e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
March 31, 2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number: 1-14131
ALKERMES, INC.
(Exact name of registrant as
specified in its charter)
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Pennsylvania
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23-2472830
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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88 Sidney Street, Cambridge,
MA
(Address of principal
executive offices)
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02139-4234
(Zip Code)
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(617) 494-0171
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(g) of the
Act:
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Common Stock, par value $.01 per
share
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Series A Junior Participating
Preferred Stock Purchase Rights
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The NASDAQ Stock Market LLC
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Title of each class
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Name of exchange on which
registered
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Securities registered pursuant to Section 12(b) of the
Act:
None
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 29, 2006 (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
Stock Market on September 29, 2006.
As of June 11, 2007, 100,994,709 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, 2007 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, 2007
INDEX
2
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. (as used in this section, together with our
subsidiaries, us, we or our)
is a biotechnology company that develops innovative medicines
designed to yield better therapeutic outcomes and improve the
lives of patients with serious disease. We currently have two
commercial products:
RISPERDAL®
CONSTA®
[(risperidone) long-acting injection], the first and only
long-acting atypical antipsychotic medication approved for use
in schizophrenia, and marketed worldwide by Janssen-Cilag
(Janssen), a wholly owned division of
Johnson & Johnson; and
VIVITROL®
(naltrexone for extended-release injectable suspension), the
first and only once-monthly injectable medication approved for
the treatment of alcohol dependence and marketed in the United
States (U.S.) primarily by Cephalon, Inc.
(Cephalon). Our pipeline includes extended-release
injectable, pulmonary, and oral products for the treatment of
prevalent, chronic diseases such as central nervous system
disorders, addiction and diabetes. Our headquarters are in
Cambridge, Massachusetts, and we operate research and
manufacturing facilities in Massachusetts and Ohio.
Our
Strategy
We leverage our unique formulation expertise and drug
development technologies to develop, both with partners and on
our own, innovative and competitively advantaged drug products
that enhance patient outcomes in major therapeutic areas.
We enter into select collaborations with pharmaceutical and
biotechnology companies to develop significant new product
candidates, based on existing drugs and incorporating our
technologies. In addition, we develop our own proprietary
therapeutics by applying our innovative formulation expertise
and drug development capabilities to create new pharmaceutical
products. Each of these approaches is discussed in more detail
in Products and Development Programs.
Products
and Development Programs
RISPERDAL
CONSTA
Using our proprietary
Medisorb®
technology, we developed RISPERDAL CONSTA, a long-acting
formulation of Janssens antipsychotic drug
RISPERDAL®,
for the treatment of schizophrenia. Schizophrenia is a brain
disorder characterized by disorganized thinking, delusions and
hallucinations. Studies have demonstrated that as many as
75 percent of patients with schizophrenia have difficulty
taking their oral medication on a regular basis, which can lead
to worsening of symptoms. Clinical data has shown that treatment
with RISPERDAL CONSTA may lead to improvements in symptoms,
sustained remission, and decreases in hospitalization. RISPERDAL
CONSTA is administered via intramuscular injection every two
weeks, alleviating the need for daily dosing. In fiscal year
2007, Johnson & Johnson reported $924.2 million
in sales of RISPERDAL CONSTA worldwide. We are the exclusive
manufacturer of RISPERDAL CONSTA for Janssen, and we earn both
manufacturing fees and royalties from Janssen. In fiscal year
2007, we reported $111.8 million in manufacturing and
royalty revenues from RISPERDAL CONSTA. See Collaborative
Arrangements Janssen for more information
about manufacturing fees and royalties received from Janssen.
RISPERDAL CONSTA was approved by regulatory authorities in the
United Kingdom and Germany in August 2002 and was approved by
the U.S. Food and Drug Administration (FDA) in
October 2003. RISPERDAL CONSTA is approved in approximately 80
countries and marketed in approximately 60 countries, and
Janssen continues to launch the product around the world. In
December 2006, we announced
3
that Janssen submitted a new drug application (NDA)
to the Pharmaceuticals and Medical Devices Agency for marketing
approval of RISPERDAL CONSTA in Japan.
Janssen continues to develop RISPERDAL CONSTA and explore its
efficacy in different patient populations. In April 2007, the
FDA approved a 12.5 mg dose of RISPERDAL CONSTA for the
treatment of schizophrenia within specific patient populations,
including those with renal and hepatic impairment. The new dose
of RISPERDAL CONSTA will provide physicians with more options to
individualize treatment approaches and adjust therapies when
clinical factors warrant dose changes.
In May 2007, the results of a study in symptomatically stable
patients were presented at the American Psychiatric Association
Annual Meeting. In this study, 44.8 percent of symptomatic
schizophrenia patients who switched to RISPERDAL CONSTA achieved
sustained remission at 18 months.
In October 2006, the results of an observational study conducted
among a population of U.S. veterans were presented at the
American Psychiatric Associations 58th Institute of
Psychiatric Services. In this study, patients with schizophrenia
or schizoaffective disorder taking RISPERDAL CONSTA were
observed to have fewer psychiatric-related hospitalizations, and
additionally fewer psychiatric-related inpatient days per month,
improved antipsychotic medication compliance, and lower total
monthly medical costs, as compared to their experience prior to
initiating treatment with RISPERDAL CONSTA.
Janssen has an ongoing phase 3 clinical program with RISPERDAL
CONSTA to expand 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.
VIVITROL
We developed VIVITROL, an extended-release Medisorb formulation
of naltrexone, 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. Alcohol dependence is a serious and chronic brain
disease characterized by cravings for alcohol, loss of control
over drinking, withdrawal symptoms and an increased tolerance
for alcohol. Adherence to medication is particularly challenging
with this patient population. In clinical trials, when used in
combination with psychosocial support, VIVITROL was shown to
reduce the number of drinking days and heavy drinking days and
to prolong abstinence in patients who abstained from alcohol the
week prior to starting treatment. Each injection of VIVITROL
provides medication for one month and alleviates the need for
patients to make daily medication dosing decisions. In our
fiscal year 2007, Cephalon reported $6.6 million in gross
sales of VIVITROL. See Collaborative
Arrangements Cephalon for more information
about revenues related to the Cephalon collaboration.
VIVITROL was approved by the FDA in April 2006 and launched in
June 2006. In March 2007, we submitted a Marketing Authorization
Application (MAA) for VIVITROL to regulatory
authorities in the United Kingdom and Germany. The MAA for
VIVITROL was submitted under a decentralized procedure, in which
the United Kingdom will act as the Reference Member State and
Germany will act as the Concerned Member State for the
application. If successful, a filing under the decentralized
procedure would result in a simultaneous approval of VIVITROL as
a treatment for alcohol dependence in these two countries. The
MAA submission reflects the Companys targeted approach to
commercialize VIVITROL in Europe on a country by country basis.
We are currently assessing the development of VIVITROL for
opioid dependence.
AIR
Insulin
We are collaborating with Eli Lilly and Company
(Lilly) to develop inhaled formulations of insulin
and other potential products for the treatment of diabetes based
on our
AIR®
pulmonary technology. Diabetes is a disease in which the body
does not produce or properly use insulin. Diabetes can result in
serious health complications, including cardiovascular, kidney
and nerve disease. Our inhaled insulin formulation, AIR Insulin,
currently in phase 3 clinical development, may improve the
treatment of diabetes by providing a
4
simpler dosing regimen, thereby potentially increasing
medication adherence and leading to better health outcomes for
patients.
As part of the comprehensive pivotal phase 3 program that began
in July 2005, Lilly is currently conducting multiple clinical
studies to evaluate the safety and efficacy of AIR Insulin. The
phase 3 program includes two long-term safety and efficacy
studies: a
24-month
study in 400 type 1 diabetes patients; and a
12-month
study in 600 type 1 and type 2 diabetes patients with mild to
moderate asthma or mild to moderate chronic obstructive lung
disease. Enrollment in the
24-month
study was completed in June 2006. Lilly is responsible for the
design and conduct of clinical trials.
In June 2006, we and Lilly reported study results of the
investigational AIR Insulin system, including the first
published analysis of the effect of chronic obstructive
pulmonary disease (COPD) on inhaled insulin
absorption and action. This phase 1 study, presented at the
American Diabetes Associations (ADA)
66th Annual Scientific Sessions, evaluated the impact of
compromised lung function on inhaled insulin dose delivery.
Study results showed that AIR Insulin was generally well
tolerated and that the absorption and action of AIR Insulin was
reduced by a consistent amount in patients with COPD. An
additional study, also presented at the ADAs
66th Annual Scientific Sessions, demonstrated that patients
were able to use the AIR Insulin system with minimal training.
Exenatide
LAR
We are collaborating with Amylin Pharmaceuticals, Inc.
(Amylin) on the development of a long-acting release
(LAR) injectable formulation of Amylins
exenatide (exenatide) for the treatment of type 2
diabetes. 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 2 diabetes who
have not achieved adequate control on metformin
and/or
sulfonylurea, two commonly used oral diabetes medications. In
December 2006, the FDA approved BYETTA as an add-on therapy for
people with type 2 diabetes unable to achieve adequate glucose
control on thiazolidinedione, a class of diabetes medications.
BYETTA is a twice-daily injection. Exenatide LAR is being
developed as a once-weekly formulation to provide a more
patient-friendly treatment option. Amylin entered into a
collaboration agreement with Lilly for the development and
commercialization of exenatide, including exenatide LAR.
In June 2006, we, Amylin and Lilly reported detailed results
from a safety and efficacy study of exenatide LAR at the
ADAs 66th Annual Scientific Sessions. Data from this
phase 2 study in 45 patients with type 2 diabetes
demonstrated that 86 percent of patients receiving a
2.0 mg dose of exenatide LAR were able to achieve
recommended levels of glucose control, as measured by hemoglobin
A1C, with an average improvement of approximately two percent
compared to placebo. None of the patients receiving placebo
achieved the recommended level of glucose control. No severe
hypoglycemia was observed, and no subjects receiving either dose
of exenatide LAR withdrew because of adverse events.
A pivotal study of exenatide LAR is currently underway. The
study is designed to evaluate the efficacy and safety of
exenatide LAR, as compared to BYETTA, in approximately 300
subjects with type 2 diabetes who are not achieving adequate
glucose control using diet and exercise with or without the use
of oral antidiabetic agents. Enrollment in this study was
completed in March 2006 and we expect to provide top-line
results in the fourth quarter of calendar year 2007. In parallel
with clinical activities, manufacturing process development and
scale-up
activities are underway. Amylin recently announced the
completion of manufacturing
scale-up to
the intermediate batch size, and this material is being used in
the pivotal study. In addition, using a third-party
manufacturer, Amylin has successfully completed engineering runs
at a commercial scale. Amylin is constructing a facility in West
Chester, Ohio for the commercial manufacture of exenatide LAR
and is currently on track to finalize the commercial
manufacturing process for exenatide LAR by the end of calendar
year 2008.
5
ALKS
29
In October 2006, we announced the expansion of our addiction
franchise to include a program to develop oral products for the
treatment of addiction. We are developing ALKS 29 in oral dosage
form for the treatment of alcohol dependence.
In March 2007, we completed patient enrollment in a phase 1/2
clinical study of ALKS 29. The multi-center, randomized,
double-blind, placebo-controlled trial is designed to assess the
safety and efficacy of ALKS 29 in approximately 150 subjects
with alcohol dependence.
ALKS
27
Using our AIR pulmonary technology, we are developing ALKS 27,
an inhaled formulation of trospium chloride, with Indevus
Pharmaceuticals, Inc. (Indevus), for the treatment
of COPD. COPD is a serious, chronic disease characterized by a
gradual loss of lung function. Trospium chloride is a muscarinic
receptor antagonist that relaxes smooth muscle tissue and has
the potential to improve airflow in patients with COPD. Trospium
chloride is the active ingredient in
SANCTURA®,
Indevus currently marketed product for overactive bladder.
The majority of medications currently available for the
treatment of COPD are short-acting, requiring patients to take
multiple daily doses, and many utilize metered dose inhalers. A
once-daily formulation of ALKS 27 could potentially improve
airflow and provide a new treatment option for patients with
COPD.
In April 2007, we and Indevus initiated a phase 2a clinical
study of ALKS 27 in patients with COPD. The study is designed to
assess the safety, tolerability, pharmacokinetics and efficacy
of single doses of ALKS 27 in patients with COPD. The companies
intend to engage in discussions with potential partners for
future development and commercialization of ALKS 27.
We and Indevus announced our joint collaboration in January 2007
after the completion of extensive feasibility work, preclinical
studies and a phase 1 study of ALKS 27 in healthy volunteers.
Preliminary results from this phase 1 study showed that ALKS 27
was well tolerated over a wide dose range, with no dose-limiting
effects observed.
AIR
parathyroid hormone
We are developing inhaled formulations of parathyroid hormone
(PTH) with Lilly for the treatment of osteoporosis,
a progressive disease in which the bones become weak and are
more likely to break. The development program utilizes our AIR
pulmonary technology in combination with Lillys
recombinant PTH,
FORTEO®
(teriparatide (rDNA origin) injection). FORTEO was approved by
the FDA in 2002 to treat osteoporosis in postmenopausal women
who are at high risk for bone fracture and to increase bone mass
in men with primary or hypogonadal osteoporosis who are at high
risk for fracture. Our inhaled formulation of PTH (AIR
PTH) could provide an important new treatment option for
people with osteoporosis.
In June 2007, we announced the initiation of a phase 1 clinical
study of AIR PTH in healthy volunteers. The phase 1 study will
assess the safety, tolerability and pharmacokinetics of AIR PTH
in healthy postmenopausal women.
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
Under a product development agreement, we collaborated with
Janssen on the development of RISPERDAL CONSTA. Under the
development agreement, Janssen provided funding to us for the
6
development of RISPERDAL CONSTA, and Janssen is responsible for
securing all necessary regulatory approvals for the product.
RISPERDAL CONSTA has been approved in approximately 80
countries. RISPERDAL CONSTA has been launched in approximately
60 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 license agreements, we granted Janssen and an affiliate of
Janssen exclusive worldwide licenses to use and sell RISPERDAL
CONSTA. 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. Janssen can terminate the license agreements
upon 30 days prior written notice to us.
Under our manufacturing and supply agreement with Janssen, we
record manufacturing revenues when product is shipped to
Janssen, based on a percentage of Janssens net unit sales
price for RISPERDAL CONSTA for the calendar year. This
percentage is determined based on Janssens unit demand for
the calendar year and varies based on the volume of units
shipped, with a minimum manufacturing fee of 7.5%.
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
license agreements, the royalty rate payable to us on
Janssens net sales of RISPERDAL CONSTA would increase from
2.5% to 5.0%.
Cephalon
In June 2005, we entered into a license and collaboration
agreement and supply agreement with Cephalon (together the
Agreements) to jointly develop, manufacture and
commercialize extended-release forms of naltrexone, including
VIVITROL (the product or products), in
the U.S. Under the terms of the Agreements, we provided
Cephalon with a co-exclusive license to use and sell the product
in the U.S. and a non-exclusive license to manufacture the
product under certain circumstances, with the ability to
sublicense. We 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, and
for completing the first VIVITROL manufacturing line. The
companies share responsibility for additional development of the
products, which may include continuation of clinical trials,
performance of new clinical trials, the development of new
indications for the products and work to improve the
manufacturing process and increase manufacturing yields. We and
Cephalon also 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. The managers of market
development facilitate the sale of VIVITROL in the market and
are also responsible for selling VIVITROL directly to various
U.S. Department of Veterans Affairs and Department of
Defense facilities. 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 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. Under the terms of the Agreements, we are
responsible to pay the first $124.6 million of net losses
incurred on VIVITROL through December 31, 2007 (the
cumulative net loss cap). These net product losses
exclude development costs incurred by us to obtain FDA approval
of VIVITROL and costs to complete the first manufacturing line,
both of which were our sole responsibility. If these net product
losses exceed the cumulative net loss cap through
December 31, 2007, Cephalon is responsible to pay all net
product losses in
7
excess of the cumulative net loss cap during this period. If
VIVITROL is profitable through December 31, 2007, net
profits will be divided between us and Cephalon in approximately
equal shares. After December 31, 2007, all net profits and
losses earned on VIVITROL will be divided between us and
Cephalon in approximately equal shares.
In October 2006, we and Cephalon entered into binding amendments
to the license and collaboration agreement and the supply
agreement (the Amendments). Under the Amendments,
the parties agreed that Cephalon would purchase from us two
VIVITROL manufacturing lines (and related equipment) under
construction, which will continue to be operated at our
manufacturing facility. Cephalon also agreed to be responsible
for its own losses related to the products during the period
August 1, 2006 through December 31, 2006. In December
2006, we received a $4.6 million payment from Cephalon as
reimbursement for certain costs incurred by us prior to October
2006, which we had charged to the collaboration and that were
related to the construction of the VIVITROL manufacturing lines.
These costs consisted primarily of internal or temporary
employee time, billed at negotiated full-time equivalent
(FTE) rates. We and Cephalon agreed to increase the
cumulative net loss cap from $120.0 million to
$124.6 million to account for this reimbursement. During
the fiscal year ended March 31, 2007, we billed Cephalon
$21.6 million for the sale of the two VIVITROL
manufacturing lines, and we will bill Cephalon for future costs
we incur related to the construction of the manufacturing lines.
Beginning in October 2006, all FTE-related costs we incur that
are reimbursable by Cephalon and related to the construction and
validation of the two VIVITROL manufacturing lines are recorded
as research and development revenue as incurred. Cephalon has
granted us an option, exercisable after two years, to repurchase
the two VIVITROL manufacturing lines at the then-current net
book value of the assets. Because we continue to operate and
maintain the equipment and intend to do so for the foreseeable
future, the payments made by Cephalon for the assets have been
treated as additional consideration under the Agreements. The
assets remain on our books.
The Agreements and Amendments 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 our AIR pulmonary 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 products.
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
8
party which is not cured within 90 days of written notice
of material breach or default or within a longer period that is
reasonably necessary to affect this cure.
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 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 purchase
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 this
Preferred Stock primarily to fund the AIR Insulin development
program; we also agreed to use a portion of the proceeds to fund
other development programs. We did not record research and
development revenue on these programs while they were funded by
the proceeds of the Preferred Stock. 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 October 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. This conversion secured a proportionate increase in the
royalty rate payable to us on future sales of the AIR Insulin
product by Lilly, if approved. In December 2006, Lilly exercised
its right to put the remaining 1,500 shares of the
outstanding Preferred Stock, with a carrying value of
$15.0 million, in exchange for a reduction in the royalty
rate payable to us on future sales of the AIR Insulin product by
Lilly, if approved (See Note 9 to the consolidated
financial statements for information on the Preferred Stock).
