UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

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

Commission file number 1-14131

ALKERMES, INC.

(Exact name of registrant as specified in its charter)

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

852 Winter Street, Waltham, MA 02451-1420
(781) 609-6000
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ       No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): Yes o       No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes o       No þ

     The number of shares outstanding of each of the issuer’s classes of common stock was:

		As of February 1,
Class		2010
Common Stock, $.01 par value			94,440,904
Non-Voting Common Stock, $.01 par value			382,632

 

 

ALKERMES, INC. AND SUBSIDIARIES

INDEX

		Page No.
PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:			3
Condensed Consolidated Balance Sheets — December 31, 2009 and March 31, 2009			3
Condensed Consolidated Statements of Operations — For the Three and Nine Months Ended December 31, 2009 and 2008			4
Condensed Consolidated Statements of Cash Flows — For the Nine Months Ended December 31, 2009 and 2008			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Discloures about Market Risk			29
Item 4. Controls and Procedures			29
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31
Item 4. Submission of Matters to a Vote of Security Holders			31
Item 5. Other Information			31
Item 6. Exhibits			33
Signatures			34
Exhibit Index			35
EX-31.1 Section 302 Certification of Chief Executive Officer
EX-31.2 Section 302 Certification of Chief Financial Officer
EX-32.1 Section 906 Certification of Chief Executive Officer and Chief Financial Officer

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements:

ALKERMES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

		December 31,				March 31,
		2009				2009
		(In thousands, except share and per
		share amounts)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	73,932			$	86,893
Investments — short-term			165,016				236,768
Receivables			28,233				24,588
Inventory			20,049				20,297
Prepaid expenses and other current assets			5,950				7,500
Total current assets			293,180				376,046
PROPERTY, PLANT AND EQUIPMENT, NET			96,332				106,461
INVESTMENTS — LONG-TERM			118,531				80,821
OTHER ASSETS			11,857				3,158
TOTAL ASSETS		$	519,900			$	566,486
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses		$	29,560			$	36,483
Deferred revenue — current			2,305				6,840
NON-RECOURSE RISPERDAL® CONSTA® SECURED 7% NOTES — CURRENT			25,667				25,667
Total current liabilities			57,532				68,990
NON-RECOURSE RISPERDAL CONSTA SECURED 7% NOTES — LONG-TERM			31,636				50,221
DEFERRED REVENUE — LONG-TERM			5,120				5,238
OTHER LONG-TERM LIABILITIES			6,386				7,149
Total liabilities			100,674				131,598
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS’ EQUITY:
Capital stock, par value, $0.01 per share; 4,550,000 shares authorized (includes 3,000,000 shares of preferred stock); none issued			—				—
Common stock, par value, $0.01 per share; 160,000,000 shares authorized; 104,354,986 and 104,044,663 shares issued; 94,418,724 and 94,536,212 shares outstanding at December 31, 2009 and March 31, 2009, respectively			1,042				1,040
Non-voting common stock, par value, $0.01 per share; 450,000 shares authorized; 382,632 shares issued and outstanding at December 31, 2009 and March 31, 2009			4				4
Treasury stock, at cost (9,936,262 and 9,508,451 shares at December 31, 2009 and March 31, 2009, respectively)			(129,567	)			(126,025	)
Additional paid-in capital			903,480				892,415
Accumulated other comprehensive loss			(3,980	)			(6,484	)
Accumulated deficit			(351,753	)			(326,062	)
Total shareholders’ equity			419,226				434,888
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	519,900			$	566,486

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

ALKERMES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2009				2008				2009				2008
		(In thousands, except per share amounts)
REVENUES:
Manufacturing revenues		$	28,650			$	20,533			$	90,289			$	92,182
Royalty revenues			9,970				7,970				27,489				24,990
Product sales, net			5,451				—				14,320				—
Research and development revenue under collaborative arrangements			81				3,736				2,705				40,438
Net collaborative profit			—				123,422				5,002				125,354
Total revenues			44,152				155,661				139,805				282,964
EXPENSES:
Cost of goods manufactured and sold			10,072				5,536				37,830				31,921
Research and development			22,577				22,669				68,827				64,640
Selling, general and administrative			17,739				14,568				57,632				38,173
Total expenses			50,388				42,773				164,289				134,734
OPERATING (LOSS) INCOME			(6,236	)			112,888				(24,484	)			148,230
OTHER EXPENSE, NET:
Interest income			1,017				2,574				3,666				8,883
Interest expense			(1,423	)			(2,436	)			(4,698	)			(10,905	)
Other expense, net			(160	)			(641	)			(290	)			(1,471	)
Total other expense, net			(566	)			(503	)			(1,322	)			(3,493	)
(LOSS) INCOME BEFORE INCOME TAXES			(6,802	)			112,385				(25,806	)			144,737
PROVISION (BENEFIT) FOR INCOME TAXES			15				(330	)			(115	)			637
NET (LOSS) INCOME		$	(6,817	)		$	112,715			$	(25,691	)		$	144,100
(LOSS) EARNINGS PER COMMON SHARE:
Basic		$	(0.07	)		$	1.18			$	(0.27	)		$	1.51
Diluted		$	(0.07	)		$	1.18			$	(0.27	)		$	1.49
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic			94,784				95,316				94,815				95,246
Diluted			94,784				95,818				94,815				96,398

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

ALKERMES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

		Nine Months Ended
		December 31,
		2009				2008
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income		$	(25,691	)		$	144,100
Adjustments to reconcile net (loss) income to cash flows from operating activities:
Depreciation			20,314				7,501
Share-based compensation expense			10,811				11,590
Other non-cash charges			3,520				4,531
Loss on the purchase of non-recourse RISPERDAL CONSTA secured 7% notes			—				1,989
Changes in assets and liabilities:
Receivables			(3,645	)			11,585
Inventory, prepaid expenses and other assets			1,199				(4,746	)
Accounts payable and accrued expenses			(11,199	)			(4,722	)
Unearned milestone revenue			—				(117,657	)
Deferred revenue			(4,653	)			(9,529	)
Other long-term liabilities			(1,369	)			(1,415	)
Payment of non-recourse RISPERDAL CONSTA secured 7% notes principal attributable to original issue discount			(1,574	)			(4,590	)
Cash flows (used in) provided by operating activities			(12,287	)			38,637
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment			(9,197	)			(4,145	)
Sales of property, plant and equipment			249				7,717
Investment in Acceleron Pharmaceuticals, Inc.			(8,000	)			—
Purchases of investments			(390,818	)			(543,408	)
Sales and maturities of investments			427,270				540,721
Cash flows provided by investing activities			19,504				885
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock for share-based compensation arrangements			182				7,606
Excess tax benefit from share-based compensation			—				75
Payment of non-recourse RISPERDAL CONSTA secured 7% notes principal			(17,676	)			—
Purchase of non-recourse RISPERDAL CONSTA secured 7% notes			—				(67,185	)
Payment of capital leases			—				(47	)
Purchase of common stock for treasury			(2,684	)			(17,948	)
Cash flows used in financing activities			(20,178	)			(77,499	)
NET DECREASE IN CASH AND CASH EQUIVALENTS			(12,961	)			(37,977	)
CASH AND CASH EQUIVALENTS — Beginning of period			86,893				101,241
CASH AND CASH EQUIVALENTS — End of period		$	73,932			$	63,264
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest		$	3,706			$	7,663
Cash paid for taxes		$	53			$	435
Non-cash investing and financing activities:
Purchased capital expenditures included in accounts payable and accrued expenses		$	3,933			$	1,883
Receipt of Alkermes shares for the purchase of stock options or to satisfy minimum tax withholding obligations related to stock based awards		$	858			$	707

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

ALKERMES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

     The accompanying condensed consolidated financial statements of Alkermes, Inc. (the “Company” or “Alkermes”) for the three and nine months ended December 31, 2009 and 2008 are unaudited and have been prepared on a basis substantially consistent with the audited financial statements for the year ended March 31, 2009. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (commonly referred to as “GAAP”). In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, that are necessary to present fairly the results of operations for the reported periods.

     These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto which are contained in the Company’s Annual Report on Form 10-K for the year ended March 31, 2009, filed with the Securities and Exchange Commission (“SEC”).

     The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year.

     Principles of Consolidation — The condensed consolidated financial statements include the accounts of Alkermes, Inc. and its wholly-owned subsidiaries: Alkermes Controlled Therapeutics, Inc.; Alkermes Europe, Ltd.; and RC Royalty Sub LLC (“Royalty Sub”). The assets of Royalty Sub are not available to satisfy obligations of Alkermes and its subsidiaries, other than the obligations of Royalty Sub, including Royalty Sub’s non-recourse RISPERDAL CONSTA secured 7% notes (the “non-recourse 7% Notes”), and the assets of Alkermes are not available to satisfy obligations of Royalty Sub. Intercompany accounts and transactions have been eliminated.

