revenues also depend heavily on manufacturing fees we
receive from our partner for RISPERDAL CONSTA.
VIVITROL
In April 2006, the FDA approved VIVITROL for the treatment of
alcohol dependence in patients able to refrain from drinking,
and not actively drinking prior to treatment initiation. In June
2006, we entered into an agreement with Cephalon to develop and
commercialize VIVITROL for the treatment of alcohol dependence
in the U.S. and its territories. Under this agreement, Cephalon
is primarily responsible for the marketing and sale of VIVITROL,
and we support their efforts with a team of managers of market
development. We currently have no sales and marketing experience
and a very small team of managers of market development. We
expect VIVITROL to become available to physicians and patients
in the U.S. by the end of June 2006. If and when VIVITROL
is available for sale, the revenues received or to be received
from the sale of the product may not be significant and will
depend on numerous factors, many of which are outside of our
control, including but not limited to those specified below.
There can be no assurance that the Phase III clinical trial
results and other clinical and preclinical data will be
sufficient to obtain regulatory approvals for VIVITROL elsewhere
in the world. Even if regulatory approvals are received in other
countries, we will have to market VIVITROL ourselves outside of
the U.S. or enter into co-promotion or sales and marketing
arrangements with other companies for VIVITROL sales and
marketing activities outside of the U.S.
In addition, there is no existing data regarding the size of the
market for VIVITROL, and it is therefore inherently difficult to
assess whether sufficient capacity exists to meet market demand.
If demand is higher than our estimates or we are not able to
bring online addition capacity, the market for VIVITROL may be
materially adversely affected.
We cannot be assured that RISPERDAL CONSTA and VIVITROL will be,
or will continue to be, accepted in the U.S. or in any
foreign markets or that sales of either of these products will
not decline in the future or end. A number of factors may affect
revenues from RISPERDAL CONSTA and VIVITROL (and any of our
product candidates that we develop, if and when approved)
including:
|
|
|
|
|
perception of physicians and other members of the health care
community of their safety and efficacy relative to that of
competing products;
|
|
|
|
their cost-effectiveness;
|
|
|
|
patient and physician satisfaction with these products;
|
|
|
|
the ability to manufacture commercial products successfully and
on a timely basis;
|
|
|
|
the cost and availability of raw materials;
|
|
|
|
the size of the markets for these products;
|
15
|
|
|
|
|
reimbursement policies of government and third-party payors;
|
|
|
|
unfavorable publicity concerning these products or similar drugs;
|
|
|
|
the introduction, availability and acceptance of competing
treatments, including those of our collaborators;
|
|
|
|
the reaction of companies that market competitive products;
|
|
|
|
adverse event information relating to these products;
|
|
|
|
changes to product labels to add significant warnings or
restrictions on use;
|
|
|
|
the continued accessibility of third parties to vial, label and
distribute these products on acceptable terms;
|
|
|
|
the unfavorable outcome of patent litigation related to any of
these products;
|
|
|
|
regulatory developments related to the manufacture or continued
use of these products;
|
|
|
|
the extent and effectiveness of the sales and marketing and
distribution support these products receive;
|
|
|
|
our collaborators decisions as to the timing of product
launches, pricing and discounting; and
|
|
|
|
any material adverse developments with respect to the
commercialization of these products may cause our revenue to
grow at a slower than expected rate, or even to decrease or end.
|
Our revenues will fluctuate from quarter to quarter based on a
number of factors, including the acceptance of RISPERDAL CONSTA
and VIVITROL in the marketplace, our partners orders, the
timing of shipments, our ability to manufacture successfully,
our yield and our production schedule. In order to meet our
financial plans, we will need to bring additional manufacturing
capacity on line in a timeframe adequate to meet demand and
prevent shortfalls in supply. In addition, the costs to
manufacture RISPERDAL CONSTA and VIVITROL may be higher than
anticipated if certain volume levels are not achieved. In
addition, we may not be able to supply the products in a timely
manner. If RISPERDAL CONSTA and VIVITROL do not produce
significant revenues, if we are unable to supply our
partners requirements, our business, results of operations
and financial condition would be materially adversely affected.
We are
subject to risks related to the manufacture of our
products.
We currently manufacture RISPERDAL CONSTA, VIVITROL and most of
our other product candidates. The manufacture of drugs for
clinical trials and for commercial sale is subject to regulation
by the FDA under cGMP regulations and by other regulators under
other laws and regulations. We have manufactured product
candidates for use in clinical trials and have limited
experience in manufacturing products for commercial sale. We
cannot assure you that we can successfully manufacture our
products under cGMP regulations or other laws and regulations in
sufficient quantities for commercial sale, or in a timely or
economical manner.
Our manufacturing facilities in Massachusetts and Ohio require
specialized personnel and are expensive to operate and maintain.
Any delay in the regulatory approval or market launch of product
candidates to be manufactured in these facilities will require
us to continue to operate these expensive facilities and retain
specialized personnel, which may cause operating losses.
The manufacture of pharmaceutical products is a highly complex
process in which a variety of difficulties may arise from time
to time, including but not limited to product loss due to
material equipment failure, or vendor or operator error.
Problems with manufacturing processes could result in product
defects or manufacturing failures, which could require us to
delay shipment of products or recall products previously
shipped, or could impair our ability to expand into new markets
or supply products in existing markets. Any such problem would
be exacerbated by unexpected demand for our products. We may not
be able to resolve any such problems in a timely fashion, if at
all. We are presently the sole manufacturer of RISPERDAL CONSTA
and VIVITROL and are currently working to increase capacity for
RISPERDAL CONSTA and VIVITROL. Also, our manufacturing facility
in Ohio is the sole source of supply for all of our injectable
product candidates and
16
products, including RISPERDAL CONSTA and VIVITROL. If we are not
able to add additional capacity or if anything were to interfere
with our continuing manufacturing operations in any of our
facilities, it would materially adversely affect our business,
results of operations and financial condition.
If we cannot produce sufficient commercial quantities of our
products to meet demand, we would need to rely on third-party
manufacturers, of which there are currently very few, if any,
capable of manufacturing our products as contract suppliers. We
cannot be certain that we could reach agreement on reasonable
terms, if at all, with those manufacturers. Even if we were to
reach agreement, the transition of the manufacturing process to
a third party to enable commercial supplies could take a
significant amount of time. Our ability to supply products in
sufficient capacity to meet demand is also dependent upon third
party contractors to provide components and bulk drug, and
package, store and distribute such finished products.
If more of our product candidates progress to mid- to late-stage
development, we may incur significant expenses in the expansion
and/or
construction of manufacturing facilities and increases in
personnel in order to manufacture product candidates. The
development of a commercial-scale manufacturing process is
complex and expensive. We cannot assure you that we have the
necessary funds or that we will be able to develop this
manufacturing infrastructure in a timely or economical manner,
or at all.
Currently, several of our product candidates, including
exenatide LAR, are manufactured in small quantities for use in
clinical trials. We cannot be assured that we will be able to
successfully manufacture each of our product candidates at a
commercial scale in a timely or economical manner, or at all. If
any of these product candidates are approved by the FDA or other
drug regulatory authorities for commercial sale, we will need to
manufacture them in larger quantities. If we are unable to
successfully increase our manufacturing scale or capacity, the
regulatory approval or commercial launch of such product
candidate may be delayed, there may be a shortage in supply of
such product candidate or our margins may become uneconomical.
If we fail to develop manufacturing capacity and experience,
fail to continue to contract for manufacturing on acceptable
terms, or fail to manufacture our commercial products
and/or
product candidates economically on a commercial scale or in
commercial volumes, or in accordance with cGMP regulations, our
development programs and commercialization of any approved
products will be materially adversely affected. This may result
in delays in receiving FDA or foreign regulatory approval for
one or more of our product candidates or delays in the
commercial production of a product that has already been
approved. Any such delays could materially adversely affect our
business, results of operations and financial condition.
We
rely to a large extent on third parties in the manufacturing of
our products.
We are responsible for the entire supply chain for VIVITROL, up
to manufacture of final product for sale, including the sourcing
of raw materials and active pharmaceutical agents from third
parties. We have no previous experience in managing a complex,
cGMP supply chain and issues with our supply sources may have a
materially adverse effect on our business, results of operations
and financial condition. The manufacture of products and product
components, bulk drug product, packaging, storage and
distribution of our products require successful coordination
among ourselves and multiple third-party providers. Our
inability to coordinate these efforts, the lack of capacity
available at the third party contractor or any other problems
with the operations of these third party contractors could
require us to delay shipment of saleable products, recall
products previously shipped or could impair our ability to
supply products at all. This could increase our costs, cause us
to lose revenue or market share and damage our reputation. Any
third party we use to manufacture bulk drug product, package,
store or distribute our products to be sold in the
U.S. must be licensed by the FDA. As a result, alternative
third party providers may not be readily available on a timely
basis.
None of our drug delivery systems can be commercialized as
stand-alone products but must be combined with a drug. To
develop any new proprietary product candidate using one of these
drug delivery systems, we must obtain the drug substance from
another party. We cannot be assured that we will be able to
obtain any such drug substance on reasonable terms, if at all.
Due to the unique nature of the production of our products,
there are several single source providers of our raw materials.
We endeavor to qualify new vendors and to develop contingency
plans so that production is
17
not impacted by issues associated with single source providers.
Nonetheless, our business could be materially impacted by issues
associated with single source providers.
The
manufacture of our products is subject to government
regulation.
We and our third party providers are generally required to
maintain compliance with cGMP, and are subject to inspections by
the FDA or comparable agencies in other jurisdictions to confirm
such compliance. Any changes of suppliers or modifications of
methods of manufacturing require amending our application to the
FDA and ultimate amendment acceptance by the FDA prior to
release of product to the marketplace. Our inability or the
inability of our third party service providers to demonstrate
ongoing cGMP compliance could require us to withdraw or recall
product and interrupt commercial supply of our products. Any
delay, interruption or other issues that arise in the
manufacture, formulation, packaging, or storage of our products
as a result of a failure of our facilities or the facilities or
operations of third parties to pass any regulatory agency
inspection could significantly impair our ability to develop and
commercialize our products. This could increase our costs, cause
us to lose revenue or market share and damage our reputation.
The FDA and a European regulatory authority have inspected and
approved our manufacturing facility for RISPERDAL CONSTA, and
the FDA has inspected and approved the same manufacturing
facility for VIVITROL. We cannot guarantee that the FDA or any
foreign regulatory agencies will approve our other facilities
or, once approved, that any of our facilities will remain in
compliance with cGMP regulations. If we fail to gain or maintain
FDA and foreign regulatory compliance, our business results of
operations and financial condition could be materially adversely
affected.
Our
business involves environmental risks.
Our business involves the controlled use of hazardous materials
and chemicals. Although we believe that our safety procedures
for handling and disposing of such materials comply with state
and federal standards, there will always be the risk of
accidental contamination or injury. If we were to become liable
for an accident, or if we were to suffer an extended facility
shutdown, we could incur significant costs, damages and
penalties that could materially harm our business, results of
operations and financial condition.
We
rely heavily on collaborative partners.
Our arrangements with collaborative partners are critical to our
success in bringing our products and product candidates to the
market and promoting such marketed products profitably. We rely
on these parties in various respects, including to conduct
preclinical testing and clinical trials, to provide funding for
product candidate development programs, raw materials, product
forecasts, and sales and marketing services, to create and
manage the distribution model for our commercial products, to
commercialize our products, or to participate actively in or to
manage the regulatory approval process. Most of our
collaborative partners can terminate their agreements with us
for no reason and on limited notice. We cannot guarantee that
any of these relationships will continue. Failure to make or
maintain these arrangements or a delay in a collaborative
partners performance or factors that may affect our
partners sales may materially adversely affect our
business, results of operations and financial condition.
We cannot control our collaborative partners performance
or the resources they devote to our programs. Consequently,
programs may be delayed or terminated or we may have to use
funds, personnel, laboratories and other resources that we have
not budgeted. A program delay or termination or unbudgeted use
of our resources may materially adversely affect our business,
results of operations and financial condition.
Disputes may arise between us and a collaborative partner and
may involve the issue of which of us owns the technology that is
developed during a collaboration or other issues arising out of
the collaborative agreements. Such a dispute could delay the
program on which the collaborative partner or we are working. It
could also result in expensive arbitration or litigation, which
may not be resolved in our favor.
A collaborative partner may choose to use its own or other
technology to develop a way to deliver its drug and withdraw its
support of our product candidate, or compete with our jointly
developed product.
18
Our collaborative partners could merge with or be acquired by
another company or experience financial or other setbacks
unrelated to our collaboration that could, nevertheless,
materially adversely affect our business, results of operations
and financial condition.
We
have no sales and marketing experience and limited sales
capabilities, which may make commercializing our products
difficult.
We currently have no marketing or distribution experience and
limited sales capabilities. Therefore, in order to commercialize
our product candidates, we must either develop our own marketing
and distribution sales capabilities or collaborate with a third
party to perform these functions. We may, in some instances,
rely significantly on sales, marketing and distribution
arrangements with our collaborative partners and other third
parties. For example, we rely completely on Janssen to market,
sell and distribute RISPERDAL CONSTA, and will rely primarily
upon Cephalon to market and distribute VIVITROL. In these
instances, our future revenues will be materially dependent upon
the success of the efforts of these third parties.
Under our agreement, Cephalon is primarily responsible for the
marketing and sale of VIVITROL. We support Cephalon in its
commercialization efforts with a small team of managers of
market development. We have limited experience in the
commercialization of pharmaceutical products. Therefore, the
successful commercial launch of VIVITROL and our future
profitability will depend in large part on the success of our
collaborative partner in its sales and marketing efforts. We may
not be able to attract and retain qualified personnel to serve
as managers of market development, or to effectively support
those commercialization activities services provided by our
collaborative partner. The cost of establishing and maintaining
managers of market development may exceed its cost
effectiveness. If we fail to develop sales and marketing
capabilities, if our collaborative partners sales efforts
are not effective or if costs of developing sales and marketing
capabilities exceed their cost effectiveness, our business,
results of operations and financial condition could be
materially adversely affected.
Our
delivery technologies or product development efforts may not
produce safe, efficacious or commercially viable
products.
Many of our product candidates require significant additional
research and development, as well as regulatory approval. To be
profitable, we must develop, manufacture and market our
products, either alone or by collaborating with others. It can
take several years for a product candidate to be approved and we
may not be successful in bringing additional product candidates
to the market. A product candidate may appear promising at an
early stage of development or after clinical trials and never
reach the market, or it may reach the market and not sell, for a
variety of reasons. The product candidate may:
|
|
|
|
|
be shown to be ineffective or to cause harmful side effects
during preclinical testing or clinical trials;
|
|
|
|
fail to receive regulatory approval on a timely basis or at all;
|
|
|
|
be difficult to manufacture on a large scale;
|
|
|
|
be uneconomical; or
|
|
|
|
infringe on proprietary rights of another party.
|
For factors that may affect the market acceptance of our
products approved for sale, see We face competition in the
biotechnology and pharmaceutical industries, and others.
If our delivery technologies or product development efforts fail
to generate product candidates that lead to the successful
development and commercialization of products, if our
collaborative partners decide not to pursue our product
candidates or if new products do not perform as anticipated, our
business, results of operations and financial condition will be
materially adversely affected.
Clinical
trials for our product candidates are expensive and their
outcome is uncertain.
Conducting clinical trials is a lengthy, time-consuming and
expensive process. Before obtaining regulatory approvals for the
commercial sale of any products, we or our partners must
demonstrate through preclinical
19
testing and clinical trials that our product candidates are safe
and effective for use in humans. We have incurred, and we will
continue to incur, substantial expense for, and devote a
significant amount of time to, preclinical testing and clinical
trials.
Historically, the results from preclinical testing and early
clinical trials often have not predicted results of later
clinical trials. A number of new drugs have shown promising
results in clinical trials, but subsequently failed to establish
sufficient safety and efficacy data to obtain necessary
regulatory approvals. Clinical trials conducted by us, by our
collaborative partners or by third parties on our behalf may not
demonstrate sufficient safety and efficacy to obtain the
requisite regulatory approvals for our product candidates.
Regulatory authorities may not permit us to undertake any
additional clinical trials for our product candidates, and it
may be difficult to design efficacy studies for product
candidates in new indications.
Clinical trials of each of our product candidates involve a drug
delivery technology and a drug. This makes testing more complex
because the outcome of the trials depends on the performance of
technology in combination with a drug.
We have other product candidates in preclinical development. We
or our collaborative partners have not submitted INDs or begun
clinical trials for these product candidates. Preclinical and
clinical development efforts performed by us may not be
successfully completed. We may not file further INDs. We or our
collaborative partners may not begin clinical trials as planned.
Completion of clinical trials may take several years or more.
The length of time can vary substantially with the type,
complexity, novelty and intended use of the product candidate.
The commencement and rate of completion of clinical trials may
be delayed by many factors, including:
|
|
|
|
|
the potential delay by a collaborative partner in beginning the
clinical trial;
|
|
|
|
the inability to recruit clinical trial participants at the
expected rate;
|
|
|
|
the failure of clinical trials to demonstrate a product
candidates safety or efficacy;
|
|
|
|
the inability to follow patients adequately after treatment;
|
|
|
|
unforeseen safety issues;
|
|
|
|
the inability to manufacture sufficient quantities of materials
used for clinical trials; or
|
|
|
|
unforeseen governmental or regulatory delays.
|
If a product candidate fails to demonstrate safety and efficacy
in clinical trials, this failure may delay development of other
product candidates and hinder our ability to conduct related
preclinical testing and clinical trials. As a result of these
failures, we may also be unable to find additional collaborative
partners or to obtain additional financing. Our business,
results of operations and financial condition may be materially
adversely affected by any delays in, or termination of, our
clinical trials.
We
depend on third parties in the conduct of our clinical trials
for our product candidates and any failure of those parties to
fulfill their obligations could adversely affect our development
and commercialization plans.
We depend on independent clinical investigators, contract
research organizations and other third party service providers
and our collaborators in the conduct of our clinical trials for
our product candidates. We rely heavily on these parties for
successful execution of our clinical trials but do not control
many aspects of their activities. For example, the investigators
are not our employees. However, we are responsible for ensuring
that each of our clinical trials is conducted in accordance with
the general investigational plan and protocols for the trial.
Third parties may not complete activities on schedule or may not
conduct our clinical trials in accordance with regulatory
requirements or our stated protocols. The failure of these third
parties to carry out their obligations could delay or prevent
the development, approval and commercialization of our product
candidates.
20
We may
not become profitable on a sustained basis.
With the exception of fiscal year 2006, we have had net
operating losses since being founded in 1987. At March 31,
2006, our accumulated deficit was $623.2 million. There can
be no assurance we will achieve sustained profitability.
Beginning April 1, 2006, we are required to recognize all
share-based payments, including grants of stock options and
stock awards, in our financial statements based on the
requirements of Statement of Financial Accounting Standard
(SFAS) No. 123R,Share-Based
Payment (SFAS 123R). We estimate that
the effect on our results of operations and comprehensive income
(loss) will range between $30.0 million and
$35.0 million for the year ended March 31, 2007. As a
result, we may not be profitable during the fiscal year 2007 or
thereafter.
A major component of our revenue is dependent on our
partners ability to sell, and our ability to manufacture
economically, our marketed products RISPERDAL CONSTA and
VIVITROL. In addition, if VIVITROL sales are not significant, we
could have significant losses in the future due to ongoing
expenses to develop and commercialize VIVITROL.
In addition, our ability to achieve sustained profitability in
the future depends, in part, on our ability to:
|
|
|
|
|
obtain and maintain regulatory approval for our products and
product candidates in the U.S. and in foreign countries;
|
|
|
|
efficiently manufacture our commercial products;
|
|
|
|
support the marketing and sale of RISPERDAL CONSTA by our
partner Janssen;
|
|
|
|
support the commercial launch of, and ongoing sales and
marketing efforts related to, VIVITROL by our partner Cephalon;
|
|
|
|
enter into agreements to develop and commercialize our products
and product candidates;
|
|
|
|
develop and expand our capacity to manufacture and market our
products and product candidates;
|
|
|
|
obtain adequate reimbursement coverage for our products from
insurance companies, government programs and other third party
payors;
|
|
|
|
obtain additional research and development funding from
collaborative partners or funding for our proprietary product
candidates; and
|
|
|
|
achieve certain product development milestones.
|
In addition, the amount we spend will impact our profitability.
Our spending will depend, in part, on:
|
|
|
|
|
the progress of our research and development programs for
proprietary and collaborative product candidates, including
clinical trials;
|
|
|
|
the time and expense that will be required to pursue FDA
and/or
foreign regulatory approvals for our product candidates and
whether such approvals are obtained;
|
|
|
|
the time and expense required to prosecute, enforce
and/or
challenge patent and other intellectual property rights;
|
|
|
|
the cost of building, operating and maintaining manufacturing
and research facilities;
|
|
|
|
the number of product candidates we pursue, particularly
proprietary product candidates;
|
|
|
|
how competing technological and market developments affect our
product candidates;
|
|
|
|
the cost of possible acquisitions of drug delivery technologies,
compounds, product rights or companies; and
|
|
|
|
the cost of obtaining licenses to use technology owned by others
for proprietary products and otherwise.
|
21
We may not achieve any or all of these goals and, thus, we
cannot provide assurances that we will ever be profitable on a
sustained basis or achieve significant revenues. Even if we do
achieve some or all of these goals, we may not achieve
significant commercial success.
We may
require additional funds to complete our programs and such
funding may not be available on commercially favorable terms and
may cause dilution to our existing shareholders.
We may require additional funds to complete any of our programs,
and may seek funds 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. If we are unable to raise additional funds on
terms that are favorable to us, we may have to cut back
significantly on one or more of our programs, give up some of
our rights to our technologies, product candidates or licensed
products or agree to reduced royalty rates from collaborative
partners. If we issue additional equity securities or securities
convertible into equity securities to raise funds, our
shareholders will suffer dilution of their investment and it may
adversely affect the market price of our common stock.
The
FDA or foreign regulatory agencies may not approve our product
candidates.
Approval from the FDA is required to manufacture and market
pharmaceutical products in the U.S. regulatory agencies in
foreign countries have similar requirements. The process that
pharmaceutical products must undergo to obtain this approval is
extensive and includes preclinical testing and clinical trials
to demonstrate safety and efficacy and a review of the
manufacturing process to ensure compliance with cGMP
regulations. The FDA may choose not to communicate with or
update us during clinical testing and regulatory review periods.
The ultimate decision by the FDA regarding drug approval may not
be consistent with prior communications. See RISPERDAL
CONSTA, VIVITROL and our product candidates may not generate
significant revenues.
This process can last many years, be very costly and still be
unsuccessful. FDA or foreign regulatory approval can be delayed,
limited or not granted at all for many reasons, including:
|
|
|
|
|
a product candidate may not be safe or effective;
|
|
|
|
data from preclinical testing and clinical trials may be
interpreted by the FDA or foreign regulatory agencies in
different ways than we or our partners interpret it;
|
|
|
|
the FDA or foreign regulatory agencies might not approve our
manufacturing processes or facilities;
|
|
|
|
the FDA or foreign regulatory agencies may change their approval
policies or adopt new regulations;
|
|
|
|
a product candidate may not be approved for all the indications
we or our partners request; or
|
|
|
|
the FDA may not agree with our or our partners regulatory
approval strategies or components of our or our partners
filings, such as clinical trial designs.
|
For some product candidates, the drug used has not been approved
at all or has not been approved for every indication for which
it is being tested. Any delay in the approval process for any of
our product candidates will result in increased costs that could
materially adversely affect our business, results of operations
and financial condition.
Regulatory approval of a product candidate generally is limited
to specific therapeutic uses for which the product has
demonstrated safety and efficacy in clinical testing. Approval
of a product candidate could also be contingent on
post-marketing studies. In addition, any marketed drug and its
manufacturer continue to be subject to strict regulation after
approval. Any unforeseen problems with an approved drug or any
violation of regulations could result in restrictions on the
drug, including its withdrawal from the market.
22
Legislative
or regulatory changes could harm our business.
Our business is subject to extensive government regulation and
oversight. As a result, we may become subject to governmental
actions which could materially adversely affect our business,
results of operations and financial condition, including:
|
|
|
|
|
new laws, regulations or judicial decisions, or new
interpretations of existing laws, regulations or decisions,
related to patent protection and enforcement, health care
availability, method of delivery and payment for health care
products and services or our business operations generally;
|
|
|
|
changes in the FDA and foreign regulatory approval processes
that may delay or prevent the approval of new products and
result in lost market opportunity;
|
|
|
|
new laws, regulations and judicial decisions affecting pricing
or marketing; and
|
|
|
|
changes in the tax laws relating to our operations.
|
Our
revenues depend on payment and reimbursement from third-party
payors, and a reduction in payment rate or reimbursement could
result in decreased use or sales of our products.