In December 2006, we and Lilly entered into a commercial
manufacturing agreement for AIR Insulin. Under the agreement, we
are the exclusive commercial manufacturer and supplier of AIR
Insulin powder for the AIR Insulin system. The agreement
provides for Lilly to fund all operating costs of the portion of
our commercial-scale production facility used to manufacture AIR
Insulin products. In addition, Lilly will fund the design,
construction, and validation of a second manufacturing line at
the facility to meet post-launch requirements for AIR Insulin
production. We are responsible for overseeing the design,
construction and validation of the second manufacturing line.
Under the commercial manufacturing agreement, Lilly supplies all
bulk active pharmaceutical product to us at no cost and is
responsible for product packaging. Lilly will reimburse us for
costs we previously incurred for the construction of the second
manufacturing line, and Lilly will own all equipment purchased.
We have the option to purchase this equipment from Lilly at any
time at Lillys then-current net book value or at a
negotiated purchase price not to exceed Lillys
then-current net book value upon termination of the commercial
manufacturing agreement.
In the event that the AIR Insulin product is commercialized,
Lilly will purchase delivered AIR Insulin powder from us at cost
plus a fee. In addition to the manufacturing fee, we earn
royalties at a low double digit rate on net sales of the AIR
Insulin product by Lilly.
Lilly has the right to terminate the commercial manufacturing
agreement at any time following the fourth anniversary of the
effective date of the agreement by providing 90 days
prior written notice to us, subject to certain continuing rights
and obligations. We have the right to terminate the commercial
manufacturing agreement at any time within 90 days after
the end of any calendar year that is four or more years after
the launch of the first product, by providing 90 days
prior written notice to Lilly, if the manufacture of the
manufactured items purchased by Lilly in such calendar year
requires less than 75 percent of the capacity of the
manufacturing lines covered by the agreement. This termination
right is subject to certain continuing rights and obligations.
In addition, either party may terminate the agreement for any
material breach by the other
9
party which is not cured within 90 days written
notice of this material breach or within a longer period that is
reasonably necessary to affect this cure.
Unless it is earlier terminated, the commercial manufacturing
agreement continues in effect until expiration or termination of
the development and license agreement that we entered into with
Lilly in April 2001 for the development of inhaled formulations
of insulin and other compounds.
AIR
PTH
In December 2005, we entered into an agreement with Lilly to
develop and commercialize an inhaled formulation of PTH
utilizing our AIR pulmonary technology. The initial development
program will utilize our AIR pulmonary technology in combination
with Lillys recombinant PTH, also used in
FORTEO®
(teriparatide (rDNA origin) injection). FORTEO was approved by
the FDA in 2002 to treat osteoporosis in postmenopausal women
who are at high risk for bone fracture and to increase bone mass
in men with primary or hypogonadal osteoporosis who are at high
risk for 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 manufacture of the products
for preclinical, phase 1 and phase 2 clinical trials. Not later
than the completion of phase 2 clinical trials for the product,
the parties will negotiate a manufacturing agreement for phase 3
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 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 2 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. 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.
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, construction 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
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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.
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 for a
product developed under the development and license agreement or
upon 180 days written notice to us 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 after receipt
of written notice specifying the default or breach.
Indevus
In January 2007, we and Indevus announced that we had entered
into a joint collaboration for the development of ALKS 27, an
inhaled formulation of trospium chloride for the treatment of
COPD. Under the joint collaboration, we and Indevus share
equally all costs of development and commercial returns for the
product on a worldwide basis. We will perform all formulation
work and manufacturing. Indevus will conduct the clinical
development program.
Rensselaer
Polytechnic Institute
In September 2006, we and Rensselaer Polytechnic Institute
(RPI) entered into a license agreement granting us
exclusive rights to a family of opioid receptor compounds
discovered at RPI. These compounds represent an opportunity for
us to develop therapeutics for a broad range of diseases and
medical conditions, including addiction, pain and other central
nervous system disorders. We will screen this library of
compounds. We plan to pursue preclinical work of an undisclosed,
lead oral compound that has already been identified.
Under the terms of the agreement, RPI granted us an exclusive
worldwide license to certain patents and patent applications
relating to its compounds designed to modulate opioid receptors.
We will be responsible for the continued research and
development of any resulting product candidates. We paid RPI a
nonrefundable upfront payment and will pay certain milestones
relating to clinical development activities and royalties on
products resulting from the agreement. All amounts paid to RPI
under this license agreement have been expensed and are included
in research and development expenses.
Drug
Delivery Technology
Our proprietary technologies address several important
development 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 Technology
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 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
Technology
The AIR technology is our proprietary pulmonary 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.
11
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.
Injectable
Extended-Release Technology
We own and occupy a manufacturing, office and laboratory site in
Wilmington, Ohio where we manufacture RISPERDAL CONSTA, VIVITROL
and development-scale products. 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 the supply of RISPERDAL CONSTA
and VIVITROL and other potential drug candidates.
Pulmonary
Technology
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 pulmonary
products. This facility is undergoing expansion to increase the
supply of AIR Insulin products (see Item 2. Properties
for details). Our inhalation devices are produced by a
contract manufacturer in the U.S. under cGMP standards.
We have established and are operating clinical facilities, with
the capability to produce clinical supplies of our pulmonary and
injectable extended-release products, within our corporate
headquarters in Cambridge, Massachusetts.
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. Under our collaboration
agreement with Cephalon, 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 steady increase in sales over time and our
marketing strategy will initially focus on a core group of
receptive and influential 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, should one occur.
Competition
The biotechnology and pharmaceutical industries are subject to
rapid and substantial technological change. We face intense
competition in the development, manufacture, marketing and
commercialization of our products and product candidates from
academic institutions, government agencies, research
institutions,
12
biotechnology and pharmaceutical companies, including our
collaborators, and other companies with similar technologies.
Our success in the marketplace depends largely on our ability to
identify and successfully commercialize products developed from
our research activities and to obtain financial resources
necessary 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 in 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 technologies or
methods.
With respect to our injectable technology, we are aware that
there are other companies developing extended-release delivery
systems for pharmaceutical products. RISPERDAL CONSTA may
compete with a number of other injectable products currently
being developed, including paliperidone palmitate, an
injectable, four-week, long-acting product being developed by
Johnson & Johnson,
ZYPREXA®
depot, a long-acting injectable formulation of olanzapine
(Zyprexa) being developed by Lilly, and a number of new oral
compounds for the treatment of schizophrenia.
VIVITROL competes 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 Pharmaceuticals Ltd. and
DEPADE®
by Mallinckrodt, Inc., a subsidiary of Tyco International Ltd.
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 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 marketing approval from the
FDA and the European Medicines Agency (EMEA) in
January 2006. In addition, 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, including our collaborators, are developing new
chemical entities or improved formulations of existing products
which, if developed successfully, could compete against our
products and product candidates and those of our collaborators.
These chemical entities are being designed to have different
mechanisms of action or improved safety and efficacy.
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, to maintain trade secret protection and to
operate 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 125
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
13
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,
2007, these fees totaled approximately $0.1 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. 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 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 testing, 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.
14
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 1 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 2 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 3 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 NDA or,
for a biological product, a biologics license application
(BLA) for approval to commence commercial sales.
Preparing such applications involves considerable data
collection, verification, analysis and expense. In responding to
an NDA or BLA, 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
will not be approved or that the FDAs review of the
application will be significantly delayed. 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 efficacy;
additional clinical trials are usually 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.
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 BLA 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 BLA, the FDA may
perform a pre-approval inspection of a manufacturing 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.
15
Similarly, NDA or BLA approval may be delayed or denied due to
cGMP non-compliance or other issues at contract sites or
suppliers included in the NDA or BLA, 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. To date, 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 June 13, 2007 we had approximately 830 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 our employees to be good.
Available
Information
We are a Pennsylvania corporation with principal executive
offices located at 88 Sidney Street, Cambridge, Massachusetts
02139. Our telephone number is
(617) 494-0171
and our website address is www.alkermes.com. We make available
free of charge through the Investor Relations section of our
website our Annual Reports on
Form 10-K
and 10-K/A,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission
(SEC). We include our website address in this Annual
Report on
Form 10-K
only as an inactive textual reference and do not intend it to be
an active link to our website. You may read and copy materials
we file with the SEC at the SECs Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549. You
may get information on the operation of the Public Reference
Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding
issuers that file electronically with the SEC at www.sec.gov.
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 and
royalties we receive from our partner for RISPERDAL CONSTA.
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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
2005, 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 have very little sales and marketing
experience and a very small team of managers of market
development. The revenues received or to be received from the
sale of VIVITROL 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 3 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 cause
our revenues from RISPERDAL CONSTA and VIVITROL (and any of our
product candidates that we develop, if and when approved) to
grow at a slower than expected rate, or even to decrease or end,
including:
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perception of physicians and other members of the health care
community of their safety and efficacy relative to that of
competing products;
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their cost-effectiveness;
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patient and physician satisfaction with these products;
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the ability to manufacture commercial products successfully and
on a timely basis;
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the cost and availability of raw materials;
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the size of the markets for these products;
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reimbursement policies of government and third-party payors;
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unfavorable publicity concerning these products or similar drugs;
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the introduction, availability and acceptance of competing
treatments, including those of our collaborators;
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the reaction of companies that market competitive products;
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adverse event information relating to these products;
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changes to product labels to add significant warnings or
restrictions on use;
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the continued accessibility of third parties to vial, label and
distribute these products on acceptable terms;
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the unfavorable outcome of patent litigation related to any of
these products;
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regulatory developments related to the manufacture or continued
use of these products;
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the extent and effectiveness of the sales and marketing and
distribution support these products receive;
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our collaborators decisions as to the timing of product
launches, pricing and discounting; and
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any other material adverse developments with respect to the
commercialization of these products.
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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 or if we are unable to supply our
partners requirements, our business, results of operations
and financial condition would be materially adversely affected.
We are
substantially dependent on revenues from our principal
product.
Our current and future revenues depend substantially upon
continued sales of RISPERDAL CONSTA by our partner, Janssen. Any
significant negative developments relating to this product, such
as safety or efficacy issues, the introduction or greater
acceptance of competing products or adverse regulatory or
legislative developments, would have a material adverse effect
on our results of operations. Although we have developed and
continue to develop additional products for commercial
introduction, we expect to be substantially dependent on sales
from this product for the foreseeable future. A decline in sales
from this product would adversely affect our business.
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 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
18
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 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, 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 technologies 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
technologies, 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 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
19
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 European regulatory authorities 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.
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 very little sales and marketing experience and limited
sales capabilities, which may make commercializing our products
difficult.
We currently have very little marketing or distribution
experience and limited sales capabilities. Therefore, in order
to commercialize our product candidates, we must either develop
our own marketing and
20
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 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
success 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 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:
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be shown to be ineffective or to cause harmful side effects
during preclinical testing or clinical trials;
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fail to receive regulatory approval on a timely basis or at all;
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be difficult to manufacture on a large scale;
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be uneconomical; or
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infringe on proprietary rights of another party.
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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 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
21
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
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.
Preclinical and clinical development efforts performed by us may
not be successfully completed. 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:
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the potential delay by a collaborative partner in beginning the
clinical trial;
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the inability to recruit clinical trial participants at the
expected rate;
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the failure of clinical trials to demonstrate a product
candidates safety or efficacy;
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the inability to follow patients adequately after treatment;
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unforeseen safety issues;
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the inability to manufacture sufficient quantities of materials
used for clinical trials; or
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unforeseen governmental or regulatory delays.
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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.
We may
not become profitable on a sustained basis.
With the exception of fiscal years 2006 and 2007, we have had
net operating losses since being founded in 1987. At
March 31, 2007, our accumulated deficit was
$623.5 million. There can be no assurance we will achieve
sustained profitability.
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.
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In addition, our ability to achieve sustained profitability in
the future depends, in part, on our ability to:
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obtain and maintain regulatory approval for our products and
product candidates in the U.S. and in foreign countries;
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efficiently manufacture our commercial products;
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support the marketing and sale of RISPERDAL CONSTA by our
partner Janssen;
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support the marketing and sale of VIVITROL by our partner
Cephalon;
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enter into agreements to develop and commercialize our products
and product candidates;
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develop and expand our capacity to manufacture and market our
products and product candidates;
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obtain adequate reimbursement coverage for our products from
insurance companies, government programs and other third party
payors;
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obtain additional research and development funding from
collaborative partners or funding for our proprietary product
candidates; and
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achieve certain product development milestones.
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In addition, the amount we spend will impact our profitability.
Our spending will depend, in part, on:
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the progress of our research and development programs for
proprietary and collaborative product candidates, including
clinical trials;
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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;
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the time and expense required to prosecute, enforce
and/or
challenge patent and other intellectual property rights;
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the cost of building, operating and maintaining manufacturing
and research facilities;
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the number of product candidates we pursue, particularly
proprietary product candidates;
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how competing technological and market developments affect our
product candidates;
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the cost of possible acquisitions of technologies, compounds,
product rights or companies; and
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the cost of obtaining licenses to use technology owned by others
for proprietary products and otherwise.
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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.
23
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:
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a product candidate may not be safe or effective;
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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;
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the FDA or foreign regulatory agencies might not approve our
manufacturing processes or facilities;
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the FDA or foreign regulatory agencies may change their approval
policies or adopt new regulations;
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a product candidate may not be approved for all the indications
we or our partners request; or
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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.
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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.
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:
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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;
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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;
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new laws, regulations and judicial decisions affecting pricing
or marketing; and
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changes in the tax laws relating to our operations.
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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
24
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.
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 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, the 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.
25
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:
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receiving and maintaining patent protection for our products and
product candidates and for those of our collaborative partners;
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maintaining our trade secrets;
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not infringing the proprietary rights of others; and
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preventing others from infringing our proprietary rights.
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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. 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.
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.
26
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 product 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 are 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 our 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 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:
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develop or successfully commercialize new products on a timely
basis or at all; or
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develop new products in a cost effective manner.
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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:
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develop their products more rapidly than we can;
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complete any applicable regulatory approval process sooner than
we can; or
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offer their newly developed products at prices lower than our
prices.
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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
27
market successfully, any of which could have a material adverse
effect on our business, results of operations and financial
condition.
Potential
tax liabilities could adversely affect our
results.
We are subject to both federal and state taxes on income.
Significant judgment is required in determining our provision
for income taxes. Although we believe our tax estimates are
reasonable, the final determination of tax audits and any
related litigation could be materially different than that which
is reflected in historical income tax provisions and accruals.
In such case, the potential exists for audit findings to have a
material effect on our income tax provision and net income in
the period or periods in which that determination is made.
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 companies with similar
technologies. Some of these competitors are also our
collaborative partners. These competitors are working to develop
and market other 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 and
pulmonary technologies. 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
technologies or product candidates. Our collaborative partners
could choose a competing technology to use with their drugs
instead of one of our technologies and could develop products
that compete with our products.
With respect to our injectable technology, we are aware that
there are other companies developing extended-release delivery
systems for pharmaceutical products. RISPERDAL CONSTA may
compete with a number of other injectable products being
developed, including paliperidone palmitate, an injectable,
four-week, long-acting product being developed by
Johnson & Johnson,
ZYPREXA®
depot, a long-acting injectable formulation of olanzapine
(Zyprexa) being developed by Eli Lilly & Company, and
a number of new oral compounds for the treatment of
schizophrenia.
VIVITROL competes 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 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
28
would compete with EXUBERA, marketed by Pfizer, Inc. in
collaboration with Nektar Therapeutics, Inc., which received
marketing approval from the FDA and the EMEA in January 2006. In
addition, 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
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 product
candidates, if and when approved, 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 its consolidated subsidiary, 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 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:
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mergers;
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acquisitions;
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strategic alliances;
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licensing agreements; and
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co-promotion agreements.
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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. As of March 31, 2007, we
were obligated to issue 19,959,681 shares of common stock
upon the vesting and exercise of stock options and vesting of
stock awards. 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 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:
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non-approval, set-backs or delays in the development or
manufacture of our product candidates and success of our
research and development programs;
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public concern as to the safety of drugs developed by us or
others;
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announcements of issuances of common stock or acquisitions by us;
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the announcement and timing of new product introductions by us
or others;
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material public announcements;
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events related to our products or those of our competitors,
including the withdrawal or suspension of products from the
market;
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availability and level of third party reimbursement;
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political developments or proposed legislation in the
pharmaceutical or healthcare industry;
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economic or other external factors, disaster or crisis;
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developments of our corporate partners;
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announcements of technological innovations or new therapeutic
products or methods by us or others;
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changes in government regulations or policies or patent
decisions;
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failure to meet our financial expectations or changes in
opinions of analysts who follow our stock; or
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general market conditions.
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30
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 is designed to cause substantial dilution to a
person who attempts to acquire us on terms not approved by our
board of directors. 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 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, 2007.
Litigation
may result in financial losses or harm our reputation and may
divert management resources.
We 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.
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We
face risks related to private litigation relating to our past
practices with respect to equity incentives.
In May 2006, we were mentioned in a third-party report
suggesting that we were at moderate risk for options backdating
(the Report) with respect to our annual grants of
options to all employees of the Company dated October 28,
1999 and November 20, 2000. Shortly after the Report
appeared, we were contacted by the SEC with respect to our
option practices for the years mentioned in the Report. We have
cooperated fully with the SECs informal inquiry. In a
letter dated May 22, 2007, the Boston District Office of
the SEC informed us that its informal investigation related to
our issuance of stock options has been completed, and that the
SEC does not intend to recommend that any enforcement action
against us be taken by the SEC. As a result of the appearance of
the Report, and concurrent with the SECs informal inquiry,
the audit committee of our board of directors undertook an
investigation into our option practices for the period 1999 to
2000 as well as for 2001 and 2002. The review was conducted with
the assistance of outside legal counsel and outside accounting
consultants. The audit committee has completed its investigation
and has concluded that nothing has come to its attention that
would cause it to believe that there were any instances where
management of the Company or the compensation committee of the
Company retroactively selected a date for the grant of stock
options during the 1999 through 2002 period. Also, management
reviewed its option grant practices for the period from 2003 to
date. As a result of these reviews, in August 2006 we
restated our consolidated balance sheets as of March 31,
2006 and 2005, our consolidated statements of operations for the
years ended March 31, 2005 and 2004, our consolidated
statements of cash flows for the years ended March 31, 2005
and 2004, our consolidated statements of changes in stockholders
equity for the years ended March 31, 2006, 2005 and 2004,
and the related disclosures.