     Use of Estimates — The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP necessarily requires management to make estimates and assumptions that affect the following: (1) reported amounts of assets and liabilities; (2) disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements; and (3) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

     Segment Information — The Company operates as one business segment, which is the business of developing, manufacturing and commercializing innovative medicines designed to yield better therapeutic outcomes and improve the lives of patients with serious diseases. The Company’s chief decision maker, the Chief Executive Officer, reviews the Company’s operating results on an aggregate basis and manages the Company’s operations as a single operating unit.

     Reclassifications — $4.6 million that was previously classified as “Purchase of non-recourse RISPERDAL CONSTA Secured 7% notes” for the nine months ended December 31, 2008, was reclassified to “Payment of non-recourse RISPERDAL CONSTA secured 7% notes principal attributable to original issue discount” in the accompanying condensed consolidated statements of cash flows to conform to current period presentation.

New Accounting Pronouncements

     On April 1, 2009, the Company adopted new guidance issued by the Financial Accounting Standards Board (“FASB”) on the accounting for collaborative arrangements. The guidance defined collaborative arrangements and established reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. The adoption of this standard did not have an impact on the Company’s financial position or results of operations.

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

     On April 1, 2009, the Company adopted new accounting guidance issued by the FASB on fair value measurements for its nonfinancial assets and liabilities that are subject to measurement at fair value on a non-recurring basis. The adoption of this standard did not impact the Company’s financial position or results of operations; however, this standard may impact the Company in subsequent periods and require additional disclosures. Also, effective April 1, 2009, the Company adopted new accounting guidance issued by the FASB on fair value measurements in determining whether a market is active or inactive and whether third-party transactions with similar assets and liabilities are distressed in determining the fair value of its assets and liabilities measured at fair value on a recurring basis. The adoption of this standard did not impact the Company’s financial position or results of operations.

     In June 2009, the FASB issued accounting guidance regarding the accounting for transfers of financial assets that will improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets, the effects of such a transfer on its financial position, financial performance and cash flows, and provide information as to a transferor’s continuing involvement, if any, in transferred financial assets. The guidance is effective for the Company’s fiscal year beginning April 1, 2010, and the Company does not expect the adoption of this standard to have a significant impact on its financial position or results of operations.

     In June 2009, the FASB issued accounting guidance on business combinations and noncontrolling interests in consolidated financial statements. The new guidance revises the method of accounting for a number of aspects of business combinations and noncontrolling interests, including acquisition costs, contingencies (including contingent assets, contingent liabilities and contingent purchase price), the impacts of partial and step-acquisitions (including the valuation of net assets attributable to non-acquired minority interests) and post-acquisition exit activities of acquired businesses. The guidance is effective for the Company’s fiscal year beginning April 1, 2010, and the Company does not expect the adoption of this standard to have a significant impact on its financial position or results of operations.

     In September 2009, the Emerging Issues Task Force (“EITF”) of the FASB issued accounting guidance related to revenue recognition that amends the previous guidance on arrangements with multiple deliverables. This guidance provides principles and application guidance on whether multiple deliverables exist, how the arrangements should be separated and how the consideration should be allocated. It also clarifies the method to allocate revenue in an arrangement using the estimated selling price. This guidance is effective for the Company’s fiscal year beginning April 1, 2011, and the Company does not expect the adoption of this standard to have a significant impact on its financial position or results of operations.

2. COMPREHENSIVE (LOSS) INCOME

Comprehensive (loss) income is as follows:

		Three Months Ended								Nine Months Ended
		December 31								December 31
(In thousands)		2009				2008				2009				2008
Net (loss) income		$	(6,817	)		$	112,715			$	(25,691	)		$	144,100
Unrealized gains (losses) on available-for-sale securities:
Holding gains (losses)			650				(1,212	)			2,410				(1,478	)
Reclassification of unrealized losses to realized losses on available-for-sale securities			94				556				94				1,163
Unrealized gains (losses) on available-for-sale securities			744				(656	)			2,504				(315	)
Comprehensive (loss) income		$	(6,073	)		$	112,059			$	(23,187	)		$	143,785

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

3. EARNINGS PER SHARE

     Basic (loss) earnings per common share is calculated based upon net (loss) income available to holders of common shares divided by the weighted average number of shares outstanding. For the calculation of diluted earnings per common share, the Company uses the weighted average number of common shares outstanding, as adjusted for the effect of potential outstanding shares, including stock options and stock awards.

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

		Three Months Ended								Nine Months Ended
		December 31								December 31
(In thousands)		2009				2008				2009				2008
Numerator:
Net (loss) income		$	(6,817	)		$	112,715			$	(25,691	)		$	144,100
Denominator:
Weighted average number of common shares outstanding			94,784				95,316				94,815				95,246
Effect of dilutive securities:
Stock options			—				446				—				974
Restricted stock units			—				56				—				178
Dilutive common share equivalents			—				502				—				1,152
Shares used in calculating diluted (loss) earnings per share			94,784				95,818				94,815				96,398

     The following amounts are not included in the calculation of (loss) earnings per common share because their effects are anti-dilutive:

		Three Months Ended								Nine Months Ended
		December 31								December 31
(In thousands)		2009				2008				2009				2008
Stock options			17,658				16,356				17,801				15,366
Restricted stock units			538				630				318				—
Total			18,196				16,986				18,119				15,366

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

4. INVESTMENTS

Investments consist of the following:

		Amortized				Gross Unrealized								Estimated
		Cost				Gains				Losses				Fair Value
						(In thousands)
December 31, 2009
Short-term investments:
Available-for-sale securities:
U.S. government and agency debt securities		$	126,980			$	202			$	—			$	127,182
International government agency debt securities			28,641				162				—				28,803
Corporate debt securities			6,748								(99	)			6,649
Other debt securities			2,501				—				(119	)			2,382
Total short-term investments			164,870				364				(218	)			165,016
Long-term investments:
Available-for-sale securities:
U.S. government and agency debt securities			61,346				—				(340	)			61,006
International government agency debt securities			851				—				(14	)			837
Corporate debt securities			43,817				—				(2,112	)			41,705
Other debt securities			10,000				—				(1,716	)			8,284
Strategic investments			644				198				—				842
			116,658				198				(4,182	)			112,674
Held-to-maturity securities:
U.S. government obligations			417				—				—				417
Certificates of deposit			5,440				—				—				5,440
Total long-term investments			122,515				198				(4,182	)			118,531
Total investments		$	287,385			$	562			$	(4,400	)		$	283,547
March 31, 2009
Short-term investments:
Available-for-sale securities:
U.S. government and agency debt securities		$	225,490			$	2,635			$	(6	)		$	228,119
Corporate debt securities			8,160				9				—				8,169
Other debt securities			500				—				(20	)			480
Total short-term investments			234,150				2,644				(26	)			236,768
Long-term investments:
Available-for-sale securities:
U.S. government and agency debt securities			10,149				—				(3	)			10,146
Corporate debt securities			57,887				—				(6,326	)			51,561
Other debt securities			16,350				—				(2,683	)			13,667
Strategic investments			738				53				—				791
			85,124				53				(9,012	)			76,165
Held-to-maturity securities:
U.S. government obligations			416				—				—				416
Certificates of deposit			4,240				—				—				4,240
Total long-term investments			89,780				53				(9,012	)			80,821
Total investments		$	323,930			$	2,697			$	(9,038	)		$	317,589

     During the nine months ended December 31, 2009, the Company had $427.3 million of proceeds from the sales and maturities of investments. The proceeds from the sales and maturities of its investments resulted in realized gains of $0.2 million and realized losses of less than $0.1 million.

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

     The Company’s available-for-sale and held-to-maturity securities at December 31, 2009 have contractual maturities in the following periods:

		Available-for-Sale								Held-to-Maturity
		Amortized				Estimated				Amortized				Estimated
(in thousands)		Cost				Fair Value				Cost				Fair Value
Within 1 year		$	72,188			$	72,095			$	5,857			$	5,857
After 1 year through 5 years (1)			149,919				149,787				—				—
After 5 years through 10 years (1)			48,777				46,682				—				—
After 10 years			10,000				8,284				—				—
Total		$	280,884			$	276,848			$	5,857			$	5,857

     The Company recognizes other-than-temporary impairments through a charge to earnings if it has the intent to sell the debt security or if it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, even if the Company does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if a credit loss has occurred. In the event of a credit loss, only the amount associated with the credit loss is recognized in operating results. The amount of loss relating to other factors is recorded in accumulated other comprehensive income. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses on available-for-sale securities that are determined to be temporary, and not related to credit loss, are recorded, net of tax, in accumulated other comprehensive income.

     For available-for-sale debt securities with unrealized losses, the Company performs an analysis to assess whether it intends to sell, or whether it would more likely than not be required to sell, the security before the expected recovery of the amortized cost basis. If the Company intends to sell a security, or may be required to do so, the security’s decline in fair value is deemed to be other-than-temporary and the full amount of the unrealized loss is recorded within earnings as an impairment loss. Regardless of its intent to sell a security, the Company performs additional analyses on all securities with unrealized losses to evaluate losses associated with the creditworthiness of the security. Credit losses are identified when the Company does not expect to receive cash flows sufficient to recover the amortized cost basis of a security.