In both domestic and foreign markets, sales of our products are
dependent, in part, on the availability of reimbursement from
third-party payors such as state and federal governments, under
programs such as Medicare and Medicaid in the U.S., and private
insurance plans. In certain foreign markets, the pricing and
profitability of our products, such as RISPERDAL CONSTA,
generally are subject to government controls. In the U.S., there
have been, there are, and we expect there will continue to be, a
number of state and federal proposals that could limit the
amount that state or federal governments will pay to reimburse
the cost of pharmaceutical products. Legislation or regulatory
action that reduces reimbursement for our products could
materially adversely impact our business. In addition, we
believe that private insurers, such as managed care
organizations, may adopt their own reimbursement reductions
unilaterally, or in response to any such federal legislation.
Reduction in reimbursement for our products could have a
material adverse effect on our results of operations and
financial condition. Also, we believe the increasing emphasis on
management of the utilization and cost of health care in the
U.S. has and will continue to put pressure on the price and
usage of our products, which may materially adversely impact
product sales. Further, when a new therapeutic product is
approved, the availability of governmental
and/or
private reimbursement for that product is uncertain, as is the
amount for which that product will be reimbursed. We cannot
predict the availability or amount of reimbursement for our
approved products or product candidates, including those at any
stage of development, and current reimbursement policies for
marketed products may change at any time.
Private insurers and government agencies continue to seek price
discounts. In addition, certain states have proposed, and
certain other states have adopted various programs for their
seniors and low income individuals where a condition of coverage
is that the manufacturer provides a discounted price, as well as
programs involving restrictions on access to certain products,
and bulk purchasing of drugs.
If reimbursement for our products changes adversely or if we
fail to obtain adequate reimbursement for our other current or
future products, health care providers may limit how much or
under what circumstances they will prescribe or administer them,
which could reduce the use of our products or cause us to reduce
the price of our products.
Failure
to comply with government regulations regarding our products
could harm our business.
Our activities, including the sale and marketing of our
products, are subject to extensive government regulation and
oversight, including regulation under the federal Food, Drug and
Cosmetic Act and other federal and state statutes. We are also
subject to the provisions of a federal law commonly known as the
Medicare/Medicaid anti-kickback law, and several similar state
laws, which prohibit payments intended to induce physicians or
others either to purchase or arrange for or recommend the
purchase of healthcare products or services. While the federal
law applies only to products or services for which payment may
be made by a federal healthcare program, state laws may apply
regardless of whether federal funds may be
23
involved. These laws constrain the sales, marketing and other
promotional activities of manufacturers of drugs and
biologicals, such as us, by limiting the kinds of financial
arrangements, including sales programs, with hospitals,
physicians, and other potential purchasers of drugs and
biologicals. Other federal and state laws generally prohibit
individuals or entities from knowingly presenting, or causing to
be presented, claims for payment from Medicare, Medicaid, or
other third party payors that are false or fraudulent, or are
for items or services that were not provided as claimed.
Anti-kickback and false claims laws prescribe civil and criminal
penalties for noncompliance that can be substantial, including
the possibility of exclusion from federal healthcare programs
(including Medicare and Medicaid).
Pharmaceutical and biotechnology companies have been the target
of lawsuits and investigations alleging violations of government
regulation, including claims asserting antitrust violations,
violations of the Federal False Claim Act, Anti-Kickback Act,
the Prescription Drug Marketing Act and other violations in
connection with off-label promotion of products and Medicare
and/or
Medicaid reimbursement or related to environmental matters and
claims under state laws, including state anti-kickback and fraud
laws.
While we continually strive to comply with these complex
requirements, interpretations of the applicability of these laws
to marketing practices are ever evolving. If any such actions
are instituted against us or our collaboration partners, and we
are not successful in defending ourselves or asserting our
rights, those actions could have a significant and material
impact on our business, including the imposition of significant
fines or other sanctions. Even an unsuccessful challenge could
cause adverse publicity and be costly to respond to, and thus
could have a material adverse effect on our business, results of
operations and financial condition.
If and
when approved, the commercial use of our products may cause
unintended side effects or adverse reactions or incidence of
misuse may appear.
We cannot predict whether the commercial use of products (or
product candidates in development, if and when they are approved
for commercial use) will produce undesirable or unintended side
effects that have not been evident in the use of, or in clinical
trials conducted for, such products (and product candidates) to
date. Additionally, incidents of product misuse may occur. These
events, among others, could result in product recalls, product
liability actions or withdrawals or additional regulatory
controls, all of which could have a material adverse effect on
our business, results of operations and financial condition.
Patent
protection for our products is important and
uncertain.
The following factors are important to our success:
|
|
|
|
|
receiving and maintaining patent protection for our products and
product candidates and for those of our collaborative partners;
|
|
|
|
maintaining our trade secrets;
|
|
|
|
not infringing the proprietary rights of others; and
|
|
|
|
preventing others from infringing our proprietary rights.
|
Patent protection only provides rights of exclusivity for the
term of the patent. We will be able to protect our proprietary
rights from unauthorized use by third parties only to the extent
that our proprietary rights are covered by valid and enforceable
patents or are effectively maintained as trade secrets.
We know of several U.S. patents issued to third parties
that may relate to our product candidates. One of those third
parties has asked us to compare our Medisorb technology to that
third partys patented technology. Another such third party
has asked a collaborative partner to substantiate how our
ProLease microspheres are different from that third partys
patented technology. The manufacture, use, offer for sale, sale
or importing of any of these product candidates might be found
to infringe the claims of these third party patents. A third
party might file an infringement action against us. Our cost of
defending such an action is likely to be high and we might not
receive a favorable ruling.
24
We also know of patent applications filed by other parties in
the U.S. and various foreign countries that may relate to some
of our product candidates if such patents are issued in their
present form. If patents are issued that cover our commercial
products, we may not be able to manufacture, use, offer for sale
or sell some of our product candidates without first getting a
license from the patent holder. The patent holder may not grant
us a license on reasonable terms or it may refuse to grant us a
license at all. This could delay or prevent us from developing,
manufacturing or selling those of our product candidates that
would require the license.
We try to protect our proprietary position by filing U.S. and
foreign patent applications related to our proprietary
technology, inventions and improvements that are important to
the development of our business. Because the patent position of
pharmaceutical and biotechnology companies involves complex
legal and factual questions, enforceability of patents cannot be
predicted with certainty. Patents, if issued, may be challenged,
invalidated or circumvented. Thus, any patents that we own or
license from others may not provide any protection against
competitors. Our pending patent applications, together with
those we may file in the future, or those we may license from
third parties, may not result in patents being issued. Even if
issued, such patents may not provide us with sufficient
proprietary protection or competitive advantages against
competitors with similar technology. Furthermore, others may
independently develop similar technologies or duplicate any
technology that we have developed. The laws of certain foreign
countries do not protect our intellectual property rights to the
same extent as do the laws of the U.S.
We also rely on trade secrets, know-how and technology, which
are not protected by patents, to maintain our competitive
position. We try to protect this information by entering into
confidentiality agreements with parties that have access to it,
such as our collaborative partners, licensors, employees and
consultants. Any of these parties may breach the agreements and
disclose our confidential information or our competitors might
learn of the information in some other way. If any trade secret,
know-how or other technology not protected by a patent were to
be disclosed to, or independently developed by, a competitor,
our business, results of operations and financial condition
could be materially adversely affected.
As more products are commercialized using our technologies, or
as any product achieves greater commercial success, our patents
become more likely to be subject to challenge by potential
competitors.
We may
be exposed to product liability claims and
recalls.
We may be exposed to liability claims arising from the
commercial sale of RISPERDAL CONSTA and VIVITROL, or the use of
our product candidates in clinical trials or commercially, once
approved. These claims may be brought by consumers, clinical
trial participants, our collaborative partners or third parties
selling the products. We currently carry product liability
insurance coverage in such amounts as we believe is sufficient
for our business. However, we cannot provide any assurance that
this coverage will be sufficient to satisfy any liabilities that
may arise. As our development activities progress and we
continue to have commercial sales, this coverage may be
inadequate, we may be unable to obtain adequate coverage at an
acceptable cost or we may be unable to get adequate coverage at
all or our insurer may disclaim coverage as to a future claim.
This could prevent or limit our commercialization of our product
candidates or commercial sales of our products. Even if we are
able to maintain insurance that we believe is adequate, our
financial condition may be materially adversely affected by a
product liability claim.
Additionally, product recalls may be issued at our discretion or
at the direction of the FDA, other government agencies or other
companies having regulatory control for pharmaceutical product
sales. We cannot assure you that product recalls will not occur
in the future or that, if such recalls occur, such recalls will
not adversely affect our business, results of operations and
financial condition or reputation.
We may
not be successful in the development of products for our own
account.
In addition to our development work with collaborative partners,
we are developing proprietary product candidates for our own
account by applying drug delivery technologies to off-patent
drugs. Because we will be funding the development of such
programs, there is a risk that we may not be able to continue to
fund all such programs to completion or to provide the support
necessary to perform the clinical trials, obtain regulatory
approvals or market any approved products on a worldwide basis.
We expect the development of products for
25
our own account to consume substantial resources. If we are able
to develop commercial products on our own, the risks associated
with these programs may be greater than those associated with
our programs with collaborative partners.
If we
are not able to develop new products, our business may
suffer.
We compete with other biotechnology and pharmaceutical companies
with financial resources and capabilities substantially greater
than our resources and capabilities, in the development of new
products. We cannot assure you that we will be able to:
|
|
|
|
|
develop or successfully commercialize new products on a timely
basis or at all; or
|
|
|
|
develop new products in a cost effective manner.
|
Further, other companies may develop products or may acquire
technology for the development of products that are the same as
or similar to our platform technologies or the product
candidates we have in development. Because there is rapid
technological change in the industry and because other companies
have more resources than we do, other companies may:
|
|
|
|
|
develop their products more rapidly than we can;
|
|
|
|
complete any applicable regulatory approval process sooner than
we can; or
|
|
|
|
offer their newly developed products at prices lower than our
prices.
|
Any of the foregoing may negatively impact our sales of newly
developed products. Technological developments or the FDAs
approval of new therapeutic indications for existing products
may make our existing products, or those product candidates we
are developing, obsolete or may make them more difficult to
market successfully, any of which could have a material adverse
effect on our business, results of operations and financial
condition.
Foreign
currency exchange rates may affect revenue.
We derive more than fifty percent (50%) of our RISPERDAL CONSTA
revenues from sales in foreign countries. Such revenues may
fluctuate when translated to U.S. dollars as a result of changes
in foreign currency exchange rates. We currently do not hedge
this exposure. A decrease in the U.S. dollar relative to other
currencies in which we have revenues will cause our revenues to
be lower than a stable exchange rate. A large decrease in the
U.S. dollar relative to such foreign currencies could have a
material adverse affect on our revenues, results of operations
and financial condition.
We
face competition in the biotechnology and pharmaceutical
industries, and others.
We can provide no assurance that we will be able to compete
successfully in developing our products and product candidates.
We face intense competition from academic institutions,
government agencies, research institutions and biotechnology and
pharmaceutical companies, including other drug delivery
companies. Some of these competitors are also our collaborative
partners. These competitors are working to develop and market
other drug delivery systems, products, vaccines and other
methods of preventing or reducing disease, and new
small-molecule and other classes of drugs that can be used
without a drug delivery system.
There are other companies developing extended-release drug
delivery systems and pulmonary delivery systems. In many cases,
there are products on the market or in development that may be
in direct competition with our products or product candidates.
In addition, we know of new chemical entities that are being
developed that, if successful, could compete against our product
candidates. These chemical entities are being designed to work
differently than our product candidates and may turn out to be
safer or to be more effective than our product candidates. Among
the many experimental therapies being tested in the U.S. and
Europe, there may be some that we do not now know of that may
compete with our drug delivery systems or product
26
candidates. Our collaborative partners could choose a competing
drug delivery system to use with their drugs instead of one of
our drug delivery systems and could develop products that
compete with our products.
With respect to our injectable drug delivery technologies, we
are aware that there are other companies developing
extended-release delivery systems for pharmaceutical products.
For example, a number of products are being developed which may
compete with RISPERDAL CONSTA, including a number of new oral
compounds for the treatment of schizophrenia, and paliperidone
palmitate, an injectable, four week long-acting product being
developed by Johnson & Johnson.
VIVITROL may compete with CAMPRAL by Forest Laboratories, Inc.
and ANTABUSE by Odyssey Pharmaceuticals, Inc. as well as
currently marketed drugs also formulated from naltrexone, such
as REVIA by Duramed Pharmaceuticals, Inc., NALOREX by
Bristol-Myers Squibb Co. and DEPADE by Mallinckrodt. Other
pharmaceutical companies are investigating product candidates
that have shown some promise in treating alcohol dependence and
that, if approved by the FDA, would compete with VIVITROL.
With respect to our AIR drug delivery technology, we are aware
that there are other companies marketing or developing pulmonary
delivery systems for pharmaceutical products. If approved, our
AIR insulin product candidate would compete with EXUBERA,
marketed by Pfizer, Inc. in collaboration with Nektar
Therapeutics, Inc., which received FDA and EMEA approval for
marketing in January 2006. There are a number of large companies
currently developing inhaled insulin product candidates that are
in late stage clinical trials that would compete with our AIR
insulin product, if approved.
Many of our competitors have much greater capital resources,
manufacturing, research and development resources and production
facilities than we do. Many of them also have much more
experience than we do in preclinical testing and clinical trials
of new drugs and in obtaining FDA and foreign regulatory
approvals.
Major technological changes can happen quickly in the
biotechnology and pharmaceutical industries, and the development
of technologically improved or different products or drug
delivery technologies may make our product candidates or
platform technologies obsolete or noncompetitive.
Our product candidates, if successfully developed and approved
for commercial sale, will compete with a number of drugs and
therapies currently manufactured and marketed by major
pharmaceutical and other biotechnology companies. Our product
candidates may also compete with new products currently under
development by others or with products which may cost less than
our product candidates. Physicians, patients, third-party payors
and the medical community may not accept or utilize any of our
product candidates that may be approved. If our products do not
achieve significant market acceptance, our business, results of
operations and financial condition will be materially adversely
affected. For more information on other factors that would
impact the market acceptance of our product candidates, if and
when approved, see the risk factor RISPERDAL CONSTA,
VIVITROL and our product candidates may not generate significant
revenues.
RISPERDAL
CONSTA revenues may not be sufficient to repay RC Royalty Sub,
LLCs obligations for the non-recourse RISPERDAL CONSTA
secured 7% notes (the
7% Notes).
Pursuant to the terms of a purchase and sales agreement between
Alkermes and RC Royalty Sub, LLC (Royalty Sub),
Royalty Sub is obligated to repay certain obligations to holders
of the 7% Notes. There can be no assurance that Royalty Sub
will have sufficient funds to satisfy these obligations. If
revenues from RISPERDAL CONSTA are not sufficient to repay
Royalty Subs obligations on the 7% notes at maturity, then
the note holders may have the right to take control of Royalty
Sub and all of its assets. If Janssen terminates the
manufacturing and supply agreement and the license agreements
with us, whether or not due to a lack of revenues, and revenues
on RISPERDAL CONSTA are not sufficient to repay Royalty
Subs obligations on the 7% Notes, then the note holders
may also be entitled to certain of our rights to RISPERDAL
CONSTA.
We may
not be able to retain our key personnel.
Our success depends largely upon the continued service of our
management and scientific staff and our ability to attract,
retain and motivate highly skilled technical, scientific,
management, regulatory compliance and marketing personnel. The
loss of key personnel or our inability to hire and retain
personnel who have
27
technical, scientific or regulatory compliance backgrounds could
materially adversely affect our research and development efforts
and our business.
Future
transactions may harm our business or the market price of our
stock.
We regularly review potential transactions related to
technologies, products or product rights and businesses
complementary to our business. These transactions could include:
|
|
|
|
|
mergers;
|
|
|
|
acquisitions;
|
|
|
|
strategic alliances;
|
|
|
|
licensing agreements; and
|
|
|
|
co-promotion agreements.
|
We may choose to enter into one or more of these transactions at
any time, which may cause substantial fluctuations in the market
price of our stock. Moreover, depending upon the nature of any
transaction, we may experience a charge to earnings, which could
also materially adversely affect our results of operations and
could harm the market price of our stock.
If we
issue additional common stock, shareholders may suffer dilution
of their investment and a decline in stock price.
As discussed above under We may require additional funds
to complete our programs and such funding may not be available
on commercially favorable terms and may cause dilution to our
existing shareholders, we may issue additional equity
securities or securities convertible into equity securities to
raise funds, thus reducing the ownership share of the current
holders of our common stock, which may adversely affect the
market price of the common stock. In addition, we were
obligated, at March 31, 2006, to issue
18,824,823 shares of common stock upon the vesting and
exercise of stock options and vesting of stock awards,
9,978 shares of common stock issuable upon conversion of
the 3.75% convertible subordinated notes, 1,417,367 shares
of common stock issuable upon conversion of the redeemable
convertible preferred stock and 9,025,271 shares of common
stock issuable upon conversion of the 2.5% convertible
subordinated notes (2.5% Subordinated Notes).
On May 22, 2006, we announced that we had exercised our
right to automatically convert all of our outstanding 2.5%
Subordinated Notes into approximately 9,025,271 shares of
our common stock. In addition, any of our shareholders could
sell all or a large number of their shares, which could
adversely affect the market price of our common stock.
Our
common stock price is highly volatile.
The realization of any of the risks described in these risk
factors (Risk Factors) or other unforeseen risks
could have a dramatic and adverse effect on the market price of
our common stock. Additionally, market prices for securities of
biotechnology and pharmaceutical companies, including ours, have
historically been very volatile. The market for these securities
has from time to time experienced significant price and volume
fluctuations for reasons that were unrelated to the operating
performance of any one company. In particular, and in addition
to circumstances described elsewhere under these Risk Factors,
the following Risk Factors can adversely affect the market price
of our common stock:
|
|
|
|
|
non-approval, set-backs or delays in the development or
manufacture of our product candidates and success of our
research and development programs;
|
|
|
|
public concern as to the safety of drugs developed by us or
others;
|
|
|
|
announcements of issuances of common stock or acquisitions by us;
|
|
|
|
the announcement and timing of new product introductions by us
or others;
|
|
|
|
material public announcements;
|
28
|
|
|
|
|
events related to our products or those of our competitors,
including the withdrawal or suspension of products from the
market;
|
|
|
|
availability and level of third party reimbursement;
|
|
|
|
political developments or proposed legislation in the
pharmaceutical or healthcare industry;
|
|
|
|
economic or other external factors, disaster or crisis;
|
|
|
|
developments of our corporate partners;
|
|
|
|
announcements of technological innovations or new therapeutic
products or drug delivery methods by us or others;
|
|
|
|
changes in government regulations or policies or patent
decisions;
|
|
|
|
failure to meet our financial expectations or changes in
opinions of analysts who follow our stock; or
|
|
|
|
general market conditions.
|
We may
undertake additional strategic acquisitions in the future, and
difficulties integrating such acquisitions could damage our
ability to sustain profitability.
Although we have limited experience in acquiring businesses, we
may acquire additional businesses that complement or augment our
existing business. If we acquire businesses with promising drug
candidates or technologies, we may not be able to realize the
benefit of acquiring such businesses if we are unable to move
one or more drug candidates through preclinical
and/or
clinical development to regulatory approval and
commercialization. Integrating any newly acquired businesses or
technologies could be expensive and time-consuming, resulting in
the diversion of resources from our current business. We may not
be able to integrate any acquired business successfully. We
cannot assure you that, following an acquisition, we will
achieve revenues, specific net income or loss levels that
justify the acquisition or that the acquisition will result in
increased earnings, or reduced losses, for the combined company
in any future period. Moreover, we may need to raise additional
funds through public or private debt or equity financing to
acquire any businesses, which would result in dilution for
shareholders or the incurrence of indebtedness. We may not be
able to operate acquired businesses profitably or otherwise
implement our growth strategy successfully.
Anti-takeover
provisions may not benefit shareholders.
We are a Pennsylvania corporation and Pennsylvania law contains
strong anti-takeover provisions. In February 2003, our board of
directors adopted a shareholder rights plan. The shareholder
rights plan provides for a dividend of one preferred share
purchase right on each outstanding share of our common stock.
Each right entitles shareholders to buy
1/1000th of
a share of our Series A Junior Participating Preferred
Stock at an exercise price of $80.00. Each right will become
exercisable following the tenth day after a person or group
announces an acquisition of or commences a tender offer to
purchase 15% or more of our common stock. We will be entitled to
redeem the rights at $0.001 per right at any time on or before
the close of business on the tenth day following acquisition by
a person or group of 15% or more of our common stock. The
shareholder rights plan and Pennsylvania law could make it more
difficult for a person or group to, or discourage a person or
group from attempting to, acquire control of us, even if the
change in control would be beneficial to shareholders. Our
articles of incorporation and bylaws also contain certain
provisions that could have a similar effect. The articles
provide that our board of directors may issue, without
shareholder approval, preferred stock having such voting rights,
preferences and special rights as the board of directors may
determine. The issuance of such preferred stock could make it
more difficult for a third party to acquire us.
We may
not recoup any of our $100 million investment in
Reliant.
In December 2001, we made a $100.0 million investment in
Series C convertible, redeemable preferred units of Reliant
Pharmaceuticals, LLC (Reliant) and we own
approximately 12% of Reliant. Through March 31, 2004, the
investment had been accounted for under the equity method of
accounting because
29
Reliant was organized as a limited liability company, which is
treated in a manner similar to a partnership. Our
$100.0 million investment was reduced to $0 in the year
ended March 31, 2003 based upon our equity losses in
Reliant. Effective April 1, 2004, Reliant converted from a
limited liability company to a corporation under Delaware state
law. Due to this change, and because Reliant is a privately held
company over which Alkermes does not exercise control, our
investment in Reliant has been accounted for under the cost
method beginning April 1, 2004. Accordingly, we do not
record any share of Reliants net income or losses, but
would record dividends, if received. Our investment remains at
$0 as of March 31, 2006.
Litigation
may result in financial losses or harm our reputation and may
divert management resources.
Public companies may be the subject of certain claims, including
those asserting violations of securities laws and derivative
actions.
We cannot predict with certainty the eventual outcome of any
future litigation or third-party inquiry. We may not be
successful in defending ourselves or asserting our rights in new
lawsuits, investigations or claims that may be brought against
us, and, as a result, our business could be materially harmed.
These lawsuits, investigations or claims may result in large
judgments or settlements against us, any of which could have a
negative effect on our financial performance and business.
Additionally, lawsuits and investigations can be expensive to
defend, whether or not the lawsuit or investigation has merit,
and the defense of these actions may divert the attention of our
management and other resources that would otherwise be engaged
in running our business.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
On September 22, 2005, in connection with the SECs
periodic review of our reports filed with the SEC, we received a
comment letter from the staff (the Staff) with
respect to our Annual Report on
Form 10-K
for the year ended March 31, 2005 and our Quarterly Report
on
Form 10-Q
for the period ended June 30, 2005. We have cooperated
fully with the Staff in connection with their review in order to
resolve all outstanding comments. As of the date of this Report,
we have resolved all comments of the Staff with the exception of
one comment related to our accounting for the Preferred Stock we
issued and sold to Lilly, and the related amendment to our
existing development and license agreement with Lilly for the
development of inhaled formulations of insulin and other
compounds potentially useful for the treatment of diabetes. The
Staff has requested an analysis of various alternatives for the
accounting for such security and the provisions of the related
agreements. Please see Note 10 to our consolidated
financial statements contained in this
Form 10-K
for an explanation of our accounting relating to our Preferred
Stock and the provisions of the related agreements with Lilly.
We have provided our analysis to the Staff and have had several
conference calls and follow up correspondence with the Staff
related to this issue. We have been advised by the Staff that
they have not reached a position on the preferred accounting and
that they are considering various alternatives, including the
accounting which the Company has applied to this security. We
believe that our accounting for this transaction was, and
remains, in conformity with accounting principles generally
accepted in the U.S. (commonly referred to as GAAP).
We lease space in Cambridge, Massachusetts under several leases
expiring through the calendar year 2012. These leases contain
provisions permitting us to extend their terms for up to two
ten-year periods. Our corporate headquarters, administration
areas and laboratories are located in this space. We also
perform clinical manufacturing at this location.
We lease a building in Chelsea, Massachusetts for clinical and
commercial manufacturing. The lease term is for fifteen years,
expiring in 2015, with an option to extend the term for up to
two five-year periods. The facility is designed to accommodate
the manufacture of multiple products and contains a facility
currently used to manufacture clinical supplies of AIR insulin.