On October 10, 2006, a purported shareholder derivative
lawsuit, captioned Thomas Bennett, III vs. Richard
Pops et al. and docketed as CIV-06-3606, was filed
ostensibly on our behalf in Middlesex County Superior Court,
Massachusetts. The complaint in that lawsuit alleges, among
other things, that, in connection with certain stock option
grants made by us, certain of our directors and officers
committed violations of state law, including breaches of
fiduciary duty. The complaint names us as a nominal defendant,
but does not seek monetary relief. The lawsuit seeks recovery of
damages allegedly caused to us as well as certain other relief,
including an order requiring us to take action to enhance our
corporate governance and internal procedures. On
January 31, 2007, the defendants served the plaintiff with
a motion to dismiss the complaint. The plaintiff has served the
defendants with an opposition to the motion to dismiss the
complaint and the defendants served the plaintiff with a reply
brief. The Court has scheduled a hearing on the defendants
motion to dismiss the complaint for July 9, 2007.
We have received four letters, allegedly sent on behalf of
owners of our securities, which claim, among other things, that
certain of our officers and directors breached their fiduciary
duties to us by, among other allegations, allegedly violating
the terms of our stock option plans, allegedly violating
generally accepted accounting principles by failing to recognize
compensation expenses with respect to certain option grants
during certain years, and allegedly publishing materially
inaccurate financial statements relating to us. The letters
demand, among other things, that our board of directors take
action on our behalf to recover from the current and former
officers and directors identified in the letters the damages
allegedly sustained by us as a result of their alleged conduct,
among other amounts. The letters do not seek any monetary
recovery from us. Our board of directors appointed a special
independent committee of the board of directors to investigate,
assess and evaluate the allegations contained in these and any
other demand letters relating to our stock option granting
practices and to report its findings, conclusions and
recommendations to our board of directors. The special
independent committee was assisted by independent outside legal
counsel. In November 2006, based on the results of its
investigation, the special independent committee of our board of
directors concluded that the assertions contained in the demand
letters lacked merit, that nothing had come to its attention
that would cause it to believe that there are any instances
where management of the Company or the Compensation Committee of
the Company had retroactively selected a date for the grant of
stock options during the 1995 through 2006 period, and that it
would not be in our best interests or the best interests of our
shareholders to commence litigation against our current or
former officers or directors as demanded in the letters. The
findings and conclusions of the special independent committee of
our board of directors have been presented to and adopted by our
board of directors.
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At this point we are unable to predict what, if any,
consequences these issues relating to our option grants may have
on us. There could be considerable legal and other expenses
associated with any private litigation, including that described
above, that might be filed relating to these issues.
The above matters and any other similar matters could divert
managements attention from other business concerns. Such
matters could also result in harm to our reputation and
significant monetary liability for the Company, and require that
we take other actions not presently contemplated, any or all of
which could have a material adverse effect on our business,
results of operations, or financial condition.
We lease space in Cambridge, Massachusetts under several leases,
the original terms of which are effective through 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 have established and are operating clinical
facilities, with the capability to produce clinical supplies of
our pulmonary and injectable extended-release products, at this
location.
We also lease a building in Chelsea, Massachusetts for clinical
and commercial manufacturing of inhaled products based on our
AIR pulmonary technology. 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 and equipment, which was
partially funded and owned by Lilly, is designed to accommodate
the manufacture of multiple products and contains a facility
currently used to manufacture clinical supplies of AIR Insulin.
Lillys funding is secured by its ownership of specific
equipment located and used in the facility.
The facility is undergoing a significant expansion to add a
second manufacturing line to meet post-launch requirements for
AIR Insulin production, which is expected to be substantially
completed in calendar year 2010. Lilly is funding, and we are
responsible for overseeing, the construction, development,
validation and
scale-up of
the second manufacturing line. Lilly owns all purchased
equipment that it funds. We have the option to purchase this
equipment from Lilly, at any time, at Lillys then-current
net book value or at a negotiated purchase price not to exceed
Lillys then-current net book value upon termination of the
commercial manufacturing agreement for AIR Insulin.
We own a
15-acre
manufacturing, office and laboratory site in Wilmington, Ohio.
The site produces RISPERDAL CONSTA, VIVITROL and clinical
supplies of exenatide LAR. The site is undergoing a significant
expansion, which is expected to be substantially completed in
calendar year 2008. 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. Janssen is funding the construction of the
additional manufacturing line for RISPERDAL CONSTA, and Cephalon
is funding the construction of the two additional manufacturing
lines for VIVITROL. Janssen and Cephalon own all purchased
equipment that they fund. Cephalon has granted us an option,
exercisable after two years, to purchase the VIVITROL
manufacturing lines at their then-current net book value.
Janssen has granted us an option, exercisable upon
30 days advance written notice, to purchase the
RISPERDAL CONSTA manufacturing line at its then-current net book
value.
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 a restructuring of operations
in June 2004 and have subleased a portion of the facility
through the lease expiration date. 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.
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Item 3.
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Legal
Proceedings
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On August 16, 2006, a purported shareholder derivative
lawsuit, captioned Maxine Phillips vs. Richard Pops et
al. and docketed as CIV-06-2931, was filed ostensibly on
our behalf in Middlesex County Superior
33
Court, Massachusetts. The complaint in that lawsuit alleged,
among other things, that, in connection with certain stock
option grants made by us, certain of our directors and officers
committed violations of state law, including breaches of
fiduciary duty. The complaint named us as a nominal defendant,
but did not seek monetary relief from us. The lawsuit sought
recovery of damages allegedly caused to us as well as certain
other relief. On September 13, 2006, the plaintiff
voluntarily dismissed this action without prejudice.
On October 10, 2006, a purported shareholder derivative
lawsuit, captioned Thomas Bennett, III vs. Richard
Pops et al. and docketed as CIV-06-3606, was filed
ostensibly on our behalf in Middlesex County Superior Court,
Massachusetts. The complaint in that lawsuit alleges, among
other things, that, in connection with certain stock option
grants made by us, certain of our directors and officers
committed violations of state law, including breaches of
fiduciary duty. The complaint names us as a nominal defendant,
but does not seek monetary relief from us. The lawsuit seeks
recovery of damages allegedly caused to us as well as certain
other relief, including an order requiring us to take action to
enhance our corporate governance and internal procedures. On
January 31, 2007, the defendants served the plaintiff with
a motion to dismiss the complaint. The plaintiff has served the
defendants with an opposition to the motion to dismiss the
complaint and the defendants have served the plaintiff with a
reply brief. The Court has scheduled a hearing on the
defendants motion to dismiss the complaint for
July 9, 2007.
We have received four letters, allegedly sent on behalf of
owners of our securities, which claim, among other things, that
certain of our officers and directors breached their fiduciary
duties to us by, among other allegations, allegedly violating
the terms of our stock option plans, allegedly violating
generally accepted accounting principles in the U.S. by
failing to recognize compensation expenses with respect to
certain option grants during certain years, and allegedly
publishing materially inaccurate financial statements relating
to us. The letters demand, among other things, that our board of
directors take action on our behalf to recover from the current
and former officers and directors identified in the letters the
damages allegedly sustained by us as a result of their alleged
conduct, among other amounts. The letters do not seek any
monetary recovery from us. Our board of directors appointed a
special independent committee of the board of directors to
investigate, assess and evaluate the allegations contained in
these and any other demand letters relating to our stock option
granting practices and to report its findings, conclusions and
recommendations to our board of directors. The special
independent committee was assisted by independent outside legal
counsel. In November 2006, based on the results of its
investigation, the special independent committee of our board of
directors concluded that the assertions contained in the demand
letters lacked merit, that nothing had come to its attention
that would cause it to believe that there are any instances
where management of the Company or the Compensation Committee of
the Company had retroactively selected a date for the grant of
stock options during the 1995 through 2006 period, and that it
would not be in our best interests or the best interests of our
shareholders to commence litigation against our current or
former officers or directors as demanded in the letters. The
findings and conclusions of the special independent committee of
our board of directors have been presented to and adopted by our
board of directors.
From time to time, we may be subject to other legal proceedings
and claims in the ordinary course of business. We are not aware
of any such proceedings or claims that we believe will have,
individually or in the aggregate, a material adverse effect on
our business, financial condition or results of operations.
|
|
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, 2007.
34
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 Stock 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 2007
|
|
|
Fiscal 2006
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
1st Quarter
|
|
$
|
22.05
|
|
|
$
|
17.91
|
|
|
$
|
14.09
|
|
|
$
|
9.68
|
|
2nd Quarter
|
|
|
19.11
|
|
|
|
13.18
|
|
|
|
19.87
|
|
|
|
12.76
|
|
3rd Quarter
|
|
|
17.48
|
|
|
|
13.37
|
|
|
|
19.87
|
|
|
|
14.69
|
|
4th Quarter
|
|
$
|
17.83
|
|
|
$
|
13.09
|
|
|
$
|
26.81
|
|
|
$
|
18.96
|
|
The last reported sale price of our common stock as reported on
the NASDAQ Stock Market on June 11, 2007 was $14.97.
There were 378 shareholders of record for our common stock
and one shareholder of record for our non-voting common stock on
June 12, 2007.
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
|
A summary of our stock repurchase activity for the fiscal year
ended March 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Value of Shares
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Purchased as
|
|
|
That May Yet
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Part of a Publicly
|
|
|
be Purchased
|
|
Period
|
|
Purchased(a)
|
|
|
per Share
|
|
|
Announced Program(a)
|
|
|
Under the Program
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
May 2006
|
|
|
65,500
|
|
|
$
|
19.27
|
|
|
|
65,500
|
|
|
$
|
13,738
|
|
June 2006
|
|
|
69,130
|
|
|
|
19.75
|
|
|
|
69,130
|
|
|
|
12,373
|
|
July 2006 though August 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,373
|
|
September 2006
|
|
|
689,047
|
|
|
|
14.32
|
|
|
|
689,047
|
|
|
|
2,508
|
|
November 2006 through March 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
823,677
|
|
|
$
|
15.17
|
|
|
|
823,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
(a) |
|
In September 2005, our Board of Directors authorized a share
repurchase program of up to $15.0 million of common stock
to be repurchased in the open market or through privately
negotiated transactions. The repurchase program has no set
expiration date and may be suspended or discontinued at any
time. We publicly announced the share repurchase program in our
press release for the fiscal 2006 second quarter financial
results dated November 3, 2005. |
In addition to the stock repurchases above, we purchased, by
means of employee forfeitures, 31,307 shares during the
year ended March 31, 2007 at an average price of $18.11 to
pay withholding taxes on employee stock awards.
36
Performance
Graph
The following graph compares the yearly percentage change in the
cumulative total shareholder return on our common stock for the
last five fiscal years, with the cumulative total return on the
Nasdaq Stock Market Index and the Nasdaq Biotechnology Index.
The comparison assumes $100 was invested on March 31, 2002
in our common stock and in each of the foregoing indices and
further assumes reinvestment of any dividends. We did not
declare or pay any dividends on our common stock during the
comparison period.
Comparison
of Cumulative Total Returns
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
Alkermes, Inc.
|
|
|
|
100
|
|
|
|
|
35
|
|
|
|
|
61
|
|
|
|
|
40
|
|
|
|
|
85
|
|
|
|
|
59
|
|
NASDAQ Stock Market Index
|
|
|
|
100
|
|
|
|
|
73
|
|
|
|
|
108
|
|
|
|
|
108
|
|
|
|
|
127
|
|
|
|
|
131
|
|
NASDAQ Biotechnology Index
|
|
|
|
100
|
|
|
|
|
66
|
|
|
|
|
101
|
|
|
|
|
84
|
|
|
|
|
109
|
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
Item 6.
|
Selected
Financial Data
|
The following financial data should be read in conjunction with
our consolidated financial statements and related notes
appearing elsewhere in this
Form 10-K,
beginning on
page F-1.
Alkermes,
Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statements of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing revenues
|
|
$
|
105,416
|
|
|
$
|
64,901
|
|
|
$
|
40,488
|
|
|
$
|
25,736
|
|
|
$
|
14,317
|
|
Royalty revenues
|
|
|
23,151
|
|
|
|
16,532
|
|
|
|
9,636
|
|
|
|
3,790
|
|
|
|
1,165
|
|
Research and development revenue
under collaborative arrangements
|
|
|
74,483
|
|
|
|
45,883
|
|
|
|
26,002
|
|
|
|
9,528
|
|
|
|
31,784
|
|
Net collaborative profit
|
|
|
36,915
|
|
|
|
39,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
239,965
|
|
|
|
166,601
|
|
|
|
76,126
|
|
|
|
39,054
|
|
|
|
47,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods manufactured(7)
|
|
|
45,209
|
|
|
|
23,489
|
|
|
|
16,834
|
|
|
|
19,037
|
|
|
|
10,910
|
|
Research and development(7)
|
|
|
117,315
|
|
|
|
89,068
|
|
|
|
91,641
|
|
|
|
92,101
|
|
|
|
86,524
|
|
Selling, general and
administrative(7)
|
|
|
66,399
|
|
|
|
40,383
|
|
|
|
29,499
|
|
|
|
27,206
|
|
|
|
28,027
|
|
Restructuring(1)
|
|
|
|
|
|
|
|
|
|
|
11,527
|
|
|
|
(208
|
)
|
|
|
6,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
228,923
|
|
|
|
152,940
|
|
|
|
149,501
|
|
|
|
138,136
|
|
|
|
131,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
11,042
|
|
|
|
13,661
|
|
|
|
(73,375
|
)
|
|
|
(99,082
|
)
|
|
|
(84,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
17,707
|
|
|
|
11,569
|
|
|
|
3,005
|
|
|
|
3,409
|
|
|
|
3,776
|
|
Interest expense
|
|
|
(17,725
|
)
|
|
|
(20,661
|
)
|
|
|
(7,394
|
)
|
|
|
(6,497
|
)
|
|
|
(10,403
|
)
|
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)
|
|
|
(481
|
)
|
|
|
333
|
|
|
|
(1,789
|
)
|
|
|
2,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(499
|
)
|
|
|
(9,843
|
)
|
|
|
(1,793
|
)
|
|
|
(5,484
|
)
|
|
|
69,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in losses of Reliant
Pharmaceuticals, LLC(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
10,543
|
|
|
|
3,818
|
|
|
|
(75,168
|
)
|
|
|
(104,566
|
)
|
|
|
(109,367
|
)
|
INCOME TAXES
|
|
|
1,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
9,445
|
|
|
$
|
3,818
|
|
|
$
|
(75,168
|
)
|
|
$
|
(104,566
|
)
|
|
$
|
(109,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
$
|
0.10
|
|
|
$
|
0.04
|
|
|
$
|
(0.83
|
)
|
|
$
|
(1.27
|
)
|
|
$
|
(1.70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
$
|
0.09
|
|
|
$
|
0.04
|
|
|
$
|
(0.83
|
)
|
|
$
|
(1.27
|
)
|
|
$
|
(1.70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
99,242
|
|
|
|
91,022
|
|
|
|
90,094
|
|
|
|
82,083
|
|
|
|
64,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
103,351
|
|
|
|
97,377
|
|
|
|
90,094
|
|
|
|
82,083
|
|
|
|
64,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Consolidated Balance Sheets
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
short-term investments
|
|
$
|
351,582
|
|
|
$
|
297,967
|
|
|
$
|
202,567
|
|
|
$
|
143,936
|
|
|
$
|
136,094
|
|
Total assets
|
|
|
568,621
|
|
|
|
477,163
|
|
|
|
338,874
|
|
|
|
270,030
|
|
|
|
255,699
|
|
Long-term debt
|
|
|
156,898
|
|
|
|
279,518
|
|
|
|
276,485
|
|
|
|
122,584
|
|
|
|
166,586
|
|
Unearned milestone
revenue current and long-term portions
|
|
|
128,750
|
|
|
|
99,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred
stock
|
|
|
|
|
|
|
15,000
|
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
30,000
|
|
Shareholders equity (deficit)
|
|
|
203,461
|
|
|
|
33,216
|
|
|
|
4,112
|
|
|
|
75,930
|
|
|
|
(5,046
|
)
|
|
|
|
(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 in fiscal
2006 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 and comprehensive income (loss). |
|
(7) |
|
Includes share-based compensation as a result of the adoption of
Statement of Financial Accounting Standard (SFAS)
No. 123(R), Share-Based Payment on
April 1, 2006 (see Note 11 in the notes to the
consolidated financial statements included in this Annual Report
on Form
10-K). |
|
|
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)
is a biotechnology company that develops innovative medicines
designed to yield better therapeutic outcomes and improve the
lives of patients with serious disease. We currently have two
commercial products:
RISPERDAL®
CONSTA®
[(risperidone) long-acting injection], the first and only
long-acting atypical antipsychotic medication approved for use
in schizophrenia, and marketed worldwide by Janssen-Cilag
(Janssen), a wholly owned division of Johnson &
Johnson; and
VIVITROL®
(naltrexone for extended-release injectable suspension), the
first and only once-monthly injectable medication approved for
the treatment of alcohol dependence and marketed in the
U.S. primarily by Cephalon, Inc. (Cephalon). Our pipeline
includes extended-release injectable, pulmonary, and oral
products for the treatment of prevalent, chronic diseases such
as central
39
nervous system disorders, addiction and diabetes. Our
headquarters are in Cambridge, Massachusetts, and we operate
research and manufacturing facilities in Massachusetts and Ohio.
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 certain collaborative arrangements 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.
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, spending relating to selling and marketing
and clinical development activities, financial goals and
projections of capital expenditures, recognition of revenues,
and future financings. These statements relate to our future
plans, objectives, expectations and intentions and may be
identified by words like believe,
expect, designed, may,
will, should, seek, or
anticipate, and similar expressions.
Although we believe that our expectations are based on
reasonable assumptions within the bounds of our knowledge of our
business and operations, the forward-looking statements
contained in this document are neither promises nor guarantees;
and our business is subject to significant risk and
uncertainties and there can be no assurance that our actual
results will not differ materially from our expectations. These
forward looking statements include, but are not limited to,
statements concerning: the achievement of certain business and
operating milestones and future operating results and
profitability; continued revenue growth from RISPERDAL CONSTA;
the successful commercialization of VIVITROL; 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 long-acting
release (LAR) formulation of exenatide
(exenatide LAR),
AIR®
Inhaled Insulin (AIR Insulin) and AIR parathyroid
hormone (AIR PTH); the successful manufacture of our
products and product candidates, including RISPERDAL CONSTA and
VIVITROL at a commercial scale, 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; and the successful
scale-up,
establishment and expansion of manufacturing capacity. 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 commercialize VIVITROL successfully;
(vi) VIVITROL may not produce significant revenues;
(vii) due to the nature of our collaboration with Cephalon
and because we have limited selling, marketing and distribution
experience, we rely primarily on our partner Cephalon to
successfully commercialize VIVITROL in the U.S.;
(viii) third party payors may not cover or reimburse
VIVITROL; (ix) we may be unable to
scale-up and
40
manufacture our product candidates, including exenatide LAR, AIR
Insulin, AIR PTH, ALKS 27, ALKS 29 and extended-release
naltrexone, commercially or economically; (x) we may not be
able to source raw materials for our production processes from
third parties; (xi) 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; (xii) our product
candidates, if approved for marketing, may not be launched
successfully in one or all indications for which marketing is
approved and, if launched, may not produce significant revenues;
(xiii) we rely on our partners to determine the regulatory
and marketing strategies for RISPERDAL CONSTA and our other
partnered, non-proprietary programs; (xiv) RISPERDAL
CONSTA, VIVITROL and our product candidates in commercial use
may have unintended side effects, adverse reactions or incidents
of misuse and the U.S. Food and Drug Administration
(FDA) or other health authorities could require post
approval studies or require removal of our products from the
market; (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 may
not necessarily be 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 or
terminated; (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 products
and/or
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 continue to incur losses in the
future; (xxiv) the effect of our adoption of Statement of
Financial Accounting Standard (SFAS)
No. 123(R),Share-Based Payment on our
results of operations depends on a number of factors, many of
which are out of our control, 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 face potential
liabilities and diversion of managements attention as a
result of private litigation relating to our past practices with
respect to equity incentives; (xxvi) we may not recoup any
of our $100.0 million investment in Reliant
Pharmaceuticals, LLC (Reliant); and (xxvii) we
may need to raise substantial additional funding to continue
research and development programs and clinical trials and other
operations and could incur difficulties or setbacks in raising
such funds.