     For equity securities, when assessing whether a decline in fair value below its cost basis is other-than-temporary, the Company considers the fair market value of the security, the duration of the security’s decline and the financial condition of the issuer. The Company then considers its intent and ability to hold the equity security for a period of time sufficient to recover its carrying value. If the Company determines that it lacks the intent and ability to hold an equity security to its expected recovery, the security’s decline in fair value is deemed to be other-than-temporary and is recorded within operating results as an impairment loss.

     Certain of the Company’s investments in corporate debt securities with a cost of $2.0 million consist of investment grade subordinated, medium term, callable step-up floating rate notes (“FRN”) issued by the Royal Bank of Scotland Group (“RBS”). At December 31, 2009, these FRN’s had a composite rating by Moody’s, Standard & Poor’s (“S&P”) and Fitch of A. During the nine months ended December 31, 2009, these FRN’s had minimal or no trades and because a fair value could not be derived from quoted prices, the Company used a discounted cash flow model to determine the estimated fair value of the securities at December 31, 2009. The assumptions used in the discounted cash flow model included estimates for interest rates, expected holding periods and risk adjusted discount rates, which the Company believes to be the most critical assumptions utilized within the analysis. The valuation analysis considered, among other items, assumptions that market participants would use in their estimates of fair value, such as the creditworthiness and credit spreads of the issuer and when callability features may be exercised by the issuer. These securities were also compared, where possible, to securities with observable market data with similar characteristics to the securities held by the Company. The Company estimated the fair value of these FRN’s to be $1.7 million at December 31, 2009.

     In making the determination that the decline in fair value of these FRN’s was temporary, the Company considered various factors, including but not limited to: the length of time each security was in an unrealized loss

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

position; the extent to which fair value was less than cost; the financial condition and near term prospects of the issuers; and the intent not to sell these securities and assessment that it is more likely than not that the Company would not be required to sell these securities before the recovery of their amortized cost basis. The estimated fair value of these FRN’s could change significantly based on future financial market conditions. These FRN’s held by the Company did not trade either because they were nearing their scheduled call dates or due to abnormally high credit spreads on the debt of the issuers, or both. Similar securities the Company has held have been called at par by issuers prior to maturity. The Company will continue to monitor the securities and the financial markets and if there is continued deterioration, the fair value of these securities could decline further resulting in an other-than-temporary impairment charge.

     The Company’s two investments in auction rate securities consist of taxable student loan revenue bonds issued by the Colorado Student Obligation Bond Authority (“Colorado”), with a cost of $5.0 million, and Brazos Higher Education Service Corporation (“Brazos”), with a cost of $5.0 million, which service student loans under the Federal Family Education Loan Program (“FFELP”). The bonds are collateralized by student loans purchased by the authorities, which are guaranteed by state sponsored agencies and reinsured by the U.S. Department of Education. Liquidity for these securities is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals. The Colorado and Brazos securities were rated Aaa and Baa3 by Moody’s, respectively, at December 31, 2009. Due to repeated failed auctions since January 2008, the Company no longer considers these securities to be liquid and has classified them as long-term investments in the condensed consolidated balance sheets. The securities continue to pay interest during the periods in which the auctions have failed.

     Since the security auctions have failed and fair value cannot be derived from quoted prices, the Company used a discounted cash flow model to determine the estimated fair value of the securities at December 31, 2009. The assumptions used in the discounted cash flow model include estimates for interest rates, timing of cash flows, expected holding periods and risk adjusted discount rates, which include provisions for default and liquidity risk, which the Company believes to be the most critical assumptions utilized within the analysis. The valuation analysis considers, among other items, assumptions that market participants would use in their estimates of fair value, such as the collateral underlying the security, the creditworthiness of the issuer and any associated guarantees, the timing of expected future cash flows, the timing of, and the likelihood that the security will have a successful auction or when callability features may be exercised by the issuer. These securities were also compared, where possible, to other observable market data with similar characteristics to the securities held by the Company. The Company estimated the fair value of the auction rate securities to be $8.3 million at December 31, 2009.

     In making the determination that the decline in fair value of the auction rate securities was temporary, the Company considered various factors, including, but not limited to: the length of time each security was in an unrealized loss position; the extent to which fair value was less than cost; financial condition and near term prospects of the issuers; and the intent not to sell these securities and assessment that it is more likely than not that the Company would not be required to sell these securities before the recovery of their amortized cost basis. The estimated fair value of the auction rate securities could change significantly based on future financial market conditions. The Company continues to monitor the securities and the financial markets and if there is continued deterioration, the fair value of these securities could decline further resulting in an other-than-temporary impairment charge.

     At December 31, 2009, the Company’s investments in asset backed debt securities consist of medium term floating rate notes (“MTN”) of Aleutian Investments, LLC (“Aleutian”) and Meridian Funding Company, LLC (“Meridian”), which are qualified special purpose entities (“QSPE’s”) of Ambac Financial Group, Inc. (“Ambac”) and MBIA, Inc. (“MBIA”), respectively. Ambac and MBIA are guarantors of financial obligations and are referred to as monoline financial guarantee insurance companies. The QSPE’s, which purchase pools of assets or securities and fund the purchase through the issuance of MTN’s, have been established to provide a vehicle to access the capital markets for asset backed debt securities and corporate borrowers. The MTN’s include sinking fund redemption features which match-fund the terms of redemptions to the maturity dates of the underlying pools of assets or securities in order to mitigate potential liquidity risk to the QSPE’s. At December 31, 2009, $7.4 million of the Company’s initial $9.9 million investment in MTN’s had been redeemed through scheduled and unscheduled sinking fund redemptions at par value.

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

     The liquidity and fair value of these securities has been negatively impacted by the uncertainty in the credit markets and the exposure of these securities to the financial condition of monoline financial guarantee insurance companies, including Ambac and MBIA. At December 31, 2009, Ambac had ratings of Caa2 and CC by Moody’s and S&P, respectively, and MBIA had ratings of Ba3 and BB+ by Moody’s and S&P, respectively. Because the MTN’s are not actively trading in the credit markets and fair value cannot be derived from quoted prices, the Company used a discounted cash flow model to determine the estimated fair value of the securities at December 31, 2009. The Company’s valuation analyses consider, among other items, assumptions that market participants would use in their estimates of fair value such as the collateral underlying the security, the creditworthiness of the issuer and the associated guarantees by Ambac and MBIA, the timing of expected future cash flows, including whether the callability features of these investments may be exercised by the issuer. These securities were also compared, where possible, to securities with observable market data with similar characteristics to the securities held by the Company. The Company believes there are several significant assumptions that are utilized in its valuation analyses, the most critical of which is the discount rate, which includes a provision for default and liquidity risk. The Company estimated the fair value of the asset backed securities to be $2.4 million at December 31, 2009.

     The Company may not be able to liquidate its investment in these securities before the scheduled redemptions or until trading in the securities resumes in the credit markets, which may not occur. At December 31, 2009, the Company determined that the securities had been temporarily impaired due to: the length of time each security was in an unrealized loss position; the extent to which fair value was less than cost; the financial condition and near term prospects of the issuers; current redemptions made by the issuers; and the intent not to sell these securities and assessment that it is more likely than not that the Company would not be required to sell these securities before the recovery of their amortized cost basis.

     The Company’s strategic investments include common stock in publicly-traded companies with which it has or did have a collaborative agreement. For the nine months ended December 31, 2009 and 2008, the Company recognized $0.1 million and $1.2 million, respectively, in charges for other-than-temporary losses on its strategic investments due to declines in their fair value.

5. FAIR VALUE MEASUREMENTS

     The following table presents information about the Company’s assets that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

		December 31,
(In thousands)		2009				Level 1				Level 2				Level 3
Cash equivalents		$	91			$	91			$	—			$	—
U.S. government and agency debt securities			188,188				188,188				—				—
International government agency debt securities			29,640				29,640				—				—
Corporate debt securities			48,354				—				46,656				1,698
Other debt securities			10,666				—				—				10,666
Strategic equity investments			842				842				—				—
Total		$	277,781			$	218,761			$	46,656			$	12,364

		March 31,
(In thousands)		2009				Level 1				Level 2				Level 3
Cash equivalents		$	822			$	822			$	—			$	—
U.S. government and agency debt securities			238,265				238,265				—				—
Corporate debt securities			59,730				—				—				59,730
Other debt securities			14,147				—				—				14,147
Strategic equity investments			791				791				—				—
Total		$	313,755			$	239,878			$	—			$	73,877

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

     The following table is a rollforward of the fair value of the Company’s investments whose fair value is determined using Level 3 inputs:

		Fair
(In thousands)		Value
Balance, March 31, 2009		$	73,877
Total unrealized gains included in comprehensive loss			4,496
Sales and redemptions, at par value			(21,049	)
Transfers out of Level 3			(44,960	)
Balance, December 31, 2009		$	12,364

     The fair values of the Company’s investments in certain of its corporate debt securities and other debt securities, including auction rate securities and asset backed debt securities, are determined using certain inputs that are unobservable and considered significant to the overall fair value measurement. During the nine months ended December 31, 2009, certain of the corporate debt securities and asset backed debt securities held by the Company had minimal or no trades and the security auctions for the Company’s auction rate securities had failed. The Company is unable to derive a fair value for these investments using quoted market prices and used discounted cash flow models as described in Note 4, Investments.