We own a
15-acre
manufacturing, office and laboratory site in Wilmington, Ohio.
The site produces RISPERDAL CONSTA and VIVITROL. The site is
undergoing a significant expansion which is expected to
30
be substantially completed in calendar year 2008. A significant
portion of our capital expenditures will support such expansion.
We are currently operating two RISPERDAL CONSTA lines and one
VIVITROL line at commercial scale, and three additional lines
are under construction for RISPERDAL CONSTA and VIVITROL.
We lease a commercial manufacturing facility in Cambridge,
Massachusetts that we are not currently utilizing. The lease
term is for fifteen years, expiring in August 2008, with an
option to extend the term for one five year period. We exited
this facility in connection with the restructuring of operations
in June 2004 and have marketed it for sublet. We have no plans
to extend the lease beyond its expiration date.
We believe that our current and our planned facilities are
adequate for our current and near-term preclinical, clinical and
commercial manufacturing requirements.
|
|
Item 3.
|
Legal
Proceedings
|
On October 27, 2005, the United States District Court for
the District of Massachusetts entered an order dismissing, in
its entirety and with prejudice, a purported securities class
action lawsuit against us and certain of our current and former
officers and directors.
Beginning in October 2003, we and certain of our current and
former officers and directors were named as defendants in six
purported securities class action lawsuits filed in the United
States District Court for the District of Massachusetts. The
cases were captioned: Bennett v. Alkermes, Inc., et. al.,
1:03-CV-12091 (D. Mass.); Ragosta v. Alkermes, Inc.,
et. al., 1:03-CV-12184 (D. Mass.); Barry Family LP v.
Alkermes, Inc., et. al., 1:03-CV-12243 (D. Mass.);
Waltzer v. Alkermes, Inc., et. al., 1:03-CV-12277 (D.
Mass.); Folkerts v. Alkermes, Inc., et. al., 1:03-CV-12386
(D. Mass.); and Slavas v. Alkermes, Inc., et. al.,
1:03-CV-12471 (D. Mass.). On May 14, 2004, the six
actions were consolidated into a single action captioned: In re
Alkermes Securities Litigation, Civil Action
No. 03-CV-12091-RCL
(D. Mass.). On July 12, 2004, a single consolidated amended
complaint was filed on behalf of purchasers of our common stock
during the period April 22, 1999 to July 1, 2002. The
consolidated amended complaint generally alleged, among other
things, that, during such period, the defendants made
misstatements to the investing public relating to the
manufacture and FDA approval of our RISPERDAL CONSTA product.
The consolidated amended complaint sought unspecified damages.
On September 10, 2004, we and the individual defendants
filed a motion seeking dismissal of the litigation on numerous
legal grounds, and the Court referred that motion to a federal
magistrate judge of the United States District Court for the
District of Massachusetts for issuance of a report and
recommendation as to disposition of the motion to dismiss. The
Court heard oral argument on the motion on January 12,
2005. On October 6, 2005, the federal magistrate judge
issued a report and recommendation for dismissal, in its
entirety, of the above-captioned purported securities class
action litigation. After issuance of this ruling, on
October 21, 2005, we, the individual defendants and the
lead plaintiff filed a stipulation with the United States
District Court for the District of Massachusetts providing for
dismissal of this action, in its entirety and with prejudice.
From time to time, we may be subject to other legal proceedings
and claims in the ordinary course of business. We are not
currently aware of any such proceedings or claims that we
believe will have, individually or in the aggregate, a material
adverse effect on our business, results of operations or
financial condition.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of our security holders,
through the solicitation of proxies or otherwise, during the
last quarter of the year ended March 31, 2006.
31
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our common stock is traded on the NASDAQ National Market under
the symbol ALKS. We have 382,632 shares of our non-voting
common stock issued and outstanding. There is no established
public trading market for our non-voting common stock. Set forth
below for the indicated periods are the high and low bid prices
for our common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
1st Quarter
|
|
$
|
14.09
|
|
|
$
|
9.68
|
|
|
$
|
16.93
|
|
|
$
|
12.06
|
|
2nd Quarter
|
|
|
19.87
|
|
|
|
12.76
|
|
|
|
13.73
|
|
|
|
8.48
|
|
3rd Quarter
|
|
|
19.87
|
|
|
|
14.69
|
|
|
|
15.61
|
|
|
|
11.16
|
|
4th Quarter
|
|
$
|
26.81
|
|
|
$
|
18.96
|
|
|
$
|
14.34
|
|
|
$
|
10.08
|
|
The last reported sale price of our common stock as reported on
the NASDAQ National Market on May 31, 2006 was $19.82.
There were 394 shareholders of record for our common stock
and one shareholder of record for our non-voting common stock on
May 31, 2006.
No dividends have been paid on the common stock or non-voting
common stock to date, and we do not expect to pay cash dividends
thereon in the foreseeable future. We anticipate that we will
retain all earnings, if any, to support our operations and our
proprietary drug development programs. Any future determination
as to the payment of dividends will be at the sole discretion of
our Board of Directors and will depend on our financial
condition, results of operations, capital requirements and other
factors our Board of Directors deems relevant.
|
|
(d)
|
Securities
authorized for issuance under equity compensation
plans
|
See Part III, Item 12 for information regarding
securities authorized for issuance under our equity compensation
plans.
|
|
(e)
|
Repurchase
of equity securities
|
On September 23, 2005, our Board of Directors authorized a
share repurchase program of up to $15.0 million dollars of
common stock in the open market or through privately negotiated
transactions. We expect to make the repurchases at the
discretion of management from time to time depending on market
conditions. The repurchase program has no set expiration date
and may be suspended or discontinued at any time. During the
period covered by this report, we have not made any repurchases.
As of the close of trading on the NASDAQ National Market on
June 12, 2006, we had repurchased 134,630 shares of
common stock at a weighted average price of $19.52.
32
|
|
Item 6.
|
Selected
Financial Data
|
Alkermes,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
March 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share
data)
|
|
|
Consolidated Statements of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing revenues
|
|
$
|
64,901
|
|
|
$
|
40,488
|
|
|
$
|
25,736
|
|
|
$
|
14,317
|
|
|
$
|
|
|
Royalty revenues
|
|
|
16,532
|
|
|
|
9,636
|
|
|
|
3,790
|
|
|
|
1,165
|
|
|
|
|
|
Research and development revenue
under collaborative agreements
|
|
|
45,883
|
|
|
|
26,002
|
|
|
|
9,528
|
|
|
|
31,784
|
|
|
|
54,102
|
|
Net collaborative profit
|
|
|
39,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
166,601
|
|
|
|
76,126
|
|
|
|
39,054
|
|
|
|
47,266
|
|
|
|
54,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods manufactured
|
|
|
23,489
|
|
|
|
16,834
|
|
|
|
19,037
|
|
|
|
10,910
|
|
|
|
|
|
Research and development
|
|
|
89,068
|
|
|
|
91,065
|
|
|
|
91,097
|
|
|
|
85,388
|
|
|
|
92,092
|
|
Selling, general and administrative
|
|
|
40,383
|
|
|
|
28,823
|
|
|
|
26,029
|
|
|
|
26,694
|
|
|
|
24,387
|
|
Restructuring(1)
|
|
|
|
|
|
|
11,527
|
|
|
|
(208
|
)
|
|
|
6,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
152,940
|
|
|
|
148,249
|
|
|
|
135,955
|
|
|
|
129,489
|
|
|
|
116,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
13,661
|
|
|
|
(72,123
|
)
|
|
|
(96,901
|
)
|
|
|
(82,223
|
)
|
|
|
(62,377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
11,569
|
|
|
|
3,005
|
|
|
|
3,409
|
|
|
|
3,776
|
|
|
|
15,302
|
|
Interest expense
|
|
|
(20,661
|
)
|
|
|
(7,394
|
)
|
|
|
(6,497
|
)
|
|
|
(10,403
|
)
|
|
|
(8,876
|
)
|
Derivative (loss) income related
to convertible subordinated notes(2)
|
|
|
(1,084
|
)
|
|
|
4,385
|
|
|
|
(4,514
|
)
|
|
|
(4,300
|
)
|
|
|
|
|
Gain on exchange of notes(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,849
|
|
|
|
|
|
Other income (expense), net(4)(5)
|
|
|
333
|
|
|
|
(1,789
|
)
|
|
|
2,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(9,843
|
)
|
|
|
(1,793
|
)
|
|
|
(5,484
|
)
|
|
|
69,922
|
|
|
|
6,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in losses of Reliant
Pharmaceuticals, LLC(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94,597
|
)
|
|
|
(5,404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
3,818
|
|
|
$
|
(73,916
|
)
|
|
$
|
(102,385
|
)
|
|
$
|
(106,898
|
)
|
|
$
|
(61,355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
$
|
0.04
|
|
|
$
|
(0.82
|
)
|
|
$
|
(1.25
|
)
|
|
$
|
(1.66
|
)
|
|
$
|
(0.96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
$
|
0.04
|
|
|
$
|
(0.82
|
)
|
|
$
|
(1.25
|
)
|
|
$
|
(1.66
|
)
|
|
$
|
(0.96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
91,022
|
|
|
|
90,094
|
|
|
|
82,083
|
|
|
|
64,368
|
|
|
|
63,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
97,377
|
|
|
|
90,094
|
|
|
|
82,083
|
|
|
|
64,368
|
|
|
|
63,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Condensed Consolidated Balance
Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
short-term investments
|
|
$
|
297,967
|
|
|
$
|
202,567
|
|
|
$
|
143,936
|
|
|
$
|
136,094
|
|
|
$
|
152,347
|
|
Total assets
|
|
|
477,163
|
|
|
|
338,874
|
|
|
|
270,030
|
|
|
|
255,699
|
|
|
|
350,350
|
|
Long-term debt
|
|
|
279,518
|
|
|
|
276,485
|
|
|
|
122,584
|
|
|
|
166,586
|
|
|
|
207,800
|
|
Unearned milestone
revenue current and long-term portions
|
|
|
99,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred
stock
|
|
|
15,000
|
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
|
|
Shareholders equity (deficit)
|
|
|
33,216
|
|
|
|
4,112
|
|
|
|
75,930
|
|
|
|
(5,046
|
)
|
|
|
99,664
|
|
|
|
|
(1) |
|
Represents charges (recoveries) in connection with our June 2004
and August 2002 restructurings of operations. The June 2004 and
August 2002 restructuring programs were substantially completed
during fiscal 2005 and 2003, respectively. However, certain
closure costs related to the exited leased facilities will
continue to be paid through August 2008. |
|
(2) |
|
Represents noncash income (loss) in connection with derivative
liabilities associated with the two-year interest make-whole
(Two-Year Interest Make-Whole) payment provision of
our 6.52% convertible senior subordinated notes
(6.52% Senior Notes) and the three-year
interest make-whole (Three-Year Interest Make-Whole)
payment provision of our 2.5% convertible subordinated
notes (2.5% Subordinated Notes). The derivative
liability is recorded at fair value in the consolidated balance
sheets. |
|
(3) |
|
Represents an $80.8 million nonrecurring gain related to
the exchange of our 3.75% convertible subordinated notes
(3.75% Subordinated Notes) for our
6.52% Senior Notes. |
|
(4) |
|
Primarily represents income (expense) recognized on the changes
in the fair value of warrants of public companies held by us in
connection with collaboration and licensing arrangements, which
are recorded as derivatives under the caption Other
assets in the consolidated balance sheets. The recorded
value of such warrants can fluctuate significantly based on
fluctuations in the market value of the underlying securities of
the issuer of the warrants. |
|
(5) |
|
Includes a charge of approximately $0.3 million for
recognizing the cumulative effect of initially applying
Financial Accounting Standards Board (FASB)
interpretation No. 47, Accounting for Conditional
Asset Retirement Obligations (FIN 47). |
|
(6) |
|
Represents our share of Reliant Pharmaceuticals, LLCs
(Reliant) losses recorded under the equity method of
accounting. Since we have no further funding commitments to
Reliant and the investment is accounted for under the cost
method effective April 1, 2004, we will not record any
further share of the losses of Reliant in our consolidated
statements of operations. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Introduction
Alkermes, Inc. (as used in this section, together with our
subsidiaries, us, we or
our), a Pennsylvania corporation organized in 1987,
is a biotechnology company that develops products based on
sophisticated drug delivery technologies to enhance therapeutic
outcomes in major diseases. We have two commercial products.
RISPERDAL®
CONSTA®
[(risperidone) long-acting injection] is the first and only
long-acting atypical antipsychotic medication approved for use
in schizophrenia, and is marketed worldwide by Janssen-Cilag, a
subsidiary of Johnson & Johnson, together with other
affiliates (Janssen).
VIVITROLtm
(naltrexone for extended-release injectable suspension) is the
first and only once-monthly injection approved for the treatment
of alcohol dependence, and is marketed in the United States
(U.S.) primarily by Cephalon, Inc.
(Cephalon). We have a pipeline of extended-release
injectable products and pulmonary products based on our
proprietary technology and expertise. Our product development
strategy is twofold: we partner our proprietary technology
systems and drug delivery expertise with several of the
worlds finest pharmaceutical
34
and biotechnology companies; and we also develop novel,
proprietary drug candidates for our own account. Our
headquarters are located in Cambridge, Massachusetts, and we
operate research and manufacturing facilities in Massachusetts
and Ohio. Since our inception in 1987, we have devoted a
significant portion of our resources to research and development
programs and the purchase of property, plant and equipment. At
March 31, 2006, we had an accumulated deficit of
approximately $623.2 million.
We have funded our operations primarily through public offerings
and private placements of debt and equity securities, bank
loans, term loans, equipment financing arrangements and payments
under research and development agreements with collaborators. We
have historically developed our product candidates in
collaboration with others on whom we rely for funding,
development, manufacturing
and/or
marketing. While we continue to develop product candidates in
collaboration with others, we also develop proprietary product
candidates for our own account that we fund on our own.
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,
research and development spending, plans for clinical trials and
regulatory approvals, 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, including but not limited to:
statements concerning the achievement of certain business and
operating milestones and future operating results and
profitability; continued revenue growth from RISPERDAL CONSTA;
the successful launch and commercialization of VIVITROL; the
launch of VIVITROL by the end of June 2006; recognition of
milestone payments from our partner Cephalon related to the
future sales of VIVITROL; the successful continuation of
development activities for our programs, including exenatide
LAR,
AIR®
insulin and AIR PTH; the successful manufacture of our products
and product candidates, including RISPERDAL CONSTA and VIVITROL,
and the successful manufacture of exenatide LAR by Amylin
Pharmaceuticals, Inc. (Amylin); the building of a
selling and marketing infrastructure for VIVITROL by ourselves
or our partner Cephalon; whether we can successfully manufacture
VIVITROL at a commercial scale; and the successful scale-up,
establishment and expansion of manufacturing capacity, 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. 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 for RISPERDAL CONSTA
may not continue to grow, particularly because we rely on our
partner, Janssen, to forecast and market this product;
(ii) we may be unable to manufacture RISPERDAL CONSTA in
sufficient quantities and with sufficient yields to meet
Janssens requirements or to add additional production
capacity for RISPERDAL CONSTA, or unexpected events could
interrupt manufacturing operations at our RISPERDAL CONSTA
facility, which is the sole source of supply for that product;
(iii) we may be unable to manufacture VIVITROL economically
or in sufficient quantities and with sufficient yields to meet
our own or our partner Cephalons requirements or add
additional production capacity for VIVITROL, or unexpected
events could interrupt manufacturing operations at our VIVITROL
facility, which is the sole source of supply for that product;
(iv) we and our partner Cephalon may be unable to develop
the selling and marketing capabilities,
and/or
infrastructure necessary to jointly support the
commercialization of VIVITROL; (v) we and our partner
Cephalon may be unable to launch VIVITROL successfully and
launch VIVITROL on the schedule that we expect; and if launched,
VIVITROL may not produce significant revenues; (vi) because
we have limited selling, marketing and distribution experience,
we depend significantly on our partner Cephalon to successfully
commercialize VIVITROL; (vii) third party payors may not
cover or reimburse VIVITROL; (viii) we may be unable to
scale-up and
manufacture our other
35
product candidates, including exenatide LAR and AIR insulin and
AIR PTH, commercially or economically; (ix) we may not be
able to source raw materials for our production processes from
third parties; (x) we may not be able to successfully
transfer manufacturing technology for exenatide LAR to Amylin
and Amylin may not be able to successfully operate the
manufacturing facility for exenatide LAR; (xi) our other
product candidates, if approved for marketing, may not be
launched successfully in one or all indications for which
marketing is approved and, if launched, may not produce
significant revenues; (xii) we rely on our partners to
determine the regulatory and marketing strategies for RISPERDAL
CONSTA and our other partnered, non-proprietary programs;
(xiii) we rely on our partner Cephalon to commercialize
VIVITROL in the U.S.; (xiv) RISPERDAL CONSTA,VIVITROL and
our product candidates in commercial use may have unintended
side effects, adverse reactions or incidents of misuse and the
FDA or other health authorities could require post approval
studies or require removal of our products from the market;
(xv) our collaborators could elect to terminate or delay
programs at any time and disputes with collaborators or failure
to negotiate acceptable new collaborative arrangements for our
technologies could occur; (xvi) clinical trials may take
more time or consume more resources than initially envisioned;
(xvii) results of earlier clinical trials are not
necessarily predictive of the safety and efficacy results in
larger clinical trials; (xviii) our product candidates
could be ineffective or unsafe during preclinical studies and
clinical trials, and we and our collaborators may not be
permitted by regulatory authorities to undertake new or
additional clinical trials for product candidates incorporating
our technologies, or clinical trials could be delayed;
(xix) after the completion of clinical trials for our
product candidates and the submission for marketing approval,
the FDA or other health authorities could refuse to accept such
filings or could request additional preclinical or clinical
studies be conducted, each of which could result in significant
delays or the failure of such product to receive marketing
approval; (xx) 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;
(xxi) technological change in the biotechnology or
pharmaceutical industries could render our product candidates
obsolete or non-competitive; (xxii) difficulties or
set-backs in obtaining and enforcing our patents and
difficulties with the patent rights of others could occur;
(xxiii) we may not be consistently profitable and could
incur losses in the future; (xxiv) the effect of our
adoption of SFAS 123R on the results of operations and
comprehensive income (loss) depends on a number of factors,
including estimates of stock price volatility, option terms,
interest rates, the number and type of stock options and stock
awards granted during the reporting period, as well as other
factors; (xxv) we may not recoup any of our
$100.0 million investment in Reliant Pharmaceuticals, LLC
(Reliant); and (xxvi) we may need to raise
substantial additional funding to continue research and
development programs and clinical trials and could incur
difficulties or setbacks in raising such funds.
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.
Critical
Accounting Policies
While our significant accounting policies are more fully
described in Note 2 to our consolidated financial
statements included in this
Form 10-K
for the year ended March 31, 2006, we believe the following
accounting policies are important to the portrayal of our
financial condition and results of operations and can require
estimates from time to time.
Revenue
Recognition
Multiple
Element Arrangements
When a collaborative arrangement contains more than one revenue
generating element, we allocate revenue between the elements
based on each elements relative fair value, provided that
each element meets the criteria for treatment as a separate unit
of accounting. An item is considered a separate unit of
accounting if it has value on a stand-alone basis and there is
objective and reliable evidence of the fair value of the
36
undelivered items. Fair value is determined based upon objective
and reliable evidence, which includes terms negotiated between
us and our collaborative partners.
Revenue
Recognition Related to the License and Collaboration Agreement
and Supply Agreement (together, the Agreements) with
Cephalon
Our revenue recognition policy related to the Agreements
complies with the SECs Staff Accounting
Bulletin No. 101, Revenue Recognition in
Financial Statements, and Emerging Issues Task Force
Issue 00-21,
Revenue Arrangements with Multiple
Deliverables
(EITF 00-21)
for multiple element revenue arrangements entered into or
materially amended after June 30, 2003. For purposes of
revenue recognition, the deliverables under these Agreements are
generally separated into three units of accounting:
(i) shared profits and losses on the sustained-release
forms of naltrexone, including VIVITROL (the
Products); (ii) manufacturing of the Products;
and (iii) development and licenses for the Products.
Under the terms of the Agreements, we are responsible for the
first $120.0 million of net losses incurred on VIVITROL
(Product Losses) through December 31, 2007. If
cumulative Product Losses exceed $120.0 million through
December 31, 2007, Cephalon will be responsible for paying
all Product Losses in excess of $120.0 million during this
period. If VIVITROL is profitable through December 31,
2007, net profits will be shared equally between us and
Cephalon. After December 31, 2007, net profits and losses
earned on VIVITROL will be shared equally between us and
Cephalon.
We and Cephalon reconcile the costs incurred by each party to
develop, commercialize and manufacture the Products, excluding
certain development and registration costs for VIVITROL for the
initial indication of alcohol dependence (the Initial
Indication) and the completion of the first manufacturing
line, to be paid solely by us, against revenues earned on the
Products, to determine net profits or losses on VIVITROL. Our
share of net profits and losses is recognized in the period
earned or incurred by the collaboration and is recorded under
the caption Net collaborative profit in the
consolidated statements of operations and comprehensive income
(loss). Cumulative Product Losses since inception of the
Agreements through March 31, 2006 were $41.0 million.
The nonrefundable payment of $160.0 million we received
from Cephalon in June 2005, and the nonrefundable milestone
payment of $110.0 million we received from Cephalon in
April 2006 upon FDA approval of VIVITROL, have been deemed to be
arrangement consideration in accordance with
EITF 00-21.
This arrangement consideration is recognized as milestone
revenue across the three accounting units referred to above. The
allocation of the arrangement consideration to each of the
accounting units was based initially on the fair value of each
unit as determined at the date of the Agreements, however, the
fair values are reviewed periodically and adjusted, as
appropriate. The above nonrefundable payments are, and will be,
recorded in the consolidated balance sheets under the captions
Unearned milestone revenue current
portion and Unearned milestone
revenue long-term portion prior to being
earned. The classification between the current and long-term
portions is based on our best estimate of whether the milestone
revenue will be recognized during or after the
12-month
period following the reporting period, respectively.
Manufacturing
Revenues Related to the Cephalon Agreements
Under the terms of the Agreements, we are responsible for the
manufacture of clinical and commercial supplies of
sustained-release forms of naltrexone, including VIVITROL, for
sale in the U.S. Under the terms of the Agreements, we will
bill Cephalon at cost for finished commercial product shipped to
them. We will record this manufacturing revenue under the
caption Manufacturing revenues in the consolidated
statements of operations and comprehensive income (loss). An
amount equal to this manufacturing revenue will be recorded as
cost of goods manufactured in the consolidated statements of
operations and comprehensive income (loss). No manufacturing
revenue or cost of goods manufactured related to VIVITROL was
recorded in the consolidated statements of operations and
comprehensive income (loss) in the years ended March 31,
2006, 2005 and 2004.
The amount of the arrangement consideration allocated to the
accounting unit manufacturing of the Products is
based on the estimated fair value of manufacturing profit to be
earned over the expected life of
37
the Products, not to exceed the total arrangement consideration
we receive from Cephalon, less the amount first allocated to the
accounting unit shared profits and losses on the
Products. Manufacturing profit is initially estimated at
10% of cost of goods manufactured. We will recognize the earned
portion of the arrangement consideration allocated to this
accounting unit in proportion to the units of finished product
shipped during the reporting period, to the total expected units
of finished product to be shipped over the expected life of the
Products. The estimate of expected units shipped will be
adjusted periodically, as necessary, whenever events or changes
in circumstances indicate that supply assumptions have changed
significantly. Adjustments to the accrual schedule for this
milestone revenue that result from changed supply assumptions
are recognized prospectively over the remaining expected life of
the Products. This milestone revenue will be recorded under the
caption Manufacturing revenues in the consolidated
statements of operations and comprehensive income (loss). No
milestone revenue was recorded for this accounting unit in the
consolidated statements of operations and comprehensive income
(loss) during the years ended March 31, 2006, 2005 and 2004.
Net
Collaborative Profit Related to the Agreements with
Cephalon
The amount of the arrangement consideration allocated to the
accounting unit shared profits and losses on the
Products represents our best estimate of the Product
Losses that we are responsible for through December 31,
2007, plus an estimate of those development costs to be incurred
by us in the period preceding FDA approval of VIVITROL and to
complete the first manufacturing line, for which we are solely
responsible. We estimate this loss to be approximately
$137.0 million. We recognize the earned portion of the
arrangement consideration allocated to this accounting unit
through the period that we are responsible for Product Losses,
being the period ending December 31, 2007. This milestone
revenue directly offsets our expenses incurred on VIVITROL and
Cephalons net losses on VIVITROL. This milestone revenue
is recorded under the caption Net collaborative
profit in the consolidated statements of operations and
comprehensive income (loss). During the years ended
March 31, 2006, 2005 and 2004, we recorded
$60.5 million, $0 and $0, respectively, for this accounting
unit in the consolidated statements of operations and
comprehensive income (loss).