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, 2007, 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
41
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 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) net
losses on the products; (ii) manufacturing of the products;
and (iii) the product license.
Under the terms of the Agreements, we are responsible for the
first $120.0 million of net product losses through
December 31, 2007, which increased pursuant to the
Amendments (see below) to $124.6 million (the
cumulative net loss cap). The net product losses
exclude development costs incurred by us to obtain FDA approval
of VIVITROL and costs incurred by us to complete the first
VIVITROL manufacturing line, both of which were our sole
responsibility. If net product losses exceed the cumulative net
loss cap through December 31, 2007, Cephalon is responsible
to pay all net product losses in excess of the cumulative net
loss cap during this period. If VIVITROL is profitable through
December 31, 2007, net profits will be divided between us
and Cephalon in approximately equal shares. After
December 31, 2007, all net profits and losses earned on the
product will be divided between us and Cephalon in approximately
equal shares. Cumulative net product losses since inception of
the Agreements through March 31, 2007 were
$119.3 million.
Cephalon records net sales from the products in the U.S. We
and Cephalon reconcile the costs incurred in the period by each
party to develop, commercialize and manufacture the products
against revenues earned on the products in the period, to
determine net profits or losses on the products in the period.
To the extent that the cash earned or expended by either of the
parties exceeds or is less than its proportional share of net
profit or loss for the period, the parties settle by delivering
cash such that the net cash earned or expended equals each
partys proportional share. The cash flow between the
companies related to our share net profits or losses is recorded
in the period in which it was made under the caption Net
collaborative profit in the consolidated statements of
operations and comprehensive income (loss).
The costs incurred by us and Cephalon with respect to the
development and commercialization of the products, and which are
charged into the collaboration, include employee time, which is
billed to the collaboration at negotiated full-time equivalent
(FTE) rates, and external expenses incurred by the
parties with respect to the products. FTE rates vary depending
on the nature of the activity performed (such as development and
sales) and are intended to approximate our actual costs. Cost of
goods manufactured related to the products is based on a fully
burdened manufacturing cost, determined in accordance with
U.S. GAAP.
The nonrefundable payments of $160.0 million and
$110.0 million we received from Cephalon in June 2005 and
April 2006, respectively, and the $4.6 million payment we
received from Cephalon in December 2006, pursuant to the
Amendments (see below), 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 the consideration was received.
Of the initial $160.0 million non-refundable payment
received from Cephalon upon signing the Agreements, we have
allocated $139.8 million to the accounting unit net
losses on the products, comprising the $120.0 million
of net product losses for which we are responsible and the
$19.8 million of expenses we incurred in attaining FDA
approval of VIVITROL and completing the first manufacturing
line. The remaining $20.2 million of the
$160.0 million payment was allocated to the accounting unit
product license. Of the $110.0 million
non-refundable payment received from Cephalon on VIVITROL
approval, we allocated $77.8 million to the accounting unit
manufacturing of the products and applied the
remaining $32.2 million
42
to the accounting unit product license. The
$4.6 million payment received from Cephalon pursuant to the
Amendments has been allocated to the accounting unit net
losses on the products. The fair values of the accounting
units are reviewed periodically and adjusted, as appropriate.
The above payments were 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.
In October 2006, we and Cephalon entered into binding amendments
to the license and collaboration agreement and the supply
agreement (the Amendments). Under the Amendments,
the parties agreed that Cephalon would purchase from us two
VIVITROL manufacturing lines (and related equipment) under
construction. Amounts we received from Cephalon for the sale of
the two VIVITROL manufacturing lines were recorded under the
caption Deferred revenue long-term
portion in the consolidated balance sheets and will be
recorded as revenue over the depreciable life of the assets in
amounts equal to the related asset depreciation once the assets
are placed in service. Future purchases of physical assets by
Cephalon will be accounted for in a similar way. Beginning
October 2006, all FTE-related costs we incur that are
reimbursable by Cephalon related to the construction and
validation of the two additional VIVITROL manufacturing lines
are recorded as research and development revenue as incurred. In
December 2006, we received a $4.6 million payment from
Cephalon as reimbursement for certain costs incurred by us prior
to October 2006, which we had charged to the collaboration and
that were related to the construction of the VIVITROL
manufacturing lines. These costs consisted primarily of internal
or temporary employee time, billed at negotiated FTE rates. We
and Cephalon agreed to increase the cumulative net loss cap from
$120.0 million to $124.6 million to account for this
reimbursement.
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 the products
for sale in the U.S. Under the terms of the Agreements, we
bill Cephalon at cost for finished product shipped to them. We
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 is recorded as cost
of goods manufactured in the consolidated statements of
operations and comprehensive income (loss). Manufacturing
revenue and cost of goods manufactured related to VIVITROL were
recorded for the first time in the year ended March 31,
2007, as we began shipping VIVITROL to Cephalon.
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 ten year life of VIVITROL.
Manufacturing profit is estimated at 10% of the forecasted cost
of goods manufactured over the expected life of VIVITROL. This
profit margin was determined by reference to margins on other
products we produce for partners, an analysis of margins enjoyed
by other pharmaceutical contract manufacturers and other
available data. The forecast of units to be manufactured was
negotiated between us and Cephalon. Our obligation to
manufacture VIVITROL is limited to volumes that we are capable
of supplying at our manufacturing facility, and the units to be
manufactured in the forecast are in line with, and do not
exceed, this maximum anticipated capacity. We estimate the fair
value of this accounting unit to be $77.8 million and this
amount was allocated out of the $110.0 million in
consideration received from Cephalon upon FDA approval of
VIVITROL. We record the earned portion of the arrangement
consideration allocated to this accounting unit to revenue in
proportion to the units of finished VIVITROL shipped during the
reporting period, to the total expected units of finished
VIVITROL to be shipped over the expected life of VIVITROL. This
milestone revenue is recorded under the caption
Manufacturing revenues in the consolidated
statements of operations and comprehensive income (loss).
Milestone revenue in the amount of $1.5 million was
recorded for this accounting unit for the first time in the year
ended March 31, 2007, as we began shipping VIVITROL to
Cephalon.
43
Net
Collaborative Profit Related to the Agreements with
Cephalon
The amount of the arrangement consideration allocated to the
accounting unit net losses on the products
represents our best estimate of the net product losses that we
are responsible for through December 31, 2007, plus those
development costs incurred by us to attain FDA approval of
VIVITROL and to complete the first manufacturing line, both of
which were our sole responsibility. We estimate the fair value
of this accounting unit to be approximately $144.4 million
and this amount was allocated out of the $160.0 million in
consideration we received from Cephalon upon signing the
Agreements. We record the earned portion of the arrangement
consideration allocated to this accounting unit to revenue in
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 and is recorded under the
caption Net collaborative profit in the consolidated
statements of operations and comprehensive income (loss). During
the years ended March 31, 2007, 2006 and 2005, we recorded
$78.8 million, $60.5 million, and $0, respectively, of
milestone revenue related to this accounting unit. In addition,
because a portion of these amounts relate to cash returned to
Cephalon as reimbursement for its net losses, those payments are
netted against the milestone revenue recorded. During the years
ended March 31, 2007, 2006 and 2005, those payments to
Cephalon were $47.0 million, $21.2 million and $0,
respectively, resulting in net revenue related to this
accounting unit of $31.8 million, $39.3 million, and
$0, respectively.
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. The arrangement
consideration allocated to the product license is based on the
residual method of allocation as outlined in
EITF 00-21,
because fair value evidence exists separately for the
undelivered obligations under the Agreements. The arrangement
consideration allocated to this accounting unit equals the total
arrangement consideration received from Cephalon less the fair
value of the manufacturing obligations and the net losses on
VIVITROL. We estimate the fair value of this accounting unit to
be approximately $52.4 million of the $274.6 million
in total consideration we have received to date. We record the
earned portion of the arrangement consideration allocated to the
product license to revenue on a straight-line basis over the
expected life of VIVITROL, being ten years. This revenue is
recorded under the caption Net collaborative profit
in the consolidated statements of operations and comprehensive
income (loss). We began to recognize milestone revenue related
to this accounting unit upon FDA approval of VIVITROL in April
2006. During the year ended March 31, 2007, we recorded
$5.1 million of milestone revenue related to this
accounting unit.
If there are significant changes in our estimates of the fair
value of an accounting unit, we would reallocate the arrangement
consideration to the accounting units based on the revised fair
values. This revision would 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 our
manufacturing and supply agreements with Janssen for RISPERDAL
CONSTA. Manufacturing revenues for RISPERDAL CONSTA are earned
when product is shipped to Janssen, based on a percentage of
Janssens estimated net unit sales price of RISPERDAL
CONSTA for the calendar year. This percentage is determined
based on Janssens forecasted unit demand for the calendar
year and varies based on the volume of units shipped, with a
minimum manufacturing fee of 7.5%. Revenues include a monthly
adjustment from Janssens estimated net unit sales price to
Janssens actual net unit sales price for product shipped.
Royalty Revenues Royalty revenues consist of
revenues earned under our 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 based on information supply to us by Janssen.
44
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.
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 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, including share-based compensation, and related
benefits, occupancy costs, depreciation expense and other
allocable costs directly related to our manufacturing
activities. Cost of goods manufactured is related to the
manufacture of RISPERDAL CONSTA and VIVITROL. Beginning in the
fiscal year ended March 31, 2007, cost of goods
manufactured includes certain unabsorbed manufacturing costs
related to VIVITROL. These costs consist of current period
manufacturing costs allocated to cost of goods manufactured
which were related to underutilized VIVITROL manufacturing
capacity.
Research and Development Expenses Our
research and development expenses include employee compensation,
including share-based 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
45
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 We record a deferred tax asset
or liability based on the difference between the financial
statement and tax bases of assets and liabilities, as measured
by enacted tax rates assumed to be in effect when these
differences reverse. We assess the recoverability of any tax
assets recorded on the balance sheet and provide any necessary
valuation allowances, as required. Currently, all of our
deferred tax assets are offset by a valuation allowance, due to
uncertainty regarding our eventual realization of those assets.
If the level of uncertainty is reduced, we may reduce our
valuation allowances, which would have the effect of increasing
income in the period where such judgment about future recovery
were made.
In evaluating our ability to recover our deferred tax assets, we
considered all available positive and negative evidence
including our past operating results, the existence of
cumulative income in the most recent fiscal years, changes in
the business in which we operate and our forecast of future
taxable income. In determining future taxable income, we utilize
assumptions regarding future events, including the amount of
state, federal and international pre-tax operating income, the
reversal of temporary differences and the implementation of
feasible and prudent tax planning strategies. These assumptions
required significant judgment about the forecasts of future
taxable income and are consistent with the plans and estimates
we are using to manage the underlying businesses. As of
March 31, 2007, we determined that it is more likely than
not that the deferred tax assets will not be realized and a full
valuation allowance has been recorded.
Share-based Compensation Effective
April 1, 2006, we account for share-based compensation in
accordance with SFAS No. 123(R). Under
SFAS No. 123(R), share-based compensation reflects the
fair value of share-based awards measured at the grant date, is
recognized as an expense over the employees requisite
service period (generally the vesting period of the equity
grant) and is adjusted each period for anticipated forfeitures.
We estimate the fair value of stock options on the grant date
using the Black-Scholes option-pricing model. Assumptions used
to estimate the fair value of stock options are the expected
option term, expected volatility of our Companys common
stock over the options expected term, the risk-free
interest rate over the options expected term and our
Companys expected annual dividend yield. Certain of these
assumptions are highly subjective and require the exercise of
management judgment. Our management must also apply judgment in
developing an estimate of awards that may be forfeited.
Measurement of Redeemable Convertible Preferred
Stock Our redeemable convertible preferred
stock, $0.01 par value per share (the Preferred
Stock), was carried on the consolidated balance sheets at
its estimated redemption value while it was outstanding. We
re-evaluated the redemption value of the Preferred Stock on a
quarterly basis, and any increases or decreases in the
redemption value of this redeemable security, of which there
were none, would have been recorded as charges or credits to
shareholders equity in the same manner as dividends on
nonredeemable stock, and would have been effected by charges or
credits against retained earnings or, in the absence of retained
earnings, by charges or credits against additional paid-in
capital. Any increases or decreases in the redemption value of
the Preferred Stock, of which there were none, would have
decreased or increased income applicable to common shareholders
in the calculation of earnings per common share and would not
have had an impact on reported net income or cash flows. The
Preferred Stock was not a traded security, therefore, market
quotations were not available, and the estimate of redemption
value was based upon an estimation process used by management.
The process of estimating the redemption value of a security
with features such as those contained within the Preferred Stock
was complex and involved multiple assumptions about matters such
as future revenues generated by our partner Lilly for certain
products still in development and assumptions about the future
market potential for insulin based products, taking into
consideration progress on our development programs, the
likelihood of product approvals and other factors.
Results
of Operations
Net income for the year ended March 31, 2007 was
$9.4 million, or $0.10 per common share basic
and $0.09 per common share diluted, as compared to
net income of $3.8 million, or $0.04 per common
46
share basic and diluted, for the year ended
March 31, 2006 and a net loss of $75.2 million, or a
net loss of $0.83 per common share basic and
diluted, for the year ended March 31, 2005.
Total manufacturing revenues were $105.4 million,
$64.9 million and $40.5 million for the years ended
March 31, 2007, 2006 and 2005, respectively.
RISPERDAL CONSTA manufacturing revenues were $88.6 million,
$64.9 million and $40.5 million for the years ended
March 31, 2007, 2006 and 2005, respectively. The increase
in RISPERDAL CONSTA revenues for the year ended March 31,
2007, as compared to the year ended March 31, 2006, was due
to increased shipments of RISPERDAL CONSTA to Janssen to satisfy
demand. The increase in RISPERDAL CONSTA manufacturing revenues
for the year ended March 31, 2006, as compared to the year
ended March 31, 2005, was also due to increased shipments
of RISPERDAL CONSTA to Janssen to satisfy demand.
Under our manufacturing and supply agreement with Janssen, we
earn manufacturing revenues when product is shipped to Janssen,
based on a percentage of Janssens unit net sales price.
This percentage is determined based on Janssens forecasted
unit demand for the calendar year and varies based on the volume
of units shipped, with a minimum manufacturing percentage of
7.5%. Revenues include a monthly adjustment from Janssens
estimated unit net sales price to Janssens actual unit net
sales price for product shipped. In the years ended
March 31, 2007, 2006 and 2005, our RISPERDAL CONSTA
manufacturing revenues were based on an average of 7.5%, 7.5%
and 8.1%, respectively, of Janssens net sales of RISPERDAL
CONSTA. We anticipate that we will earn manufacturing revenues
at 7.5% of Janssens unit net sales of RISPERDAL CONSTA for
product shipped to Janssen in the fiscal year ending
March 31, 2008 and beyond.
VIVITROL manufacturing revenues were $16.8 million, $0 and
$0 for the years ended March 31, 2007, 2006 and 2005,
respectively. We began shipping VIVITROL to our partner Cephalon
for the first time during the quarter ended June 30, 2006,
and we did not record any manufacturing revenue related to
VIVITROL for any periods prior to the year ended March 31,
2007. Under our Agreements with Cephalon, we bill Cephalon at
cost for finished commercial product shipped to them. VIVITROL
manufacturing revenue for the year ended March 31, 2007
included $1.5 million of milestone revenue related to
manufacturing profit on VIVITROL, which draws down unearned
milestone revenue. This equates to a 10% profit margin on sales
of VIVITROL to Cephalon.
Royalty revenues were $23.2 million, $16.5 million and
$9.6 million for the years ended March 31, 2007, 2006
and 2005, respectively, all of which were related to sales of
RISPERDAL CONSTA. The increase in royalty revenues for the year
ended March 31, 2007, as compared to the year ended
March 31, 2006, was due to an increase in global sales of
RISPERDAL CONSTA by Janssen. The increase in royalty revenues
for the year ended March 31, 2006, as compared to the year
ended March 31, 2005, was also 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
period that the product is sold by Janssen.
Research and development revenue under collaborative
arrangements was $74.5 million, $45.9 million and
$26.0 million for the years ended March 31, 2007, 2006
and 2005, respectively. The increase in research and development
revenue under collaborative arrangements for the year ended
March 31, 2007, as compared to the year ended
March 31, 2006, was primarily due to increases in revenues
related to work performed on the AIR Insulin, AIR PTH and
exenatide LAR programs and revenues related to work performed on
the construction and validation of additional VIVITROL
manufacturing lines at our Ohio manufacturing facility under the
Amendments with Cephalon. Research and development revenue under
collaborative arrangements for the year ended March 31,
2007 included revenue of $4.6 million for FTE-related costs
we incurred that were reimbursable by Cephalon under the
Amendments for the construction and validation of the additional
VIVITROL manufacturing lines. The increase in research and
development revenue under collaborative arrangements 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, which included a $9.0 million milestone
payment we received from Lilly in September 2005 upon the
initiation of the phase 3 clinical program, as well as an
increase in revenues related to the exenatide LAR program.