     During the three months ended September 30, 2009, trading resumed for certain of the Company’s investments in corporate debt securities and these corporate debt securities, with a fair value of $33.9 million, were transferred from a Level 3 classification to a Level 2 classification. During the three months ended December 31, 2009, the Company transferred an additional $11.0 million of corporate debt securities to a Level 2 classification as trading resumed for these securities. At December 31, 2009, the Company derived a fair value for its Level 2 investments using market observable inputs.

     The carrying amounts reflected in the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses approximate fair value due to their short-term nature. The Company’s non-recourse 7% Notes had a carrying value of $57.3 million and $75.9 million and a fair value of $55.0 million and $74.7 million at December 31, 2009 and March 31, 2009, respectively. The estimated fair value of the non-recourse 7% Notes was based on a discounted cash flow model.

6. INVENTORY

     Inventory is stated at the lower of cost or market value. Cost is determined using the first-in, first-out method. Inventory consists of the following:

		December 31,				March 31,
(In thousands)		2009				2009
Raw materials		$	5,169			$	5,916
Work in process			6,251				5,397
Finished goods (1)			8,381				7,015
Consigned-out inventory (2)			248				1,969
Inventory		$	20,049			$	20,297

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

7. PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment consist of the following:

		December 31,				March 31,
(In thousands)		2009				2009
Land		$	301			$	301
Building and improvements			36,548				36,325
Furniture, fixture and equipment			61,635				67,165
Leasehold improvements			33,980				33,996
Construction in progress			50,677				41,908
Subtotal			183,141				179,695
Less: accumulated depreciation			(86,809	)			(73,234	)
Total property, plant and equipment, net		$	96,332			$	106,461

     As a result of the Company’s relocation of its corporate headquarters from Cambridge, Massachusetts to Waltham, Massachusetts in January 2010, the Company recorded a charge of $14.8 million to depreciation during the nine months ended December 31, 2009. The depreciation charge relates to the acceleration of depreciation on laboratory related leasehold improvements located at the Company’s Cambridge facility, which no longer has any benefit or future use to the Company, and the write-down of laboratory equipment that is no longer in use and will be disposed of.

8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

     Accounts payable and accrued expenses consist of the following:

		December 31,				March 31,
(In thousands)		2009				2009
Accounts payable		$	6,140			$	8,046
Accrued compensation			11,482				13,817
Accrued interest			1,011				1,549
Amounts due to Cephalon			—				1,169
Accrued other			10,927				11,902
Total accounts payable and accrued expenses		$	29,560			$	36,483

9. SHARE-BASED COMPENSATION

     Share-based compensation expense consists of the following:

		Three Months Ended								Nine Months Ended
		December 31								December 31
(In thousands)		2009				2008				2009				2008
Cost of goods manufactured and sold		$	434			$	291			$	1,263			$	1,148
Research and development			759				527				2,485				3,397
Selling, general and administrative (1)			2,179				2,463				7,063				7,045
Total share-based compensation expense		$	3,372			$	3,281			$	10,811			$	11,590

     At December 31, 2009 and March 31, 2009, $0.5 million and $0.4 million, respectively, of share-based compensation expense was capitalized and recorded as Inventory in the condensed consolidated balance sheets.

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

10. COLLABORATIONS

     In December 2009, the Company entered into a collaboration and license agreement with Acceleron Pharma, Inc. (“Acceleron”). In exchange for a nonrefundable upfront payment of $2.0 million, an equity investment in Acceleron of $8.0 million and certain potential milestone payments and royalties, the Company has obtained an exclusive license to Acceleron’s proprietary long-acting Fc fusion technology platform, called the Medifusion^TM technology, which is designed to extend the circulating half-life of proteins and peptides. The first drug candidate being developed with this technology is a long-acting form of a TNF receptor-Fc fusion protein for the treatment of rheumatoid arthritis and related autoimmune diseases. The Company and Acceleron have agreed to collaborate on the development of product candidates from the Medifusion technology. Pursuant to the terms of the agreement, Acceleron will develop up to two selected drug compounds using the Medifusion technology through preclinical studies, at which point the Company will assume responsibility for all clinical development and commercialization of these two compounds and any other compounds the Company elects to develop resulting from the platform. Acceleron will retain all rights to the technology for products derived from the TGF-beta superfamily.

     The Company’s $8.0 million investment in Acceleron consists of shares of Series D-1 convertible, redeemable preferred stock, which represents a 3% ownership position in Acceleron. The Company’s Chief Executive Officer has been one of nine members of Acceleron’s board of directors. The Company is accounting for its investment in Acceleron under the cost method as Acceleron is a privately-held company over which the Company does not exercise significant influence. Accordingly, the Company does not record any share of Acceleron’s net income or losses, but would record dividends, if received. The carrying value of the investment is $8.0 million at December 31, 2009 and is recorded within “other assets” in the accompanying condensed consolidated balance sheet. The Company will monitor this investment to evaluate whether any decline in its value has occurred that would be other than temporary, based on the implied value from any recent rounds of financing completed by the investee, market prices of comparable public companies, and general market conditions.

     In addition to the upfront payment and equity investment, the Company will reimburse Acceleron for any time, at an agreed-upon full-time equivalent (“FTE”) rate, and materials Acceleron incurs during development. The Company is obligated to make developmental and sales milestone payments in the aggregate of up to $110.0 million per product in the event that certain development and sales goals are achieved. The Company is also obligated to make tiered royalty payments in the mid-single digits on annual net sales in the event any products developed under the agreement are commercialized.

     During the three months ended December 31, 2009, the Company incurred expenses of $0.1 million in connection with its arrangement with Acceleron, which is recorded within research and development expense in the accompanying condensed consolidated statement of operations. Additionally, the $2.0 million upfront payment was charged to research and development expense as technological feasibility of the acquired technology has not been established.

11. RESTRUCTURING

     In connection with the 2008 restructuring program in which the Company and Eli Lilly and Company announced the decision to discontinue the AIR^® Insulin development program (the “2008 Restructuring”), the Company recorded charges of $6.9 million during the year ended March 31, 2008. Activity related to the 2008 Restructuring in the nine months ended December 31, 2009 was as follows:

(In thousands)		Balance
Accrued restructuring, March 31, 2009		$	4,193
Payments for facility closure costs			(611	)
Other adjustments			158
Accrued Restructuring, December 31, 2009		$	3,740

     At December 31, 2009 and March 31, 2009, the restructuring liability related to the 2008 Restructuring consists of $0.6 million classified as current, and $3.1 million and $3.5 million classified as long-term, respectively, in the accompanying condensed consolidated balance sheets. As of December 31, 2009, the Company has paid in cash, written off, recovered and made restructuring charge adjustments totaling approximately $0.2 million in facility closure costs, $2.9 million in employee separation costs and $0.1 million in other contract termination costs in connection with the 2008 Restructuring. The $3.7 million remaining in the restructuring accrual at December 31, 2009 is expected to be paid out through fiscal year 2016 and relates primarily to future lease costs associated with an exited facility.

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

12. INCOME TAXES

     The Company records a deferred tax asset or liability based on the difference between the financial statement and tax bases of assets and liabilities, as measured by enacted tax rates assumed to be in effect when these differences reverse. At December 31, 2009, the Company determined that it is more likely than not that the deferred tax assets may not be realized and a full valuation allowance continues to be recorded.

     The Company had an income tax provision of less than $0.1 million and an income tax benefit of $0.1 million during the three and nine months ended December 31, 2009, respectively. This income tax provision and benefit for the three and nine months ended December 31, 2009, respectively, primarily represents the amount the Company estimates it will benefit from the Housing and Economic Recovery Act of 2008. This legislation allows for certain taxpayers to forego bonus depreciation in lieu of a refundable cash credit based on certain qualified asset purchases. The income tax benefit of $0.3 million and provision of $0.6 million for the three and nine months ended December 31, 2008, respectively, is related to the U.S. alternative minimum tax (“AMT”). The utilization of tax loss carryforwards is limited in the calculation of AMT and, as a result, a federal tax benefit and charge were recorded in the three and nine months ended December 31, 2008, respectively. The AMT liability is available as a credit against future tax obligations upon the full utilization or expiration of the Company’s net operating loss carryforward and research and development credits.

13. COMMITMENTS AND CONTINGENCIES

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

     In April 2009, the Company entered into a lease agreement in connection with the relocation of its corporate headquarters from Cambridge, Massachusetts to Waltham, Massachusetts, which began in January 2010. The initial lease term, which began in December 2009, is for 10 years with provisions for the Company to extend the lease term up to an additional 10 years. In June 2009, the Company executed an amendment to the lease agreement which increased the square footage leased by the Company by approximately 15%. The total rent expense related to the new headquarters is approximately $3.1 million annually during the initial lease term.