Under the terms of the Agreements, we granted Cephalon a
co-exclusive license to our patents and know-how necessary to
use, sell, offer for sale and import the Products for all
current and future indications in the U.S. On a combined
basis, the development and license deliverables under the
Agreements have value to us on a stand-alone basis. That is,
under the terms of the Agreements, the additional development
activities that we perform for the Initial Indication of
VIVITROL will result in a marketable product that has value in
the market place. Accordingly, the amount of the arrangement
consideration allocated to the accounting unit development
and licenses for the Products is based on the residual
method of allocation as outlined in
EITF 00-21,
because fair value evidence exists separately for the other two
units of accounting under the Agreements but not on a combined
basis with this accounting unit. Consequently, arrangement
consideration allocated to this accounting unit will equal the
total arrangement consideration received from Cephalon less the
amounts allocated to the other two accounting units. We
recognize the earned portion of this arrangement consideration
on a straight-line basis over the expected life of VIVITROL,
being ten years. This milestone revenue will be recorded under
the caption Net collaborative profit in the
consolidated statements of operations and comprehensive income
(loss). No milestone revenue was recorded for this accounting
unit in the consolidated statements of operations and
comprehensive income (loss) during the years ended
March 31, 2006, 2005 and 2004.
Under the terms of the Agreements, we reimburse Cephalon for the
net losses they incur on VIVITROL, provided these net losses,
together with our VIVITROL-related collaboration expenses, do
not exceed $120.0 million through December 31, 2007.
This reimbursement is recorded under the caption Net
collaborative profit in the consolidated statements of
operations and comprehensive income (loss). Once VIVITROL
becomes profitable, Cephalon will reimburse us for our
product-related expenses together with our share of the net
profits, and this reimbursement will be recorded under the
caption Net collaborative profit in the consolidated
statements of operations and comprehensive income (loss). During
the years ended March 31, 2006, 2005 and 2004, we paid
Cephalon $21.2 million, $0 and $0, respectively, as
reimbursement for the net losses they incurred on VIVITROL.
38
If there are significant changes in the estimates of the fair
value of an accounting unit, we will reallocate the arrangement
consideration to the accounting units based on the revised fair
values. This revision will be recognized prospectively in the
consolidated statements of operations and comprehensive income
(loss) over the remaining terms of the affected accounting units.
Under the terms of the Agreements, Cephalon will pay us up to
$220 million in nonrefundable milestone payments if
calendar year net sales of the Products exceed certain
agreed-upon sales levels. Under current accounting guidance, we
expect to recognize these milestone payments in the period
earned, under the caption Net collaborative profit
in the consolidated statement of operations and comprehensive
income (loss).
Other Manufacturing Revenues Other
manufacturing revenues consist of revenues earned under certain
manufacturing and supply agreements with Janssen for RISPERDAL
CONSTA. Manufacturing revenues are earned when product is
shipped to our collaborative partner. Manufacturing revenues
recognized by us for RISPERDAL CONSTA are based on information
supplied to us by Janssen and require estimates to be made. In
June 2004, we announced a decision to discontinue
commercialization of NUTROPIN
DEPOT®
with Genentech, Inc. (Genentech). Manufacturing
revenues for NUTROPIN DEPOT ceased in the year ended
March 31, 2004.
Royalty Revenues Royalty revenues
consist of revenues earned under certain license agreements for
RISPERDAL CONSTA. Royalty revenues are earned on sales of
RISPERDAL CONSTA made by our collaborative partner and are
recorded in the period the product is sold by our collaborative
partner. Royalty revenues recognized by us for RISPERDAL CONSTA
are based on information supplied to us by our collaborative
partner. Royalty revenues for NUTROPIN DEPOT ceased in the year
ended March 31, 2005.
Research and Development Revenue Under Collaborative
Arrangements Research and development
revenue consists of nonrefundable research and development
funding under collaborative arrangements with various
collaborative partners. Research and development funding
generally compensates us for formulation, preclinical and
clinical testing related to the collaborative research programs,
and is recognized as revenue at the time the research and
development activities are performed under the terms of the
related agreements, when the collaborative partner is obligated
to pay and when no future performance obligations exist.
Fees for the licensing of technology or intellectual property
rights on initiation of collaborative arrangements are recorded
as deferred revenue upon receipt and recognized as income on a
systematic basis, based upon the timing and level of work
performed, or on a straight-line basis if not otherwise
determinable, over the period that the related products or
services are delivered or obligations, as defined in the
relevant agreement, are performed. Revenue from milestone or
other upfront payments is recognized as earned in accordance
with the terms of the related agreements. Accounting guidance
may require deferral of such revenue to future periods.
Derivatives Embedded in Certain Debt
Securities In June 2005, the Financial
Accounting Standards Board (FASB) released DIG Issue
B39Embedded Derivatives: Application of
Paragraph 13(b) to Call Options That Exercisable Only by
the Debtor (DIG Issue B39) which modified
accounting guidance for determining whether an embedded call
option held by the issuer of a debt contract would require
separate accounting recognition. We adopted the provisions of
DIG Issue B39 in the reporting period beginning January 1,
2006, at which time the carrying value of the embedded
derivative contained in our 2.5% Subordinated Notes was
combined with the carrying value of the host contract. Beginning
January 1, 2006, we no longer record changes in the
estimated fair value of the embedded derivative in the
consolidated results of operations and comprehensive income
(loss).
Certain of our debt securities have contained features providing
for cash payments to be made in the event of our stock price
exceeding certain levels and triggering conversions of the debt
to common stock. In general, these features call for make-whole
payments equal to two or three years of interest on the debt
less any amounts paid or accrued prior to the date conversion is
triggered. These features expire once the holder has received a
defined number of interest payments. These features represent
embedded derivatives which are required to be accounted for
separately from the related debt securities through the
reporting period ended December 31, 2005. The estimated
fair value of these features had been valued using a simulation
model that
39
incorporates factors such as the current price of our common
stock, its volatility, and time to expiration. Changes in the
estimated fair value of the liability represented by these
factors had been charged to the consolidated statements of
operations and comprehensive income (loss) under the caption
Derivative (loss) income related to convertible
subordinated notes through the reporting period ended
December 31, 2005. These adjustments were required until
the features were either triggered or expired as of the
reporting period ended December 31, 2005.
Warrant Valuation We hold warrants to
purchase securities of certain publicly held companies, received
in connection with our collaboration and licensing activities.
The warrants are valued using a Black-Scholes pricing model and
changes in value are recorded in the consolidated statement of
operations and comprehensive income (loss) under the caption
Other income (expense), net. The recorded value of
the warrants can fluctuate significantly based on changes in the
value of the underlying securities of the issuer of the warrants.
Cost of Goods Manufactured Our cost of
goods manufactured includes estimates made in allocating
employee compensation and related benefits, occupancy costs,
depreciation expense and other allocable costs directly related
to our manufacturing activities. Cost of goods manufactured is
incurred related to the manufacture of RISPERDAL CONSTA and
NUTROPIN DEPOT, until the termination of the NUTROPIN DEPOT
manufacturing and supply and license agreements with Genentech
in June 2004.
Research and Development Expenses Our
research and development expenses include employee compensation
and related benefits, laboratory supplies, temporary help costs,
external research costs, consulting costs, occupancy costs,
depreciation expense and other allocable costs directly related
to our research and development activities. Research and
development expenses are incurred in conjunction with the
development of our technologies, proprietary product candidates,
collaborators product candidates and in-licensing
arrangements. External research costs relate to toxicology
studies, pharmacokinetic studies and clinical trials that are
performed for us under contract by external companies, hospitals
or medical centers. All such costs are expensed as incurred.
Restructuring Charges We have, at times,
announced restructuring programs and, accordingly, recorded
certain charges in connection with implementing such programs.
These charges generally include employee separation costs,
including severance and related benefits, as well as facility
consolidation and closure costs, the timing of facility
subleases and sublease rates we may negotiate with third
parties. Actual costs may differ from those estimates, and in
the event that we under- or over-estimate the restructuring
charges and related accruals, our reported expenses for a
reporting period may be overstated or understated and may
require adjustment in the future.
Accrued Expenses As part of the process
of preparing our financial statements, we are required to
estimate certain accrued expenses. This process involves
identifying services that third parties have performed on our
behalf and estimating the level of service performed and the
associated cost incurred for these services as of the balance
sheet date in our financial statements. Examples of estimated
accrued expenses are contract service fees, such as amounts due
to clinical research organizations, professional service fees,
such as attorneys and accountants, and investigators in
conjunction with clinical trials. Accruals are based on
significant estimates. In connection with these service fees,
our estimates are most affected by our understanding of the
status and timing of services provided relative to the actual
level of services incurred by the service providers. In the
event that we do not identify certain costs that have been
incurred or we under- or over-estimate the level of services or
the costs of such services, our reported expenses for a
reporting period could be overstated or understated. The date on
which certain services commence, the level of services performed
on or before a given date, and the cost of services is sometimes
subject to our judgment.
Income Taxes Deferred income taxes are
provided for temporary differences between the financial
reporting and tax bases of assets and liabilities and for net
operating loss and credit carryforwards. Deferred income taxes
are recognized at enacted rates expected to be in effect when
temporary differences reverse. Valuation allowances are provided
to the extent that it is more likely than not that the deferred
tax assets will not be recoverable.
40
Stock Options and Awards We use the
intrinsic value method to measure compensation expense
associated with the grants of stock options and awards to
employees. We account for stock options and awards to
non-employees using the fair-value method. Under the intrinsic
value method, compensation associated with stock options and
awards to employees is determined as the difference, if any,
between the current fair value of the underlying common stock on
the measurement date and the price an employee must pay to
exercise the award. Under the fair-value method, compensation
associated with stock awards is determined based on the
estimated fair value of the award itself, measured using either
current market data or an established option-pricing model. The
measurement date for employee awards is generally the grant
date, and the measurement date for non-employee awards is
generally the date performance of certain services is complete.
In December 2004, the FASB issued SFAS 123R, which is a
revision of SFAS 123, Accounting for Stock-Based
Compensation, and supersedes Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued
to Employees. SFAS 123R requires all share-based
payments, including grants of stock options and stock awards, to
be recognized in the financial statements based generally on
their grant date fair values. SFAS 123R is effective for us
in the reporting period beginning April 1, 2006. We
estimate that the effect on the results of operations and
comprehensive income (loss) will range between
$30.0 million and $35.0 million for the year ended
March 31, 2007.
Results
of Operations
Net income in accordance with GAAP for the year ended
March 31, 2006 was $3.8 million or $0.04 per
basic and diluted share, as compared to a net loss of
$73.9 million or a net loss of $0.82 per basic and
diluted share for the year ended March 31, 2005 and a net
loss of $102.4 million or a net loss of $1.25 per basic and
diluted share for the year ended March 31, 2004.
Total revenues were $166.6 million for the year ended
March 31, 2006 compared to $76.1 million and
$39.1 million for the years ended March 31, 2005 and
2004, respectively.
Total manufacturing and royalty revenues were $81.4 million
for the year ended March 31, 2006 compared to
$50.1 million and $29.5 million for the years ended
March 31, 2005 and 2004, respectively.
Total manufacturing revenues were $64.9 million and
$40.5 million for the years ended March 31, 2006 and
2005, respectively. The increase in manufacturing revenues for
the year ended March 31, 2006 as compared to the year ended
March 31, 2005 was due to increased shipments of RISPERDAL
CONSTA to Janssen. In the year ended March 31, 2006, our
manufacturing revenues were based on an average of 7.5% of
Janssens net sales price for RISPERDAL CONSTA compared to
8.1% in the year ended March 31, 2005. For the year ended
March 31, 2004, total manufacturing revenues were
$25.7 million. The increase in manufacturing revenues for
the year ended March 31, 2005 as compared to the year ended
March 31, 2004 was due to increased shipments of RISPERDAL
CONSTA to Janssen. In the year ended March 31, 2004, our
manufacturing revenues were based on an average of 9.8% of
Janssens net sales price for RISPERDAL CONSTA. Under our
manufacturing and supply agreement with Janssen, we record
manufacturing revenues upon shipment of product by us to Janssen
based on a percentage of Janssens net selling price. These
percentages are based on the volume of units shipped to Janssen
in any given calendar year, with a minimum manufacturing fee of
7.5%.
Total royalty revenues were $16.5 million and
$9.6 million for the years ended March 31, 2006 and
2005, respectively, including $16.5 million and
$9.5 million, respectively, of royalty revenues from sales
of RISPERDAL CONSTA. The increase in royalty revenues for the
year ended March 31, 2006 as compared to the year ended
March 31, 2005 was due to an increase in global sales of
RISPERDAL CONSTA by Janssen. For the year ended March 31,
2004, total royalty revenues were $3.8 million, including
$3.1 million of royalty revenues from sales of RISPERDAL
CONSTA. The increase in royalty revenues for the year ended
March 31, 2005 as compared to the year ended March 31,
2004 was due to an increase in global sales of RISPERDAL CONSTA
by Janssen. Under our license agreements with Janssen, we record
royalty revenues equal to 2.5% of Janssens net sales of
RISPERDAL CONSTA in the quarter when the product is sold by
Janssen.
Research and development revenue under collaborative
arrangements was $45.9 million, $26.0 million and
$9.5 million for the years ended March 31, 2006, 2005
and 2004, respectively. The increase in this
41
revenue for the year ended March 31, 2006 as compared to
the year ended March 31, 2005 was primarily the result of a
$17.3 million increase in revenues related to our AIR
insulin program with Lilly, which includes a $9.0 million
milestone payment we received from Lilly in September 2005 upon
the initiation of the Phase III clinical program, as well
as an increase in revenues related to the exenatide LAR program.
For the year ended March 31, 2004, research and development
revenue under collaborative arrangements was $9.5 million.
The increase in this revenue for the year ended March 31,
2005 as compared to the year ended March 31, 2004 was
primarily the result of an increase in revenues related to our
AIR insulin and AIR hGH programs with Lilly, as well as changes
in the stage of development of several other collaborative
programs.
Net collaborative profit was $39.3 million for the year
ended March 31, 2006. This represents a new source of
revenue for us in fiscal 2006. The three components to net
collaborative profit are: the recognition of milestone revenue
to offset net losses incurred by both us and Cephalon on
VIVITROL; the recognition of milestone revenue related to the
license for VIVITROL; and the flow of funds between the two
companies with respect to our share of VIVITROL net profits or
losses. During the year ended March 31, 2006, we recognized
$60.5 of milestone revenue to offset losses incurred on VIVITROL
by both us and Cephalon. This consists of $19.8 million
that we incurred on behalf of the collaboration,
$19.5 million that we incurred with respect to our ongoing
efforts to obtain approval of VIVITROL and to complete
validation of the manufacturing line, for which we are solely
responsible, and $21.2 million of expenses incurred by
Cephalon on behalf of the collaboration. We did not recognize
any milestone revenue related to the license during the year
ended March 31, 2006 because VIVITROL had not yet been
approved by the FDA. During the year ended March 31, 2006,
we made payments of $21.2 million to Cephalon as
reimbursement for losses they incurred on VIVITROL. In the
aggregate, net collaborative profit of $39.3 million for
the year ended March 31, 2006 consists of
$60.5 million of milestone revenue recognized to offset
losses incurred by us and Cephalon on VIVITROL, partially offset
by the $21.2 million of payments we made to Cephalon as
reimbursement for losses they incurred on VIVITROL.
We are responsible for the first $120.0 million of net
losses incurred on VIVITROL (Product Losses) through
the period ending December 31, 2007. If the Product Losses
exceed $120.0 million during this period, Cephalon is
responsible for all Product Losses in excess of
$120.0 million and would reimburse us for all our
VIVITROL-related expenses. Through March 31, 2006, the
cumulative losses incurred by us and Cephalon on VIVITROL,
against this $120.0 million, were $41.0 million, of
which $19.8 million was incurred by us on behalf of the
collaboration and $21.2 million was incurred by Cephalon on
behalf of the collaboration.
Net collaborative profit for the year ended March 31, 2006
was as follows:
|
|
|
|
|
Net Collaborative Profit
Summary
|
|
(In thousands)
|
|
|
Milestone
revenue cost recovery:
|
|
|
|
|
Alkermes expenses incurred on
behalf of the collaboration
|
|
$
|
19,791
|
|
Cephalon net losses incurred on
behalf of the collaboration
|
|
|
21,179
|
|
Alkermes expenses related to
VIVITROL for which Alkermes was solely responsible
|
|
|
19,495
|
|
|
|
|
|
|
Total milestone
revenue cost recovery
|
|
|
60,465
|
|
Milestone
revenue license
|
|
|
|
|
Payments made to Cephalon to
reimburse their net losses
|
|
|
(21,179
|
)
|
|
|
|
|
|
Net collaborative profit
|
|
$
|
39,286
|
|
|
|
|
|
|
Cost of goods manufactured was $23.5 million in the year
ended March 31, 2006, related entirely to RISPERDAL CONSTA.
Cost of goods manufactured was $16.8 million in the year
ended March 31, 2005, consisting of $14.5 million
related to RISPERDAL CONSTA and $2.3 million related to
NUTROPIN DEPOT. The increase in cost of goods manufactured in
the year ended March 31, 2006 as compared to the year ended
March 31, 2005 was due to increased shipments of RISPERDAL
CONSTA to meet increased demand for the product, offset by the
impact of discontinuing the manufacture of NUTROPIN DEPOT under
the termination of a license agreement and manufacturing and
supply agreement with Genentech in June 2004. Cost of goods
42
manufactured in the year ended March 31, 2005 included a
one-time write-off of NUTROPIN DEPOT inventory of
$1.3 million following the decision to discontinue
manufacture of the product. For the year ended March 31,
2004, cost of goods manufactured was $19.0 million,
consisting of approximately $13.0 million related to
RISPERDAL CONSTA and $6.0 million related to NUTROPIN
DEPOT. The decrease in cost of goods manufactured in the year
ended March 31, 2005 as compared to the year ended
March 31, 2004 was primarily due to the impact of
discontinuing the manufacture of NUTROPIN DEPOT under the
termination of a license agreement and manufacturing and supply
agreement with Genentech in June 2004.
Research and development expenses were $89.1 million for
the year ended March 31, 2006 compared to
$91.1 million and $91.1 million for the years ended
March 31, 2005 and 2004, respectively. Research and
development expenses for the year ended March 31, 2006 were
lower than the year ended March 31, 2005 primarily due to
reductions in external research expenses related to the
completion of certain clinical trial programs for VIVITROL,
partially offset by an increase in personnel-related costs, an
increase in utility costs and a one-time lease charge in the
amount of approximately $1.5 million, of which
$1.2 million was recorded as research and development
expense. In November 2005, we entered into a sublease agreement
in which the total sublease income over the sublease period was
less than our lease expense, resulting in a loss on the
sublease. In addition, during the year ended March 31,
2006, we capitalized into inventory certain raw materials costs
to be used in the manufacture of VIVITROL, which in previous
years had been recorded in research and development expenses. In
total, research and development expenses in the year ended
March 31, 2005 were consistent with the year ended
March 31, 2004. This reflects a decrease in external
research expenses due to the completion of certain clinical
trials related to VIVITROL, in addition to the termination of a
development agreement with Serono in October 2004, offset by an
increase in personnel costs, an increase in occupancy costs
related to the expansion of our facilities in both Massachusetts
and Ohio, and costs incurred in the completion and filing of the
VIVITROL NDA. In addition, in the year ended March, 31 2005, we
conformed our accounting for lease expenses to the views of the
SEC whereby lease expenses must be recognized on a straight-line
basis, rather than as incurred. This resulted in a cumulative
one-time, non-cash charge of $2.5 million, related to the
previous five years since lease inception. Of this amount,
$2.3 million was reported within research and development
expenses. The amount was not material to our reported results in
any one quarter or any one year. The remaining $0.2 million
of this amount was reported in selling, general and
administrative expenses.
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 drug
delivery 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
single full-time equivalent 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 full-time
equivalent or hourly rate for the hours worked by our employees
on a particular project, plus any direct external research
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 expenses were
$40.4 million, $28.8 million and $26.0 million
for the years ended March 31, 2006, 2005 and 2004,
respectively. The increase in selling, general and
administrative expenses for the year ended March 31, 2006
as compared to the year ended March 31, 2005 was primarily
due to an increase in personnel-related costs within the
commercial organization as we continued to prepare for the
commercialization of VIVITROL, an increase in utility costs and
a one-time lease charge in the amount of approximately
$1.5 million, of which $0.3 million was recorded as
selling, general and administrative expenses. In November 2005,
we entered into a sublease agreement in which the total sublease
income over the sublease period was less than our lease expense,
resulting in a loss on the sublease. The increase in selling,
general and administrative expenses for the year ended
March 31, 2005 as compared to the year ended March 31,
2004 was primarily due to increases in sales and marketing costs
as we prepared for the potential
43
future commercialization of VIVITROL, higher personnel costs and
an increase in legal fees related to the securities litigation,
and accountant fees related to Sarbanes-Oxley compliance.
In June 2004, Alkermes and Genentech announced the decision to
discontinue commercialization of NUTROPIN DEPOT (the 2004
Restructuring). The decision was based on the significant
resources required by both companies to continue manufacturing
and commercializing the product. In connection with this
decision, we ceased commercial manufacturing of NUTROPIN DEPOT
and recorded restructuring charges of approximately
$11.9 million in the quarter ended June 30, 2004. The
restructuring charges consisted of a write-off of equipment and
leasehold improvements related to the manufacture of NUTROPIN
DEPOT, as well as employee separation costs, including severance
and related benefits. The restructuring charges also included
lease costs and significant estimates related to the costs to
maintain the facility in which NUTROPIN DEPOT was produced
through the end of its lease term, August 2008. In addition to
the restructuring charges, we recorded a one-time write-off of
NUTROPIN DEPOT inventory of approximately $1.3 million
which was recorded under the caption Cost of goods
manufactured in the consolidated statement of operations
and comprehensive loss. In the quarter ended March 31,
2005, we reversed a reserve, through restructuring, that we had
been carrying related to a yield loss penalty originally due
under the manufacturing and supply agreement for NUTROPIN DEPOT.
This penalty was forgiven and the reserve was reversed. The
final net restructuring charge for the year ended March 31,
2005 was approximately $11.5 million. As of March 31,
2006, we had paid in cash or written off an aggregate of
approximately $9.0 million in facility closure costs and
$0.1 million in employee separation costs in connection
with the 2004 Restructuring. The amounts remaining in the 2004
Restructuring accrual at March 31, 2006 relate primarily to
estimates of lease costs associated with the exited facility and
are expected to be paid through the fiscal year ended
March 31, 2009.
In August 2002, we announced a restructuring program (the
2002 Restructuring) to reduce our cost structure as
a result of our expectations regarding the financial impact of a
delay in the U.S. launch of RISPERDAL CONSTA by our
collaborative partner, Janssen. In connection with the 2002
Restructuring, we recorded charges of approximately
$6.5 million in the consolidated statement of operations
and comprehensive loss for the year ended March 31, 2003.
As of March 31, 2005, we had paid and recovered an
aggregate of approximately $1.5 million in employee
separation costs and approximately $5.0 million in facility
closure costs. There are no remaining liabilities associated
with the 2002 restructuring program as of March 31, 2006.
44
Pursuant to the restructuring plans, the following charges and
payments have been recorded during the year ended March 31,
2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2004
|
|
|
Fiscal 2005
|
|
|
Fiscal 2006
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
Non-Cash
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
Write-Downs
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
March 31,
|
|
Type of Liability
|
|
2003
|
|
|
Recoveries
|
|
|
Payments
|
|
|
2004
|
|
|
Charges
|
|
|
and Payments
|
|
|
2005
|
|
|
Adjustments
|
|
|
Payments
|
|
|
2006
|
|
|
2004 Restructuring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
146
|
|
|
$
|
(137
|
)
|
|
$
|
9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9
|
|
Facility closure(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,381
|
|
|
|
(8,416
|
)
|
|
|
2,965
|
|
|
|
|
|
|
|
(606
|
)
|
|
|
2,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,527
|
|
|
|
(8,553
|
)
|
|
|
2,974
|
|
|
|
|
|
|
|
(606
|
)
|
|
|
2,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 Restructuring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation
|
|
|
17
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility closure
|
|
|
3,520
|
|
|
|
(208
|
)
|
|
|
(2,174
|
)
|
|
|
1,138
|
|
|
|
|
|
|
|
(749
|
)
|
|
|
389
|
|
|
|
(34
|
)
|
|
|
(355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,537
|
|
|
|
(208
|
)
|
|
|
(2,191
|
)
|
|
|
1,138
|
|
|
|
|
|
|
|
(749
|
)
|
|
|
389
|
|
|
|
(34
|
)
|
|
|
(355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,537
|
|
|
$
|
(208
|
)
|
|
$
|
(2,191
|
)
|
|
$
|
1,138
|
|
|
$
|
11,527
|
|
|
$
|
(9,302
|
)
|
|
$
|
3,363
|
|
|
$
|
(34
|
)
|
|
|
(961
|
)
|
|
$
|
2,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fiscal 2005 non-cash write-downs and payments consist of
$7.7 million of non-cash write-downs and $0.7 million
of payments. |
We have substantially completed our restructuring programs.