47
Net collaborative profit was $36.9 million,
$39.3 million and $0 for the years ended March 31,
2007, 2006 and 2005, respectively. This was a new source of
revenue for us in the year ended March 31, 2006. For the
years ended March 31, 2007 and 2006, we recognized
$78.8 million and $60.5 million of milestone
revenue cost recovery, respectively, to offset net
losses incurred on VIVITROL by both us and Cephalon. This
consisted of $31.4 million and $19.8 million of
expenses that we incurred on behalf of the collaboration during
the years ended March 31, 2007 and 2006, respectively,
$47.0 million and $21.2 million of net losses incurred
by Cephalon on behalf of the collaboration during the years
ended March 31, 2007 and 2006, respectively, and
$0.4 million and $19.5 million of expenses that we
incurred outside the collaboration during the years ended
March 31, 2007 and 2006, respectively, for which we were
solely responsible. In addition, during the year ended
March 31, 2007, following FDA approval of VIVITROL, we
recognized $5.1 million of milestone revenue related to the
license provided to Cephalon to commercialize VIVITROL. We did
not recognize any milestone revenue related to the license
during the years ended March 31, 2006 and 2005 because
VIVITROL had not yet been approved by the FDA. During the years
ended March 31, 2007 and 2006, we made payments of
$47.0 million and $21.2 million, respectively, to
Cephalon to reimburse their net losses on VIVITROL. In the
aggregate, net collaborative profit of $36.9 million and
$39.3 million for the years ended March 31, 2007 and
2006, respectively, consisted of approximately
$83.9 million and $60.5 million of milestone revenue,
respectively, partially offset by the $47.0 million and
$21.2 million, respectively, of payments we made to
Cephalon to reimburse their net losses on VIVITROL.
Net collaborative profit for the years ended March 31 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Milestone revenue cost
recovery:
|
|
|
|
|
|
|
|
|
Alkermes expenses incurred on
behalf of the collaboration
|
|
$
|
31,431
|
|
|
$
|
19,790
|
|
Cephalon net losses incurred on
behalf of the collaboration(1)
|
|
|
46,945
|
|
|
|
21,179
|
|
Alkermes expenses for which
Alkermes was solely responsible
|
|
|
397
|
|
|
|
19,495
|
|
|
|
|
|
|
|
|
|
|
Total milestone
revenue cost recovery
|
|
|
78,773
|
|
|
|
60,464
|
|
Milestone revenue
license
|
|
|
5,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total milestone
revenue cost recovery and license
|
|
|
83,860
|
|
|
|
60,464
|
|
Payments made to Cephalon to
reimburse their net losses
|
|
|
(46,945
|
)
|
|
|
(21,179
|
)
|
|
|
|
|
|
|
|
|
|
Net collaborative profit
|
|
$
|
36,915
|
|
|
$
|
39,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Under the Amendments discussed under Collaborative
Arrangements Cephalon above, Cephalon was
responsible for its own VIVITROL-related costs during the period
August 1, 2006 through December 31, 2006, and for this
period no such costs were charged by Cephalon to the
collaboration and against the cumulative net loss cap.
Accordingly, we did not reimburse Cephalon for any of its
VIVITROL-related costs during this period. |
We are responsible for the first $124.6 million of
cumulative net losses incurred on VIVITROL through
December 31, 2007. If cumulative net losses on VIVITROL
exceed $124.6 million during this period, Cephalon is
responsible to pay these excess losses. If VIVITROL is
profitable before December 31, 2007, net profits will be
shared between us and Cephalon. After December 31, 2007,
all net profits or losses earned on VIVITROL will be shared
between us and Cephalon. Through March 31, 2007, the
cumulative net losses on VIVITROL were $119.3 million, of
which $51.2 million was incurred by us on behalf of the
collaboration and $68.1 million was incurred by Cephalon on
behalf of the collaboration. We expect net losses on VIVITROL to
exceed $124.6 million in the quarter ended June 30,
2007, at which time Cephalon will be responsible to pay these
excess losses through December 31, 2007. The net profits
earned or losses incurred on VIVITROL after December 31,
2007 will be dependent upon end-market sales, which are
difficult to predict at this time, and on the level of
expenditures by both us and Cephalon in developing,
manufacturing and commercializing VIVITROL, all of which is
subject to change.
48
Cost of goods manufactured was $45.2 million,
$23.5 million and $16.8 million for the years ended
March 31, 2007, 2006 and 2005, respectively. The increase
in cost of goods manufactured for the year ended March 31,
2007, as compared to the year ended March 31, 2006, was due
to increased shipments of RISPERDAL CONSTA to Janssen, first
time shipments of VIVITROL to Cephalon and to share-based
compensation expense recognized in accordance with
SFAS No. 123(R). 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, 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, Inc. in June 2004. In the year ended
March 31, 2005, cost of goods manufactured for NUTROPIN
DEPOT was $2.3 million and included a one-time write-off of
NUTROPIN DEPOT inventory of $1.3 million following the
decision to discontinue the manufacture of the product.
Cost of goods manufactured for RISPERDAL CONSTA was
$29.9 million, $23.5 million and $14.5 million
for the years ended March 31, 2007, 2006 and 2005,
respectively. The increase in cost of goods manufactured for
RISPERDAL CONSTA during the year ended March 31, 2007, as
compared to the year ended March 31, 2006, was due to
increased shipments of the product to Janssen to satisfy demand
and to share-based compensation expense resulting from the
adoption of SFAS No. 123(R) beginning April 1,
2006. For the year ended March 31, 2007, cost of goods
manufactured for RISPERDAL CONSTA included $1.9 million of
share-based compensation expense. The increase in cost of goods
manufactured for RISPERDAL CONSTA 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 Janssen to satisfy demand.
Cost of goods manufactured for VIVITROL was $15.3 million,
$0 and $0 for the years ended March 31, 2007, 2006 and
2005, respectively. We began shipping VIVITROL to our partner
Cephalon for the first time during the quarter ended
June 30, 2006, and we did not record any cost of goods
manufactured related to VIVITROL for any periods prior to the
year ended March 31, 2007. Cost of goods manufactured for
VIVITROL for the year ended March 31, 2007 included
$3.7 million of idle capacity costs. These costs consisted
of current year manufacturing costs allocated to cost of goods
manufactured which were related to underutilized VIVITROL
manufacturing capacity. For the year ended March 31, 2007,
cost of goods manufactured for VIVITROL included
$0.8 million of share-based compensation expense resulting
from the adoption of SFAS No. 123(R)beginning
April 1, 2006. There was no share-based compensation
charged to cost of goods manufactured in the years ended
March 31, 2006 and 2005.
Research and development expenses were $117.3 million,
$89.1 million and $91.6 million for the years ended
March 31, 2007, 2006 and 2005, respectively. The increase
in research and development expenses for the year ended
March 31, 2007, as compared to the year ended
March 31, 2006, was primarily due to increased
personnel-related costs, raw materials used during work we
performed on our product candidates, increased cost for third
party packaging of clinical drug product and to share-based
compensation expense resulting from the adoption of
SFAS No. 123(R) beginning April 1, 2006. For the
years ended March 31, 2007, 2006 and 2005, research and
development expenses included $8.6 million,
$0.2 million and $0.7 million, respectively, of
share-based compensation expense.
The decrease in research and development expenses for the year
ended March 31, 2006, as compared to the year ended
March 31, 2005, was 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 year ended March 31, 2006, 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 sublease charge in the amount of approximately
$1.5 million, of which $1.2 million was recorded as
research and development expense. During the year ended
March 31, 2006, we capitalized into inventory certain raw
materials costs to be used in the manufacture of VIVITROL
(approved by the FDA for marketing in April 2006), which in
previous years had been recorded in research and development
expenses. In the year ended March, 31 2005, we recorded a
non-cash charge of $2.5 million to adjust our accounting
for leases to a straight line basis as opposed to as incurred,
all of which related to the previous five years since lease
inception. Of this amount, $2.3 million was reported within
research and development
49
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
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
$66.4 million, $40.4 million and $29.5 million
for the years ended March 31, 2007, 2006 and 2005,
respectively. The increase in selling, general and
administrative expenses for the year ended March 31, 2007,
as compared to the year ended March 31, 2006, was primarily
due to increases in selling and marketing costs related to
VIVITROL, legal fees and to share-based compensation expense
resulting from the adoption of SFAS No. 123(R)
beginning April 1, 2006. For the years ended March 31,
2007, 2006 and 2005, selling, general and administrative
expenses included $16.4 million, $0.2 million and
$0.8 million, respectively, of share-based compensation
expense.
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
prepared for the commercialization of VIVITROL, an increase in
utility costs and a one-time lease charge. In the year ended
March 31, 2006, 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 sublease charge in
the amount of approximately $1.5 million, of which
$0.3 million was recorded as selling, general and
administrative expenses.
Restructuring expenses were $0 million, $0 million and
$11.5 million for the years ended March 31, 2007, 2006
and 2005, respectively.
In June 2004, we and our former collaborative partner Genentech
announced the decision to discontinue commercialization of
NUTROPIN DEPOT (the 2004 Restructuring). In
connection with the 2004 Restructuring , we recorded net
restructuring charges of $11.5 million in the year ended
March 31, 2005. In addition to the restructuring, the
Company also 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 income
(loss) in the year ended March 31, 2005. As of
March 31, 2007, the Company had paid in cash, written down,
recovered and made restructuring charge adjustments that
aggregate approximately $10.4 million in connection with
the 2004 Restructuring.
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.
There are no remaining liabilities associated with the 2002
restructuring program as of March 31, 2007.
The amounts remaining in the restructuring accrual as of
March 31, 2007 are expected to be paid out through the year
ended March 31, 2009 and relate primarily to estimates of
lease costs, net of sublease income, associated with an exited
facility, and may require adjustment in the future.
50
The following restructuring activity has been recorded during
the years ended March 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2005
|
|
|
Year Ended March 31, 2006
|
|
|
Year Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
Non-Cash
|
|
|
|
|
|
|
|
|
Non-Cash
|
|
|
|
|
|
|
|
|
Non-Cash
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
Write-Downs
|
|
|
Balance
|
|
|
|
|
|
Write-Downs
|
|
|
Balance
|
|
|
|
|
|
Write-Downs,
|
|
|
Balance
|
|
|
|
March 31,
|
|
|
|
|
|
and
|
|
|
March 31,
|
|
|
|
|
|
and
|
|
|
March31,
|
|
|
|
|
|
and
|
|
|
March 31,
|
|
Liability
|
|
2004
|
|
|
Charges
|
|
|
Payments(1)
|
|
|
2005
|
|
|
Adjustments
|
|
|
Payments
|
|
|
2006
|
|
|
Adjustments(2)
|
|
|
Payments(3)
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
2004 Restructuring
|
|
$
|
|
|
|
$
|
11,527
|
|
|
$
|
(8,553
|
)
|
|
$
|
2,974
|
|
|
$
|
|
|
|
$
|
(606
|
)
|
|
$
|
2,368
|
|
|
$
|
(518
|
)
|
|
$
|
(771
|
)
|
|
$
|
1,079
|
|
2002 Restructuring
|
|
|
1,138
|
|
|
|
|
|
|
|
(749
|
)
|
|
|
389
|
|
|
|
(34
|
)
|
|
|
(355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,138
|
|
|
$
|
11,527
|
|
|
$
|
(9,302
|
)
|
|
$
|
3,363
|
|
|
$
|
(34
|
)
|
|
$
|
(961
|
)
|
|
$
|
2,368
|
|
|
$
|
(518
|
)
|
|
$
|
(771
|
)
|
|
$
|
1,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Non-cash write-downs and payments consists of $7.7 million
of non-cash write-downs and $1.6 million of payments for
the year ended March 31, 2005. |
|
(2) |
|
Adjustments consist of $0.5 million of income due to us
under a sublease agreement for a facility that we closed in
connection with the 2004 Restructuring in the year ended
March 31, 2007. This adjustment is included in selling,
general and administrative expense. |
|
(3) |
|
Non-cash write-downs and payments consist of $0.3 million
of non-cash write-downs and $0.5 million of payments for
the year ended March 31, 2007. |
Interest income was $17.7 million, $11.6 million and
$3.0 million for the years ended March 31, 2007, 2006
and 2005, respectively. The increase for the year ended
March 31, 2007, as compared to the year ended
March 31, 2006, was primarily due to higher average cash
and investment balances held and higher interest rates earned
during the year ended March 31, 2007. 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 year ended March 31, 2006.
Interest expense was $17.7 million, $20.7 million and
$7.4 million for the years ended March 31, 2007, 2006
and 2005, respectively. The decrease for the year ended
March 31, 2007, as compared to the year ended
March 31, 2006, was primarily due to the conversion of our
2.5% convertible subordinated notes due 2023 (the
2.5% Subordinated Notes) in June 2006. Interest
expense for the year ended March 31, 2007 includes a
one-time interest charge of $0.6 million for a payment we
made in June 2006 in connection with the conversion of our
2.5% Subordinated Notes to satisfy the three-year interest
make-whole provision in the note indenture. 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 non-recourse RISPERDAL CONSTA secured
7% notes (the Non-Recourse 7% Notes),
which were issued in February 2005. We incur approximately
$4.0 million of interest expense each quarter on the
Non-Recourse 7% Notes through the period until principal
repayment starts on April 1, 2009.
Derivative (loss) income related to convertible subordinated
notes was $0, a loss of $1.1 million and income of
$4.4 million for the years ended March 31, 2007, 2006
and 2005, respectively. Beginning January 1, 2006, we no
longer recorded changes in the estimated fair value of the
embedded derivatives in our results of operations and
comprehensive income (loss). In June 2005, the FASB released DIG
Issue B39, which modified accounting guidance for determining
whether an embedded call option held by the issuer of a debt
contract requires 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.
Prior to January 1, 2006, derivative (loss) income related
to convertible subordinated notes consisted of changes in the
fair value of the three-year interest make-whole provision
included in our 2.5% Subordinated Notes. The three-year
interest make-whole provision was recorded as a derivative
liability in the consolidated balance sheets apart from the
underlying 2.5% Subordinated Notes. At issuance of the
2.5% Subordinated Notes, the three-year interest make-whole
provision had an initial estimated fair value of
$3.9 million, which reduced the amount of the outstanding
debt. The initial estimated fair value of the three-year
interest make-whole provision was treated as a discount on the
2.5% Subordinated Notes and was accreted to interest
51
expense on five year schedule 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 provision was carried in the
consolidated balance sheets under the caption Derivative
liability related to convertible notes and was adjusted to
its fair value on a quarterly basis until it expired or was
paid. Quarterly adjustments to the fair value of the three-year
interest make-whole provision were charged to Derivative
(loss) income related to convertible subordinated notes in
the consolidated statement of operations and comprehensive
income (loss). The value of the derivative liability recorded on
the consolidated balance sheets was $0, $0 and $0.3 million
at March 31, 2007, 2006 and 2005, respectively, and
fluctuated based on changes in the market value of the
Companys common stock. In June 2006, the
2.5% Subordinated Notes were converted to common stock and
the related make-whole provisions were settled.
Other (expense), income net was an expense of $0.5 million,
an income of $0.3 million and an expense of
$1.8 million for the years ended March 31, 2007, 2006
and 2005, respectively. Other (expense) income, net consists
primarily 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, and the accretion of discounts
related to restructuring and asset retirement obligations. The
recorded value of warrants we hold can fluctuate significantly
based on fluctuations in the market value of the underlying
securities of the issuer of the warrants. For the year ended
March 31, 2007, other income (expense) included a gain of
$0.5 million related to equipment sales. For the year ended
March 31, 2006, other income (expense) included 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 47Accounting for Conditional Asset Retirement
Obligations.
Income taxes were $1.1 million, $0 and $0 for years ended
March 31, 2007, 2006 and 2005, respectively. We did not
record a provision for income taxes for the years ended
March 31, 2006 and 2005. The provision for income taxes for
the year ended March 31, 2007 related to the
U.S. alternative minimum tax (AMT). Utilization
of tax loss carryforwards is limited in the calculation of AMT.
As a result, a federal tax charge was recorded in the year ended
March 31, 2007. The current AMT liability is available as a
credit against future tax obligations upon the full utilization
or expiration of our net operating loss carryforward.
We do not believe that inflation and changing prices have had a
material impact on our results of operations.
Financial
Condition
Cash and cash equivalents and short-term investments were
$351.6 million and $298.0 million as of March 31,
2007 and March 31, 2006, respectively. Short-term
investments were $271.1 million and $264.4 million as
of March 31, 2007 and March 31, 2006, respectively.
During the year ended March 31, 2007, combined cash and
cash equivalents and short-term investments increased by
$53.6 million, primarily due to the receipt of a
$110.0 million non-refundable milestone payment from
Cephalon in April 2006 following FDA approval of VIVITROL,
proceeds from the issuance of common stock related to our
share-based compensation plans and the sale of equipment,
partially offset by cash used to fund our operations, to acquire
fixed assets and to purchase our common stock under the stock
repurchase program.
We invest in cash equivalents, U.S. government obligations,
high-grade corporate notes and commercial paper. Our investment
objectives are, first, to assure liquidity and conservation of
capital and, second, to obtain investment income. We held
approximately $5.1 million of U.S. government
obligations classified as restricted long-term investments as of
March 31, 2007 and March 31, 2006, 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.
52
Receivables were $56.0 million and $39.8 million as of
March 31, 2007 and March 31, 2006, respectively. The
increase of $16.2 million during the year ended
March 31, 2007 was primarily due to increased development
revenues related to the AIR Insulin, AIR PTH and exenatide LAR
programs and to the timing of payments received from our
partners with respect to these programs; amounts due from Lilly
for the reimbursement of costs we incurred related to the
construction of the second manufacturing line at our
commercial-scale production facility for inhaled medications;
amounts due from Cephalon for VIVITROL product deliveries and
reimbursement for costs we incurred on the construction of the
two VIVITROL manufacturing lines; offset by reductions in
amounts due from Janssen for RISPERDAL CONSTA product deliveries
due to the timing of payments.
Inventory, net was $18.2 million and $7.3 million as
of March 31, 2007, and March 31, 2006, respectively.
This consisted of RISPERDAL CONSTA inventory of
$11.2 million and $4.8 million as of March 31,
2007 and March 31, 2006, respectively, and VIVITROL
inventory of $7.0 million and $2.5 million as of
March 31, 2007 and March 31, 2006, respectively. The
increase in inventory, net of $10.9 million during the year
ended March 31, 2007, was primarily due to increases in
VIVITROL raw materials inventory, increases in RISPERDAL CONSTA
finished goods inventory related to the timing of shipments to
Janssen and to the capitalization of share-based compensation
cost to inventory resulting from the adoption of
SFAS No. 123(R) beginning April 1, 2006. As of
March 31, 2007, inventory, net included $0.6 million
of share-based compensation payments.
Accounts payable and accrued expenses were $45.6 million
and $36.1 million as of March 31, 2007 and
March 31, 2006, respectively. The increase of
$9.5 million during the year ended March 31, 2007 was
primarily due to increases in amounts due to Cephalon under our
Agreements and to increases in compensation accruals due to the
timing of normal payroll and bonus payments.
Convertible subordinated notes long-term portion was
$0 and $124.3 million as of March 31, 2007 and
March 31, 2006, respectively. In June 2006, we converted
all of our outstanding 2.5% Subordinated Notes into
9,025,271 shares of the Companys common stock.