     In April 2009, the Company entered into an agreement to sublease a portion of its Cambridge, Massachusetts headquarters. Under the terms of the agreement, the Company exited and made available certain of its Cambridge, Massachusetts facility to the leasee on August 1, 2009 and recorded a charge of $1.0 million, which equals the amount of rent expense in excess of estimated sublease income associated with the vacated space the Company expects to collect through the remainder of the lease term.

14. SUBSEQUENT EVENTS

     The Company has evaluated events occurring subsequent to December 31, 2009 through February 4, 2010, which is the date the Company’s financial statements were issued. The Company does not have any recognized or nonrecognized subsequent events to disclose.

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

     Alkermes, Inc. (as used in this section, together with our subsidiaries, “us”, “we”, “our” or the “Company”) is a fully integrated biotechnology company committed to developing innovative medicines to improve patients’ lives. We developed, manufacture and commercialize VIVITROL^® for alcohol dependence and manufacture RISPERDAL^® CONSTA^® for schizophrenia and bipolar disorder. Our robust pipeline includes extended-release injectable, pulmonary and oral products for the treatment of prevalent, chronic diseases, such as central nervous system disorders, addiction and diabetes. We have research facilities in Massachusetts and a commercial manufacturing facility in Ohio. In January 2010, we relocated our corporate headquarters from Cambridge, Massachusetts, to Waltham, Massachusetts.

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. 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. These forward looking statements may include, but are not limited to, statements concerning: the achievement of certain business and operating goals and future operating results and profitability; manufacturing revenues; product sales and royalty revenues; spending relating to research and development, manufacturing, and selling and marketing activities; financial goals and projections of capital expenditures; recognition of revenues; future financings; continued growth of RISPERDAL CONSTA sales; the commercialization of VIVITROL in the United States (“U.S.”) by us and in Russia and the Commonwealth of Independent States (“CIS”) by Cilag GmbH International (“Cilag”), a subsidiary of Johnson & Johnson; recognition of milestone payments from Cilag related to the future sales of VIVITROL in Russia and the CIS; the successful continuation of development activities for our programs, including exenatide once weekly, VIVITROL for opioid dependence (including our plans to file a supplemental NDA (“sNDA”) for VIVITROL for the treatment of opioid dependence), ALKS 29, ALKS 33, ALKS 36 and ALKS 37, ALKS 6931, ALKS 9070; the expectation and timeline for regulatory approval of the New Drug Application (“NDA”) submission for exenatide once weekly; the patentability of our new chemistry-based LinkeRx^TM technology platform; and the successful manufacture of our products and product candidates, including RISPERDAL CONSTA, VIVITROL and polymer for exenatide once weekly, by us at a commercial scale, and the successful manufacture of exenatide once weekly by Amylin Pharmaceuticals, Inc. (“Amylin”).

     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. Our business is subject to significant risk and uncertainties and there can be no assurance that our actual results will not differ materially from our expectations. Factors which could cause actual results to differ materially from our expectations set forth in our forward-looking statements are set forth in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2009 and subsequent Quarterly Reports on Form 10-Q, and include, among others: (i) manufacturing and royalty revenues from RISPERDAL CONSTA may not continue to grow, particularly because we rely on our partner, Janssen Pharmaceutica, Inc., a division of Ortho-McNeil-Janssen Pharmaceuticals, Inc., and Janssen Pharmaceutica International, a division of Cilag International (together “Janssen”), to forecast and market this product and because our partner markets and sells INVEGA^® SUSTENNA™, a competing product; (ii) we may be unable to manufacture RISPERDAL CONSTA, VIVITROL and polymer for exenatide once weekly, in sufficient quantities and with sufficient yields to meet our or our partners’ requirements or to add additional production capacity for RISPERDAL CONSTA and VIVITROL, or unexpected events could interrupt manufacturing operations at our RISPERDAL CONSTA and VIVITROL manufacturing facility, which is the sole source of supply for these products; (iii) we may be unable to develop the commercial capabilities, and/or infrastructure, necessary to successfully commercialize VIVITROL; (iv) Cilag may be unable to receive approval for VIVITROL for the treatment of opioid dependence in Russia and for the treatment of alcohol and opioid dependence in the CIS; (v) Cilag may be unable to successfully commercialize VIVITROL in Russia and the CIS; (vi) third party payors may not cover or reimburse us for purchases of our products; (vii) if approved, Eli Lilly and Company (“Lilly”) and Amylin may be unable to successfully commercialize exenatide once weekly; (viii) we may be unable to scale-up and manufacture our product candidates commercially or economically; (ix) we may not be able to source raw

materials for our production processes from third parties; (x) Amylin may not be able to successfully operate the manufacturing facility for exenatide once weekly and the U.S. Food and Drug Administration (“FDA”) may not find the product produced in the Amylin facility comparable to the product used in the pivotal clinical study which was manufactured in our facility; (xi) our product candidates, if approved for marketing, may not be launched successfully in one or all indications for which marketing is approved and, if launched, may not produce significant revenues; (xii) we rely on our partners to determine the regulatory and marketing strategies for RISPERDAL CONSTA and our other partnered, non-proprietary programs; (xiii) RISPERDAL CONSTA, VIVITROL and, if approved, exenatide once weekly, may have unintended side effects, adverse reactions or incidents of misuse and the FDA or other health authorities could require post approval studies or the removal of our products from the market; (xiv) our collaborators could elect to terminate or delay programs at any time and disputes with collaborators or failure to negotiate acceptable new collaborative arrangements for our technologies could occur; (xv) clinical trials may take more time or consume more resources than initially envisioned; (xvi) results of earlier clinical trials may not necessarily be predictive of the safety and efficacy results in larger clinical trials, and the results of clinical trials may not be predictive of the safety or efficacy results of the product in commercial use; (xvii) our product candidates could be ineffective or unsafe during preclinical studies and clinical trials, and we and our collaborators may not be permitted by regulatory authorities to undertake new or additional clinical trials for product candidates incorporating our technologies, or clinical trials could be delayed or terminated; (xviii) after the completion of clinical trials for our product candidates, including exenatide once weekly, or after the submission for marketing approval of such product candidates, the FDA or other health authorities could refuse to accept such filings, could request additional preclinical or clinical studies be conducted or request a safety monitoring program, any of which could result in significant delays or the failure of such products to receive marketing approval; (xix) even if our product candidates appear promising at an early stage of development, product candidates could fail to receive necessary regulatory approvals, be difficult to manufacture on a large scale, be uneconomical, fail to achieve market acceptance, be precluded from commercialization by proprietary rights of third parties or experience substantial competition in the marketplace; (xx) technological change in the biotechnology or pharmaceutical industries could render our products and/or product candidates obsolete or non-competitive; (xxi) difficulties or set-backs in obtaining and enforcing our patents, including but not limited to those related to our LinkeRx technology platform, and difficulties with the patent rights of others could occur; (xxii) we may incur losses in the future; (xxiii) we may need to raise substantial additional funding to continue research and development programs and clinical trials and other operations and could incur difficulties or setbacks in raising such funds, which may be further impacted by current economic conditions and the lack of available credit sources; (xxiv) our methodology for determining the fair value of our investments may change; and (xxv) we may not be able to liquidate or otherwise recoup our investments in corporate debt securities, asset backed debt securities and auction rate securities.

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

Our Strategy

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

Products and Development Programs

RISPERDAL CONSTA

     RISPERDAL CONSTA is a long-acting formulation of risperidone, a product of Janssen, and is the first and only long-acting, atypical antipsychotic approved by the FDA for both the treatment of both schizophrenia and bipolar I disorder. The medication uses our proprietary Medisorb^® technology to deliver and maintain therapeutic medication levels in the body through just one injection every two weeks. RISPERDAL CONSTA is marketed by

Janssen and is exclusively manufactured by us. RISPERDAL CONSTA was first approved by regulatory authorities in the United Kingdom and Germany in August 2002 and by the FDA in October 2003. RISPERDAL CONSTA is approved for the treatment of schizophrenia in approximately 85 countries and marketed in approximately 60 countries, and Janssen continues to launch the product around the world. In the U.S., RISPERDAL CONSTA is also approved for the treatment of bipolar I disorder.

     Schizophrenia is a brain disorder characterized by disorganized thinking, delusions and hallucinations. Studies have demonstrated that as many as 75 percent of patients with schizophrenia have difficulty taking their oral medication on a regular basis, which can lead to worsening of symptoms. Clinical data have shown that treatment with RISPERDAL CONSTA may lead to improvements in symptoms, sustained remission and decreases in hospitalization in patients with schizophrenia. Bipolar disorder is a brain disorder that causes unusual shifts in a person’s mood, energy and ability to function. It is often characterized by debilitating mood swings, from extreme highs (mania) to extreme lows (depression). Bipolar I disorder is characterized based on the occurrence of at least one manic episode, with or without the occurrence of a major depressive episode. Clinical data have shown that RISPERDAL CONSTA significantly delayed the time to relapse compared to placebo treatment in patients with bipolar disorder.