However, the remaining restructuring accrual as of
March 31, 2006 is an estimate of costs associated with
leases or closed facilities and may require adjustment in the
future.
Interest income was $11.6 million, $3.0 million and
$3.4 million for the years ended March 31, 2006, 2005
and 2004, respectively. The increase for the year ended
March 31, 2006 as compared to the year ended March 31,
2005 was primarily due to higher average cash and investment
balances held and higher interest rates earned during the
respective periods. The decrease for the year ended
March 31, 2005 as compared to the year ended March 31,
2004 was primarily due to lower average cash and investment
balances held.
Interest expense was $20.6 million for the year ended
March 31, 2006 as compared to $7.4 million and
$6.5 million for the year ended March 31, 2005 and
2004, respectively. The increase for the year ended
March 31, 2006 as compared to the year ended March 31,
2005 was primarily due to a full year of interest on our
7% Notes. The increase for the year ended March 31,
2005 as compared to the year ended March 31, 2004 was
primarily due to interest on our 7% Notes incurred since
inception of the 7% Notes in February 2005.
Derivative (loss) income related to convertible subordinated
notes was a loss of $1.1 million for the year ended
March 31, 2006, as compared to an income of
$4.4 million and a loss of $4.5 million for the years
ended March 31, 2005 and 2004, respectively.
We recorded a derivative liability related to the
6.52% Senior Notes. The Two-Year Interest Make-Whole
provision, included in the note indenture and described in
Note 9 to our consolidated financial statements included in
this annual report on
Form 10-K,
represented an embedded derivative which was required to be
accounted for apart from the underlying 6.52% Senior Notes.
At issuance of the 6.52% Senior Notes, the Two-Year
Interest Make-Whole feature was estimated to have a fair value
of $9.0 million and the initial recorded value of the
6.52% Senior Notes was reduced by this allocation. The
estimated value of the Two-Year Interest Make-Whole feature was
carried in the consolidated balance sheets under the caption
Derivative liability related to convertible subordinated
notes and was adjusted quarterly through Derivative
(loss) income related to convertible subordinated notes in
the consolidated statement of operations and comprehensive
income (loss) for changes in the estimated market value of the
feature. During the years ended March 31, 2006, 2005 and
2004, we recorded charges of $0, $0 and $3.8 million,
respectively, in the consolidated statement of operations and
comprehensive income (loss) for changes in the estimated value
of the feature after issuance. In June 2003, we announced that
we had exercised our automatic conversion right for the 6.52%
Senior Notes.
45
The embedded derivative was adjusted to the value of the
remaining balance of the Two-Year Interest Make-Whole payment,
or approximately $17.1 million, at June 30, 2003 and
was accounted for as a liability in the consolidated balance
sheets. In July 2003, upon conversion of the then outstanding
6.52% Senior Notes and payment of the Two-Year Interest
Make-Whole, the embedded derivative was settled in full and the
balance was reduced to zero.
We recorded a derivative liability related to the
2.5% Subordinated Notes. The Three-Year Interest Make-Whole
represented an embedded derivative which was required to be
accounted for apart from the underlying 2.5% Subordinated
Notes. At issuance of the 2.5% Subordinated Notes, the
Three-Year Interest Make-Whole feature had an estimated initial
aggregate fair value of $3.9 million, which reduced the
amount of the outstanding debt and was recorded as a derivative
liability in the consolidated balance sheets. The
$3.9 million initially allocated to the Three-Year Interest
Make-Whole feature was treated as a discount on the
2.5% Subordinated Notes and was being accreted to interest
expense over five years through September 1, 2008, the
first date on which holders of the 2.5% Subordinated Notes
have the right to require us to repurchase the
2.5% Subordinated Notes. The estimated value of the
Three-Year Interest Make-Whole feature was carried in the
consolidated balance sheets under the caption Derivative
liability related to convertible notes and was being
adjusted to its fair value on a quarterly basis until it expires
or is paid. Quarterly adjustments to the fair value of the
Three-Year Interest Make-Whole were being charged to
Derivative (loss) income related to convertible
subordinated notes in the consolidated statement of
operations and comprehensive income (loss) until it is paid out
or expires. During the years ended March 31, 2006 and 2005,
we recorded a loss of $1.1 million and income of
$4.4 million, respectively, in the consolidated statement
of operations and comprehensive income (loss) for changes in the
estimated value of the feature after issuance. The recorded
value of the derivative liability related to the
2.5% Subordinated Notes, approximately $0 and
$0.3 million at March 31, 2006 and 2005, respectively,
fluctuated significantly based on fluctuations in the market
value of our common stock. See Note 9 for our modified
accounting for embedded derivatives, effective January 1,
2006.
Other income (expense), net was an income of $0.3 million
in the year ended March 31, 2006 as compared to an expense
of $1.8 million and an income of $2.1 million in the
years ended March 31, 2005 and 2004, respectively. Other
income (expense), net primarily consists of income or expense
recognized on the changes in the fair value of warrants of
public companies held by us in connection with collaboration and
licensing arrangements, which are recorded under the caption
Other assets in the consolidated balance sheets. The
recorded value of such warrants can fluctuate significantly
based on fluctuations in the market value of the underlying
securities of the issuer of the warrants. In the year ended
March 31, 2006, other income (expense) included, amongst
other things: an income of $1.4 million on changes in the
fair value of warrants held; an expense of $0.6 million for
a loss related to other than temporary impairment on certain
equity securities held; and an expense of $0.3 million
related to the initial application of FIN 47
Accounting for Conditional Asset Retirement
Obligations.
We do not believe that inflation and changing prices have had a
material impact on our results of operations.
Reliant
In December 2001, we made a $100.0 million investment in
Series C convertible, redeemable preferred units of Reliant
Pharmaceuticals, LLC (Reliant) and we currently own
approximately 12% of Reliant. Through March 31, 2004, the
investment had been accounted for under the equity method of
accounting because Reliant was organized as a limited liability
company, which is treated in a manner similar to a partnership.
Our $100.0 million investment was reduced to $0 in the year
ended March 31, 2003 based upon our equity losses in
Reliant. Effective April 1, 2004, Reliant converted from a
limited liability company to a corporation under Delaware state
law. Due to this change, and because Reliant is a privately held
company over which Alkermes does not exercise control, our
investment in Reliant has been accounted for under the cost
method beginning April 1, 2004. Accordingly, we do not
record any share of Reliants net income or losses, but
would record dividends, if received. Our investment remains at
$0 as of March 31, 2006.
46
Financial
Condition
Cash and cash equivalents and short-term investments were
$298.0 million and $202.6 million as of March 31,
2006 and March 31, 2005, respectively. Short-term
investments were $264.4 million and $155.1 million as
of March 31, 2006 and March 31, 2005, respectively.
During the year ended March 31, 2006, combined cash and
cash equivalents and short-term investments increased by
$95.4 million, primarily due to a $160.0 million
nonrefundable payment we received from Cephalon in June 2005, in
connection with the signing of our Agreements, and a
$9.0 million nonrefundable milestone payment we received
from Lilly in September 2005, partially offset by net cash used
to fund our operations, to acquire fixed assets and to service
our debt.
We invest in cash equivalents, U.S. government obligations,
high-grade corporate notes and commercial paper, with the
exception of our $100.0 million investment in Reliant, and
warrants we receive in connection with our collaborations and
licensing activities. Our investment objectives, other than our
investment in Reliant and our warrants, are, first, to assure
liquidity and conservation of capital and, second, to obtain
investment income. We held approximately $5.1 million and
$4.9 million of U.S. government obligations classified
as restricted long-term investments as of March 31, 2006,
and March 31, 2005, respectively, which are pledged as
collateral under certain letters of credit and lease agreements.
All of our investments in debt securities are classified as
available-for-sale
and are recorded at fair value. Fair value is determined based
on quoted market prices.
Receivables were $39.8 million and $18.8 million as of
March 31, 2006 and March 31, 2005, respectively. The
increase of $21.0 million during the year ended
March 31, 2006 was primarily due to increased manufacturing
and royalty revenues due from Janssen for both RISPERDAL CONSTA
shipments and capital expenditure reimbursements due under our
manufacturing and supply agreements, in addition to the timing
of payments received from Lilly and Amylin with respect to our
collaborative programs. All of our receivables are current.
Inventory, net was $7.3 million and $3.8 million as of
March 31, 2006 and March 31, 2005, respectively. The
increase of $3.5 million during the year ended
March 31, 2006 was due to a $2.5 million increase in
VIVITROL raw materials and work in process inventories related
to the start of commercial manufacturing. In previous years, we
expensed VIVITROL raw materials to research and development
expenses because they were used to manufacture clinical
supplies. The remaining increase relates to RISPERDAL CONSTA raw
materials and finished goods inventory increases due to
production volumes and the timing of shipments of the product to
Janssen.
Accounts payable and accrued expenses were $36.1 million
and $18.8 million as of March 31, 2006 and
March 31, 2005, respectively. The increase of
$17.3 million during the year ended March 31, 2006 was
primarily due to an increase in accounts payable due to the
timing of vendor payments, increases in compensation accruals
due to the timing of normal payroll and bonus payments, and
accruals of $9.0 million for amounts due to Cephalon under
our Agreements.
Unearned milestone revenue current portion and
long-term portion combined, was $99.5 million and $0 as of
March 31, 2006 and 2005, respectively. The increase during
the year ended March 31, 2006 was due to the receipt of a
$160.0 million nonrefundable payment from Cephalon in June
2005 in connection with the signing of our Agreements, reduced
by $60.5 million of milestone revenue we recognized under
the caption Net collaborative profit in the
consolidated statement of operations and comprehensive income
(loss) during the year ended March 31, 2006.
In October 2005, we converted 1,500 shares of our Preferred
Stock with a carrying value of $15.0 million into
823,677 shares of common stock. The conversion was made in
accordance with the stock purchase agreement with Lilly dated
December 13, 2002. The conversion secured a proportional
increase in the minimum royalty rate payable to us on sales of
the AIR insulin product by Lilly, if approved. The carrying
amount of the Preferred Stock on the consolidated balance sheets
as of March 31, 2006 and 2005 was $15.0 million and
$30.0 million, respectively.
47
As of March 31, 2006, we had approximately
$575.0 million of federal net operating loss
(NOL) carryforwards, $371.0 million of state
operating loss carryforwards, and $25.0 million of foreign
net operating loss and foreign capital loss carryforwards, which
expire on various dates through 2026 or can be carried forward
indefinitely. These loss carryforwards are available to reduce
future federal and foreign taxable income, if any. These loss
carryforwards are subject to review and possible adjustment by
the applicable taxing authorities. The available loss
carryforwards that may be utilized in any future period may be
subject to limitation based upon historical changes in the
ownership of our stock. We are presently analyzing historical
ownership changes to determine whether the losses are limited
under Sec. 382 of the Internal Revenue Code. The valuation
allowance of $266.8 million relates to our U.S. net
operating losses and deferred tax assets and certain other
foreign deferred tax assets and is recorded based upon the
uncertainty surrounding future utilization.
Liquidity
and Capital Resources
We have funded our operations primarily through public offerings
and private placements of debt and equity securities, bank
loans, term loans, equipment financing arrangements and payments
received under research and development agreements and other
agreements with collaborators. We expect to incur significant
additional research and development and other costs in
connection with collaborative arrangements and as we expand the
development of our proprietary product candidates, including
costs related to preclinical studies, clinical trials and
facilities expansion. Our costs, including research and
development costs for our product candidates and sales,
marketing and promotion expenses for any future products to be
marketed by us or our collaborators, if any, may exceed revenues
in the future, which may result in losses from operations.
We believe that our current cash and cash equivalents and
short-term investments, combined with our unused equipment lease
line, anticipated interest income, anticipated manufacturing and
royalty revenues, and anticipated research and development
revenue under collaborative arrangements, and anticipated net
collaborative profit from our collaboration with Cephalon, will
generate sufficient cash flows to meet our anticipated liquidity
and capital requirements through at least March 31, 2008.
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
magnitude 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, competing technological and 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
future proprietary products, the sales, marketing and promotion
expenses associated with marketing such products.
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 were approximately $28.7 million for
the year ended March 31, 2006, net of $6.0 million in
reimbursements from Janssen under our RISPERDAL CONSTA
manufacturing and supply agreement for costs related to the
construction of a third bulk manufacturing line for RISPERDAL
CONSTA. Our capital expenditures were primarily related to the
purchase of equipment to make improvements to and expand our
manufacturing facility in Ohio. Our capital expenditures for
equipment, facilities and building
48
improvements have been financed to-date primarily with proceeds
from bank loans and the sales of debt and equity securities.
Under the provisions of our existing loans, General Electric
Capital Corporation (GE) and Johnson &
Johnson Finance Corporation have security interests in certain
of our capital assets.
Our manufacturing site in Wilmington, Ohio is undergoing a
significant expansion which is expected to be substantially
completed in calendar year 2008. Our capital expenditures in FY
2007 are expected to be approximately $40.0 million. The
majority of these expenditures are related to our manufacturing
site in Wilmington, Ohio. The expansion will add three
additional manufacturing lines for RISPERDAL CONSTA AND
VIVITROL. In addition to our spending, Janssen is funding the
cost related to one of the new lines for RISPERDAL CONSTA in the
amount of approximately $11.0 million, of which
approximately $5.0 million in funding has been received by
us through March 31, 2006.
Off-Balance
Sheet Arrangements
As of March 31, 2006, we were not a party to any
off-balance sheet financing arrangements, other than operating
leases.
Contractual
Obligations
We have summarized below our material contractual cash
obligations as of March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
Two to
|
|
|
Four to Five
|
|
|
After Five
|
|
|
|
|
|
|
One Year
|
|
|
Three Years
|
|
|
Years
|
|
|
Years
|
|
|
|
|
|
|
(Fiscal
|
|
|
(Fiscal 2008-
|
|
|
(Fiscal 2010-
|
|
|
(After Fiscal
|
|
Contractual Cash
Obligations
|
|
Total
|
|
|
2007)
|
|
|
2009)
|
|
|
2011)
|
|
|
2011)
|
|
|
|
(In thousands)
|
|
|
7% Notes principal(1)
|
|
$
|
170,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
113,333
|
|
|
$
|
56,667
|
|
7% Notes interest
|
|
|
55,037
|
|
|
|
11,900
|
|
|
|
23,800
|
|
|
|
16,858
|
|
|
|
2,479
|
|
Convertible subordinated
notes principal(2)
|
|
|
125,676
|
|
|
|
676
|
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
Convertible subordinated
notes interest(2)
|
|
|
53,150
|
|
|
|
3,150
|
|
|
|
6,250
|
|
|
|
6,250
|
|
|
|
37,500
|
|
Term
loan principal
|
|
|
2,484
|
|
|
|
1,118
|
|
|
|
1,366
|
|
|
|
|
|
|
|
|
|
Term loan interest
|
|
|
212
|
|
|
|
153
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
276
|
|
|
|
114
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
184,901
|
|
|
|
9,976
|
|
|
|
20,732
|
|
|
|
20,486
|
|
|
|
133,707
|
|
Purchase obligations
|
|
|
4,898
|
|
|
|
4,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expansion programs
|
|
|
10,837
|
|
|
|
10,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
607,471
|
|
|
$
|
42,822
|
|
|
$
|
52,369
|
|
|
$
|
156,927
|
|
|
$
|
355,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The 7% Notes were issued by RC Royalty Sub LLC, a
wholly-owned subsidiary of Alkermes, Inc. The 7% Notes are
non-recourse to Alkermes, Inc. (see Note 6 to the
consolidated financial statements included in this
Form 10-K). |
|
(2) |
|
Subsequent to March 31, 2006, we announced that we had
exercised our right to automatically convert all of our
outstanding 2.5% Subordinated Notes into approximately
9,025,271 shares of common stock, pursuant to the terms of
the notes. The conversion date is June 15, 2006. |
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
Quarterly Financial
Data
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except per share
data)
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing revenues
|
|
$
|
13,983
|
|
|
$
|
13,526
|
|
|
$
|
14,715
|
|
|
$
|
22,677
|
|
Royalty revenues
|
|
|
3,604
|
|
|
|
4,035
|
|
|
|
4,228
|
|
|
|
4,665
|
|
Research and development revenue
under collaborative arrangements
|
|
|
7,251
|
|
|
|
16,733
|
|
|
|
9,951
|
|
|
|
11,948
|
|
Net collaborative profit
|
|
|
|
|
|
|
12,394
|
|
|
|
12,524
|
|
|
|
14,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
24,838
|
|
|
|
46,688
|
|
|
|
41,418
|
|
|
|
53,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods manufactured
|
|
|
4,517
|
|
|
|
4,360
|
|
|
|
6,077
|
|
|
|
8,535
|
|
Research and development
|
|
|
21,622
|
|
|
|
19,370
|
|
|
|
22,501
|
|
|
|
25,575
|
|
Selling, general and administrative
|
|
|
8,952
|
|
|
|
9,109
|
|
|
|
9,332
|
|
|
|
12,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
35,091
|
|
|
|
32,839
|
|
|
|
37,910
|
|
|
|
47,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
(10,253
|
)
|
|
|
13,849
|
|
|
|
3,508
|
|
|
|
6,557
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,631
|
|
|
|
3,019
|
|
|
|
3,278
|
|
|
|
3,641
|
|
Interest expense
|
|
|
(5,169
|
)
|
|
|
(5,212
|
)
|
|
|
(5,177
|
)
|
|
|
(5,103
|
)
|
Derivative loss related to
convertible subordinated notes
|
|
|
(266
|
)
|
|
|
(503
|
)
|
|
|
(315
|
)
|
|
|
|
|
Other income (expense), net(1)
|
|
|
320
|
|
|
|
599
|
|
|
|
113
|
|
|
|
(699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(3,484
|
)
|
|
|
(2,097
|
)
|
|
|
(2,101
|
)
|
|
|
(2,161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(13,737
|
)
|
|
$
|
11,752
|
|
|
$
|
1,407
|
|
|
$
|
4,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
$
|
(0.15
|
)
|
|
$
|
0.13
|
|
|
$
|
0.02
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
$
|
(0.15
|
)
|
|
$
|
0.12
|
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
90,410
|
|
|
|
90,558
|
|
|
|
91,505
|
|
|
|
91,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
90,410
|
|
|
|
96,599
|
|
|
|
96,720
|
|
|
|
99,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes a charge of approximately $0.3 million in the
quarter ended March 31, 2006 for recognizing the cumulative
effect of initially applying FIN 47, Accounting
for Conditional Asset Retirement Obligations. |
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
Quarterly Financial
Data
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
2005
|
|
|
|
(In thousands, except per share
data)
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing revenues
|
|
$
|
6,155
|
|
|
$
|
7,753
|
|
|
$
|
13,922
|
|
|
$
|
12,656
|
|
Royalty revenues
|
|
|
1,810
|
|
|
|
2,185
|
|
|
|
2,652
|
|
|
|
2,991
|
|
Research and development revenue
under collaborative arrangements
|
|
|
3,509
|
|
|
|
8,097
|
|
|
|
7,011
|
|
|
|
7,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
11,474
|
|
|
|
18,035
|
|
|
|
23,585
|
|
|
|
23,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods manufactured
|
|
|
5,241
|
|
|
|
2,390
|
|
|
|
4,930
|
|
|
|
4,273
|
|
Research and development
|
|
|
24,132
|
|
|
|
22,590
|
|
|
|
20,058
|
|
|
|
24,285
|
|
Selling, general and administrative
|
|
|
7,039
|
|
|
|
7,379
|
|
|
|
6,868
|
|
|
|
7,537
|
|
Restructuring
|
|
|
11,896
|
|
|
|
|
|
|
|
|
|
|
|
(369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
48,308
|
|
|
|
32,359
|
|
|
|
31,856
|
|
|
|
35,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS
|
|
|
(36,834
|
)
|
|
|
(14,324
|
)
|
|
|
(8,271
|
)
|
|
|
(12,694
|
)
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
630
|
|
|
|
660
|
|
|
|
646
|
|
|
|
1,069
|
|
Interest expense
|
|
|
(1,188
|
)
|
|
|
(1,187
|
)
|
|
|
(1,158
|
)
|
|
|
(3,861
|
)
|
Derivative income (loss) related
to convertible subordinated notes
|
|
|
1,518
|
|
|
|
1,172
|
|
|
|
(347
|
)
|
|
|
2,042
|
|
Other income (expense), net
|
|
|
(274
|
)
|
|
|
(585
|
)
|
|
|
131
|
|
|
|
(1,061
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
686
|
|
|
|
60
|
|
|
|
(728
|
)
|
|
|
(1,811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(36,148
|
)
|
|
$
|
(14,264
|
)
|
|
$
|
(8,999
|
)
|
|
$
|
(14,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
$
|
(0.40
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
$
|
(0.40
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
89,409
|
|
|
|
90,067
|
|
|
|
90,176
|
|
|
|
90,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
89,409
|
|
|
|
90,067
|
|
|
|
90,176
|
|
|
|
90,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating expenses in the quarter ended March 31, 2005
include a cumulative charge of approximately $2.5 million
to record lease costs on a straight-line basis from their
inception through March 31, 2005. |
Recent
Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, which amends accounting
research bulletin (ARB) No. 43, Chapter 4,
Inventory Pricing, to clarify the accounting
for idle facility expense, freight, handling costs and waste
(spoilage). This new standard is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005,
and, thus, will be effective for us for the reporting period
beginning April 1, 2006. We believe our current accounting
policies closely align to the new rules. Accordingly, we do not
believe this new standard will have a material impact on our
consolidated financial statements.
51
In December 2004, the FASB issued SFAS 123R, Share
Based Payment, which is a revision of SFAS 123,
Accounting for Stock-Based Compensation, and
supersedes accounting principles board (APB) Opinion
No. 25, Accounting for Stock Issued to
Employees. SFAS 123R requires all share-based
payments, including grants of stock options and stock awards, to
be recognized in the financial statements based generally on
their grant date fair values. SFAS 123R is effective for us
in the reporting period beginning April 1, 2006. We have
adopted as of April 1, 2006 the provisions of
SFAS 123R using the modified prospective transition method,
and will recognize share-based compensation cost on a
straight-line basis over the requisite service periods of
awards. We will recognize share-based compensation cost for
awards that have graded vesting on a straight-line basis over
the requisite service period for each separately vesting
portion. Under the modified prospective method, share-based
compensation expense will be recognized for the portion of
outstanding stock options and stock awards granted prior to the
adoption of SFAS 123R for which service has not been
rendered, and for any future stock options and stock awards.
Although the adoption of SFAS 123R is not expected to have
a material effect on our cash flows, we expect to record
substantial non-cash compensation expense that will have a
significant, adverse effect on our results of operations and
comprehensive income (loss). The impact of adoption of
SFAS 123R depends on estimates of stock price volatility,
option terms, interest rates, the number and type of stock
options and stock awards granted during the reporting period, as
well as other factors. We estimate that the effect on our
results of operations and comprehensive income (loss) will range
between $30.0 million and $35.0 million for the year
ended March 31, 2007.
In March 2005, the FASB issued Interpretation No. 47,
Accounting for Conditional Asset Retirement
Obligations (FIN 47). FIN 47
clarifies that the term conditional asset retirement
obligation, as used in SFAS No. 143,
Accounting for Asset Retirement Obligations
(SFAS 143) refers to a legal obligation to
perform an asset retirement activity in which the timing or
method of settlement are conditional on a future event that may
or may not be within the control of the entity. FIN 47 also
clarifies that an entity is required to recognize a liability
for such an obligation when incurred if the liabilitys
fair value can be reasonably estimated. FIN 47 is required
to become effective no later than the end of the first fiscal
year ending after December 15, 2005 and, thus, is effective
for us for the year ended March 31, 2006. We recorded a
charge of $0.3 million in the year ended March 31,
2006 for recognizing the cumulative effect of initially applying
FIN 47 under the caption, Other income (expense),
net in the consolidated statement of operations and
comprehensive income (loss). We believe that this amount was
immaterial for separate presentation in the consolidated
statement of operations and comprehensive income (loss).