Unearned milestone revenue current and long-term
portions, combined, were $128.8 million and
$99.5 million as of March 31, 2007 and March 31,
2006, respectively. The increase during the year ended
March 31, 2007 was due to the receipt of a
$110.0 million non-refundable milestone payment from
Cephalon in April 2006 following FDA approval of VIVITROL, the
receipt of $4.6 million from Cephalon as reimbursement for
certain costs that we incurred prior to October 2006 and charged
to the collaboration, reduced by approximately
$83.8 million and $1.5 million of milestone revenue we
recognized under the captions Net collaborative
profit and Manufacturing revenues,
respectively, in the consolidated statement of operations and
comprehensive income (loss) during the year ended March 31,
2007.
Deferred revenue current and long-term portions,
combined, were $22.4 million and $1.0 million as of
March 31, 2007 and March 31, 2006, respectively. In
the year ended March 31, 2007, we recorded
$21.6 million of deferred revenue long-term
portion related to the purchase by Cephalon of the two VIVITROL
manufacturing lines currently under construction.
Redeemable convertible preferred stock was $0 and
$15.0 million as of March 31, 2007 and March 31,
2006, respectively. In December 2006, Lilly exercised its right
to put the remaining 1,500 shares of our outstanding
Preferred Stock, with a carrying value of $15.0 million, in
exchange for a reduction in the royalty rate payable to us on
future sales of the AIR Insulin product by Lilly, if approved.
At that time, the remaining Preferred Stock was reclassified to
shareholders equity in the consolidated balance sheets
under the caption Additional paid-in capital at its
redemption value of $15.0 million. This transaction did not
require the use of cash. See Note 9 to the consolidated
financial statements for additional information on our Preferred
Stock.
Treasury stock, at cost was $12.5 million and $0 as of
March 31, 2007 and March 31, 2006, respectively. In
September 2005, our Companys Board of Directors authorized
a share repurchase program of up to $15.0 million of common
stock to be repurchased in the open market or through privately
negotiated transactions. The repurchase program has no set
expiration date and may be suspended or discontinued at any
53
time. During the year ended March 31, 2007, and since
September 2005, we had repurchased 823,677 shares at a cost
of approximately $12.5 million under the program.
As of March 31, 2007, we had approximately
$527.0 million of federal net operating loss
(NOL) carryforwards, $420.0 million of state
operating loss carryforwards, and $27.0 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 $252.0 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 and anticipated revenues 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.
54
Under Amendments discussed under Collaborative
Arrangements Cephalon above, Cephalon was
responsible for its own VIVITROL-related costs during the period
August 1, 2006 through December 31, 2006, and for this
period no such costs were charged by Cephalon to the
collaboration and against the cumulative net loss cap.
Accordingly, we did not reimburse Cephalon for any of its
VIVITROL-related costs during this period. Also under the
Amendments, the parties agreed that Cephalon would purchase from
us our two VIVITROL manufacturing lines under construction (and
related equipment). Through March 31, 2007, we had billed
Cephalon $21.6 million for the sale of the two
manufacturing lines. We will bill Cephalon for future costs
incurred related to the construction and validation of the two
manufacturing lines.
In December 2002, we and Lilly expanded our collaboration for
the development of inhaled formulations of insulin and hGH based
on our AIR pulmonary technology. In connection with the
expansion, Lilly purchased $30.0 million of our Preferred
Stock. In October 2005, we converted 1,500 shares of the
Preferred Stock with a carrying value of $15.0 million into
823,677 shares of our Companys common stock. This
conversion secured a proportionate increase in the royalty rate
payable to us on future sales of the AIR Insulin product by
Lilly, if approved. In December 2006, Lilly exercised its right
to put the remaining 1,500 shares of our outstanding
Preferred Stock, with a carrying value of $15.0 million, in
exchange for a reduction in the royalty rate payable to us on
future sales of the AIR Insulin product by Lilly, if approved.
See Note 12 Collaborative Arrangements
Lilly to the consolidated financial statements for
information on royalties payable to us on sales of the AIR
Insulin product by Lilly.
The Preferred Stock was carried on the consolidated balance
sheets at its estimated redemption value in the amount of
$0 million and $15.0 million as of March 31, 2007
and March 31, 2006, respectively. Following Lillys
exercise of its put right, the Preferred Stock was reclassified
to shareholders equity in the consolidated balance sheets
under the caption Additional paid-in capital at its
redemption value of $15.0 million.
While the Preferred Stock was outstanding, we re-evaluated its
redemption value on a quarterly basis. Any increases or
decreases in the redemption value of the Preferred Stock, of
which there were none, would have been recorded as charges or
credits to shareholders equity in the same manner as
dividends on nonredeemable stock, and would have been effected
by charges or credits against retained earnings or, in the
absence of retained earnings, by charges or credits against
additional paid-in capital. Any increases or decreases in the
redemption value of the Preferred Stock, of which there were
none, would have decreased or increased income applicable to
common shareholders in the calculation of earnings per common
share and would not have had an impact on reported net income or
cash flows.
Our capital expenditures 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.
Capital expenditures were $36.3 million for the year ended
March 31, 2007. Our capital expenditures were primarily
related to the purchase of equipment and to expand our
manufacturing facilities in Wilmington, Ohio and in Chelsea,
Massachusetts.
Our manufacturing facility in Wilmington, Ohio is undergoing a
major expansion that is expected to be substantially completed
in calendar year 2008. The facility expansion will add one
additional manufacturing line for RISPERDAL CONSTA and two
additional manufacturing lines for VIVITROL. Janssen is funding
the construction of the additional manufacturing line for
RISPERDAL CONSTA, and Cephalon is funding the construction of
the two additional manufacturing lines for VIVITROL.
Our manufacturing facility in Chelsea, Massachusetts is
undergoing an expansion which is expected to be completed in
calendar year 2010. Under our commercial manufacturing agreement
with Lilly for AIR Insulin, Lilly funds the construction of a
second manufacturing line at the Chelsea, Massachusetts
facility. In the year ended March 31, 2007, we received a
payment of $11.5 million from Lilly as reimbursement for
costs we previously incurred related to the construction of the
second manufacturing line.
55
Off-Balance
Sheet Arrangements
As of March 31, 2007, 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, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
Two to
|
|
|
Four to Five
|
|
|
After Five
|
|
|
|
|
|
|
One Year
|
|
|
Three Years
|
|
|
Years
|
|
|
Years
|
|
|
|
|
|
|
(Fiscal
|
|
|
(Fiscal 2009-
|
|
|
(Fiscal 2011-
|
|
|
(After Fiscal
|
|
Contractual Cash Obligations
|
|
Total
|
|
|
2008)
|
|
|
2010)
|
|
|
2012)
|
|
|
2012)
|
|
|
|
(In thousands)
|
|
|
7% Notes
principal(1)
|
|
$
|
170,000
|
|
|
$
|
|
|
|
$
|
56,667
|
|
|
$
|
113,333
|
|
|
$
|
|
|
7% Notes
interest(1)
|
|
|
43,138
|
|
|
|
11,900
|
|
|
|
22,313
|
|
|
|
8,925
|
|
|
|
|
|
Term loan principal
|
|
|
1,474
|
|
|
|
1,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan interest
|
|
|
59
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
162
|
|
|
|
114
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
170,095
|
|
|
|
10,381
|
|
|
|
20,552
|
|
|
|
20,577
|
|
|
|
118,585
|
|
Purchase obligations
|
|
|
4,645
|
|
|
|
4,413
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
Capital expansion programs
|
|
|
12,019
|
|
|
|
11,926
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
401,592
|
|
|
$
|
40,267
|
|
|
$
|
99,905
|
|
|
$
|
142,835
|
|
|
$
|
118,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 5 to the
consolidated financial statements included in this Form
10-K). |
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
Unaudited Quarterly Financial Data
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing revenues
|
|
$
|
22,193
|
|
|
$
|
26,122
|
|
|
$
|
28,763
|
|
|
$
|
28,338
|
|
Royalty revenues
|
|
|
5,139
|
|
|
|
5,813
|
|
|
|
5,673
|
|
|
|
6,526
|
|
Research and development revenue
under collaborative arrangements
|
|
|
14,464
|
|
|
|
17,624
|
|
|
|
19,532
|
|
|
|
22,863
|
|
Net collaborative profit
|
|
|
9,742
|
|
|
|
11,611
|
|
|
|
8,445
|
|
|
|
7,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
51,538
|
|
|
|
61,170
|
|
|
|
62,413
|
|
|
|
64,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods manufactured
|
|
|
9,338
|
|
|
|
11,822
|
|
|
|
12,989
|
|
|
|
11,060
|
|
Research and development
|
|
|
25,863
|
|
|
|
29,817
|
|
|
|
29,908
|
|
|
|
31,727
|
|
Selling, general and administrative
|
|
|
16,530
|
|
|
|
15,677
|
|
|
|
16,365
|
|
|
|
17,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
51,731
|
|
|
|
57,316
|
|
|
|
59,262
|
|
|
|
60,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
(193
|
)
|
|
|
3,854
|
|
|
|
3,151
|
|
|
|
4,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4,335
|
|
|
|
4,734
|
|
|
|
4,260
|
|
|
|
4,378
|
|
Interest expense
|
|
|
(5,473
|
)
|
|
|
(4,034
|
)
|
|
|
(4,141
|
)
|
|
|
(4,077
|
)
|
Other income (expense), net
|
|
|
787
|
|
|
|
(664
|
)
|
|
|
89
|
|
|
|
(693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(351
|
)
|
|
|
36
|
|
|
|
208
|
|
|
|
(392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(544
|
)
|
|
|
3,890
|
|
|
|
3,359
|
|
|
|
3,838
|
|
INCOME TAXES
|
|
|
171
|
|
|
|
164
|
|
|
|
426
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(715
|
)
|
|
$
|
3,726
|
|
|
$
|
2,933
|
|
|
$
|
3,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
$
|
(0.01
|
)
|
|
$
|
0.04
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
$
|
(0.01
|
)
|
|
$
|
0.04
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
93,784
|
|
|
|
101,331
|
|
|
|
100,896
|
|
|
|
101,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
93,784
|
|
|
|
105,543
|
|
|
|
104,746
|
|
|
|
104,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
Unaudited 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. |
Recent
Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standard (SFAS) No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities
Including an Amendment of FASB Statement No. 115
(SFAS No. 159). SFAS No. 159
permits entities to elect to measure selected financial
instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has
been elected are recognized in earnings at each reporting
period. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. We are currently
assessing the impact of SFAS No. 159 on our
consolidated financial statements.
58
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157), which establishes a
framework for measuring fair value in GAAP and expands
disclosures about the use of fair value to measure assets and
liabilities in interim and annual reporting periods subsequent
to initial recognition. Prior to SFAS No. 157, which
emphasizes that fair value is a market-based measurement and not
an entity-specific measurement, there were different definitions
of fair value and limited guidance for applying those
definitions in GAAP. SFAS No. 157 is effective for us
on a prospective basis for the reporting period beginning
April 1, 2008. We are in the process of evaluating the
impact of the adoption of SFAS No. 157 on our
consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation
(FIN) No. 48, Accounting for
Uncertainty in Income Taxes
(FIN No. 48) an interpretation of
SFAS No. 109, Accounting for Income
Taxes FIN No. 48 clarifies the accounting
for uncertainty in income taxes recognized in a companys
financial statements and prescribes a recognition threshold and
measurement process for financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. FIN No. 48 also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition and
will become effective for the Company on April 1, 2007. We
are in the process of evaluating the impact of the adoption of
FIN No. 48 on our consolidated financial statements.
|
|
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 licensing 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, 2007, the fair value of our Non-Recourse
7% Notes approximates the carrying value. The interest rate
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, 2007, we have a term loan in the amount of
$1.5 million 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.
59
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.
|
|
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) of
the Securities Exchange Act of 1934) as of March 31,
2007. This evaluation included consideration of the controls,
processes and procedures that comprise our internal control over
financial reporting. Based on such evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as
of March 31, 2007, our disclosure controls and procedures
were effective to provide reasonable assurance that information
required to be disclosed by us in the reports that we file under
the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms and that such information is
accumulated and communicated to our management as appropriate to
allow timely decisions regarding required disclosure.
(b) Evaluation of internal control over financial reporting
Managements Annual Report on Internal Control over
Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f).
Under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting as of March 31,
2007, based on the framework in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
In completing our assessment, no material weaknesses in the
Companys internal controls over financial reporting as of
March 31, 2007 were identified. In addition, based on such
assessment, our Chief Executive Officer and Chief Financial
Officer concluded that, as of March 31, 2007, our
disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed
by us in the reports that we file under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and
forms and that such information is
60
accumulated and communicated to our management as appropriate to
allow timely decisions regarding required disclosure.
Managements assessment of the effectiveness of our
internal control over financial reporting as of March 31,
2007 has been attested to by Deloitte & Touche LLP, an
independent registered public accounting firm, as stated in
their report which is included following Item 9A below.
(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, 2007 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
(d) Inherent Limitations of Disclosure Controls and
Internal Control Over Financial Reporting
The effectiveness of our disclosure controls and procedures and
our internal control over financial reporting is subject to
various inherent limitations, including cost limitations,
judgments used in decision making, assumptions about the
likelihood of future events, the soundness of our systems, the
possibility of human error, and the risk of fraud. Moreover,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions and the risk that the degree of
compliance with policies or procedures may deteriorate over
time. Because of these limitations, there can be no assurance
that any system of disclosure controls and procedures or
internal control over financial reporting will be successful in
preventing all errors or fraud or in making all material
information known in a timely manner to the appropriate levels
of management.
61
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 Annual 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, 2007, 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, 2007, 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, 2007, 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, 2007 of the Company and our report dated
June 14, 2007 expressed an unqualified opinion on those
financial statements and included an explanatory paragraph
regarding the Companys adoption of Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment
, effective April 1, 2006.
Boston, Massachusetts
June 14, 2007
62
|
|
Item 9B.
|
Other
Information
|
Our policy governing transactions in our securities by our
directors, officers and employees permits our officers,
directors and employees to enter into trading plans in
accordance with
Rule 10b5-1
under the Exchange Act. During the third and fourth quarters of
the Fiscal year ending March 31, 2007,
Mr. James M. Frates, Mr. Michael J. Landine
and Mr. Richard F. Pops, executive officers of the
Company, entered into trading plans in accordance with
Rule 10b5-1
and our policy governing transactions in our securities by our
directors, officers and employees. We undertake 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 2007 Proxy
Statement).
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item is incorporated herein by
reference to the 2007 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 2007 Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information required by this item is incorporated herein by
reference to the 2007 Proxy Statement.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this item is incorporated herein by
reference to the 2007 Proxy Statement.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) (1) Consolidated 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
63
|
|
|
|
|
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
|
|
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
|
.4
|
|
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
|
.5
|
|
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
|
|
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
|
.4
|
|
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
|
.5
|
|
License Agreement, dated as of
February 13, 1996, between Medisorb Technologies International
L.P. and Janssen Pharmaceutica Inc. (U.S.) (assigned to Alkermes
Inc. in July 2006). (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
|
.6
|
|
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 Inc. in July 2006). (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
|
.7
|
|
Manufacturing and Supply
Agreement, dated August 6, 1997, by and among Alkermes
Controlled Therapeutics Inc. II, Janssen Pharmaceutica
International and Janssen Pharmaceutica, Inc. (assigned to
Alkermes Inc. in July 2006) (Incorporated by reference to
Exhibit 10.19 to the Registrants Report on Form 10-K for
the fiscal year ended March 31, 2002.)***
|
64
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
|
|
|
10
|
.7(a)
|
|
Third Amendment To Development
Agreement, Second Amendment To Manufacturing and Supply
Agreement and First Amendment To License Agreements by and
between Janssen Pharmaceutica International Inc. and Alkermes
Controlled Therapeutics Inc. II, dated April 1, 2000 (assigned
to Alkermes Inc. in July 2006) (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.)****
|
|
10
|
.7(b)
|
|
Fourth Amendment To Development
Agreement and First Amendment To Manufacturing and Supply
Agreement by and between Janssen Pharmaceutica International
Inc. and Alkermes Controlled Therapeutics Inc. II, dated
December 20, 2000 (assigned to Alkermes Inc. in July 2006) (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
|
.7(c)
|
|
Addendum to Manufacturing and
Supply Agreement, dated August 2001, by and among Alkermes
Controlled Therapeutics Inc. II, Janssen Pharmaceutica
International and Janssen Pharmaceutica, Inc. (assigned to
Alkermes Inc. in July 2006) (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
|
.7(d)
|
|
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.
(assigned to Alkermes Inc. in July 2006) (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
|
.7(e)
|
|
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 (assigned to Alkermes Inc. in
July 2006) (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
|
.7(f)
|
|
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
(assigned to Alkermes Inc. in July 2006) (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
|
.8
|
|
Agreement by and between JPI
Pharmaceutica International, Janssen Pharmaceutica Inc. and
Alkermes Controlled Therapeutics Inc. II, dated December 21,
2002 (assigned to Alkermes Inc. in July 2006) (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
|
.8(a)
|
|
Amendment to Agreement by and
between JPI Pharmaceutica International, Janssen Pharmaceutica
Inc. and Alkermes Controlled Therapeutics Inc. II, dated
December 16, 2003 (assigned to Alkermes Inc. in July 2006) (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
|
.9
|
|
Patent License Agreement, dated as
of August 11, 1997, between Massachusetts Institute of
Technology and Advanced Inhalation Research, Inc. (assigned to
Alkermes, Inc. in March 2007), 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
|
.10
|
|
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
|
.11
|
|
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
|
.11(a)
|
|
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.)
|
65
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
|
|
|
10
|
.12
|
|
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
|
.13
|
|
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 L. 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
|
.14
|
|
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
|
.15
|
|
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
|
.16
|
|
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
|
.16(a)
|
|
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
|
.16(b)
|
|
Amendment to the License and
Collaboration Agreement between Alkermes, Inc. and Cephalon,
Inc. dated as of December 21, 2006.§#
|
|
10
|
.16(c)
|
|
Amendment to the Supply Agreement
between Alkermes, Inc. and Cephalon, Inc. dated as of December
21, 2006.§#
|
|
10
|
.17
|
|
Alkermes Fiscal 2007 Named
Executive Bonus Plan. (Incorporated by reference to Exhibit 10.1
to the Registrants Current Report on Form 8-K filed on May
8, 2006.)+
|
|
10
|
.17(a)
|
|
Alkermes Amended Fiscal 2007 Named
Executive Bonus Plan. (Incorporated by reference to Exhibit 10.1
to the Registrants Current Report on Form 8-K filed on
September 27, 2006.)+
|
|
10
|
.18
|
|
Employment Agreement, dated
November 20, 2001 by and between Gordon G. Pugh and the
Registrant. (Incorporated by reference to Exhibit 10.2 to the
Registrants Report on Form 10-Q for the fiscal quarter
ended September 30, 2006.)+
|
|
10
|
.19
|
|
Employment Agreement, dated May
30, 2000 by and between Elliot W. Ehrich, M.D. and the
Registrant. (Incorporated by reference to Exhibit 10.3 to the
Registrants Report on Form 10-Q for the fiscal quarter
ended September 30, 2006.)+
|
|
10
|
.20
|
|
Alkermes, Inc. 1998 Equity
Incentive Plan as Amended and Approved on November 2, 2006.