     In August 2009, we received notification from Ortho-McNeil-Janssen Pharmaceuticals, Inc. and Janssen Pharmaceutica International, a division of Cilag International AG, that based on a portfolio review, it has decided not to pursue further development of the four-week long-acting injectable formulation of risperidone.

VIVITROL

     We developed VIVITROL, an extended-release Medisorb formulation of naltrexone, which is the first and only once-monthly injectable medication for the treatment of alcohol dependence. Alcohol dependence is a serious and chronic brain disease characterized by cravings for alcohol, loss of control over drinking, withdrawal symptoms and an increased tolerance for alcohol. Adherence to medication is particularly challenging with this patient population. In clinical trials, when used in combination with psychosocial support, VIVITROL was shown to reduce the number of drinking days and heavy drinking days and to prolong abstinence in patients who abstained from alcohol the week prior to starting treatment. VIVITROL was approved by the FDA in April 2006 and was launched in June 2006. In December, 2008, we assumed sole responsibility for the commercialization of VIVITROL in the U.S.. In December 2007, we exclusively licensed the right to commercialize VIVITROL for the treatment of alcohol and opioid dependence in Russia and other countries in the CIS to Cilag. In August 2008, the Russian regulatory authorities approved VIVITROL for the treatment of alcohol dependence. Cilag launched VIVITROL in Russia in March 2009.

     We are also developing VIVITROL for the treatment of opioid dependence, a serious and chronic brain disease characterized by compulsive, prolonged-self administration of opioid substances that are not used for a medical purpose. In November 2009, we announced positive preliminary results from a phase 3 clinical trial of VIVITROL for the treatment of opioid dependence. The six-month phase 3 study met its primary efficacy endpoint, and all secondary endpoints, and data showed that patients treated once-monthly with VIVITROL demonstrated statistically significant higher rates of clean (opioid-free) urine screens, compared to patients treated with placebo. Based on the positive results of this phase 3 study, we plan to file a supplemental New Drug Application (sNDA) with the FDA in the first half of calendar year 2010.

Exenatide Once Weekly

     We are collaborating with Amylin on the development of exenatide once weekly for the treatment of type 2 diabetes. Exenatide once weekly is an injectable formulation of Amylin’s BYETTA^® (exenatide). BYETTA is an injection administered twice daily. Diabetes is a disease in which the body does not produce or properly use insulin. Diabetes can result in serious health complications, including cardiovascular, kidney and nerve disease. BYETTA was approved by the FDA in April 2005 as adjunctive therapy to improve blood sugar control in patients with type 2 diabetes who have not achieved adequate control on metformin and/or a sulfonylurea, which are commonly used oral diabetes medications. In December 2006, the FDA approved BYETTA as an add-on therapy for people with type 2 diabetes unable to achieve adequate glucose control on thiazolidinediones, a class of diabetes medications. Amylin has an agreement with Lilly for the development and commercialization of exenatide, including exenatide

once weekly. Exenatide once weekly is being developed with the goal of providing patients with an effective and more patient-friendly treatment option.

     In May 2009, Amylin submitted a NDA to the FDA for the treatment of type 2 diabetes. The FDA accepted the submission in July 2009.

     In July 2009, Amylin, Lilly and we announced positive results from the DURATION-3 study designed to compare exenatide once weekly to LANTUS^® (insulin glargine) in 467 patients with type 2 diabetes taking stable doses of metformin alone or in combination with a sulfonylurea. Patients randomized to exenatide once weekly experienced a statistically superior reduction in A1C, a measure of average blood sugar over three months, of 1.5 percentage points from baseline, compared to a reduction of 1.3 percentage points for LANTUS after completing 26 weeks of treatment. At the end of the study, patients treated with exenatide once weekly achieved a mean A1C of 6.8 percent compared with a mean A1C of 7.0 percent in those treated with LANTUS. Treatment with exenatide once weekly also produced a statistically significant difference in weight, with a mean weight loss of 5.8 pounds at 26 weeks, compared with a mean weight gain of 3.1 pounds for LANTUS, a difference of 8.9 pounds between the treatments. In addition, patients treated with exenatide once weekly reported significantly fewer episodes of confirmed hypoglycemia than those patients treated with LANTUS.

     In October 2009, the FDA approved BYETTA as a stand-alone medication (monotherapy) along with diet and exercise to improve glycemic control in adults with type 2 diabetes.

     In December 2009, Amylin, Lilly and we announced positive results from the DURATION-5 study designed to compare exenatide once weekly to BYETTA in patients with type 2 diabetes who were not achieving adequate glucose control using background therapies that included diet and exercise, metformin, sulfonylurea, thiazolidinediones or a combination of the agents. Patients randomized to exenatide once weekly experienced a statistically superior reduction in A1C, a measure of average blood sugar over three months, of 1.6 percentage points from baseline, compared to a reduction of 0.9 percentage points for BYETTA after completing 24 weeks of treatment. At the end of the study, patients treated with exenatide once weekly achieved a mean A1C of 7.1 percent compared with a mean A1C of 7.7 percent in those treated with BYETTA. Both treatment groups achieved statistically significant weight loss by the end of the study, with an average loss of 5.1 pounds for patients taking exenatide once weekly and 3.0 pounds for patients taking BYETTA. Additional studies designed to demonstrate the superiority of exenatide once weekly compared to commonly prescribed diabetes medications are ongoing.

ALKS 37

     We are developing ALKS 37, an oral, peripherally-restricted opioid antagonist for the treatment of opioid-induced constipation. Research indicates that a high percentage of patients receiving opioids are likely to experience side effects affecting gastrointestinal motility. There are currently no available oral treatments for this condition, which has severe quality of life implications. In October 2009, we initiated a phase 1 study of ALKS 37 in approximately 40 healthy volunteers. The randomized, double-blind, placebo-controlled study will assess the safety, tolerability, pharmacokinetic and pharmacologic effects of a single oral administration of five doses of ALKS 37. We expect to report topline results from the study in the first half of calendar 2010. ALKS 37 is a component of ALKS 36.

ALKS 36

     ALKS 36, a co-formulation of an opioid analgesic and an oral, peripherally-restricted opioid antagonist, is being developed for the treatment of pain without the side effects of constipation. Research indicates that a high percentage of patients receiving opioids are likely to experience side effects affecting gastrointestinal motility. A pain medication that does not inhibit gastrointestinal motility, such as ALKS 36, could provide an advantage over current therapies.

ALKS 33

     ALKS 33 is an oral opioid modulator for the potential treatment of addiction and other central nervous system disorders. In October 2009, we announced positive topline data from two clinical trials of ALKS 33. Data from the

studies, ALK33-003 and ALK33-004, showed that ALKS 33 was generally well tolerated and successfully blocked the effects of an opioid with a duration of action that supports once daily dosing. ALK33-003 was a phase 1 randomized, double-blind, placebo-controlled, multi-dose study designed to assess the steady-state pharmacokinetics, safety and tolerability of ALKS 33 in 30 healthy subjects. ALK33-004 was a phase 1, randomized, single-blind, placebo-controlled, single-dose study designed to test the ability of ALKS 33 to block the subjective and objective effects of a potent opioid agonist, remifentanil (a commercially available analgesic) in 24 healthy, non-dependent, opioid-experienced subjects. In November 2009, we announced the initiation of a phase 2 clinical study to assess the safety and efficacy of multiple doses of ALKS 33 in patients with alcohol dependence and to further define the clinical profile of ALKS 33.

ALKS 29

     We are developing ALKS 29, an oral combination therapy for the treatment of alcohol dependence. ALKS 29 is a co-formulation of ALKS 33, a proprietary opioid modulator, and baclofen, an FDA-approved muscle relaxant and antispasmodic therapeutic. Research suggests that baclofen may attenuate the compulsive component of alcohol dependence. As a co-formulation of ALKS 33 and baclofen, ALKS 29 is designed to address both the compulsive and impulsive components of alcohol dependence.

ALKS 6931

     ALKS 6931 is a long-acting form of a TNF receptor-FC fusion protein for the treatment of rheumatoid arthritis and related autoimmune diseases. ALKS 6931 is our first candidate being developed using the Medifusion^TM technology licensed from Acceleron Pharmaceuticals, Inc. (“Acceleron”). ALKS 6931 is structurally similar to etanercept, commercially available under the name ENBREL^®.

ALKS 9070

     ALKS 9070 is a once-monthly, injectable, sustained-release version of aripiprazole for the treatment of schizophrenia. ALKS 9070 is our first candidate to leverage our proprietary LinkeRx^TM technology platform. Aripiprazole is commercially available under the name ABILIFY^® for the treatment of a number of CNS disorders. Based on encouraging preclinical results, ALKS 9070 is expected to enter the clinic in the second half of calendar 2010.