In June 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error
Corrections a replacement of APB Opinion
No. 20 and FASB Statement No. 3
(SFAS 154). SFAS 154 replaces APB Opinion
No. 20, Accounting Changes
(APB 20), and SFAS No. 3,
Reporting Accounting Changes in Interim Financial
Statements. SFAS 154 requires retrospective
application to prior periods financial statements of a
voluntary change in accounting principle unless it is
impracticable to determine either the period-specific effects or
the cumulative effects of the change. APB 20 previously
required that most voluntary changes in accounting principle be
recognized by including in net income in the period of the
change the cumulative effect of changing to the new accounting
principle. This standard generally will not apply with respect
to the adoption of new accounting standards, as new accounting
standards usually include specific transition provisions, and
will not override transition provisions contained in new or
existing accounting literature. SFAS 154 is effective for
fiscal years beginning after December 15, 2005, and, thus,
will be effective for us in the reporting period beginning
April 1, 2006.
In June 2005, the FASB released Derivatives Implementation Group
Issue B39, Embedded Derivatives: Application of
Paragraph 13(b) to Call Options That are Exercisable Only
by the Debtor (DIG Issue B39). DIG Issue
B39 modifies current accounting guidance for determining whether
an embedded call option in a debt contract that could
potentially accelerate the settlement of that instrument would
require separate accounting under the provisions of
SFAS 133, Accounting for Derivative Instruments
and Hedging Activities. Essentially, DIG Issue B39
concluded that options exercisable only by the issuer of such a
contract will no longer require separate accounting recognition,
as long as they satisfy all other criteria in SFAS 133. We
adopted the provisions of DIG Issue B39 in the reporting period
beginning January 1, 2006, at which time
52
the carrying value of the embedded derivative contained in our
convertible subordinated notes (described in more detail in
note 9 to the consolidated financial statements) was
combined with the carrying value of the host contracts and will
no longer require separate recognition or accounting.
Implementation of DIG Issue B39 had no impact on our operating
cash flows, and we will no longer be required to record changes
in the estimated fair value of the embedded derivatives in the
results of operations and comprehensive income (loss).
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
We hold financial instruments in our investment portfolio that
are sensitive to market risks. Our investment portfolio,
excluding our investment in Reliant, and warrants we receive in
connection with our collaborations and licencing activities, is
used to preserve capital until it is required to fund
operations. Our short-term and restricted long-term investments
consist of U.S. government obligations, high-grade
corporate notes and commercial paper. These debt securities are:
(i) classified as
available-for-sale;
(ii) are recorded at fair value; and (iii) are subject
to interest rate risk, and could decline in value if interest
rates increase. 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, excluding our investment in Reliant,
are subject to credit risk, our investment policies specify
credit quality standards for our investments and limit the
amount of credit exposure from any single issue, issuer or type
of investment.
We also hold certain marketable equity securities, including
warrants to purchase the securities of publicly traded companies
we collaborate with, that are classified as
available-for-sale
and recorded at fair value under the caption Other
assets in the consolidated balance sheets. These
marketable equity securities are sensitive to changes in
interest rates. Interest rate changes would result in a change
in the fair value of these financial instruments due to the
difference between the market interest rate and the rate at the
date of purchase of the financial instrument. A 10% increase or
decrease in market interest rates would not have a material
impact on the consolidated financial statements.
As of March 31, 2006, the fair value of our 7% Notes,
our 2.5% Subordinated Notes, and our 3.75% Subordinated
Notes approximate the carrying values. The interest rates on
these notes, and our capital lease obligations, are fixed and
therefore not subject to interest rate risk. A 10% increase or
decrease in market interest rates would not have a material
impact on the consolidated financial statements.
As of March 31, 2006, we have a term loan that bears a
floating interest rate equal to the one-month London Interbank
Offered Rate (LIBOR) plus 5.45%. A 10% increase or
decrease in market interest rates would not have a material
impact on the consolidated financial statements.
Foreign
Currency Exchange Rate Risk
The royalty revenues we receive on RISPERDAL CONSTA are a
percentage of the net sales made by our collaborative partner.
Some of these sales are made in foreign countries and are
denominated in foreign currencies. The royalty payment on these
foreign sales is calculated initially in the foreign currency in
which the sale is made and is then converted into
U.S. dollars to determine the amount that our collaborative
partner pays us for 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
royalty revenues even if there is a constant amount of sales in
foreign currencies. For example, if the U.S. dollar
strengthens against a foreign currency, then our royalty
revenues will decrease given a constant amount of sales in such
foreign currency.
The impact on our royalty revenues from foreign currency
exchange rate risk is based on a number 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 sales by our collaborative
partner that are denominated in foreign currencies. We do not
currently hedge our foreign currency exchange rate risk.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
All financial statements required to be filed hereunder are
filed as an exhibit hereto, are listed under Item 15
(a) (1) and (2) and are incorporated herein by
reference.
53
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
There have been no changes in and no disagreements with our
independent registered public accounting firm on accounting and
financial disclosure matters.
|
|
Item 9A.
|
Controls
and Procedures
|
(a) Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended, or the
Exchange Act) as of March 31, 2006. In designing and
evaluating our disclosure controls and procedures, our
management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives, and our
management necessarily applied its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of March 31, 2006, our
disclosure controls and procedures were: (1) designed to
ensure that material information relating to our company,
including our consolidated subsidiaries, is made known to our
Chief Executive Officer and Chief Financial Officer by others
within those entities, particularly during the period in which
this report was being prepared; and (2) effective, in that
they provide reasonable assurance that information required to
be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and
forms.
(b) Evaluation of internal control over financial reporting
Managements Report on Internal Control over Financial
Reporting
The management of Alkermes, Inc. (the Company) is
responsible for establishing and maintaining adequate internal
control over financial reporting, and for performing an
assessment of the effectiveness of internal control over
financial reporting as of March 31, 2006. Under the
supervision and with the participation of management, including
the Companys Chief Executive Officer and Chief Financial
Officer, management assessed the effectiveness of the
Companys internal control over financial reporting based
on the criteria in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management believes that
the Companys internal control over financial reporting was
effective as of March 31, 2006.
The Companys internal control over financial reporting
includes policies and procedures that pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect transactions and dispositions of assets; provide
reasonable assurances that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the
United States of America, and that receipts and expenditures are
being made only in accordance with authorizations of our
management and directors; and provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a
material effect on our financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to risks that controls may become inadequate because
of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Managements assessment of the effectiveness of the
Companys internal control over financial reporting as of
March 31, 2006 has been attested to by Deloitte &
Touche LLP, independent registered public accounting firm, as
stated in their report which is included herein.
54
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Alkermes, Inc.
Cambridge, Massachusetts
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that Alkermes, Inc. and subsidiaries (the
Company) maintained effective internal control over
financial reporting as of March 31, 2006, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that: (1) pertain to the
maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a
material effect on the financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, managements assessment that the Company
maintained effective internal control over financial reporting
as of March 31, 2006, is fairly stated, in all material
respects, based on the criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of March 31, 2006, based on the criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
March 31, 2006 of the Company and our report dated
June 14, 2006 expressed an unqualified opinion on those
consolidated financial statements and includes an explanatory
paragraph regarding the Companys adoption of DIG
Issue B-39.
Boston, Massachusetts
June 14, 2006
55
(c) Changes in internal controls
No change in our internal control over financial reporting (as
defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) occurred during the quarter ended
March 31, 2006 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
Item 9B.
|
Other
Information
|
The Companys 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 quarter ended June 30,
2006, subsequent to FDA approval of VIVITROL and the
Companys announcement of its financial results for the
fiscal year ended March 31, 2006, Mr. Richard F. Pops,
Mr. David A. Broecker, Mr. James M. Frates and
Mr. Michael J. Landine, executive officers of the Company,
entered into trading plans in accordance with
Rule 10b5-1
and the Companys 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.
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
The information required by this item is incorporated herein by
reference to our Proxy Statement for our annual
shareholders meeting (the 2006 Proxy
Statement).
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item is incorporated herein by
reference to the 2006 Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this item is incorporated herein by
reference to the 2006 Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information required by this item is incorporated herein by
reference to the 2006 Proxy Statement.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this item is incorporated herein by
reference to the 2006 Proxy Statement.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) (1) Financial
Statements The Consolidated Financial
Statements of Alkermes, Inc. required by this item are submitted
in a separate section beginning on
page F-1
of this Report.
(2) Financial Statement
Schedules All schedules have been omitted
because of the absence of conditions under which they are
required or because the required information is included in the
Consolidated Financial Statements or Notes thereto.
(3) Exhibits
56
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
|
|
|
3
|
.1
|
|
Third Amended and Restated
Articles of Incorporation as filed with the Pennsylvania
Secretary of State on June 7, 2001. (Incorporated by
reference to Exhibit 3.1 to the Registrants Report on
Form 10-K
for the fiscal year ended March 31, 2001.)
|
|
3
|
.1(a)
|
|
Amendment to Third Amended and
Restated Articles of Incorporation as filed with the
Pennsylvania Secretary of State on December 16, 2002 (2002
Preferred Stock Terms). (Incorporated by reference to
Exhibit 3.1 to the Registrants Current Report on
Form 8-K
filed on December 16, 2002.)
|
|
3
|
.1(b)
|
|
Amendment to Third Amended and
Restated Articles of Incorporation as filed with the
Pennsylvania Secretary of State on May 14, 2003
(Incorporated by reference to Exhibit A to Exhibit 4.1
to the Registrants Report on
Form 8-A
filed on May 2, 2003.)
|
|
3
|
.2
|
|
Second Amended and Restated
By-Laws of Alkermes, Inc. (Incorporated by reference to
Exhibit 3.2 to the Registrants Current Report on
Form 8-K
filed on September 28, 2005.)
|
|
4
|
.1
|
|
Specimen of Common Stock
Certificate of Alkermes, Inc. (Incorporated by reference to
Exhibit 4 to the Registrants Registration Statement
on
Form S-1,
as amended (File
No. 33-40250).)
|
|
4
|
.2
|
|
Specimen of Non-Voting Common
Stock Certificate of Alkermes, Inc. (Incorporated by reference
to Exhibit 4.4 to the Registrants Report on
Form 10-K
for the fiscal year ended March 31, 1999 (File
No. 001-14131).)
|
|
4
|
.3
|
|
Specimen of 2002 Preferred Stock
Certificate of Alkermes, Inc. (Incorporated by reference to
Exhibit 4.1 to the Registrants Report on
Form 8-K
filed on December 13, 2002.)
|
|
4
|
.4
|
|
Indenture, dated as of
February 18, 2000, between Alkermes, Inc. and State Street
Bank and Trust Company, as Trustee. (3.75% Subordinated
Notes) (Incorporated by reference to Exhibit 4.6 to the
Registrants Registration Statement on
Form S-3,
as amended filed on February 29, 2000 (File
No. 333-31354).)
|
|
4
|
.5
|
|
Form of 3.75% Subordinated
Note (Incorporated by reference to Exhibit 4.6 to the
Registrants Registration Statement on
Form S-3,
as amended filed on February 29, 2000 (File
No. 333-31354).)
|
|
4
|
.6
|
|
Rights Agreement, dated as of
February 7, 2003, as amended, between Alkermes, Inc. and
EquiServe Trust Co., N.A., as Rights Agent. (Incorporated by
reference to Exhibit 4.1 to the Registrants Report on
Form 8-A
filed on May 2, 2003.)
|
|
4
|
.7
|
|
Indenture, dated August 22,
2003, between Alkermes, Inc. and U.S. Bank National
Association, as Trustee (2.5% Subordinated Notes.)
(Incorporated by reference to Exhibit 4.7 to the
Registrants Registration Statement on
Form S-1,
as amended filed on September 3, 2003 (File
No. 333-108483).)
|
|
4
|
.8
|
|
Form of
21/2% Subordinated
Note (Incorporated by reference to Exhibit 4.7 to the
Registrants Registration Statement on
Form S-1,
as amended filed on September 3, 2003 (File
No. 333-108483).)
|
|
4
|
.9
|
|
Indenture, dated as of
February 1, 2005, between RC Royalty Sub LLC and
U.S. Bank National Association, as Trustee. (Incorporated
by reference to Exhibit 4.1 to the Registrants
Current Report on
Form 8-K
filed on February 3, 2005.)
|
|
4
|
.10
|
|
Form of Risperdal
Consta®
PhaRMAsm
Secured 7% Notes due 2018. (Incorporated by reference to
Exhibit 4.1 to the Registrants Current Report on
Form 8-K
filed on February 3, 2005.)
|
|
10
|
.1
|
|
Amended and Restated 1990 Omnibus
Stock Option Plan, as amended. (Incorporated by reference to
Exhibit 10.2 to the Registrants Report on
Form 10-K
for the fiscal year ended March 31, 1998 (File
No. 001-14131).)+
|
|
10
|
.2
|
|
Stock Option Plan for Non-Employee
Directors, as amended. (Incorporated by reference to
Exhibit 99.2 to the Registrants Registration
Statement on
Form S-8
filed on October, 1, 2003 (File
No. 333-109376).)+
|
|
10
|
.3
|
|
Alkermes, Inc. 1998 Equity
Incentive Plan. (Incorporated by reference to Exhibit 10.6
to the Registrants Report on
Form 10-K
for the fiscal year ended March 31, 1999 (File
No. 001-14131).)+
|
|
10
|
.4
|
|
1999 Stock Option Plan, as
amended. (Incorporated by reference to Exhibit 10.1 to the
Registrants Report on
Form 10-Q
for the quarter ended September 30, 2004.)+
|
57
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
|
|
|
10
|
.5
|
|
2002 Restricted Stock Award Plan.
(Incorporated by reference to Exhibit 10.2 to the
Registrants Report on
Form 10-Q
for the quarter ended September 30, 2002.)+
|
|
10
|
.6
|
|
Lease, dated as of
October 26, 2000, between FC88 Sidney, Inc. and Alkermes,
Inc. (Incorporated by reference to Exhibit 10.3 to the
Registrants Report on
Form 10-Q
for the quarter ended December 31, 2000.)
|
|
10
|
.7
|
|
Lease, dated as of
October 26, 2000, between Forest City 64 Sidney Street,
Inc. and Alkermes, Inc. (Incorporated by reference to
Exhibit 10.4 to the Registrants Report on
Form 10-Q
for the quarter ended December 31, 2000.)
|
|
10
|
.8
|
|
Lease, dated July 26, 1993,
between the Massachusetts Institute of Technology and Alkermes,
Inc. (Incorporated by reference to Exhibit 10.8 to the
Registrants Report on
Form 10-K
for the fiscal year ended March 31, 1997 (File
No. 000-19267).)
|
|
10
|
.8(a)
|
|
First Amendment of Lease, dated
June 9, 1997, between the Massachusetts Institute of
Technology and Alkermes, Inc. (Incorporated by reference to
Exhibit 10.8(a) to the Registrants Report on
Form 10-K
for the fiscal year ended March 31, 1997 (File
No. 000-19267).)
|
|
10
|
.9
|
|
License Agreement, dated as of
April 14, 1999, by and between Genentech, Inc. and Alkermes
Controlled Therapeutics, Inc. (Incorporated by reference to
Exhibit 10.18 to the Registrants Report on
Form 10-K
for the fiscal year ended March 31, 1999 (File
No. 001-14131).)*
|
|
10
|
.10
|
|
Manufacture and Supply Agreement,
entered into April 5, 2001, by and between Alkermes, Inc.
and Genentech, Inc. (Incorporated by reference to
Exhibit 10.16 to the Registrants Report on
Form 10-K
for the fiscal year ended March 31, 2001.)**
|
|
10
|
.11
|
|
License Agreement, dated as of
February 13, 1996, between Medisorb Technologies
International L.P. and Janssen Pharmaceutica International
(U.S.) (assigned to Alkermes Controlled Therapeutics
Inc. II in March 1996). (Incorporated by reference to
Exhibit 10.19 to the Registrants Report on
Form 10-K
for the fiscal year ended March 31, 1996 (File
No. 000-19267).)***
|
|
10
|
.12
|
|
License Agreement, dated as of
February 21, 1996, between Medisorb Technologies
International L.P. and Janssen Pharmaceutica International
(worldwide except U.S.) (assigned to Alkermes Controlled
Therapeutics Inc. II in March 1996). (Incorporated by
reference to Exhibit 10.20 to the Registrants Report
on
Form 10-K
for the fiscal year ended March 31, 1996 (File
No. 000-19267).)***
|
|
10
|
.13
|
|
Manufacturing and Supply
Agreement, dated August 6, 1997, by and among Alkermes
Controlled Therapeutics Inc. II, Janssen Pharmaceutica
International and Janssen Pharmaceutica, Inc. (Incorporated by
reference to Exhibit 10.19 to the Registrants Report
on
Form 10-K
for the fiscal year ended March 31, 2002.)§
|
|
10
|
.13(a)
|
|
Letter Agreement and Exhibits to
Manufacturing and Supply Agreement, dated February 1, 2002,
by and among Alkermes Controlled Therapeutics Inc. II,
Janssen Pharmaceutica International and Janssen Pharmaceutica,
Inc. (Incorporated by reference to Exhibit 10.19(a) to the
Registrants Report on
Form 10-K
for the fiscal year ended March 31, 2002.)§
|
|
10
|
.13(b)
|
|
Addendum to Manufacturing and
Supply Agreement, dated August 2001, by and among Alkermes
Controlled Therapeutics Inc. II, Janssen Pharmaceutica
International and Janssen Pharmaceutica, Inc. (Incorporated by
reference to Exhibit 10.19(b) to the Registrants
Report on
Form 10-K
for the fiscal year ended March 31, 2002.)§
|
|
10
|
.14
|
|
Fourth Amendment To Development
Agreement and First Amendment To Manufacturing and Supply
Agreement by and between JPI Pharmaceutica International,
Janssen Pharmaceutica Inc. and Alkermes Controlled Therapeutics
Inc. II, dated December 20, 2000 (with certain
confidential information deleted) (Incorporated by reference to
Exhibit 10.4 to the Registrants Report on
Form 10-Q
for the quarter ended December 31, 2004.).****
|
|
10
|
.15
|
|
Third Amendment To Development
Agreement, Second Amendment To Manufacturing and Supply
Agreement and First Amendment To License Agreements by and
between JPI Pharmaceutica International, Janssen Pharmaceutica
Inc. and Alkermes Controlled Therapeutics Inc. II, dated
April 1, 2000 (with certain confidential information
deleted) (Incorporated by reference to Exhibit 10.5 to the
Registrants Report on
Form 10-Q
for the quarter ended December 31, 2004.)****
|
58
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
|
|
|
10
|
.16
|
|
Agreement by and between JPI
Pharmaceutica International, Janssen Pharmaceutica Inc. and
Alkermes Controlled Therapeutics Inc. II, dated
December 21, 2002 (with certain confidential information
deleted) (Incorporated by reference to Exhibit 10.6 to the
Registrants Report on
Form 10-Q
for the quarter ended December 31, 2004.)****
|
|
10
|
.17
|
|
Amendment to Agreement by and
between JPI Pharmaceutica International, Janssen Pharmaceutica
Inc. and Alkermes Controlled Therapeutics Inc. II, dated
December 16, 2003 (with certain confidential information
deleted) (Incorporated by reference to Exhibit 10.7 to the
Registrants Report on
Form 10-Q
for the quarter ended December 31, 2004.)****
|
|
10
|
.18
|
|
Amendment to Manufacturing and
Supply Agreement by and between JPI Pharmaceutica International,
Janssen Pharmaceutica Inc. and Alkermes Controlled Therapeutics
Inc. II, dated December 22, 2003 (with certain
confidential information deleted) (Incorporated by reference to
Exhibit 10.8 to the Registrants Report on
Form 10-Q
for the quarter ended December 31, 2004.)****
|
|
10
|
.19
|
|
Fourth Amendment To Manufacturing
and Supply Agreement by and between JPI Pharmaceutica
International, Janssen Pharmaceutica Inc. and Alkermes
Controlled Therapeutics Inc. II, dated January 10,
2005 (with certain confidential information deleted)
(Incorporated by reference to Exhibit 10.9 to the
Registrants Report on
Form 10-Q
for the quarter ended December 31, 2004.)****
|
|
10
|
.20
|
|
Patent License Agreement, dated as
of August 11, 1997, between Massachusetts Institute of
Technology and Advanced Inhalation Research, Inc., as amended.
(Incorporated by reference to Exhibit 10.25 to the
Registrants Report on
Form 10-K
for the fiscal year ended March 31, 1999 (File
No. 001-14131).)*
|
|
10
|
.21
|
|
Promissory Note by and between
Alkermes, Inc. and General Electric Capital Corporation, dated
December 22, 2004. (Incorporated by reference to
Exhibit 10.1 to the Registrants Report on
Form 10-Q
for the quarter ended December 31, 2004.)
|
|
10
|
.22
|
|
Master Security Agreement by and
between Alkermes, Inc. and General Electric Capital Corporation
dated December 22, 2004. (Incorporated by reference to
Exhibit 10.2 to the Registrants Report on
Form 10-Q
for the quarter ended December 31, 2004.)
|
|
10
|
.23
|
|
Addendum No. 001 To Master
Security Agreement by and between Alkermes, Inc. and General
Electric Capital Corporation, dated December 22, 2004.
(Incorporated by reference to Exhibit 10.3 to the
Registrants Report on
Form 10-Q
for the quarter ended December 31, 2004.)
|
|
10
|
.24
|
|
Employment Agreement, entered into
as of February 7, 1991, between Richard F. Pops and the
Registrant. (Incorporated by reference to Exhibit 10.12 to
the Registrants Registration Statement on
Form S-1,
as amended (File
No. 33-40250).)+
|
|
10
|
.25
|
|
Change in Control Employment
Agreement, dated as of December 19, 2000, between Alkermes,
Inc. and Richard F. Pops. (Incorporated by reference to
Exhibit 10.1 to the Registrants Report on
Form 10-Q
for the quarter ended December 31, 2000.)+
|
|
10
|
.26
|
|
Change in Control Employment
Agreement, of various dates, between Alkermes, Inc. and each of
James M. Frates, Michael J. Landine, David A. Broecker and
Kathryn Biberstein. (Form of agreement incorporated by reference
to Exhibit 10.2 to Registrants Report on
Form 10-Q
for the quarter ended December 31, 2000.)+
|
|
10
|
.27
|
|
Employment Agreement, dated
December 22, 2000 by and between David A. Broecker and the
Registrant. (Incorporated by reference to Exhibit 10.32 to
the Registrants Report on
Form 10-K
for the fiscal year ended March 31, 2001.)+
|
|
10
|
.28
|
|
Employment Agreement, dated
January 8, 2003, by and between Kathryn L. Biberstein and
the Registrant. (Incorporated by reference to Exhibit 10.31
to the Registrants Report on
Form 10-K
for the fiscal year ended March 31, 2003.)+
|
|
10
|
.29
|
|
Stock Purchase Agreement, dated
December 13, 2002, between Alkermes and Eli Lilly and
Company. (Incorporated by reference to Exhibit 4.2 to the
Current Report on
Form 8-K
filed on December 16, 2002.)
|
59
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
|
|
|
10
|
.30
|
|
Registration Rights Agreement,
dated August 19, 2003, between Alkermes, Inc. and
U.S. Bancorp. Piper Jaffray Inc. (Incorporated by reference
to Exhibit 10.33 to the Registrants Registration
Statement on
Form S-1,
as amended filed on September 3, 2003 (File
No. 333-108483).)
|
|
10
|
.31
|
|
License and Collaboration
Agreement between Alkermes, Inc. and Cephalon, Inc. dated as of
June 23, 2005. (Incorporated by reference to
Exhibit 10.1 to the Registrants Report on
Form 10-Q
for the quarter ended June 30, 2005.)*****
|
|
10
|
.32
|
|
Supply Agreement between Alkermes,
Inc. and Cephalon, Inc. dated as of June 23, 2005.