(Incorporated by reference to Exhibit 10.1 to the
Registrants Report on Form 10-Q for the fiscal quarter
ended December 31, 2006.)+
|
|
10
|
.20(a)
|
|
Form of Stock Option Certificate
pursuant to Alkermes, Inc. 1998 Equity Incentive Plan.
(Incorporated by reference to Exhibit 10.37 to the
Registrants Report on Form 10-K for the fiscal year ended
March 31, 2006.)+
|
|
10
|
.21
|
|
Alkermes, Inc. 1999 Stock Option
Plan as Amended and Approved on November 2, 2006. (Incorporated
by reference to Exhibit 10.2 to the Registrants Report on
Form 10-Q for the fiscal quarter ended December 31, 2006.)+
|
|
10
|
.21(a)
|
|
Form of Incentive Stock Option
Certificate pursuant to the 1999 Stock Option Plan, as amended.
(Incorporated by reference to Exhibit 10.35 to the
Registrants Report on Form 10-K for the fiscal year ended
March 31, 2006.)+
|
|
10
|
.21(b)
|
|
Form of Non-Qualified Stock Option
Certificate pursuant to the 1999 Stock Option Plan, as amended.
(Incorporated by reference to Exhibit 10.36 to the
Registrants Report on Form 10-K for the fiscal year ended
March 31, 2006.)+
|
|
10
|
.22
|
|
Alkermes, Inc. 2002 Restricted
Stock Award Plan as Amended and Approved on November 2, 2006.
(Incorporated by reference to Exhibit 10.3 to the
Registrants Report on Form 10-Q for the fiscal quarter
ended December 31, 2006.)+
|
66
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
|
|
|
10
|
.23
|
|
2006 Stock Option Plan for
Non-Employee Directors. (Incorporated by reference to Exhibit
10.4 to the Registrants Report on Form 10-Q for the fiscal
quarter ended September 30, 2006.)+
|
|
10
|
.24
|
|
Employment Agreement, dated
February 27, 2007 by and between Richard F. Pops and the
Registrant. (Incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
filed on March 5, 2007.)+
|
|
10
|
.25
|
|
Alkermes Fiscal 2008
Named-Executive Bonus Plan. (Incorporated by reference to
Exhibit 10.1 to the Registrants Current Report on Form 8-K
filed on April 26, 2007.)+
|
|
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 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 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 16, 2002. Such provisions have been separately
filed 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 granted for certain portions
thereof pursuant to a Commission Order granted July 31,
2006. 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. |
|
+ |
|
Indicates a management contract or any compensatory plan,
contract or arrangement. |
|
# |
|
Filed herewith. |
67
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.
|
|
|
|
By:
|
/s/ David
A. Broecker
|
David A. Broecker
President and Chief Executive Officer
June 14, 2007
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 David A. Broecker 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/ Richard
F. Pops
Richard
F. Pops
|
|
Director and Chairman of the Board
|
|
June 14, 2007
|
|
|
|
|
|
/s/ David
A. Broecker
David
A. Broecker
|
|
President and Chief Executive
Officer and Director (Principal Executive Officer)
|
|
June 14, 2007
|
|
|
|
|
|
/s/ James
M. Frates
James
M. Frates
|
|
Senior Vice President, Chief
Financial Officer and Treasurer (Principal Financial and
Accounting Officer)
|
|
June 14, 2007
|
|
|
|
|
|
/s/ Floyd
E. Bloom
Floyd
E. Bloom
|
|
Director
|
|
June 14, 2007
|
|
|
|
|
|
/s/ Robert
A. Breyer
Robert
A. Breyer
|
|
Director
|
|
June 14, 2007
|
|
|
|
|
|
/s/ Gerri
Henwood
Gerri
Henwood
|
|
Director
|
|
June 14, 2007
|
|
|
|
|
|
/s/ Paul
J. Mitchell
Paul
J. Mitchell
|
|
Director
|
|
June 14, 2007
|
|
|
|
|
|
/s/ Alexander
Rich
Alexander
Rich
|
|
Director
|
|
June 14, 2007
|
68
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Paul
Schimmel
Paul
Schimmel
|
|
Director
|
|
June 14, 2007
|
|
|
|
|
|
/s/ Mark
B. Skaletsky
Mark
B. Skaletsky
|
|
Director
|
|
June 14, 2007
|
|
|
|
|
|
/s/ Michael
A. Wall
Michael
A. Wall
|
|
Director and Chairman Emeritus
|
|
June 14, 2007
|
69
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, 2007 and 2006, and the related consolidated
statements of operations and comprehensive income (loss),
stockholders equity, and cash flows for each of the three
years in the period ended March 31, 2007. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
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, 2007 and
2006, and the results of their operations and their cash flows
for each of the three years in the period ended March 31,
2007, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 11 to the financial statements, the
Company changed its method of accounting for share-based
payments upon the adoption of Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment, effective
April 1, 2006.
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, 2007, 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, 2007 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, 2007
F-1
ALKERMES,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
March 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
80,500
|
|
|
$
|
33,578
|
|
Investments short-term
|
|
|
271,082
|
|
|
|
264,389
|
|
Receivables
|
|
|
56,049
|
|
|
|
39,802
|
|
Inventory, net
|
|
|
18,190
|
|
|
|
7,341
|
|
Prepaid expenses and other current
assets
|
|
|
7,054
|
|
|
|
2,782
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
432,875
|
|
|
|
347,892
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT:
|
|
|
|
|
|
|
|
|
Land
|
|
|
301
|
|
|
|
301
|
|
Building and improvements
|
|
|
25,717
|
|
|
|
20,966
|
|
Furniture, fixtures and equipment
|
|
|
64,203
|
|
|
|
61,086
|
|
Equipment under capital lease
|
|
|
464
|
|
|
|
464
|
|
Leasehold improvements
|
|
|
32,345
|
|
|
|
45,842
|
|
Construction in progress
|
|
|
42,442
|
|
|
|
23,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165,472
|
|
|
|
152,214
|
|
Less: accumulated depreciation and
amortization
|
|
|
(41,877
|
)
|
|
|
(39,297
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and
equipment net
|
|
|
123,595
|
|
|
|
112,917
|
|
|
|
|
|
|
|
|
|
|
RESTRICTED INVESTMENTS
|
|
|
5,144
|
|
|
|
5,145
|
|
OTHER ASSETS
|
|
|
7,007
|
|
|
|
11,209
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
568,621
|
|
|
$
|
477,163
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS
EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
$
|
45,571
|
|
|
$
|
36,141
|
|
Accrued interest
|
|
|
2,976
|
|
|
|
3,239
|
|
Accrued restructuring costs
|
|
|
284
|
|
|
|
852
|
|
Unearned milestone
revenue current portion
|
|
|
11,450
|
|
|
|
83,338
|
|
Deferred revenue
current portion
|
|
|
200
|
|
|
|
200
|
|
Convertible subordinated
notes current portion
|
|
|
|
|
|
|
676
|
|
Long-term debt current
portion
|
|
|
1,579
|
|
|
|
1,214
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
62,060
|
|
|
|
125,660
|
|
|
|
|
|
|
|
|
|
|
NON-RECOURSE RISPERDAL CONSTA
SECURED 7% NOTES
|
|
|
156,851
|
|
|
|
153,653
|
|
CONVERTIBLE SUBORDINATED
NOTES LONG-TERM PORTION
|
|
|
|
|
|
|
124,346
|
|
LONG-TERM DEBT
|
|
|
47
|
|
|
|
1,519
|
|
UNEARNED MILESTONE
REVENUE LONG-TERM PORTION
|
|
|
117,300
|
|
|
|
16,198
|
|
DEFERRED REVENUE
LONG-TERM PORTION
|
|
|
22,153
|
|
|
|
750
|
|
OTHER LONG-TERM LIABILITIES
|
|
|
6,749
|
|
|
|
6,821
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
365,160
|
|
|
|
428,947
|
|
|
|
|
|
|
|
|
|
|
REDEEMABLE CONVERTIBLE PREFERRED
STOCK, par value, $0.01 per share; authorized and issued, none
and 1,500 shares at March 31, 2007 and March 31,
2006, respectively (at liquidation preference),
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
(Note 13)
|
|
|
|
|
|
|
|
|
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; 101,550,673 and
91,744,680 shares issued, 100,726,996 and
91,744,680 shares outstanding at March 31, 2007 and
March 31, 2006, respectively
|
|
|
1,015
|
|
|
|
917
|
|
Non-voting common stock, par value,
$0.01 per share; authorized 450,000 shares; issued and
outstanding, 382,632 shares at March 31, 2007 and
March 31, 2006
|
|
|
4
|
|
|
|
4
|
|
Treasury stock, at cost
(823,677 shares and none at March 31, 2007 and
March 31, 2006, respectively)
|
|
|
(12,492
|
)
|
|
|
|
|
Additional paid-in capital
|
|
|
837,727
|
|
|
|
664,596
|
|
Deferred compensation
|
|
|
|
|
|
|
(374
|
)
|
Accumulated other comprehensive
income
|
|
|
753
|
|
|
|
1,064
|
|
Accumulated deficit
|
|
|
(623,546
|
)
|
|
|
(632,991
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
203,461
|
|
|
|
33,216
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS EQUITY
|
|
$
|
568,621
|
|
|
$
|
477,163
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-2
ALKERMES,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS)
Years Ended March 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing revenues
|
|
$
|
105,416
|
|
|
$
|
64,901
|
|
|
$
|
40,488
|
|
Royalty revenues
|
|
|
23,151
|
|
|
|
16,532
|
|
|
|
9,636
|
|
Research and development revenue
under collaborative arrangements
|
|
|
74,483
|
|
|
|
45,883
|
|
|
|
26,002
|
|
Net collaborative profit
|
|
|
36,915
|
|
|
|
39,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
239,965
|
|
|
|
166,601
|
|
|
|
76,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods manufactured
|
|
|
45,209
|
|
|
|
23,489
|
|
|
|
16,834
|
|
Research and development
|
|
|
117,315
|
|
|
|
89,068
|
|
|
|
91,641
|
|
Selling, general and administrative
|
|
|
66,399
|
|
|
|
40,383
|
|
|
|
29,499
|
|
Restructuring
|
|
|
|
|
|
|
|
|
|
|
11,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
228,923
|
|
|
|
152,940
|
|
|
|
149,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
11,042
|
|
|
|
13,661
|
|
|
|
(73,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
17,707
|
|
|
|
11,569
|
|
|
|
3,005
|
|
Interest expense
|
|
|
(17,725
|
)
|
|
|
(20,661
|
)
|
|
|
(7,394
|
)
|
Derivative loss (income) related
to convertible subordinated notes
|
|
|
|
|
|
|
(1,084
|
)
|
|
|
4,385
|
|
Other (expense) income, net
|
|
|
(481
|
)
|
|
|
333
|
|
|
|
(1,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(499
|
)
|
|
|
(9,843
|
)
|
|
|
(1,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
10,543
|
|
|
|
3818
|
|
|
|
(75,168
|
)
|
INCOME TAXES
|
|
|
1,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
9,445
|
|
|
$
|
3,818
|
|
|
$
|
(75,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
$
|
0.10
|
|
|
$
|
0.04
|
|
|
$
|
(0.83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
$
|
0.09
|
|
|
$
|
0.04
|
|
|
$
|
(0.83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
99,242
|
|
|
|
91,022
|
|
|
|
90,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
103,351
|
|
|
|
97,377
|
|
|
|
90,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
9,445
|
|
|
$
|
3,818
|
|
|
$
|
(75,168
|
)
|
Unrealized (loss) gain on
marketable securities
|
|
|
(311
|
)
|
|
|
1,285
|
|
|
|
(1,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS)
|
|
$
|
9,134
|
|
|
$
|
5,103
|
|
|
$
|
(76,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
ALKERMES,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
Years Ended March 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Currency
|
|
|
Gain (Loss) on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Non-voting Common Stock
|
|
|
Paid-In
|
|
|
Deferred
|
|
|
Translation
|
|
|
Marketable
|
|
|
Accumulated
|
|
|
Treasury Stock
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Adjustments
|
|
|
Securities
|
|
|
Deficit
|
|
|
Shares
|
|
|
Amount
|
|
|
Total
|
|
|
|
(In thousands, except share amounts)
|
|
|
BALANCE April 1,
2004
|
|
|
89,305,261
|
|
|
$
|
893
|
|
|
|
382,632
|
|
|
$
|
4
|
|
|
$
|
635,940
|
|
|
$
|
(276
|
)
|
|
$
|
(142
|
)
|
|
$
|
1,152
|
|
|
$
|
(561,641
|
)
|
|
|
|
|
|
$
|
|
|
|
$
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,252
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,503
|
|
Unrealized loss on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,231
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75,168
|
)
|
|
|
|
|
|
|
|
|
|
|
(75,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE March 31,
2005
|
|
|
89,999,526
|
|
|
$
|
900
|
|
|
|
382,632
|
|
|
$
|
4
|
|
|
|
640,238
|
|
|
$
|
|
|
|
$
|
(142
|
)
|
|
$
|
(79
|
)
|
|
$
|
(636,809
|
)
|
|
|
|
|
|
|
|
|
|
$
|
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
|
|
|
$
|
664,596
|
|
|
$
|
(374
|
)
|
|
$
|
(142
|
)
|
|
$
|
1,206
|
|
|
$
|
(632,991
|
)
|
|
|
|
|
|
$
|
|
|
|
$
|
33,216
|
|
Issuance of common stock upon
exercise of options or vesting of restricted stock awards
|
|
|
780,722
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
7,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,547
|
|
Elimination of deferred
compensation with the adoption of SFAS 123(R)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(374
|
)
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of 2.5% convertible
subordinated notes into common stock
|
|
|
9,025,271
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
124,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,402
|
|
Elimination of deferred financing
costs on 2.5% convertible subordinated notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,751
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,751
|
)
|
Redemption of redeemable
convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
Repurchase of common stock for
treasury, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(823,677
|
)
|
|
|
(12,492
|
)
|
|
|
(12,492
|
)
|
Unrealized loss on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(311
|
)
|
Share-based payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,249
|
|
Tax benefit from share-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,445
|
|
|
|
|
|
|
|
|
|
|
|
9,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE March 31,
2007
|
|
|
101,550,673
|
|
|
$
|
1,015
|
|
|
|
382,632
|
|
|
$
|
4
|
|
|
$
|
837,727
|
|
|
$
|
|
|
|
$
|
(142
|
)
|
|
$
|
895
|
|
|
$
|
(623,546
|
)
|
|
|
(823,677
|
)
|
|
$
|
(12,492
|
)
|
|
$
|
203,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
ALKERMES,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years Ended March 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
9,445
|
|
|
$
|
3,818
|
|
|
$
|
(75,168
|
)
|
Adjustments to reconcile net
income (loss) to cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
27,687
|
|
|
|
442
|
|
|
|
1,551
|
|
Depreciation and amortization
|
|
|
11,991
|
|
|
|
10,879
|
|
|
|
10,618
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
11,527
|
|
Other non-cash charges
|
|
|
3,783
|
|
|
|
5,251
|
|
|
|
3,922
|
|
Derivative loss (income) related
to convertible subordinated notes
|
|
|
|
|
|
|
1,084
|
|
|
|
(4,385
|
)
|
Loss (gain) on sale of investments
|
|
|
743
|
|
|
|
(761
|
)
|
|
|
1,961
|
|
Gain on sale of equipment
|
|
|
(530
|
)
|
|
|
(70
|
)
|
|
|
(172
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(13,537
|
)
|
|
|
(20,987
|
)
|
|
|
(7,289
|
)
|
Inventory, prepaid expenses and
other current assets
|
|
|
(12,142
|
)
|
|
|
(3,777
|
)
|
|
|
(3,071
|
)
|
Accounts payable, accrued expenses
and accrued interest
|
|
|
8,226
|
|
|
|
18,329
|
|
|
|
2,578
|
|
Accrued restructuring costs
|
|
|
(496
|
)
|
|
|
(995
|
)
|
|
|
(1,628
|
)
|
Unearned milestone revenue
|
|
|
29,214
|
|
|
|
99,536
|
|
|
|
|
|
Deferred revenue
|
|
|
18,694
|
|
|
|
950
|
|
|
|
(17,173
|
)
|
Other long-term liabilities
|
|
|
649
|
|
|
|
2,831
|
|
|
|
2,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating
activities
|
|
|
83,727
|
|
|
|
116,530
|
|
|
|
(74,255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and
equipment
|
|
|
(36,305
|
)
|
|
|
(28,660
|
)
|
|
|
(17,817
|
)
|
Proceeds from sales of equipment
|
|
|
12,571
|
|
|
|
122
|
|
|
|
252
|
|
Purchases of short and long-term
investments
|
|
|
(329,234
|
)
|
|
|
(661,671
|
)
|
|
|
(178,925
|
)
|
Sales and maturities of short and
long-term investments
|
|
|
322,989
|
|
|
|
552,161
|
|
|
|
157,682
|
|
(Increase) decrease in other assets
|
|
|
(98
|
)
|
|
|
176
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
(30,077
|
)
|
|
|
(137,872
|
)
|
|
|
(38,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
stock
|
|
|
7,547
|
|
|
|
8,559
|
|
|
|
3,030
|
|
Proceeds from the issuance of
Non-Recourse RISPERDAL CONSTA Secured 7% notes, net of
issuance discount
|
|
|
|
|
|
|
|
|
|
|
150,271
|
|
Borrowings under term loan
|
|
|
|
|
|
|
|
|
|
|
3,676
|
|
Payment of debt
|
|
|
(1,783
|
)
|
|
|
(1,124
|
)
|
|
|
(239
|
)
|
Payment of financing costs in
connection with issuance of notes
|
|
|
|
|
|
|
|
|
|
|
(6,119
|
)
|
Purchase of treasury stock
|
|
|
(12,492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
(6,728
|
)
|
|
|
7,435
|
|
|
|
150,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
|
|
|
46,922
|
|
|
|
(13,907
|
)
|
|
|
37,586
|
|
CASH AND CASH
EQUIVALENTS Beginning of period
|
|
|
33,578
|
|
|
|
47,485
|
|
|
|
9,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS End of period
|
|
$
|
80,500
|
|
|
$
|
33,578
|
|
|
$
|
47,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW DISCLOSURE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
13,647
|
|
|
$
|
14,319
|
|
|
$
|
3,238
|
|
Cash paid for taxes
|
|
$
|
1,051
|
|
|
$
|
|
|
|
$
|
|
|
Non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of 2.5% convertible
subordinated notes into common stock
|
|
$
|
125,000
|
|
|
$
|
|
|
|
$
|
|
|
Conversion of redeemable
convertible preferred stock into common stock
|
|
$
|
|
|
|
$
|
15,000
|
|
|
$
|
|
|
Redemption of redeemable
convertible preferred stock
|
|
$
|
15,000
|
|
|
$
|
|
|
|
$
|
|
|
Increase in property, plant and
equipment and accounts payable and accrued expenses
|
|
$
|
(1,321
|
)
|
|
$
|
|
|
|
$
|
|
|
See notes to consolidated financial statements.