Executive Summary

     Net loss for the three months ended December 31, 2009 was $6.8 million, or $0.07 per common share — basic and diluted, as compared to net income of $112.7 million, or $1.18 per common share — basic and diluted, for the three months ended December 31, 2008. Net loss for the nine months ended December 31, 2009 was $25.7 million or $0.27 per common share— basic and diluted, as compared to net income of $144.1 million, or $1.51 per common share — basic and $1.49 per common share — diluted, for the nine months ended December 31, 2008. Net loss for the three and nine months ended December 31, 2009 includes $3.6 million and $15.9 million, respectively, in charges associated with the relocation of our corporate headquarters from Cambridge, Massachusetts to Waltham, Massachusetts.

Results of Operations

Manufacturing Revenues

		Three Months Ended								Change				Nine Months Ended								Change
		December 31								Favorable/				December 31								Favorable/
(In millions)		2009				2008				(Unfavorable)				2009				2008				(Unfavorable)
Manufacturing revenues:
RISPERDAL CONSTA		$	27.2			$	21.3			$	5.9			$	87.0			$	88.0			$	(1.0	)
Polymer			1.5				—				1.5				2.9				—				2.9
VIVITROL			—				(0.8	)			0.8				0.4				4.2				(3.8	)
Manufacturing revenues		$	28.7			$	20.5			$	8.2			$	90.3			$	92.2			$	(1.9	)

     The increase in RISPERDAL CONSTA manufacturing revenues for the three months ended December 31, 2009,

as compared to the three months ended December 31, 2008, was primarily due to an 8% increase in the number of units shipped to Janssen and an increase in the net unit sales price. The decrease in RISPERDAL CONSTA manufacturing revenues for the nine months ended December 31, 2009, as compared to the nine months ended December 31, 2008, was primarily due to a decrease in the net unit sales price, partially offset by an increase in the number of units shipped to Janssen of less than 1%. The increase in the net unit sales price in the three months ended December 31, 2009, as compared to the three months ended December 31, 2008, was primarily due to a weaker U.S. dollar in relation to the foreign currencies in which the product was sold. The decrease in the net unit sales price in the nine months ended December 31, 2009, as compared to the nine months ended December 31, 2008, was primarily due to a stronger U.S. dollar in relation to the foreign currencies in which the product was sold. See Part I, Item 3. “Quantitative and Qualitative Disclosures about Market Risk” for information on foreign currency exchange rate risk related to RISPERDAL CONSTA revenues.

     Under our manufacturing and supply agreement with Janssen, we earn manufacturing revenues when product is shipped to Janssen, based on a percentage of Janssen’s estimated unit net sales price. Revenues include a quarterly adjustment from Janssen’s estimated unit net sales price to Janssen’s actual unit net sales price for product shipped. In the three and nine months ended December 31, 2009 and 2008, our RISPERDAL CONSTA manufacturing revenues were based on an average of 7.5% of Janssen’s unit net sales price of RISPERDAL CONSTA. We anticipate that we will earn manufacturing revenues at 7.5% of Janssen’s unit net sales price of RISPERDAL CONSTA for product shipped in the fiscal year ending March 31, 2010 and beyond.

     Polymer manufacturing revenues for the three and nine months ended December 31, 2009 consist of polymer sales to Amylin for use in the formulation of exenatide once weekly. We record manufacturing revenues under our arrangement with Amylin for polymer sales at an agreed upon price when product is shipped to them. During the three and nine months ended December 31, 2008, we did not make any shipments of polymer to Amylin.

     We record VIVITROL manufacturing revenues under our arrangement with Cilag at an agreed upon price when product is shipped to them. We made no shipments during the three months ended December 31, 2009 or 2008. VIVITROL manufacturing revenues for the nine months ended December 31, 2009 consisted entirely of product shipments to Cilag for resale in Russia. During the nine months ended December 31, 2008, we had $0.4 million of billings to Cilag for shipments of VIVITROL to support the commercialization of VIVITROL in Russia.

     Effective December 1, 2008 (the “Termination Date”), we ended our collaboration with Cephalon and assumed full responsibility for the marketing and sale of VIVITROL in the U.S., and assumed title to certain VIVITROL inventory which we had previously sold to Cephalon prior to the termination. In the three months ended December 31, 2008, we reduced VIVITROL manufacturing revenues by $0.8 million to reverse the previous sale of this inventory to Cephalon. VIVITROL manufacturing revenues for the nine months ended December 31, 2008 consisted of $2.8 million of billings to Cephalon for failed product batches, $0.7 million of net shipments of VIVITROL to Cephalon and $0.3 million related to manufacturing profit on VIVITROL, which equaled a 10% markup on VIVITROL cost of goods manufactured, all of which occurred prior to the termination of the VIVITROL collaboration.

Royalty Revenues

		Three Months Ended								Change				Nine Months Ended								Change
		December 31								Favorable/				December 31								Favorable/
(In millions)		2009				2008				(Unfavorable)				2009				2008				(Unfavorable)
Royalty revenues		$	10.0			$	8.0			$	2.0			$	27.5			$	25.0			$	2.5

     Substantially all of our royalty revenues for the three and nine months ended December 31, 2009 and 2008 were related to sales of RISPERDAL CONSTA. Under our license agreements with Janssen, we record royalty revenues equal to 2.5% of Janssen’s net sales of RISPERDAL CONSTA in the period that the product is sold by Janssen. RISPERDAL CONSTA royalty revenues for the three and nine months ended December 31, 2009 were based on RISPERDAL CONSTA sales of $398.7 million and $1,099.1 million, respectively. Royalty revenues for the three and nine months ended December 31, 2008 were based on RISPERDAL CONSTA sales of $318.8 million and $999.5 million, respectively. During the three and nine months ended December 31, 2009, 67% and 64% of RISPERDAL CONSTA sales occurred in foreign countries, respectively, as compared to 63% and 64% during the three and nine months ended December 31, 2008, respectively.

Product Sales, net

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

		Three Months Ended								Nine Months Ended
		December 31								December 31
(In millions)		2009				% of Sales				2009				% of Sales
Product sales, gross		$	7.2				100.0	%		$	17.7				100.0	%
Adjustments to product sales, gross:
Chargebacks			(0.4	)			(5.6	)%			(0.7	)			(4.0	)%
Wholesaler fees			(0.3	)			(4.2	)%			(0.7	)			(4.0	)%
Medicaid rebates			(0.3	)			(4.2	)%			(0.6	)			(3.4	)%
Product returns (1)			(0.4	)			(5.6	)%			(0.5	)			(2.8	)%
Other			(0.3	)			(4.2	)%			(0.9	)			(5.1	)%
Total adjustments			(1.7	)			(23.8	)%			(3.4	)			(19.3	)%
Product sales, net		$	5.5				76.2	%		$	14.3				80.7	%

     We began selling VIVITROL in the U.S. on December 1, 2008 and had gross sales during the month of December of $1.6 million, but no net sales primarily due to the deferral of $1.4 million of revenue as none of the product sold was estimated to have left the distribution channel. Net sales of VIVITROL by Cephalon during the three and nine months ended December 31, 2008 were $2.8 million and $11.0 million, respectively.

Research and Development Revenue Under Collaborative Arrangements

		Three Months Ended								Change				Nine Months Ended								Change
		December 31								Favorable/				December 31								Favorable/
(In millions)		2009				2008				(Unfavorable)				2009				2008				(Unfavorable)
Research and development programs:
Four-week RISPERDAL CONSTA		$	—			$	1.6			$	(1.6	)		$	2.0			$	3.5			$	(1.5	)
Exenatide once weekly			—				1.5				(1.5	)			0.4				9.3				(8.9	)
AIR Insulin			—				0.1				(0.1	)			—				26.8				(26.8	)
Other			0.1				0.5				(0.4	)			0.3				0.8				(0.5	)
Research and development revenue under collaborative arrangements		$	0.1			$	3.7			$	(3.6	)		$	2.7			$	40.4			$	(37.7	)

     In August 2009, we announced that Ortho-McNeil-Janssen Pharmaceuticals, Inc. and Janssen Pharmaceutica International, a division of Cilag International AG, decided not to pursue further development of the four-week formulation of RISPERDAL CONSTA for the treatment of schizophrenia. Accordingly, we do not expect to recognize revenue from this development program in the future. The NDA for exenatide once weekly was filed with the FDA in May 2009 and, as a result, revenues under the program decreased in the three and nine months ended December 31, 2009, as compared to the three and nine months ended December 31, 2008. The decrease in revenue from the AIR Insulin program in the three and nine months ended December 31, 2009, as compared to the three and nine months ended December 31, 2008, was due to the termination of the AIR Insulin development program in March 2008.