(Incorporated by reference to Exhibit 10.2 to the
Registrants Report on
Form 10-Q
for the quarter ended June 30, 2005.)*****
|
|
10
|
.33
|
|
Amended and Restated
January 1, 2005 to March 31, 2006 Named Executive
Bonus Plan. (Incorporated by reference to Exhibit 10.1 to
the Registrants Report on
Form 10-Q
for the quarter ended September 30, 2005.)+
|
|
10
|
.34
|
|
Amendment to 1999 Stock Option
Plan, as amended. (Incorporated by reference to
Exhibit 10.2 to the Registrants Report on
Form 10-Q/A
for the quarter ended September 30, 2005.)+
|
|
10
|
.35
|
|
Form of Incentive Stock Option
Certificate pursuant to the 1999 Stock Option Plan, as amended.+#
|
|
10
|
.36
|
|
Form of Non-Qualified Stock Option
Certificate pursuant to the 1999 Stock Option Plan, as amended.+#
|
|
10
|
.37
|
|
Form of Stock Option Certificate
pursuant to Alkermes, Inc. 1998 Equity Incentive Plan.+#
|
|
21
|
.1
|
|
Subsidiaries of the Registrant#
|
|
23
|
.1
|
|
Consent of Independent Registered
Public Accounting Firm Deloitte & Touche LLP#
|
|
24
|
.1
|
|
Power of Attorney (included on
signature pages)#
|
|
31
|
.1
|
|
Rule 13a-14(a)/15d-14(a)
Certification#
|
|
31
|
.2
|
|
Rule 13a-14(a)/15d-14(a)
Certification#
|
|
32
|
.1
|
|
Certification pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.#
|
|
|
|
* |
|
Confidential status has been granted for certain portions
thereof pursuant to a Commission Order granted August 19,
1999. Such provisions have been filed separately with the
Commission. |
|
** |
|
Confidential status has been granted for certain portions
thereof pursuant to a Commission Order granted
September 27, 2001. Such provisions have been filed
separately with the Commission. |
|
*** |
|
Confidential status has been granted for certain portions
thereof pursuant to a Commission Order granted September 3,
1996. Such provisions have been filed separately with the
Commission. |
|
**** |
|
Confidential status has been granted for certain portions
thereof pursuant to a Commission Order granted
September 26, 2005. Such provisions have been filed
separately with the Commission. |
|
***** |
|
Confidential status has been requested for certain portions of
this document. Such provisions have been filed separately with
the Commission. |
|
§ |
|
Confidential status has been granted for certain portions
thereof pursuant to a Commission Order granted
September 16, 2002. Such provisions have been separately
filed with the Commission. |
|
+ |
|
Indicates a management contract or any compensatory plan,
contract or arrangement. |
|
# |
|
Filed herewith. |
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ALKERMES, INC.
Richard F. Pops
Chief Executive Officer
June 14, 2006
POWER OF
ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
Each person whose signature appears below in so signing also
makes, constitutes and appoints Richard F. Pops and James M.
Frates, and each of them, his true and lawful
attorney-in-fact,
with full power of substitution, for him in any and all
capacities, to execute and cause to be filed with the Securities
and Exchange Commission any and all amendments to this
Form 10-K,
with exhibits thereto and other documents in connection
therewith, and hereby ratifies and confirms all that said
attorney-in-fact
or his substitute or substitutes may do or cause to be done by
virtue hereof.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Michael
A. Wall
Michael
A. Wall
|
|
Director and Chairman of the Board
|
|
June 14, 2006
|
|
|
|
|
|
/s/ Richard
F. Pops
Richard
F. Pops
|
|
Director and Chief Executive
Officer (Principal Executive Officer)
|
|
June 14, 2006
|
|
|
|
|
|
/s/ James
M. Frates
James
M. Frates
|
|
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
|
|
June 14, 2006
|
|
|
|
|
|
/s/ Floyd
E. Bloom
Floyd
E. Bloom
|
|
Director
|
|
June 14, 2006
|
|
|
|
|
|
/s/ Robert
A. Breyer
Robert
A. Breyer
|
|
Director
|
|
June 14, 2006
|
|
|
|
|
|
/s/ Gerri
Henwood
Gerri
Henwood
|
|
Director
|
|
June 14, 2006
|
|
|
|
|
|
/s/ Paul
J. Mitchell
Paul
J. Mitchell
|
|
Director
|
|
June 14, 2006
|
61
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Alexander
Rich
Alexander
Rich
|
|
Director
|
|
June 14, 2006
|
|
|
|
|
|
/s/ Paul
Schimmel
Paul
Schimmel
|
|
Director
|
|
June 14, 2006
|
|
|
|
|
|
/s/ Mark
B. Skaletsky
Mark
B. Skaletsky
|
|
Director
|
|
June 14, 2006
|
62
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Alkermes, Inc.
Cambridge, Massachusetts
We have audited the accompanying consolidated balance sheets of
Alkermes, Inc. and subsidiaries (the Company) as of
March 31, 2006 and 2005, and the related consolidated
statements of operations and comprehensive income (loss),
shareholders equity, and cash flows for each of the three
years in the period ended March 31, 2006. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Alkermes, Inc. and subsidiaries as of March 31, 2006 and
2005, and the results of its operations and its cash flows for
each of the three years in the period ended March 31, 2006,
in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 2 to the consolidated financial
statements, in 2006, the Company adopted the provisions of
Derivatives Implementation Group
Issue B-39,
Embedded Derivatives: Application of Paragraph 13(b)
to Options that are Exercisable only by the Debtor.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of March 31, 2006, based on the
criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated June 14, 2006 expressed an unqualified
opinion on managements assessment of the effectiveness of
the Companys internal control over financial reporting and
an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.
Boston, Massachusetts
June 14, 2006
F-1
ALKERMES,
INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share
|
|
|
|
and per share amounts)
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
33,578
|
|
|
$
|
47,485
|
|
Investments short-term
|
|
|
264,389
|
|
|
|
155,082
|
|
Receivables
|
|
|
39,802
|
|
|
|
18,815
|
|
Inventory, net
|
|
|
7,341
|
|
|
|
3,766
|
|
Prepaid expenses and other current
assets
|
|
|
2,782
|
|
|
|
2,580
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
347,892
|
|
|
|
227,728
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT:
|
|
|
|
|
|
|
|
|
Land
|
|
|
301
|
|
|
|
269
|
|
Building and improvements
|
|
|
20,966
|
|
|
|
19,150
|
|
Furniture, fixtures and equipment
|
|
|
61,086
|
|
|
|
66,805
|
|
Equipment under capital lease
|
|
|
464
|
|
|
|
464
|
|
Leasehold improvements
|
|
|
45,842
|
|
|
|
45,991
|
|
Construction in progress
|
|
|
23,555
|
|
|
|
11,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,214
|
|
|
|
143,986
|
|
Less: accumulated depreciation and
amortization
|
|
|
(39,297
|
)
|
|
|
(48,798
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and
equipment net
|
|
|
112,917
|
|
|
|
95,188
|
|
|
|
|
|
|
|
|
|
|
RESTRICTED
INVESTMENTS long-term
|
|
|
5,145
|
|
|
|
4,903
|
|
OTHER ASSETS
|
|
|
11,209
|
|
|
|
11,055
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
477,163
|
|
|
$
|
338,874
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS
EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
$
|
36,141
|
|
|
$
|
18,803
|
|
Accrued interest
|
|
|
3,239
|
|
|
|
2,248
|
|
Accrued restructuring costs
|
|
|
852
|
|
|
|
1,228
|
|
Unearned milestone
revenue current portion
|
|
|
83,338
|
|
|
|
|
|
Derivative liability related to
convertible subordinated notes
|
|
|
|
|
|
|
265
|
|
Deferred
revenue current portion
|
|
|
200
|
|
|
|
|
|
Convertible subordinated
notes current portion
|
|
|
676
|
|
|
|
|
|
Long-term
debt current portion
|
|
|
1,214
|
|
|
|
1,124
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
125,660
|
|
|
|
23,668
|
|
|
|
|
|
|
|
|
|
|
NON-RECOURSE RISPERDAL CONSTA
SECURED 7% NOTES
|
|
|
153,653
|
|
|
|
150,730
|
|
CONVERTIBLE SUBORDINATED
NOTES LONG-TERM PORTION
|
|
|
124,346
|
|
|
|
123,022
|
|
LONG-TERM DEBT
|
|
|
1,519
|
|
|
|
2,733
|
|
UNEARNED MILESTONE
REVENUE LONG-TERM PORTION
|
|
|
16,198
|
|
|
|
|
|
DEFERRED
REVENUE LONG-TERM PORTION
|
|
|
750
|
|
|
|
|
|
OTHER LONG-TERM LIABILITIES
|
|
|
6,821
|
|
|
|
4,609
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
428,947
|
|
|
|
304,762
|
|
|
|
|
|
|
|
|
|
|
REDEEMABLE CONVERTIBLE PREFERRED
STOCK, par value, $0.01 per share; authorized and issued,
1,500 and 3,000 shares at March 31, 2006 and 2005,
respectively (at liquidation preference)
|
|
|
15,000
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
(Note 15)
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Capital stock, par value,
$0.01 per share; authorized, 4,550,000 shares
(includes 2,997,000 shares of preferred stock); issued, none
|
|
|
|
|
|
|
|
|
Common stock, par value,
$0.01 per share; authorized, 160,000,000 shares;
issued and outstanding, 91,744,680 and 89,999,526 shares at
March 31, 2006 and 2005, respectively
|
|
|
917
|
|
|
|
900
|
|
Nonvoting common stock, par value,
$0.01 per share; authorized 450,000 shares; issued and
outstanding, 382,632 shares at March 31, 2006 and 2005
|
|
|
4
|
|
|
|
4
|
|
Additional paid-in capital
|
|
|
654,850
|
|
|
|
630,492
|
|
Deferred compensation
|
|
|
(374
|
)
|
|
|
|
|
Accumulated other comprehensive
income (loss)
|
|
|
1,064
|
|
|
|
(221
|
)
|
Accumulated deficit
|
|
|
(623,245
|
)
|
|
|
(627,063
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
33,216
|
|
|
|
4,112
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS EQUITY
|
|
$
|
477,163
|
|
|
$
|
338,874
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-2
ALKERMES,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Years
Ended March 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share
amounts)
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing revenues
|
|
$
|
64,901
|
|
|
$
|
40,488
|
|
|
$
|
25,736
|
|
Royalty revenues
|
|
|
16,532
|
|
|
|
9,636
|
|
|
|
3,790
|
|
Research and development revenue
under collaborative arrangements
|
|
|
45,883
|
|
|
|
26,002
|
|
|
|
9,528
|
|
Net collaborative profit
|
|
|
39,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
166,601
|
|
|
|
76,126
|
|
|
|
39,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods manufactured
|
|
|
23,489
|
|
|
|
16,834
|
|
|
|
19,037
|
|
Research and development
|
|
|
89,068
|
|
|
|
91,065
|
|
|
|
91,097
|
|
Selling, general and administrative
|
|
|
40,383
|
|
|
|
28,823
|
|
|
|
26,029
|
|
Restructuring
|
|
|
|
|
|
|
11,527
|
|
|
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
152,940
|
|
|
|
148,249
|
|
|
|
135,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
13,661
|
|
|
|
(72,123
|
)
|
|
|
(96,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
11,569
|
|
|
|
3,005
|
|
|
|
3,409
|
|
Interest expense
|
|
|
(20,661
|
)
|
|
|
(7,394
|
)
|
|
|
(6,497
|
)
|
Derivative (loss) income related
to convertible subordinated notes
|
|
|
(1,084
|
)
|
|
|
4,385
|
|
|
|
(4,514
|
)
|
Other income (expense), net
|
|
|
333
|
|
|
|
(1,789
|
)
|
|
|
2,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(9,843
|
)
|
|
|
(1,793
|
)
|
|
|
(5,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
3,818
|
|
|
$
|
(73,916
|
)
|
|
$
|
(102,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
$
|
0.04
|
|
|
$
|
(0.82
|
)
|
|
$
|
(1.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
$
|
0.04
|
|
|
$
|
(0.82
|
)
|
|
$
|
(1.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
91,022
|
|
|
|
90,094
|
|
|
|
82,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
97,377
|
|
|
|
90,094
|
|
|
|
82,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,818
|
|
|
$
|
(73,916
|
)
|
|
$
|
(102,385
|
)
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
Unrealized gain (loss) on
marketable securities
|
|
|
1,285
|
|
|
|
(1,231
|
)
|
|
|
1,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS)
|
|
$
|
5,103
|
|
|
$
|
(75,147
|
)
|
|
$
|
(101,201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
ALKERMES,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
Years
Ended March 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvoting
|
|
|
Additional
|
|
|
|
|
|
Currency
|
|
|
Gain (Loss) on
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Deferred
|
|
|
Translation
|
|
|
Marketable
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Adjustments
|
|
|
Securities
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE April 1,
2003
|
|
|
64,692,848
|
|
|
$
|
647
|
|
|
|
382,632
|
|
|
$
|
4
|
|
|
$
|
447,104
|
|
|
$
|
(1,864
|
)
|
|
$
|
(111
|
)
|
|
$
|
(63
|
)
|
|
$
|
(450,762
|
)
|
|
$
|
(5,045
|
)
|
Issuance of common stock upon
exercise of options or vesting of restricted stock awards
|
|
|
569,084
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
3,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,410
|
|
Conversion of
6.52% convertible senior subordinated notes into interest
and common stock
|
|
|
24,043,329
|
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
|
177,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177,264
|
|
Restricted stock awards canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(220
|
)
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
Amortization of noncash compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,419
|
|
Cumulative foreign currency
translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
Unrealized gain on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,215
|
|
|
|
|
|
|
|
1,215
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(102,385
|
)
|
|
|
(102,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE March 31,
2004
|
|
|
89,305,261
|
|
|
|
893
|
|
|
|
382,632
|
|
|
|
4
|
|
|
|
627,446
|
|
|
|
(276
|
)
|
|
|
(142
|
)
|
|
|
1,152
|
|
|
|
(553,147
|
)
|
|
|
75,930
|
|
Issuance of common stock upon
exercise of options or vesting of restricted stock awards
|
|
|
694,265
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
3,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,030
|
|
Restricted stock awards canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25
|
)
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
Amortization of noncash compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251
|
|
Unrealized loss on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,231
|
)
|
|
|
|
|
|
|
(1,231
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(73,916
|
)
|
|
|
(73,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE March 31,
2005
|
|
|
89,999,526
|
|
|
|
900
|
|
|
|
382,632
|
|
|
|
4
|
|
|
|
630,492
|
|
|
|
|
|
|
|
(142
|
)
|
|
|
(79
|
)
|
|
|
(627,063
|
)
|
|
|
4,112
|
|
Issuance of common stock upon
exercise of options or vesting of restricted stock awards
|
|
|
921,477
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
8,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,559
|
|
Conversion of redeemable
convertible preferred stock into common stock
|
|
|
823,677
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
14,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
Restricted stock awards canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(89
|
)
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
905
|
|
|
|
(664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
241
|
|
Amortization of noncash compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201
|
|
Unrealized gain on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,285
|
|
|
|
|
|
|
|
1,285
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,818
|
|
|
|
3,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE March 31,
2006
|
|
|
91,744,680
|
|
|
$
|
917
|
|
|
|
382,632
|
|
|
$
|
4
|
|
|
$
|
654,850
|
|
|
$
|
(374
|
)
|
|
$
|
(142
|
)
|
|
$
|
1,206
|
|
|
$
|
(623,245
|
)
|
|
$
|
33,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
ALKERMES,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended March 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,818
|
|
|
$
|
(73,916
|
)
|
|
$
|
(102,385
|
)
|
Adjustments to reconcile net income
(loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
10,879
|
|
|
|
10,618
|
|
|
|
10,915
|
|
Restructuring charges
|
|
|
|
|
|
|
11,527
|
|
|
|
(208
|
)
|
Other non-cash charges
|
|
|
5,693
|
|
|
|
4,221
|
|
|
|
3,840
|
|
Derivative loss (income) related to
convertible subordinated notes
|
|
|
1,084
|
|
|
|
(4,385
|
)
|
|
|
4,514
|
|
(Gain) loss on investments
|
|
|
(761
|
)
|
|
|
1,961
|
|
|
|
(2,118
|
)
|
Gain on sale of equipment
|
|
|
(70
|
)
|
|
|
(172
|
)
|
|
|
(182
|
)
|
Cash paid on interest make-whole
provision
|
|
|
|
|
|
|
|
|
|
|
(2,325
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(20,987
|
)
|
|
|
(7,289
|
)
|
|
|
(4,225
|
)
|
Inventory, prepaid expenses and
other current assets
|
|
|
(3,777
|
)
|
|
|
(3,071
|
)
|
|
|
(20
|
)
|
Accounts payable, accrued expenses
and accrued interest
|
|
|
18,329
|
|
|
|
2,578
|
|
|
|
1,343
|
|
Accrued restructuring costs
|
|
|
(995
|
)
|
|
|
(1,628
|
)
|
|
|
(2,191
|
)
|
Unearned milestone revenue
|
|
|
99,536
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
950
|
|
|
|
(17,173
|
)
|
|
|
(5,207
|
)
|
Other long-term liabilities
|
|
|
2,831
|
|
|
|
2,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
116,530
|
|
|
|
(74,255
|
)
|
|
|
(98,249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and
equipment
|
|
|
(28,660
|
)
|
|
|
(17,817
|
)
|
|
|
(15,101
|
)
|
Proceeds from the sale of equipment
|
|
|
122
|
|
|
|
252
|
|
|
|
321
|
|
Proceeds from equipment
sale-leaseback
|
|
|
|
|
|
|
|
|
|
|
464
|
|
Purchases of
available-for-sale
investments
|
|
|
(661,671
|
)
|
|
|
(178,925
|
)
|
|
|
(220,062
|
)
|
Sales of
available-for-sale
investments
|
|
|
552,161
|
|
|
|
157,682
|
|
|
|
153,598
|
|
Decrease (increase) in other assets
|
|
|
176
|
|
|
|
30
|
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(137,872
|
)
|
|
|
(38,778
|
)
|
|
|
(80,879
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
stock
|
|
|
8,559
|
|
|
|
3,030
|
|
|
|
3,410
|
|
Proceeds from issuance of
Non-Recourse RISPERDAL CONSTA Secured 7% Notes, net of issuance
discount
|
|
|
|
|
|
|
150,271
|
|
|
|
|
|
Borrowings under term loan
|
|
|
|
|
|
|
3,676
|
|
|
|
|
|
Proceeds from issuance of
convertible subordinated notes
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
Payment of debt
|
|
|
(1,124
|
)
|
|
|
(239
|
)
|
|
|
(7,845
|
)
|
Payment of financing costs in
connection with issuance of notes
|
|
|
|
|
|
|
(6,119
|
)
|
|
|
(3,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
7,435
|
|
|
|
150,619
|
|
|
|
116,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON
CASH
|
|
|
|
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS
|
|
|
(13,907
|
)
|
|
|
37,586
|
|
|
|
(62,580
|
)
|
CASH AND CASH
EQUIVALENTS Beginning of year
|
|
|
47,485
|
|
|
|
9,899
|
|
|
|
72,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS End of year
|
|
$
|
33,578
|
|
|
$
|
47,485
|
|
|
$
|
9,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
14,319
|
|
|
$
|
3,238
|
|
|
$
|
9,547
|
|
Noncash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of
6.52% convertible senior subordinated notes and interest
into common stock
|
|
|
|
|
|
|
|
|
|
|
177,264
|
|
Equipment acquired under capital
lease
|
|
|
|
|
|
|
|
|
|
|
464
|
|
Conversion of redeemable
convertible preferred stock into common stock
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended March 31, 2006, 2005 and 2004
(In thousands, except share and per share amounts)
Alkermes, Inc. (the Company or Alkermes)
is a biotechnology company that develops products based on
sophisticated drug delivery technologies to enhance therapeutic
outcomes in major diseases. The Company has two commercial
products.
RISPERDAL®
CONSTA®
[(risperidone) long-acting injection] is the first and only
long-acting atypical antipsychotic medication approved for use
in schizophrenia and is marketed worldwide by Janssen-Cilag
(Janssen), a subsidiary of Johnson &
Johnson.
VIVITROLtm
(naltrexone for extended-release injectable suspension) is the
first and only once-monthly injection approved for the treatment
of alcohol dependence and is marketed in the United States
(U.S.) primarily by Cephalon, Inc.
(Cephalon). The Company has a pipeline of
extended-release injectable products and pulmonary products
based on its proprietary technologies and expertise.
Alkermes product development strategy is twofold: the
Company partners its proprietary technology systems and drug
delivery expertise with several of the worlds finest
pharmaceutical and biotechnology companies; and it also develops
novel, proprietary drug candidates for its own account. The
Companys headquarters are located in Cambridge,
Massachusetts, and it operates research and manufacturing
facilities in Massachusetts and Ohio.
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles of Consolidation The
consolidated financial statements include the accounts of
Alkermes, Inc. and its wholly-owned subsidiaries: Alkermes
Controlled Therapeutics, Inc. (ACT I); Alkermes
Controlled Therapeutics Inc. II (ACT II);
Alkermes Acquisition Corp.; Alkermes Europe, Ltd.; Advanced
Inhalation Research, Inc. (AIR); and RC Royalty Sub
LLC (Royalty Sub). Intercompany accounts and
transactions have been eliminated. 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 Subs non-recourse RISPERDAL CONSTA
secured 7% notes (the 7% Notes). Alkermes
Investments, Inc. was dissolved effective March 31, 2006.
Use of Estimates The preparation of the
Companys consolidated financial statements in conformity
with accounting principles generally accepted in the U.S.
(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 consolidated financial statements; and (3) the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
Fair Value of Financial Instruments The
carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate
fair value because of their short-term nature. Marketable equity
securities have been designated as
available-for-sale
and are recorded at fair value with any unrealized gains or
losses included as a component of accumulated other
comprehensive income (loss), included in shareholders
equity in the consolidated balance sheets.
F-6
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the carrying values and estimated
fair values of the Companys debt instruments and
redeemable convertible preferred stock at March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
2.5% convertible subordinated
notes, including embedded derivative liability
|
|
$
|
124,346
|
|
|
$
|
200,313
|
|
|
$
|
122,611
|
|
|
$
|
120,000
|
|
3.75% convertible
subordinated notes
|
|
|
676
|
|
|
|
663
|
|
|
|
676
|
|
|
|
608
|
|
7% Notes
|
|
|
153,653
|
|
|
|
158,100
|
|
|
|
150,730
|
|
|
|
153,000
|
|
Term loan
|
|
|
2,484
|
|
|
|
2,484
|
|
|
|
3,519
|
|
|
|
3,519
|
|
Obligation under capital lease
|
|
|
249
|
|
|
|
249
|
|
|
|
338
|
|
|
|
338
|
|
Redeemable convertible preferred
stock
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
30,000
|
|
|
|
30,000
|
|
The estimated fair values of the 2.5% convertible
subordinated notes (2.5% Subordinated Notes),
the 3.75% convertible subordinated notes (3.75%
Subordinated Notes) and the 7% Notes were based on
quoted market prices. The estimated fair values of the term
loan, obligation under capital lease and redeemable convertible
preferred stock (the Preferred Stock) were based on
prevailing interest rates or rates of return on similar
instruments and other factors. The increase in the fair value of
the 2.5% Subordinated Notes during the year ended
March 31, 2006 was primarily due to increases in the
Companys stock price, credit quality, credit spreads in
the market and treasury rates.
Earnings (Loss) Per Common Share Basic
earnings (loss) per common share is calculated based upon net
income (loss) 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 shares outstanding, as
adjusted for the effect of potential outstanding shares,
including stock options, stock awards, convertible preferred
stock and convertible debt. For periods during which the Company
reports a net loss from operations, basic and diluted net loss
per common share are equal since the impact of potential common
shares would have an anti-dilutive effect.
The average share price of Company common stock during the year
ended March 31, 2006, used for the calculation of stock
option equivalent shares, was $17.39.
Basic and diluted earnings (loss) per share for the years ended
March 31 were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,818
|
|
|
$
|
(73,916
|
)
|
|
$
|
(102,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding, basic
|
|
|
91,022
|
|
|
|
90,094
|
|
|
|
82,083
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
4,132
|
|
|
|
|
|
|
|
|
|
Stock awards
|
|
|
84
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred
stock
|
|
|
2,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common share
equivalents
|
|
|
6,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding, diluted
|
|
|
97,377
|
|
|
|
90,094
|
|
|
|
82,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following amounts were not included in the calculation of
earnings (loss) per common share because their effects were
anti-dilutive for the years ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for interest, net of tax
|
|
$
|
3,150
|
|
|
$
|
3,150
|
|
|
$
|
1,796
|
|
Adjustment for derivative loss
(income)
|
|
|
1,084
|
|
|
|
(4,385
|
)
|
|
|
4,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,234
|
|
|
$
|
(1,235
|
)
|
|
$
|
6,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
17,761
|
|
|
|
15,349
|
|
Stock awards
|
|
|
|
|
|
|
51
|
|
|
|
168
|
|
Redeemable convertible preferred
stock
|
|
|
|
|
|
|
2,021
|
|
|
|
3,467
|
|
2.5% convertible subordinated
notes
|
|
|
9,025
|
|
|
|
9,025
|
|
|
|
9,025
|
|
3.75% convertible
subordinated notes
|
|
|
10
|
|
|
|
10
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,035
|
|
|
|
28,868
|
|
|
|
28,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Recognition
Multiple
Element Arrangements
When a collaborative arrangement contains more than one revenue
generating element, the Company allocates revenue between the
elements based on each elements relative fair value,
provided that each element meets the criteria for treatment as a
separate unit of accounting. Revenue is then recognized when an
agreement exists, delivery has occurred and collection is
probable. An item is considered a separate unit of accounting if
it has value on a standalone basis and there is a fair value for
the undelivered items. Fair value is determined based upon
objective and reliable evidence, which includes terms negotiated
between the Company and its collaborative partners.