F-5
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended March 31, 2007, 2006 and 2005
(In thousands, except share and per share amounts)
Alkermes, Inc. (as used in this section, together with its
subsidiaries, Alkermes or the Company)
is a biotechnology company that develops innovative medicines
designed to yield better therapeutic outcomes and improve the
lives of patients with serious disease. The Company currently
has two commercial products:
RISPERDAL®
CONSTA®
[(risperidone) long-acting injection], the first and only
long-acting atypical antipsychotic medication approved for use
in schizophrenia, and marketed worldwide by Janssen-Cilag
(Janssen), a wholly owned division of Johnson &
Johnson; and
VIVITROL®
(naltrexone for extended-release injectable suspension), the
first and only once-monthly injectable medication approved for
the treatment of alcohol dependence and marketed in the United
States (U.S.) primarily by Cephalon, Inc.
(Cephalon). The Companys pipeline includes
extended-release injectable, pulmonary, and oral products for
the treatment of prevalent, chronic diseases such as central
nervous system disorders, addiction and diabetes. The
Companys headquarters are 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 Europe, Ltd. and RC Royalty
Sub LLC (Royalty Sub). The assets of Royalty Sub are
not available to satisfy obligations of Alkermes and its
subsidiaries, other than the obligations of Royalty Sub
including Royalty Subs non-recourse RISPERDAL CONSTA
secured 7% notes (the Non-Recourse
7% Notes). Alkermes Acquisition Corp. was dissolved
effective March 31, 2007. Alkermes Controlled Therapeutics
Inc. II (ACT II) and Advanced Inhalation
Research, Inc. (AIR) were merged into Alkermes, Inc.
effective July 31, 2006 and March 31, 2007,
respectively. Intercompany accounts and transactions have been
eliminated.
Use of Estimates The preparation of the
Companys consolidated financial statements in conformity
with GAAP necessarily requires management to make estimates and
assumptions that affect the following: (1) reported amounts
of assets and liabilities; (2) disclosure of contingent
assets and liabilities at the date of the 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
carried 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
2.5% convertible subordinated
notes, including embedded derivative liability
|
|
$
|
|
|
|
$
|
|
|
|
$
|
124,346
|
|
|
$
|
200,313
|
|
3.75% convertible subordinated
notes
|
|
|
|
|
|
|
|
|
|
|
676
|
|
|
|
663
|
|
7% Notes
|
|
|
156,851
|
|
|
|
156,400
|
|
|
|
153,653
|
|
|
|
158,100
|
|
Term loan
|
|
|
1,474
|
|
|
|
1,474
|
|
|
|
2,484
|
|
|
|
2,484
|
|
Obligation under capital lease
|
|
|
152
|
|
|
|
152
|
|
|
|
249
|
|
|
|
249
|
|
Redeemable convertible preferred
stock
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
15,000
|
|
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.
Earnings (Loss) Per Common Share The Company
calculates earnings per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128,
Earnings per Share
(SFAS No. 128). SFAS No. 128
requires the presentation of basic earnings per
share and diluted earnings per 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, redeemable 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.
Basic and diluted earnings (loss) per share for the years ended
March 31 were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
9,445
|
|
|
$
|
3,818
|
|
|
$
|
(75,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding, basic
|
|
|
99,242
|
|
|
|
91,022
|
|
|
|
90,094
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
3,411
|
|
|
|
4,132
|
|
|
|
|
|
Restricted stock awards
|
|
|
254
|
|
|
|
84
|
|
|
|
|
|
Redeemable convertible preferred
stock
|
|
|
444
|
|
|
|
2,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common share
equivalents
|
|
|
4,109
|
|
|
|
6,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating diluted
earnings (loss) per common share
|
|
|
103,351
|
|
|
|
97,377
|
|
|
|
90,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for interest, net of tax
|
|
$
|
1,246
|
|
|
$
|
3,150
|
|
|
$
|
3,150
|
|
Adjustment for derivative loss
(income)
|
|
|
|
|
|
|
1,084
|
|
|
|
(4,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,246
|
|
|
$
|
4,234
|
|
|
$
|
(1,235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
6,985
|
|
|
|
4,912
|
|
|
|
17,761
|
|
Restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
51
|
|
Redeemable convertible preferred
stock
|
|
|
|
|
|
|
|
|
|
|
2,021
|
|
2.5% convertible subordinated notes
|
|
|
1,879
|
|
|
|
9,025
|
|
|
|
9,025
|
|
3.75% convertible subordinated
notes
|
|
|
9
|
|
|
|
10
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,873
|
|
|
|
13,947
|
|
|
|
28,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. 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 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 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) net
losses on the products; (ii) manufacturing of the products;
and (iii) the product license.
Under the terms of the Agreements, the Company is responsible
for the first $120.0 million of net product losses through
December 31, 2007, which increased pursuant to the
Amendments (see below) to $124.6 million (the
cumulative net loss cap). The net product losses
exclude development costs incurred by the Company to obtain FDA
approval of VIVITROL and costs incurred by the Company to
complete the first VIVITROL manufacturing line, both of which
were the Companys sole responsibility. If net product
losses exceed the cumulative net loss cap through
December 31, 2007, Cephalon is responsible to pay all net
product losses in excess of the cumulative net loss cap during
this period. If VIVITROL is profitable through December 31,
2007, net profits will be divided between the Company and
Cephalon in approximately equal shares. After December 31,
2007, all net profits and losses earned on the product will be
divided between the Company and Cephalon in approximately equal
shares. Cumulative net product losses since inception of the
Agreements through March 31, 2007 were $119.3 million.
F-8
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cephalon records net sales from the products in the
U.S. The Company and Cephalon reconcile the costs incurred
in the period by each party to develop, commercialize and
manufacture the products against revenues earned on the products
in the period, to determine net profits or losses on the
products in the period. To the extent that the cash earned or
expended by either of the parties exceeds or is less than its
proportional share of net profit or loss for the period, the
parties settle by delivering cash such that the net cash earned
or expended equals each partys proportional share. The
cash flow between the companies related to our share net profits
or losses is recorded in the period in which it was made under
the caption Net collaborative profit in the
consolidated statements of operations and comprehensive income
(loss).
The costs incurred by the Company and Cephalon with respect to
the development and commercialization of the products, and which
are charged into the collaboration, include employee time, which
is billed to the collaboration at negotiated full-time
equivalent (FTE) rates, and external expenses
incurred by the parties with respect to the products. FTE rates
vary depending on the nature of the activity performed (such as
development and sales) and are intended to approximate our
actual costs. Cost of goods manufactured related to the products
is based on a fully burdened manufacturing cost, determined in
accordance with U.S. GAAP.
The nonrefundable payments of $160.0 million and
$110.0 million the Company received from Cephalon in June
2005 and April 2006, respectively, and the $4.6 million
payment the Company received from Cephalon in December 2006,
pursuant to the Amendments (see below), 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 the consideration was received.
Of the initial $160.0 million non-refundable payment
received from Cephalon upon signing the Agreements, the Company
has allocated $139.8 million to the accounting unit
net losses on the products, comprising the
$120.0 million of net product losses for which the Company
is responsible and the $19.8 million of expenses the
Company incurred in attaining FDA approval of VIVITROL and
completing the first manufacturing line. The remaining
$20.2 million of the $160.0 million payment was
allocated to the accounting unit product license. Of
the $110.0 million non-refundable payment received from
Cephalon on VIVITROL approval, the Company allocated
$77.8 million to the accounting unit manufacturing of
the products and applied the remaining $32.2 million
to the accounting unit product license. The
$4.6 million payment received from Cephalon pursuant to the
Amendments has been allocated to the accounting unit net
losses on the products. The fair values of the accounting
units are reviewed periodically and adjusted, as appropriate.
The above payments were 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.
In October 2006, the Company and Cephalon entered into binding
amendments to the license and collaboration agreement and the
supply agreement (the Amendments). Under the
Amendments, the parties agreed that Cephalon would purchase from
the Company two VIVITROL manufacturing lines (and related
equipment) under construction. Amounts the Company received from
Cephalon for the sale of the two VIVITROL manufacturing lines
were recorded under the caption Deferred
revenue long-term portion in the consolidated
balance sheets and will be recorded as revenue over the
depreciable life of the assets in amounts equal to the related
asset depreciation once the assets are placed in service. Future
purchases of physical assets by Cephalon will be accounted for
in a similar way. Beginning October 2006, all FTE related costs
the Company incurs that are reimbursable by Cephalon related to
the construction and validation of the two additional VIVITROL
manufacturing lines are recorded as research and development
revenue as incurred. In December 2006, the Company received a
$4.6 million payment from Cephalon as reimbursement for
certain costs incurred by the Company prior to October 2006,
which the Company had charged to the collaboration and that were
related to the construction of the VIVITROL manufacturing lines.
These costs
F-9
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
consisted primarily of internal or temporary employee time,
billed at negotiated FTE rates. The Company and Cephalon agreed
to increase the cumulative net loss cap from $120.0 million
to $124.6 million to account for this reimbursement.
Manufacturing
Revenues Related to the Cephalon Agreements
Under the terms of the Agreements, the Company is responsible
for the manufacture of clinical and commercial supplies of the
products for sale in the U.S. Under the terms of the
Agreements, the Company bills Cephalon at cost for finished
product shipped to them. The Company records 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 is
recorded as cost of goods manufactured in the consolidated
statements of operations and comprehensive income (loss).
Manufacturing revenue and cost of goods manufactured related to
VIVITROL were recorded for the first time in the year ended
March 31, 2007, as the Company began shipping VIVITROL to
Cephalon.
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 ten year life of VIVITROL.
Manufacturing profit is estimated at 10% of the forecasted cost
of goods manufactured over the expected life of VIVITROL. This
profit margin was determined by reference to margins on other
products the Company produces for partners, an analysis of
margins enjoyed by other pharmaceutical contract manufacturers
and other available data. The forecast of units to be
manufactured was negotiated between the Company and Cephalon.
The Companys obligation to manufacture VIVITROL is limited
to volumes that the Company is capable of supplying at its
manufacturing facility, and the units to be manufactured in the
forecast are in line with, and do not exceed, this maximum
anticipated capacity. The Company estimates the fair value of
this accounting unit to be $77.8 million and this amount
was allocated out of the $110.0 million in consideration
received from Cephalon upon FDA approval of VIVITROL. The
Company records the earned portion of the arrangement
consideration allocated to this accounting unit to revenue in
proportion to the units of finished VIVITROL shipped during the
reporting period, to the total expected units of finished
VIVITROL to be shipped over the expected life of VIVITROL. This
milestone revenue is recorded under the caption
Manufacturing revenues in the consolidated
statements of operations and comprehensive income (loss).
Milestone revenue in the amount of $1.5 million was
recorded for this accounting unit for the first time in the year
ended March 31, 2007, as the Company began shipping
VIVITROL to Cephalon.
Net
Collaborative Profit Related to the Agreements with
Cephalon
The amount of the arrangement consideration allocated to the
accounting unit net losses on the products
represents the Companys best estimate of the net product
losses that the Company is responsible for through
December 31, 2007, plus those development costs incurred by
the Company to attain FDA approval of VIVITROL and to complete
the first manufacturing line, both of which were the
Companys sole responsibility. The Company estimates the
fair value of this accounting unit to be approximately
$144.4 million and this amount was allocated out of the
$160.0 million in consideration the Company received from
Cephalon upon signing the Agreements. The Company records the
earned portion of the arrangement consideration allocated to
this accounting unit to revenue in 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 and is recorded under the
caption Net collaborative profit in the consolidated
statements of operations and comprehensive income (loss). During
the years ended March 31, 2007, 2006 and 2005, the Company
recorded $78.8 million, $60.5 million, and $0,
respectively, of milestone revenue related to this accounting
unit. In addition, because a portion of these amounts relate to
cash returned to Cephalon as reimbursement for its net losses,
those payments are netted against the milestone revenue
recorded. During the years ended March 31, 2007, 2006
F-10
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and 2005, those payments to Cephalon were $47.0 million,
$21.2 million and $0, respectively, resulting in net
revenue related to this accounting unit of $31.8 million,
$39.3 million, and $0, respectively.
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. The arrangement consideration allocated to the product
license is based on the residual method of allocation as
outlined in
EITF 00-21,
because fair value evidence exists separately for the
undelivered obligations under the Agreements. The arrangement
consideration allocated to this accounting unit equals the total
arrangement consideration received from Cephalon less the fair
value of the manufacturing obligations and the net losses on
VIVITROL. The Company estimates the fair value of this
accounting unit to be approximately $52.4 million of the
$274.6 million in total consideration the Company has
received to date. The Company records the earned portion of the
arrangement consideration allocated to the product license to
revenue on a straight-line basis over the expected life of
VIVITROL, being ten years. This revenue is recorded under the
caption Net collaborative profit in the consolidated
statements of operations and comprehensive income (loss). The
Company began to recognize milestone revenue related to this
accounting unit upon FDA approval of VIVITROL in April 2006.
During the year ended March 31, 2007, the Company recorded
$5.1 million of milestone revenue related to this
accounting unit.
If there are significant changes in the Companys estimates
of the fair value of an accounting unit, the Company would
reallocate the arrangement consideration to the accounting units
based on the revised fair values. This revision would 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 million in nonrefundable milestone payments if
calendar year net sales of the products exceed certain
agreed-upon
sales levels. Under current accounting guidance, the Company
expects 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 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.
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.
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 collectibility is reasonably assured and when
no future performance obligations exist. The Company generally
bills its partners under collaborative arrangements using a
single full-time equivalent or hourly rate. This rate has been
established by the Company based on its 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
F-11
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
full-time equivalent or hourly rate for the hours worked by the
Companys employees on a particular project, plus any
direct external research costs, if any.
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, including share-based 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. A
significant portion of our research and development expenses
(including laboratory supplies, travel, dues and subscriptions,
recruiting costs, temporary help costs, consulting costs and
allocable costs such as occupancy and depreciation) are not
tracked by project as they benefit multiple projects or our
technologies in general. Expenses incurred to purchase specific
services from third parties to support the Companys
collaborative research and development activities are tracked by
project and are reimbursed to the Company by its partners. The
Company accounts for its research and development expenses on a
departmental and functional basis in accordance with its budget
and management practices. All such costs are expensed as
incurred.
Share-based Compensation Effective
April 1, 2006, the Company accounts for share-based
compensation in accordance with SFAS No. 123(R),
Share-Based Payment. Under
SFAS No. 123(R), share-based compensation reflects the
fair value of share-based awards measured at the grant date, is
recognized as an expense over the requisite service period
(generally the vesting period of the equity grant) and is
adjusted each period for anticipated forfeitures. The Company
estimates the fair value of stock options on the grant date
using the Black-Scholes option-pricing model. Assumptions used
to estimate the fair value of stock options are the expected
option term, expected volatility of the Companys common
stock over the options expected term, the risk-free
interest rate over the options expected term and the
Companys expected annual dividend yield. Certain of these
assumptions are highly subjective and require the exercise of
management judgment. The Companys management must also
apply judgment in developing an estimate of awards that may be
forfeited.
The Company elected to adopt the provisions of
SFAS No. 123(R) using the modified prospective
transition method, and the Company recognizes share-based
compensation cost on a straight-line basis over the requisite
service periods of awards. Under the modified prospective
transition method, share-based compensation expense is
recognized for the portion of outstanding stock options and
stock awards granted prior to the adoption of
SFAS No. 123(R) for which service has not been
rendered, and for any future grants of stock options and stock
awards. The Company recognizes share-based compensation cost for
awards that have graded vesting on a straight-line basis over
the requisite service period of each separately vesting portion.
Income Taxes The Company records a deferred
tax asset or liability based on the difference between the
financial statement and tax bases of assets and liabilities, as
measured by enacted tax rates assumed to be in effect when these
differences reverse. The Company assesses the recoverability of
any tax assets recorded on the balance sheet and provides any
necessary valuation allowances, as required. If the Company were
to
F-12
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
determine that it was more likely than not that it would be
unable to realize all or part of its net deferred tax asset in
the future, an adjustment to the deferred tax asset would be
charged to operations in the period that such determination was
made.
In evaluating the Companys ability to recover its deferred
tax assets, the Company considers all available positive and
negative evidence including its past operating results, the
existence of cumulative income in the most recent fiscal years,
changes in the business in which the Company operates and its
forecast of future taxable income. In determining future taxable
income, the Company is responsible for assumptions utilized
including the amount of state, federal and international pre-tax
operating income, the reversal of temporary differences and the
implementation of feasible and prudent tax planning strategies.
These assumptions require significant judgment about the
forecasts of future taxable income and are consistent with the
plans and estimates that the Company is using to manage the
underlying businesses. As of March 31, 2007 and 2006, the
Company determined that it is more likely than not that the
deferred tax assets will not be realized and a full valuation
allowance has been recorded.
The provision for income taxes in the amount of
$1.1 million for the year ended March 31, 2007 related
to the U.S. alternative minimum tax (AMT). Tax
recognition of a portion of the nonrefundable payment received
from Cephalon during the year ended March 31, 2006 was
deferred to the year ended March 31, 2007 when it was
recognized in full. Utilization of tax loss carryforwards is
limited in the calculation of AMT. As a result, a federal tax
charge was reflected in the year ended March 31, 2007. The
current AMT liability is available as a credit against future
tax obligations upon the full utilization or expiration of the
Companys net operating loss carryforward.
Comprehensive Income (Loss)
SFAS No. 130, Reporting Comprehensive
Income, (SFAS No. 130) requires
the Company to display comprehensive income (loss) and its
components as part of the Companys consolidated financial
statements. Comprehensive income (loss) consists of net income
(loss) and other comprehensive income (loss). Other
comprehensive income (loss) includes changes in equity that are
excluded from net income (loss), such as unrealized holding
gains and losses on available-for-sale marketable securities.
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, 2007 and 2006,
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.
F-13
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investments consist of the following at March 31:
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Amortized Cost
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Gross
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Due Under
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Due After
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Unrealized
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Aggregate
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One Year
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One Year
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Total
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Gains
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Losses
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Fair Value
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