Net Collaborative Profit

		Three Months Ended								Change				Nine Months Ended								Change
		December 31								Favorable/				December 31								Favorable/
(In millions)		2009				2008				(Unfavorable)				2009				2008				(Unfavorable)
Net collabortive profit:
Milestone revenue — license		$	—			$	0.8			$	(0.8	)		$	—			$	3.5			$	(3.5	)
Net payments from Cephalon			—				0.7				(0.7	)			—				—				—
VIVITROL losses funded by Cephalon, post termination			—				1.2				(1.2	)			5.0				1.2				3.8
Recognition of deferred and unearned milestone revenue due to termination of VIVITROL collaboration			—				120.7				(120.7	)			—				120.7				(120.7	)
Net collaborative profit		$	—			$	123.4			$	(123.4	)		$	5.0			$	125.4			$	(120.4	)

     Net collaborative profit for the nine months ended December 31, 2009 consisted of revenue earned as a result of the $11.0 million payment we received from Cephalon to fund its share of estimated VIVITROL losses during the one-year period following the Termination Date. We recorded the $11.0 million payment as deferred revenue and recognized it as revenue through the application of a proportional performance model based on VIVITROL losses. This deferred revenue was completely recognized as of July 31, 2009, and we do not expect to recognize any further net collaborative profit. Net collaborative profit during the three and nine months ended December 31, 2008 consisted primarily of $120.7 million of unearned milestone and deferred revenue that existed at the Termination Date, which was recognized in the three months ended December 31, 2008, as we had no remaining performance obligations to Cephalon and the amounts were nonrefundable.

Cost of Goods Manufactured and Sold

		Three Months Ended								Change				Nine Months Ended								Change
		December 31								Favorable/				December 31								Favorable/
(In millions)		2009				2008				(Unfavorable)				2009				2008				(Unfavorable)
Cost of goods manufactured and sold:
RISPERDAL CONSTA		$	8.4			$	5.0			$	(3.4	)		$	30.2			$	24.0			$	(6.2	)
VIVITROL			1.1				0.5				(0.6	)			5.7				7.9				2.2
Polymer			0.6				—				(0.6	)			1.9				—				(1.9	)
Cost of goods manufactured and sold		$	10.1			$	5.5			$	(4.6	)		$	37.8			$	31.9			$	(5.9	)

     The increase in cost of goods manufactured for RISPERDAL CONSTA in the three months ended December 31, 2009, as compared to the three months ended December 31, 2008, was due to a 8% increase in the number of units of RISPERDAL CONSTA shipped to Janssen, an increase in costs for failed batches and an increase in overhead and support costs allocated to cost of goods manufactured from research and development (“R&D”) expense as a result of increasing the focus on manufacturing activities, as compared to development activities, at our Ohio manufacturing facility. The increase in cost of goods manufactured for RISPERDAL CONSTA in the nine months ended December 31, 2009, as compared to the nine months ended December 31, 2008, was primarily due to the increase in overhead and support costs allocated to cost of goods manufactured for the reason previously discussed and an increase in costs for failed product batches.

     The increase in cost of goods manufactured and sold for VIVITROL in the three months ended December 31, 2009, as compared to the three months ended December 31, 2008, was primarily due to an increase in the number of units sold during the period. During the three months ended December 31, 2008, we did not ship any VIVITROL to Cephalon or Cilag, and we purchased product back from Cephalon resulting in a reversal of prior sales in connection with the termination of the VIVITROL collaboration with Cephalon. The decrease in cost of goods manufactured and sold for VIVITROL in the nine months ended December 31, 2009, as compared to the nine months ended December 31, 2008, was primarily due to a decrease in the costs related to the restart of the manufacturing line following a scheduled shutdown of the line and reduced costs for failed batches, partially offset by an increase in the number of units sold during the period.

     During the three and nine months ended December 31, 2008, we did not make any shipments of polymer to Amylin.

Research and Development Expense

		Three Months Ended								Change				Nine Months Ended								Change
		December 31								Favorable/				December 31								Favorable/
(In millions)		2009				2008				(Unfavorable)				2009				2008				(Unfavorable)
Research and development		$	22.6			$	22.7			$	0.1			$	68.8			$	64.6			$	(4.2	)

     R&D expenses in the three months ended December 31, 2009 were comparable to the R&D expenses in the three months ended December 31, 2008. During the three months ended December 31, 2009, we recorded $3.5 million of costs related to the relocation of our corporate headquarters from Cambridge, Massachusetts, to Waltham, Massachusetts, consisting primarily of the acceleration of depreciation on laboratory related leasehold improvements located at our Cambridge facility, which no longer have any benefit or use to us once we exit the Cambridge facility, and the write-down of laboratory equipment that is no longer in use and will be disposed of. In addition, we incurred $2.1 million of R&D expense related to the collaboration and license agreement we signed with Acceleron, in December 2009. These expenses were offset by a decrease in occupancy costs due to the consolidation of space at our Cambridge, Massachusetts facility, as well as a decrease in overhead and support costs allocated to R&D at our Ohio manufacturing facility, as discussed above.

     The increase in R&D expenses in the nine months ended December 31, 2009, as compared to the nine months ended December 31, 2008, was primarily due to $15.6 million of costs we incurred as a result of the relocation of our corporate headquarters, an increase in clinical and pre-clinical study expense resulting from an increase in the number of ongoing studies, and $2.1 million of expense related to the collaboration and license agreement we signed with Acceleron in December 2009. These expenses were partially offset by a decrease in overhead and support costs allocated to R&D at our Ohio manufacturing facility, a decrease in labor and benefits due to a reduction in R&D headcount and a decrease in occupancy costs due to the consolidation of space at our Cambridge, Massachusetts facility.

     A significant portion of our research and development expenses (including laboratory supplies, travel, dues and subscriptions, recruiting costs, temporary help costs, consulting costs and allocable costs such as occupancy and depreciation) are not tracked by project as they benefit multiple projects or our technologies in general. Expenses incurred to purchase specific services from third parties to support our collaborative research and development activities are tracked by project and are reimbursed to us by our partners. We generally bill our partners under collaborative arrangements using a negotiated FTE or hourly rate. This rate has been established by us based on our annual budget of employee compensation, employee benefits and the billable non-project-specific costs mentioned above and is generally increased annually based on increases in the consumer price index. Each collaborative partner is billed using a negotiated FTE or hourly rate for the hours worked by our employees on a particular project, plus direct external costs, if any. We account for our research and development expenses on a departmental and functional basis in accordance with our budget and management practices.

Selling, General and Administrative Expense

		Three Months Ended								Change				Nine Months Ended								Change
		December 31								Favorable/				December 31								Favorable/
(In millions)		2009				2008				(Unfavorable)				2009				2008				(Unfavorable)
Selling, general and administrative		$	17.7			$	14.6			$	(3.1	)		$	57.6			$	38.2			$	(19.4	)

     The increase in selling, general and administrative (“SG&A”) expense for the three months ended December 31, 2009, as compared to the three months ended December 31, 2008, was primarily due to increased sales and marketing costs as we became responsible for the commercialization of VIVITROL in the U.S. beginning December 1, 2008. The increase in SG&A for the nine months ended December 31, 2009, as compared to the nine months ended December 31, 2008, was primarily due to increased sales and marketing costs related to VIVITROL and severance costs we recorded in connection with the resignation of our former President and Chief Executive Officer in September 2009.

Other Expense, Net

		Three Months Ended								Change				Nine Months Ended								Change
		December 31								Favorable/				December 31								Favorable/
(In millions)		2009				2008				(Unfavorable)				2009				2008				(Unfavorable)
Interest income		$	1.0			$	2.6			$	(1.6	)		$	3.7			$	8.9			$	(5.2	)
Interest expense			(1.4	)			(2.4	)			1.0				(4.7	)			(10.9	)			6.2
Other expense, net			(0.2	)			(0.7	)			0.5				(0.3	)			(1.5	)			1.2
Total other expense, net		$	(0.6	)		$	(0.5	)		$	(0.1	)		$	(1.3	)		$	(3.5	)		$	2.2

     The decrease in interest income for the three and nine months ended December 31, 2009, as compared to the three and nine months ended December 31, 2008, was due to a lower average balance of cash and investments as well as lower interest rates earned. The decrease in interest expense for the three and nine months ended December 31, 2009, as compared to the three and nine months ended December 31, 2008, was the result of our repurchase of an aggregate total of $93.0 million principal amount, or approximately 55%, of our non-recourse RISPERDAL CONSTA secured 7% Notes (the “non-recourse 7% Notes”), in five separately negotiated transactions during the year ended March 31, 2009. In addition, we began making quarterly scheduled principal payments on our non-recourse 7% Notes, beginning in April 2009, which reduced interest expense in the three and nine months ended December 31, 2009. The decrease in other expense, net, for the three and nine months ended December 31, 2009, as compared to the three and nine months ended December 31, 2008, was due to decreases in other-than-temporary impairment charges taken on our investments in the common stock of certain publicly held companies.

Provision for Income Taxes

		Three Months Ended								Change				Nine Months Ended								Change
		December 31								Favorable/				December 31								Favorable/
(In millions)		2009				2008				(Unfavorable)				2009				2008				(Unfavorable)
Provision (benefit) for income taxes		$	—			$	(0.3	)		$	(0.3	)		$	(0.1	)		$	0.6			$	(0.7	)