Revenue
Recognition Related to the License and Collaboration Agreement
and Supply Agreement (together, the Agreements) with
Cephalon.
The Companys revenue recognition policy related to the
Agreements complies with the Securities and Exchange
Commissions (SEC) Staff Accounting
Bulletin No. 101, Revenue Recognition in
Financial Statements, and Emerging Issues Task Force
Issue 00-21,
Revenue Arrangements with Multiple
Deliverables
(EITF 00-21)
for multiple element revenue arrangements entered into or
materially amended after June 30, 2003. For purposes of
revenue recognition, the deliverables under these Agreements are
generally separated into three units of accounting:
(i) shared profits and losses on the sustained-release
forms of naltrexone, including VIVITROL (the
Products); (ii) manufacturing of the Products;
and (iii) development and licenses for the Products.
Under the terms of the Agreements, the Company is responsible
for the first $120.0 million of net losses incurred on
VIVITROL (Product Losses) through December 31,
2007. If cumulative Product Losses exceed $120.0 million
through December 31, 2007, Cephalon will be responsible for
paying all Product Losses in excess of $120.0 million
during this period. If VIVITROL is profitable through
December 31, 2007, net profits will be shared equally
between the Company and Cephalon. After December 31, 2007,
net profits and losses earned on VIVITROL will be shared equally
between the Company and Cephalon.
The Company and Cephalon reconcile the costs incurred by each
party to develop, commercialize and manufacture the Products,
excluding certain development and registration costs for
VIVITROL for the initial
F-8
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
indication of alcohol dependence (the Initial
Indication) and the completion of the first manufacturing
line, to be paid solely by the Company, against revenues earned
on the Products, to determine net profits or losses on VIVITROL.
The Companys share of net profits and losses is recognized
in the period earned or incurred by the collaboration and is
recorded under the caption Net collaborative profit
in the Companys consolidated statements of operations and
comprehensive income (loss). Cumulative Product Losses since
inception of the Agreements through March 31, 2006 were
$41.0 million.
The nonrefundable payment of $160.0 million the Company
received from Cephalon in June 2005, and the nonrefundable
milestone payment of $110.0 million the Company received
from Cephalon in April 2006 upon approval by the U.S. Food
and Drug Administration (FDA) of the new drug
application (NDA) for VIVITROL, have been deemed to
be arrangement consideration in accordance with
EITF 00-21.
This arrangement consideration is recognized as milestone
revenue across the three accounting units referred to above. The
allocation of the arrangement consideration to each of the
accounting units was based initially on the fair value of each
unit as determined at the date of the Agreements, however, the
fair values are reviewed periodically and adjusted, as
appropriate. The above nonrefundable payments are, and will be,
recorded in the consolidated balance sheets under the captions
Unearned milestone revenue current
portion and Unearned milestone
revenue long-term portion prior to being
earned. The classification between the current and long-term
portions is based on the Companys best estimate of whether
the milestone revenue will be recognized during or after the
12-month
period following the reporting period, respectively.
Manufacturing
Revenues Related to the Agreements with Cephalon
Under the terms of the Agreements, the Company is responsible
for the manufacture of clinical and commercial supplies of
sustained-release forms of naltrexone, including VIVITROL, for
sale in the U.S. Under the terms of the Agreements, the
Company will bill Cephalon at cost for finished commercial
product shipped to them. The Company will record this
manufacturing revenue under the caption Manufacturing
revenues in the consolidated statements of operations and
comprehensive income (loss). An amount equal to this
manufacturing revenue will be recorded as cost of goods
manufactured in the Companys consolidated statements of
operations and comprehensive income (loss). No manufacturing
revenue or cost of goods manufactured related to VIVITROL was
recorded in the consolidated statements of operations and
comprehensive income (loss) in the years ended March 31,
2006, 2005 and 2004.
The amount of the arrangement consideration allocated to the
accounting unit manufacturing of the Products is
based on the estimated fair value of manufacturing profit to be
earned over the expected life of the Products, not to exceed the
total arrangement consideration the Company receives from
Cephalon, less the amount first allocated to the accounting unit
shared profits and losses on the Products.
Manufacturing profit is initially estimated at 10% of cost of
goods manufactured. The Company will recognize the earned
portion of the arrangement consideration allocated to this
accounting unit in proportion to the units of finished product
shipped during the reporting period, to the total expected units
of finished product to be shipped over the expected life of the
Products. The estimate of expected units shipped will be
adjusted periodically, as necessary, whenever events or changes
in circumstances indicate that supply assumptions have changed
significantly. Adjustments to the accrual schedule for this
milestone revenue that result from changed supply assumptions
are recognized prospectively over the remaining expected life of
the Products. This milestone revenue will be recorded under the
caption Manufacturing revenues in the consolidated
statements of operations and comprehensive income (loss). No
milestone revenue was recorded for this accounting unit in the
consolidated statements of operations and comprehensive income
(loss) during the years ended March 31, 2006, 2005 and 2004.
F-9
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net
Collaborative Profit Related to the Agreements with
Cephalon
The amount of the arrangement consideration allocated to the
accounting unit shared profits and losses on the
Products represents the Companys best estimate of
the Product Losses that the Company is responsible for through
December 31, 2007, plus an estimate of those development
costs to be incurred by the Company in the period preceding FDA
approval of VIVITROL and to complete the first manufacturing
line, for which the Company is solely responsible. The Company
estimates this loss to be approximately $137.0 million. The
Company recognizes the earned portion of the arrangement
consideration allocated to this accounting unit through the
period that the Company is responsible for Product Losses, being
the period ending December 31, 2007. This milestone revenue
directly offsets the Companys expenses incurred on
VIVITROL and Cephalons net losses on VIVITROL. This
milestone revenue is recorded under the caption Net
collaborative profit in the consolidated statements of
operations and comprehensive income (loss). During the years
ended March 31, 2006, 2005 and 2004, the Company recorded
$60.5 million, $0 and $0, respectively, for this accounting
unit in the consolidated statements of operations and
comprehensive income (loss).
Under the terms of the Agreements, the Company granted Cephalon
a co-exclusive license to the Companys patents and
know-how necessary to use, sell, offer for sale and import the
Products for all current and future indications in the
U.S. On a combined basis, the development and license
deliverables under the Agreements have value to the Company on a
stand-alone basis. That is, under the terms of the Agreements,
the additional development activities that the Company performs
for the Initial Indication of VIVITROL will result in a
marketable product that has value in the market place.
Accordingly, the amount of the arrangement consideration
allocated to the accounting unit development and licenses
for the Products is based on the residual method of
allocation as outlined in
EITF 00-21,
because fair value evidence exists separately for the other two
units of accounting under the Agreements but not on a combined
basis with this accounting unit. Consequently, arrangement
consideration allocated to this accounting unit will equal the
total arrangement consideration received from Cephalon less the
amounts allocated to the other two accounting units. The Company
will recognize the earned portion of this arrangement
consideration on a straight-line basis over the expected life of
VIVITROL, being ten years. This milestone revenue will be
recorded under the caption Net collaborative profit
in the consolidated statements of operations and comprehensive
income (loss). No milestone revenue was recorded for this
accounting unit in the consolidated statements of operations and
comprehensive income (loss) during the years ended
March 31, 2006, 2005 and 2004.
Under the terms of the Agreements, the Company reimburses
Cephalon for the net losses they incur on VIVITROL, provided
these net losses, together with the Companys
VIVITROL-related collaboration expenses, do not exceed
$120.0 million through December 31, 2007. This
reimbursement is recorded under the caption Net
collaborative profit in the consolidated statements of
operations and comprehensive income (loss). Once VIVITROL
becomes profitable, Cephalon will reimburse the Company for its
product-related expenses together with the Companys share
of the net profits, and this reimbursement will be recorded
under the caption Net collaborative profit in the
consolidated statements of operations and comprehensive income
(loss). During the years ended March 31, 2006, 2005 and
2004, the Company paid Cephalon $21.2 million, $0 and $0,
respectively, as reimbursement for the net losses they incurred
on VIVITROL.
If there are significant changes in the estimates of the fair
value of an accounting unit, the Company will reallocate the
arrangement consideration to the accounting units based on the
revised fair values. This revision will be recognized
prospectively in the consolidated statements of operations and
comprehensive income (loss) over the remaining terms of the
affected accounting units.
Under the terms of the Agreements, Cephalon will pay the Company
up to $220.0 million in nonrefundable milestone payments if
calendar year net sales of the Products exceed certain
agreed-upon sales levels. Under current accounting guidance, we
expect to recognize these milestone payments in the period
earned,
F-10
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
under the caption Net collaborative profit in the
consolidated statement of operations and comprehensive income
(loss).
Other Manufacturing Revenues Other
manufacturing revenues consist of revenues earned under certain
manufacturing and supply agreements with Janssen for RISPERDAL
CONSTA. Manufacturing revenues are earned when product is
shipped to the Companys collaborative partner.
Manufacturing revenues recognized by the Company for RISPERDAL
CONSTA are based on information supplied to the Company by
Janssen and require estimates to be made. In June 2004, the
Company announced a decision to discontinue commercialization of
NUTROPIN
DEPOT®
with Genentech, Inc. (Genentech). Manufacturing
revenues for NUTROPIN DEPOT ceased in the year ended
March 31, 2004.
Royalty Revenues Royalty revenues
consist of revenues earned under certain license agreements for
RISPERDAL CONSTA. Royalty revenues are earned on sales of
RISPERDAL CONSTA made by Janssen and are recorded in the period
the product is sold by Janssen. Royalty revenues recognized by
the Company for RISPERDAL CONSTA are based on information
supplied to the Company by Janssen and may require estimates to
be made. Royalty revenues for NUTROPIN DEPOT ceased in the year
ended March 31, 2005.
Research and Development Revenue Under Collaborative
Arrangements Research and development
revenue consists of nonrefundable research and development
funding under collaborative arrangements with various
collaborative partners. Research and development funding
generally compensates the Company for formulation, preclinical
and clinical testing related to the collaborative research
programs, and is recognized as revenue at the time the research
and development activities are performed under the terms of the
related agreements, when the collaborative partner is obligated
to pay and when no future performance obligations exist.
Fees for the licensing of technology or intellectual property
rights on initiation of collaborative arrangements are recorded
as deferred revenue upon receipt and recognized as income on a
systematic basis based upon the timing and level of work
performed or on a straight-line basis if not otherwise
determinable, over the period that the related products or
services are delivered or obligations, as defined in the related
agreement, are performed. Revenue from milestone or other
upfront payments is recognized as earned in accordance with the
terms of the related agreement. These agreements may require
deferral of revenue recognition to future periods.
Research and Development Expenses The
Companys research and development expenses include
employee compensation and related benefits, laboratory supplies,
temporary help costs, external research costs, consulting costs,
occupancy costs, depreciation expense and other allocable costs
directly related to the Companys research and development
activities. Research and development expenses are incurred in
conjunction with the development of the Companys
technologies, proprietary product candidates,
collaborators product candidates and in-licensing
arrangements. External research costs relate to toxicology
studies, pharmacokinetic studies and clinical trials that are
performed for the Company under contract by external companies,
hospitals or medical centers. All such costs are expensed as
incurred.
Stock Options and Awards The Company
uses the intrinsic value method to measure compensation expense
associated with the grants of stock options and awards to
employees. The Company accounts for stock options and awards to
non-employees using the fair-value method. Under the intrinsic
value method, compensation associated with stock options and
awards to employees is determined as the difference, if any,
between the current fair value of the underlying common stock on
the measurement date and the price an employee must pay to
exercise the award. Under the fair-value method, compensation
associated with stock awards is determined based on the
estimated fair value of the award itself, measured using either
current market data or an established option-pricing model. The
measurement date for employee awards is generally the grant
date, and the measurement date for non-employee awards is
generally the date performance of certain services is complete.
For the years ended March 31, 2006, 2005 and 2004,
stock-based compensation
F-11
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expense of $0.4 million, $0.3 million and
$1.5 million, respectively, was primarily related to the
amortization of stock awards and is included in research and
development expenses or selling, general and administrative
expenses, as appropriate.
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standard (SFAS) No. 123R,Share-Based
Payment (SFAS 123R), which is a
revision of SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123),
and supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees.
SFAS 123R requires all share-based payments, including
grants of stock options and stock awards, to be recognized in
the financial statements based generally on their grant date
fair values. SFAS 123R is effective for the Company in the
reporting period beginning April 1, 2006.
In accordance with SFAS No. 148, Accounting
for Stock Based Compensation Transition
and Disclosure, pro-forma information regarding net
earnings (loss) and basic and diluted net earnings (loss) per
common share for the years ended March 31, 2006, 2005 and
2004 has been presented as if the Company had accounted for its
employee stock options under the fair-value method. For purposes
of pro-forma disclosure, the estimated fair value of stock
options is amortized to pro-forma expense over the vesting
periods of the stock options.
Pro-forma information for the years ended March 31 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income
(loss) as reported
|
|
$
|
3,818
|
|
|
$
|
(73,916
|
)
|
|
$
|
(102,385
|
)
|
Add stock-based
compensation expense as reported in the consolidated statements
of operations and comprehensive income (loss)
|
|
|
442
|
|
|
|
299
|
|
|
|
1,503
|
|
Deduct total
stock-based compensation expense determined under the fair-value
method for all options and awards
|
|
|
(22,512
|
)
|
|
|
(20,786
|
)
|
|
|
(20,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss pro-forma
|
|
$
|
(18,252
|
)
|
|
$
|
(94,403
|
)
|
|
$
|
(121,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported earnings (loss) per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
$
|
(0.82
|
)
|
|
$
|
(1.25
|
)
|
Diluted
|
|
$
|
0.04
|
|
|
$
|
(0.82
|
)
|
|
$
|
(1.25
|
)
|
Pro forma loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.20
|
)
|
|
$
|
(1.05
|
)
|
|
$
|
(1.48
|
)
|
Diluted
|
|
$
|
(0.20
|
)
|
|
$
|
(1.05
|
)
|
|
$
|
(1.48
|
)
|
The fair value of the options was estimated at the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions for the year ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Expected life (years)
|
|
|
4.8
|
|
|
|
4.0
|
|
|
|
4.0
|
|
Interest rate
|
|
|
4.27
|
%
|
|
|
3.75
|
%
|
|
|
2.89
|
%
|
Volatility
|
|
|
50
|
%
|
|
|
67
|
%
|
|
|
73
|
%
|
Dividends
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Using the Black-Scholes option-pricing model, the
weighted-average fair value of options granted in the years
ended March 31, 2006, 2005 and 2004 was $8.41, $7.59 and
$6.45, respectively.
Income Taxes Deferred income taxes are
provided for temporary differences between the financial
reporting and tax bases of assets and liabilities and for net
loss and credit carryforwards. Deferred income taxes are
recognized at enacted rates expected to be in effect when
temporary differences reverse. Valuation
F-12
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
allowances are provided to the extent that it is more likely
than not that the deferred tax assets will not be recoverable.
Cash Equivalents Cash equivalents, with
remaining maturities of three months or less when purchased,
consist of money market accounts, mutual funds and an overnight
repurchase agreement. The repurchase agreement is fully
collateralized by U.S. government securities.
Investments At March 31, 2006 and
2005, all short-term and long-term investments consist of debt
securities (U.S. Treasury and other government securities,
commercial paper and corporate notes) that are classified as
available-for-sale
and recorded at fair value. Fair value was determined based on
quoted market prices.
Investments classified as long-term are restricted and held as
collateral under certain letters of credit related to the
Companys lease agreements.
Investments consist of the following at March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due Under
|
|
|
Due After
|
|
|
|
|
|
Gross Unrealized
|
|
|
Aggregate
|
|
|
|
One Year
|
|
|
One Year
|
|
|
Total
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments short-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
$
|
20,000
|
|
|
$
|
|
|
|
$
|
20,000
|
|
|
$
|
|
|
|
$
|
(110
|
)
|
|
$
|
19,890
|
|
Corporate debt securities
|
|
|
10,917
|
|
|
|
233,269
|
|
|
|
244,186
|
|
|
|
368
|
|
|
|
(55
|
)
|
|
|
244,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,917
|
|
|
|
233,269
|
|
|
|
264,186
|
|
|
|
368
|
|
|
|
(165
|
)
|
|
|
264,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments long-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
|
405
|
|
|
|
|
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
|
405
|
|
Corporate debt securities
|
|
|
4,740
|
|
|
|
|
|
|
|
4,740
|
|
|
|
|
|
|
|
|
|
|
|
4,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,145
|
|
|
|
|
|
|
|
5,145
|
|
|
|
|
|
|
|
|
|
|
|
5,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,062
|
|
|
$
|
233,269
|
|
|
$
|
269,331
|
|
|
$
|
368
|
|
|
$
|
(165
|
)
|
|
$
|
269,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments short-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
2,048
|
|
|
$
|
152,856
|
|
|
$
|
154,904
|
|
|
$
|
178
|
|
|
$
|
|
|
|
$
|
155,082
|
|
Investments long-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
|
4,900
|
|
|
|
|
|
|
|
4,900
|
|
|
|
3
|
|
|
|
|
|
|
|
4,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,948
|
|
|
$
|
152,856
|
|
|
$
|
159,804
|
|
|
$
|
181
|
|
|
$
|
|
|
|
$
|
159,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company also has investments in certain marketable equity
securities with a fair value of approximately $1.5 million
and $0.8 million as of March 31, 2006 and 2005,
respectively, which are currently classified as
available-for-sale
securities and are recorded under the caption Other
assets in the consolidated balance sheets. The cost of
such securities, net of write-downs for
other-than-temporary
impairment, was $1.0 million and $1.6 million as of
March 31, 2006 and 2005, respectively.
F-13
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventory, net Inventory, net is stated
at the lower of cost or market. Cost is determined in a manner
that approximates the
first-in,
first-out method. Inventory, net consists of the following at
March 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Raw materials
|
|
$
|
3,757
|
|
|
$
|
1,667
|
|
Work in process
|
|
|
2,083
|
|
|
|
992
|
|
Finished goods
|
|
|
1,501
|
|
|
|
1,107
|
|
|
|
|
|
|
|
|
|
|
Total(1)
|
|
$
|
7,341
|
|
|
$
|
3,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net of allowance for inventory losses of $0.8 million and
$0.3 million as of March 31, 2006 and March 31,
2005, respectively. |
Property, Plant and Equipment Property,
plant and equipment are recorded at cost. Depreciation and
amortization are recorded using the straight-line method over
the following estimated useful lives of the assets:
building 25 years; furniture, fixtures and
equipment 3 to 7 years; and, leasehold
improvements, over the shorter of the useful life of the assets
and the lease terms 1 to 20 years.
During the fourth quarter of fiscal 2006, the Company wrote down
approximately $18.5 million of fully depreciated furniture,
fixtures and equipment in accordance with its capital assets
accounting policy.
Amounts recorded as construction in progress in the consolidated
balance sheets consist primarily of costs incurred for the
expansion of the Companys manufacturing and research and
development facilities in Massachusetts and Ohio.
Property, plant and equipment acquired under capital leases
totaled $0.5 million as of March 31, 2006 and 2005,
and accumulated amortization of such assets totaled
$0.2 million and $0.1 million as of March 31,
2006 and 2005, respectively.
Other Assets Other assets consist
primarily of unamortized debt offering costs which are being
amortized over the lives of the expected principal repayment
periods of the related notes (5 to 7 years), and certain
marketable equity securities and warrants to purchase stock in
certain publicly traded companies (see Note 9).
Accrued Expenses As part of the process
of preparing the financial statements, the Company is required
to estimate certain accrued expenses. This process involves
identifying services that third parties have performed on the
Companys behalf and estimating the level of service
performed and the associated cost incurred for these services as
of the balance sheet date. Examples of accrued expenses are
contract service fees, such as amounts due to clinical research
organizations, professional service fees, such as attorneys and
accountants, and investigators fees in conjunction with
clinical trials. Accruals may be based on significant estimates.
In connection with these service fees, the Companys
estimates are most affected by its understanding of the status
and timing of services provided relative to the actual level of
services incurred by the service providers.
Unearned Milestone Revenue In June 2005,
the Company received from Cephalon a nonrefundable payment of
$160.0 million under the terms of the Agreements. The
payment was recorded in the consolidated balance sheet for the
year ended March 31, 2006 under the caption Unearned
milestone revenue current portion and
Unearned milestone revenue long-term
portion prior to being earned and is recognized as
milestone revenue across the three accounting units related to
the Agreements. The allocation of the arrangement consideration
to each of the accounting units under the Agreements was based
initially on the fair value of each unit as determined at the
date of the Agreements.
Deferred Revenue During the year ended
March 31, 2003, the Company received an up-front payment of
approximately $23.9 million from Janssen as an advance of
the first two years of minimum manufacturing
F-14
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
revenue amounts due under a manufacturing agreement based on the
approval and launch of RISPERDAL CONSTA in Germany and the
United Kingdom (see Note 13). As of March 31, 2006 and
2005, the entire $23.9 million has been recognized as
manufacturing revenue.
During the year ended March 31, 2004, Eli Lilly and Company
(Lilly) made payments to the Company totaling
approximately $7.0 million to fund an increase in the scope
of the Company and Lillys pulmonary insulin and pulmonary
human growth hormone development programs, which was recorded as
deferred revenue as of March 31, 2004. During the year
ended March 31, 2005, these amounts were expended and
recorded as research and development revenue under collaborative
agreements in the consolidated statement of operations and
comprehensive loss.
The Company has also received prepayments for research and
development costs under collaborative research projects with
other collaborative partners that are being amortized over the
estimated term of the agreements based upon services performed
or on a straight-line basis.
401(k) Plan The Companys 401(k)
retirement savings plan (the 401(k) Plan) covers
substantially all of its employees. Eligible employees may
contribute up to 100% of their eligible compensation, subject to
certain Internal Revenue Service limitations. The Company
matches a portion of employee contributions. The match is equal
to 50% of the first 6% of deferrals and is fully vested when
made. During the years ended March 31, 2006, 2005 and 2004,
the Company contributed approximately $1.1 million,
$0.9 million and $0.9 million, respectively, to match
employee deferrals under the 401(k) Plan.
Segments The Companys operations
consist of one operating segment, based on how the business is
evaluated by the Companys chief decision maker, the Chief
Executive Officer.
Reclassifications Manufacturing and
royalty revenues in the consolidated statements of operations
and comprehensive income (loss) for fiscal 2005 and 2004 have
been reclassified to conform to the fiscal 2006 presentation,
which separately presents manufacturing revenues and royalty
revenues.
New Accounting Pronouncements In
November 2004, the FASB issued SFAS No. 151,
Inventory Costs (SFAS 151),
which amends accounting research bulletin (ARB)
No. 43, Chapter 4, Inventory
Pricing, to clarify the accounting for idle facility
expense, freight, handling costs and waste (spoilage).
SFAS 151 is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005, and, thus, will
be effective for the Company for the reporting period beginning
April 1, 2006. The Company believes its current accounting
policies closely align to the new rules. Accordingly, the
Company does not believe this new standard will have a material
impact on its consolidated financial statements.
In December 2004, the FASB issued SFAS 123R, which is a
revision of SFAS 123 and supersedes accounting principles
board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees. SFAS 123R requires
all share-based payments, including grants of stock options and
stock awards, to be recognized in the financial statements based
generally on their grant date fair values. SFAS 123R is
effective for the Company in the reporting period beginning
April 1, 2006. The Company will adopt the provisions of
SFAS 123R using the modified prospective transition method,
and will recognize share-based compensation cost on a
straight-line basis over the requisite service periods of
awards. The company will recognize share-based compensation cost
for awards that have graded vesting on a straight-line basis
over the requisite service period for each separately vesting
portion. Under the modified prospective method, share-based
compensation expense will be recognized for the portion of
outstanding stock options and stock awards granted prior to the
adoption of SFAS 123R for which service has not been
rendered, and for any future stock options and stock awards.
Although the adoption of SFAS 123R is not expected to have
a significant effect on the Companys cash flows, the
Company expects to record substantial non-cash compensation
expense that will have a significant, adverse effect on its
results of operations and comprehensive income (loss). The
impact of adoption of SFAS 123R depends on estimates of
stock price volatility, option terms, interest rates, the number
and type of stock options and stock awards granted during the
reporting period, as well as other factors. The Company
F-15